Hut 8 Corp

F:V71

Earnings Call Transcript 2022-Q1

[Operator]

Welcome to the Hut 8 Q1 2022 Earnings Call. My name is James, and I'll be your operator for today's call. [Operator Instructions] As a reminder, this conference is being recorded.

I'd now like to turn the call over to Jaime Leverton. Jaime, you may begin.

[Jaime Leverton, executive]

Thank you so much, James. And I do apologize. We've actually just done this entire earnings call, but apparently, our audience could not hear. So we are about to do it for a second time and I do so appreciate the patience of everybody on the line given the technical difficulties that our partner company here has had this morning.

So with that, thank you for joining us to discuss Hut 8's financial results for the first quarter of the year. We had a very strong quarter, outperforming our results for the same period in the year prior by a considerable margin with respect to revenue, net income, mining profit and adjusted EBITDA. Our Bitcoin holdings also increased and as of the end of March, we had 6,460 in reserve.

Notably, we advanced our corporate strategy with the strategic acquisition of TeraGo's 5 data centers at the end of January. We are currently blessed with 400 cloud services and colocation clients across a number of sectors and have moved further into the high-performance computing industry, where we are looking forward to offering companies in the blockchain and Web 3.0 space with rendering, artificial intelligence and VFX support that they uniquely need.

We are the only digital asset miner that has diversified in this way. And while we continued to be bullish on Bitcoin, we also believe in a promise of the high-performance computing industry overall.

Before I turn it over to our CFO, Shane Downey, for a second time, who will review our key financial results. I would like to thank our executive team for their leadership, the entire Hut 8 mining team for their execution and our investors for your continued support.

And with that, Shane, back over to you.

[Shane Downey, executive]

Thanks, Jaime, and good morning, everyone. I assure you when I did this last time, it was Epic, and I'll try to do this, I will run through some short disclaimer language and then jump into a summary of our quarter results. In addition to the press release issued earlier today, you can find our financial statements and MD&A on SEDAR and shortly on both EDGAR and our website at hut8mining.com. Unless noted otherwise, all amounts referred to are denominated in Canadian dollars.

I'd like to remind you that comments made during this call may include forward-looking statements within the meaning of the applicable securities legislation regarding the future performance of Hut 8 Mining Corp. and its subsidiaries. These statements are current expectations and as such, are subject to a variety of risks and uncertainties that could cause actual results to differ materially from current expectations.

These risks and uncertainties include, but are not limited to, the factors discussed in the quarterly MD&A for the 3 months ended March 31, 2022, as well as the company's MD&A and annual information form for the year ended December 31, 2021.

Overall, we were pleased with the strong operating results for Q1 in 2022. With our expanded and efficient Bitcoin mining fleet driving a profitable quarterly performance in our core digital asset mining operation combined with the initial results from our recently acquired high-performance computing business, Hut 8 remains well positioned for continued growth in the dynamic and challenging market environment.

Revenue. We achieved solid revenue of $53.3 million for the quarter, a 67% increase over the prior year quarter of $32 million. This performance was driven by strong digital asset mining activity and increased hash rate from under 900 petahash in Q1 '21 to approximately 2.2 exahash in Q1 '22.

We achieved revenue of $49.3 million from digital asset mining activities as we mined 942 new Bitcoin at an average price of approximately $52,300 per Bitcoin. This compares with 539 Bitcoin at an average of approximately $56,700 in the prior year period.

Our hosting lined business generated $0.8 million of revenue compared to $1.4 million in the prior year period. The decrease in hosting revenue is due to a reduced level of hosting customers as the company acquired equipment from one of its two hosted customers in December of 2021. We've since exited the digital asset mining hosting business with our April 2022 acquisition of equipment from our remaining hosting customers.

Our newly acquired data center business contributed an additional $3.3 million of revenue, in line with management's expectation for 2 months of operations, given the January 31 acquisition date. Reflecting early and ongoing efforts of our sales team, we expect to deliver recurring revenue growth for the high-performance computing business in the 15% to 18% range over the course of 2022.

On to operating costs, cost of revenue for the quarter was $36.9 million compared to 19.8 million in the prior year. The increase is the result of higher depreciation expense and site operating costs, mostly electricity.

The increased depreciation expense from $5.8 million to $18.4 million was driven by the addition of approximately $130 million of new mining equipment and infrastructure assets over the past 12 months, as well as approximately $25 million of data center fixed assets through the previously mentioned acquisition.

