Applied Digital Corporation

Good afternoon and welcome to Applied Digital's fiscal second quarter 2025 conference call. My name is Julian and I'll be your operator for today. For this call, Applied Digital issued its financial results for fiscal second quarter ended November 30th, 2024 in a press release. The 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. Joining us today, All joining us on today's call are Applied Digital's Chairman and CEO, Wes Cummins, and CFO, Saidal Mahmand. Following their remarks, we will open the call for questions. Before we begin, Matt Glover from Gateway Group will make a brief introductory statement. Mr. Glover, you may begin.

Thank you, Julian. Good afternoon, everyone, and welcome to Applied Digital's Fiscal Second Corner 2025 Conference Call. Before management begins formal remarks, we would like to remind everyone that some statements and involve a number of risks and uncertainties. As a result, we caution you that a number of factors, many of which are beyond our control, could cause actual results and events that differ materially from those described in the forward-looking statements. For more detailed risks, uncertainties, and assumptions relating to our forward-looking statements, please see the disclosures in our earnings release and public filings made with the Securities and Exchange Commission, or SEC. We disclaim any obligation or any undertaking to update forward-looking statements to reflect forward-looking statements are made, except as required by law. We also discuss non-GAAP financial metrics and encourage you to carefully read our disclosures and the reconciliation tables to the applicable GAAP measures in our earnings release as you consider these metrics. We refer you to our filings of the SEC 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. You may get Applied Digital's FCC filings for free by visiting the FCC website at www.fcc.gov. I would also like to remind everyone that this call is being recorded and will be made available for replay via link in the Investor Relations section of Applied Digital's website. Now, I'd like to turn the call over to Applied Digital's Chairman and CEO, Wes Cummins. Wes?

Thanks, Matt, and good afternoon, everyone. Thank you for joining our fiscal second quarter 2025 conference call. I want to start by expressing gratitude to our employees for their continued hard work and service in supporting our mission of providing purpose-built infrastructure to the rapidly-growing high-performance computing industry. Before turning the call over to our CFO, Saddam Oman, for a detailed review of our financial results, I'd like to share some recent developments across our businesses. 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. Next, let's discuss our cloud services business, which provides high-performance computing power for AI applications. This segment continues to experience growth as we fulfill our existing contracts and explore new opportunities in our pipeline. As of the end of the second quarter, we had six clusters online. We are currently evaluating numerous opportunities in this area as we see how next-generation GPUs come to market. In our HPC hosting segment, we continue construction of our 400-megawatt campus in Ellendale, North Dakota. In December, we reached a major milestone with the successful energization of the main substation transformer. Additionally, I'm very pleased to announce that we won the DCD Community Impact Award for our Ellendale Community and Economic Development Initiative. Through the Our Wish program, we're addressing housing shortages and supporting workforce growth in Allendale, North Dakota. 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. Let's now turn to the topic that's on everyone's mind, the lease of our campus in Allendale, North Dakota. Over the past year, We've learned that the hyperscaler contract process is extremely thorough. While we cannot control their speed, we are focusing on what we can control, completing the construction of our 100 megawatt data center on time and within budget. I strongly believe that our Ellendale campus is a valuable asset with 100 megawatts of critical IT load available in 2025. We believe it is in our shareholders' best interest to continue managing what we can and avoid speculating on an exact date. While the process has been long, one of the major benefits of undergoing such a significant diligence process is that we have been engaged with some of the largest finance and investment partners in the world. Today, I'm excited to share we've agreed to form strategic partnership with Macquarie Asset Management. Macquarie Asset Management, the asset management division of Macquarie Group, is a global financial services organization operating in 34 markets with over 20,000 employees. 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 investments and data centers. They will leverage their infrastructure investing and development expertise along with our growing digital, along with their growing digital ecosystem capabilities to complement Applied Digital's expertise in delivering and servicing data center infrastructure solutions for enterprise and hyperscale companies. The partnership will include a $5 billion perpetual preferred equity financing facility. This facility will allocate up to $900 million to the company's Allendale High Performance Computing Data Center campus and give Macquarie the right of first refusal to invest up to an additional $4.1 billion across Applied Digital's future HPC data center pipeline. The investment will take the form of perpetual preferred and 15% common equity interest in Applied Digital's HPC business segment. McCrory investment in conjunction with future project financing will be used to repaid project level debt and allow the company to recover over an estimated $300 million of its equity investment in the L&L HPC campus. We believe this expanded relationship with McCrory positions Applied Digital for significant growth in the industry, establishing Applied Digital as one of the fastest growing HPC data center owners, operators, and developers in the United States. At today's build cost, we have a significant portion of the equity needed to construct over 2 gigawatts of the HPC data center capacity, including our L&L HPC campus. 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. We're excited to have McCrory 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. In summary, we're encouraged by the positive trends we're witnessing across our business and remain confident in our growth trajectory. With that, I will now turn the call over to our CFO, Sainal Mohmand, to walk you through our financials and provide an update on guidance. Sainal?