Site operating costs increased due to Hut 8's continued expansion, specifically the addition of incremental miners to our fleet, which drove an absolute increase in operating costs, albeit at much improved margins, as I will discuss in a moment. The data center business incurred $1.6 million of operating costs, reflecting 2 months of operation.

In terms of margins, our core digital asset mining operation generated mining margins of approximately 67% versus 57% in the prior year period, reflecting our substantially more efficient fleet, and this is given average quarterly Bitcoin price was actually down slightly period-over-period.

Our preliminary view is that the high-performance computing business will generate gross margins in the 35% to 40% range. We're continuing to delve deeply into our business integration exercise, which includes formulating granular bottom-up views on profitability across this line of business. We've also begun to identify and implement opportunities to further optimize high-performance computing margins going forward, including, for example, streamlining the product stack. These initiatives are in the previous stages and will progress over Q2 and Q3.

General and administrative costs were $11.5 million compared to $6.5 million in the prior year. The increase was primarily driven by sales tax expense, higher professional fees to support the company's growth as well as higher insurance expense. Insurance expense reflects increased premiums driven by global insurance markets, combined with expansion of D&O liability insurance and incremental coverage related to high-performance computing operations. Sales tax expense increased by $2.5 million, mainly driven by capital investments attracting sales tax and duties and overall increase in the company's purchases.

The data center business contributed -- sorry, $0.7 million of selling, general and admin expenses, and we will continue to refine our expectation of quarterly SG&A going forward. We reported net income of $55.7 million for the quarter compared to net income of $19.1 million in the prior year period. This net income was impacted by the company's strong operating performance as well as a $54.1 million noncash gain on revaluation of the company's warrant liability. Given movement in the price of Bitcoin, we recorded a $4.9 million unrealized loss in digital assets, all of which went through OCI on an after-tax basis. Taken together, this results in other comprehensive income of $50.8 million for the quarter.

Driven by the strong operating performance, Hut 8 achieved adjusted EBITDA of $27.1 million for Q1 2022 compared to $16.2 million in the prior year quarter.

I will conclude my remarks with respect to financial position. Simply put, our balance sheet remains healthy. We entered into a USD 65 million at-the-market offering program in February 2022 and raised net proceeds of $32.5 million during the first quarter. The proceeds from these issuances were and will continue to be invested in the growth of the company. We continue to evaluate non-dilutive alternatives to optimize our capital structure as well.

Our Bitcoin holdings are marked at fair value and totaled $367.6 million as of March 31, 2022, based on 6,460 Bitcoin held in reserve. We continue to emphasize our long-term HODL strategy and did not sell any Bitcoin during the quarter. The acquisition of TeraGo's data center business added approximately $30 million of assets to our balance sheet, and we will finalize the purchase price allocation here over the balance of 2022.

With that, I will turn the call back to our operator for questions.

[Operator]

[Operator Instructions] Our first question is from George Sutton of Craig-Hallum.

[George Sutton, analyst]

Actually, Sue, you had the best possible mic drop in the world for a conference call. It's just saying this is Sue from Hut 8, and then you just end the call, but maybe next quarter.

So looking at the MRR of $1.6 million in your HPC area, can you just give us a sense of where capacity utilization is today? How significant could it be with the existing assets?

[Jaime Leverton, executive]

Yes. So that -- I mean, Shane alluded to the deep dive that we're doing into the business, and we'll continue to update as we roll forward here. We definitely have available incremental sellable capacity in the assets today. If that's your question, George.

[George Sutton, analyst]

So we'll get more clarity on that is the point once the deep dive is completed?

[Jaime Leverton, executive]

Yes, exactly, exactly.

[George Sutton, analyst]

Okay. And then just one other question. The difficulty rates went up during the quarter. You actually had, in my opinion, a very good cost per Bitcoin mined. Can you just give us a sense of where that credit is due? Is it the MicroBT machines that have come in? Or are there other components that we should be aware of?

[Jaime Leverton, executive]

Yes. I mean, certainly, the increased efficiency of our hardware stack is the biggest contributor to that, George.

[Operator]

Our next question comes from Chris Brendler of D.A. Davidson.

[Christopher Brendler, analyst]

Yes, again on the cost per coin really impressive, I just wanted to drill down a little bit more. Is there anything other than the machines that's happening there? Because it seems like we're still waiting for, I guess, the third facility to open and then I think that's going to be even lower cost per coin. So can you just talk about, I think, the outlook for cost per coin as that new facility comes on, given the progress this quarter?