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. Let me begin by highlighting some of our recent financial announcements, followed by a detailed overview of the quarter. In November, we completed a $450 million, 2.75% convertible senior note offering due 2030, which included $84 million allocated for share repurchases. In December, we announced a $150 million senior secured debt financing facility with Macquarie 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. Today, we announced the strategic partnership with Macquarie Asset Management for a $5 billion perpetual deferred equity financing facility. Now, let's turn to the quarter. Revenues for the fiscal second quarter of 2025 were $63.9 million, up 51% over the prior comparable period. This increase was primarily driven by the continued growth of our cloud services business due to the deployment of additional GPU clusters. In total, our data center hosting segment generated $36.2 million in revenue, while our cloud services segment contributed $27.7 million. Cost of revenues increased $22.6 million to $52.4 million from the prior comparable period, primarily driven by the growth in the business as more facilities were energized and additional services were provided to customers. SG&A expense increased $9.5 million to $29.8 million, also driven by growth in the business as more facilities were energized and additional services were provided. This quarter, our depreciation amortization expense increased to $26.4 million compared to $13.4 million in the same period of 2024. Of this amount, $21.7 million was attributable to DNA in our cloud segment. 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. During the quarter, we renegotiated our GPU lease terms, which allowed us to extend the amortization period for our GPU leases to a more industry-standard timeline of five years. This adjustment reduced segment DNA expense by $8.5 million for this quarter. Looking ahead, we expect this change to further lower DNA expenses by about $7 million per quarter on a GAAP-reported basis. All in going forward, we expect to recognize around $15 million per quarter in the cloud segment for the DNA. Moving on to interest expense. Interest expense increased $4.9 million to $7.5 million, primarily driven by an increase in finance leases and interest-bearing loans between periods. Net loss tributable to our common stockholders was $138.7 million, or $0.66 on a basic and diluted share. I want to note that this quarter was impacted by the loss and conversion of debt of $25.4 million as convertible debt issued to YA Fund was converted during the period. 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. This was prior to us receiving shareholder approval at the annual meeting on November 20, 2024, to increase our authorized share count. The adjusted net loss was $12.6 million, or $0.06 per share. Adjusted EBITDA increased 93% to $21.4 million as well. Moving to our balance sheet. We ended the fiscal second quarter with $314.6 million of cash, cash equivalents, and restricted cash, along with $479.6 million in debt. With that, I'll turn over the call to Wes for closing remarks.

Thank you, Seidel. 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. 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. Based on these dynamics, we believe that much of the U.S.' 's currently available excess power could be under contract within the next few years. Applied Digital was one of the first companies to recognize this growing demand for power and data centers. Anticipating these needs, we began construction of our facilities before the market fully grasped the shifting demand landscape. As a result, we believe we are well positioned to capitalize on these trends. Our strategy has been further validated over the past year by securing strategic investments from Sim Group, NVIDIA, and now Macquarie Asset Management. 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 highly valuable assets for our shareholders. 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? Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. Confirmation tone will indicate your line is in the question queue. You may press star 2 to remove yourself from the queue. For participants using speaker equipment, it may be necessary to pick up the handset before pressing the star keys.

One moment while we poll for questions. And our first question comes from Nick Giles, B. Reilly Security.

Please proceed with your question.

Thank you very much, operator. Wes and team, congratulations on today's announcement. In the release, you noted late-stage discussions with multiple hyperscalers. I was wondering, can you provide any color on where due diligence processes stand with the other potential hyperscalers at this point? My next question is, would there come a point where you would reenter exclusivity with any of these counterparties? Thank you very much.

Nick, thanks for the question. So I think we disclosed in either October or November, you know, we had the exclusivity with the first potential customer had expired. We opened up the site for additional customers to look. You know, those are in varying stages of progress, but it's once, I would say this, once it's been done, once everything is prepared for easy access on, when you're doing the diligence around, you know, technicals, the design, fiber, power, all of those things. So much more accelerated, you know, progression of those. And does that answer your question?

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.

So we started this process last year. It's been probably seven months. We looked at multiple proposals. And I think as the market developed and the year moved on and the progress that we've made at our site, You know, we, I think, signed the best terms, and I'm very happy with the outcome on the terms we did with this structure with Macquarie. But we did, you know, do a full process to make sure that we were getting, you know, A, the best partner and the best terms.

Appreciate all the color. Continue best of luck. Thanks, Nick. Thank you. And our next question comes from Rob Brown, Lake Street Capital.

Good afternoon. Just a little further on the hyperscaler discussions, I know you can't exactly predict, but are they kind of moving forward? Are you working 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?

Hey, Rob. Thanks. What I would say about it, I think the best way to frame this is, you know, the experience we have had thus far, again, very thorough process. We've done great, you know, like from a design technical perspective, you know, fiber, the work we've done there and what's going into that site, specifically in Allendale, power, you know, all of that has been great and made a huge amount of progress on that. I think with the announcement today, you know, we're hitting really one of the last piece of the puzzle for us, which is, I think I've communicated this before, we, you know, while we have this, I think the demand for this capacity, again, I don't know of 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 is You know, we're new, we're a new interim, we're a first-time supplier to any of these hyperscalers, and the financial backing from a very well-known partner with a lot of capital, I think, is really helpful in checking the box for the last hurdle we need to get over. But I'm really optimistic about finalizing a lease on that facility and then moving on to the next one.

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?

Again, I think just 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, a 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, Rob, and I think this is really important, is it allows David Price- funds at i've talked about this, for I think our last two or three earnings calls, we really needed to move finding financing and funding down to the asset level, this is an asset heavy business a capex heavy business. David Price- 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, you know, over two gigawatts of the pipeline, which is what we, you know, have in the near term, you know, 25, 26, 27 pipeline to go and build out.

But I think the important part here is it provides a very clear roadmap of how we plan to finance that. Okay, great. Thank you. I'll turn it over. Thank you.

Our next question comes from Darren Aftahi, Roth Capital Partners.

Hey, guys. Yeah, too, if I may. Just on the Macquarie announcement this morning, is there anything strategic in terms of the process and timing as it relates to the lease? And then I know you guys already hit this, the multiple hyperscalers and the PR. Is there a scenario where that 400 megawatts in Allendale could get squashed? split amongst two, or are you kind of down the path of one entity is going to take all the capacity? Thanks.

Thanks, Jared. On the first question, you know, it's really about getting, you know, to the right terms, and, you know, 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. Thank you. Our next question comes from Mike Grondahl, Northland Securities.

Hey, guys. Thanks. Could you remind us exactly how much money you had invested in Ellendale HPC and how much you'll be able to pull out with this Macquarie financing?

Yeah, I'll call it settle into that. Hey, Mike. So, as we disclose in the, in the, in the, we have roughly over 700Million invested in the Ellen Dale campus and assuming project financing on terms entered along the lease. We expect an access of 300Million of cash proceeds that we can take back up to the parent.

And Mike, I think it's important just to as a reminder, we have the McQuarrie 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 the 700 and then what we pull out, there's there is that that that repayment effectively for the 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 Ellendale campus.

Right. So 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 investment is about $400 million.

It's also a moving target, too. Just think about it, right? We're putting dollars into the ground every month in the project as well.

Yeah, a moving target as far as what we'll be able to pull back out. Got it. Yeah, the cash comes back out of what is now the HPC subsidiary and goes back to the public parent code.

Okay. And then two more questions. One, Wes, If you could maybe define your pipeline right now, it looks like Macquarie can fund, you know, two gigawatts. Do you, after the 400, how much more do you have or can you get your hands on? And then secondly, if you could, I don't know, maybe just demand sounds pretty good with all these hyperscalers, but what's the pricing environment look like?

So, I'll answer the second one first. So, you know, the pricing environment is reflective of the demand environment. And I think there's plenty of data points just even in the last few weeks about data center spend from some of the hyperscalers that is a strong indicator of where the demand in the market remains. And then go to the pipeline. Mike, we've talked about, we talked about this on our last call and we have other campuses. I think that the total is one point six. So that's the two outside of one point six of campuses that we have twenty, twenty six hour and twenty, twenty seven power. So those are the ones that in some cases we've already been in market with those campuses.

So outside of Ellendale, 1-6, and you can have that available 26 or 27. Okay.

Yeah, building all of that, you can't build it all for 27, but first power available in 26. And at this point, that's really all that matters. If you haven't started building now, you're not having 2025 power. So this is really looking at 26 for the other campuses.

Got it. Thank you. Thank you. And our next question comes from George Sutton, Craig Holland.

Thank you and congratulations on the Macquarie deal today. So I'm curious, Wes, I understand timing is challenging to predict, but in the facility, it looks like there is a February 15th, 2025 lease signing date that is necessary for this. Can you just address that specific date?

Yeah, so thanks, George. But so the Feb 2015 is not a lease signing date. I'll have to go back and look, but I think that outside date is maybe in June. But the Feb 15 is for completion of some other items, but it's not a lease signature date.

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 going forward. So you would go get a traditional construction loan financing for a large percentage. Underneath that would be the infrastructure equity that is a fairly significant portion of the rest of that. That's what this represents, correct?

That's exactly it. You know, important to delineate here between the equity component, which is what this deal is, and then the debt component, which is, you know, project finance that then, you know, in the future flips into an ABS or another debt instrument. So, you know, if you want to look at total capital, you know, that would be available when you match that equity with debt, right, there's a big multiplier effect there.

Understood. And then lastly, if I could just understand the 15% ownership that Macquarie takes on of the HPC business, what investment are they making for that? Is that the initial $200-ish million, or is there a requirement for them to fund a specific portion of the $5 billion in total?

So, George, the way to think about it, It's basically lease by lease. Each asset will go into what we deem, what we call the box of the HPC company, APLDH. So any asset that goes into that entity, they will own 15% of. And assuming that that goes on, they accept the lease, and then it's funded simultaneously entering the entity.

So any asset that they fund goes into the entity. So it's asset by asset that drops it.

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.

Hi, guys. Thanks for taking my question and correcting the answer this morning. On the ROFR, is that just a ROFR on the perpetual preferreds, or would you have to use that before, say, you wanted to raise a traditional equity through a secondary, or you'd have to use the preferreds before you could go down that route?

Think of it at two different levels. We want to finance everything at the asset level with the preferred, anything up at 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.

I think that answers it. And then just another question on, you know, it says kind of Macquarie will receive preferred and common. I guess how many shares of common are they getting and how does that mechanism work?

So it's just 15% of the HPC subsidiary.

So not like common of the parent?

Not common of the parent. 15% of the HPC subsidiary.

Understood. Perfect. And then just maybe just on the terms, 12.75% on a dividend, I guess. you guys talked about, you know, lease terms ranging in the yield on cost range of, you know, called low to mid teens, which is more or less the cost of capital here on the preferred equity side. Have you seen terms improve to a level where you would get a yield on cost above the cost of the preferred?

Yeah. So, but, but just remember that the preferred is a sliver of the capital and then the, You know, the remainder of the capital is our equity in the site and then project level finance, which, you know, is the SOFR plus, you know, 250 or 225. So when you look at the blended cost, we fully expect the return to be well north of our cost of capital.

Perfect. Thank you so much, guys. Really appreciate it. And we do have one more question from Brian Biden, Needham & Co.

Great. Thanks, guys. You mentioned there's been some learnings on the delivered approach hyperscalers take. What's one of those learnings you can apply to the next set of negotiations, you know, some of which may be ongoing?

Yeah. So, just, you know, the preparation of, you know, everything that we need to provide going through the process, like I said, it was much more accelerated with anyone else because we have all the prep, we have the knowledge base of what is being looked for, you know, potential changes for things in the future as far as, um, you know, design and, you know, there's, there's constant evolution, especially on cooling. Um, so there's, there's that aspect. And then, you know, I think one of the biggest is, you know, just, well, I'll call it being stamped, right. Just, um, getting through the process, uh, signing the lease, being stamped by, you know, one of these types of customers that, uh, that we have the ability to do all these things. I think that's going to help accelerate it. You know, one of the things that we have learned is first-time supplier, it always is going to take longer than if you're already a supplier to that company. And that shouldn't be, I guess, a big surprise, but it's just the delta between existing supplier and first-time is a little bit larger than we thought.

Thank you. Thank you. There are no further questions at this time.

I would like to pass it back to Wes Cummins for closing remarks.

Thank you. Thanks everyone for joining our Q2 fiscal 2025 conference call. Look forward to speaking with everyone in April.

Thank you. This does conclude today's teleconference. We thank you for your participation.

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