[Jaime Leverton, executive]

Yes. So we were really excited with the progress that we're making in North Bay, and we expect to turn up the first phase, which will initially be 15 megawatts later this month, in the month of May. And then the balance, which will be just over 30 megawatts in total in North Bay. We expect that to be stood up by the end of June. And yes, as you referenced, that will be our lowest cost site from a power perspective. But of course, we can't project where the difficulty rate will move over the course of the quarter. But absolutely, our average utility cost will go down as that facility comes online?

[Christopher Brendler, analyst]

Great. Can you just remind us where you stand from a cost of electricity standpoint. I think you had a 5-year PPA that you -- there's more enough to pay for like last year. And so is there any exposure in 2022 to the rise in natural gas prices?

[Jaime Leverton, executive]

So the North Bay PPA is at a fixed rate that's sub $0.03, just under CAD 0.03. The -- our other sites that are in Alberta do have some exposure to natural gas pricing because they're grid connected, whereas the North Bay facility is behind the meter. So definitely a significant advantage to having this new site come online in North Bay.

[Christopher Brendler, analyst]

Okay. So maybe the -- is it possible that the North Bay will help offset some of the increases you see in the other 2 sites? And I guess, why did we see that -- I guess, can you benchmark maybe where we're running today, just given what's happened in the world?

[Jaime Leverton, executive]

Well, that's difficult to say to benchmark because it does move quite a bit and our -- and we don't have a consistent price across the 2 assets in Alberta. So it's a range, and I can't give you a specific number. And I can't project what the number will be, where there is variability and volatility in natural gas pricing and our exposure to that in Alberta. Although as you can see, even though there was incremental volatility in Q1 as well around the energy markets, our margins were incredibly healthy.

So I don't expect the volatility to get outside of that band. And then don't forget, we -- thank you. Don't forget we also a portion of the Bitcoin we mine, we mine using by mining Ethereum using GPUs, which has a significantly lower cost per Bitcoin to mine. So that all blends into the overall cost per Bitcoin as well.

[Christopher Brendler, analyst]

Great. I'm going to ask one more then. Let's let folks ask questions. On your equipment orders, things have changed quite a bit in the rig market recently. I'm hearing prices coming down even further. Just wanted to know, from your standpoint, do you lead into that opportunity? Do you feel good from an equipment perspective? And what are the remaining payments that you need to make to -- I see these large deposits fell your balance sheet. So you got some equipment on the way and usually they have some payments at the end. Is that something that you've already funded?

[Jaime Leverton, executive]

Yes. So we've -- the remaining orders that we have coming in is with MicroBT. We get approximately 1,000 units monthly, and that runs through the balance of 2022. So that -- those machines continue to come in, and they're actually coming in on -- consistently on schedule, which is great. And we are -- we have the funding required for the balance of those payments. And as you know, we haven't deployed incremental capital into ASICs because we did believe that pricing was going to come down. And I actually don't think that we are at the bottom of the market from an ASIC pricing perspective yet. So we will continue to be patient and watch as the market dynamics evolve.

[Operator]

Our next question is from Kevin Dede. [Operator Instructions]

[Kevin Dede, analyst]

So the MicroBT machines, can you just give us an idea on how much you've completed that transition of the B8 at Drumheller Medicine Hat versus machines that will go to North Bay?

[Jaime Leverton, executive]

Yes. So currently, all of the B8s are off-line. We were continuing to hold them in inventory, but they're not operating. The fleet is almost entirely MicroBT that we're running right now, and it is MicroBT that will be turning up in the initial 15 megawatts at North Bay. We have some Clarkes that are still operational but no B8s.

[Kevin Dede, analyst]

Okay. So what's the intention with the Clarke? Are you going to continue to run them? Are you happy with the efficiency that you're getting?

[Jaime Leverton, executive]

Yes. We're happy with the efficiencies that we're getting. Obviously, they are through their depreciation schedule as well. As you know, we use an aggressive 2-year depreciation schedule. So they are profitable and in money as it were.

[Kevin Dede, analyst]

Okay. So the B8s that you decommissioned, what's your intent there? To sell, just hold them?

[Jaime Leverton, executive]

I don't know yet, Kevin.

[Kevin Dede, analyst]

Still contemplating. Okay. Fair enough. I mean you do have open sockets -- yes, you have open sockets at TeraGo, right?

[Jaime Leverton, executive]

We wouldn't put ASICs in enterprise data centers. It's a completely different type of compute that doesn't play nicely in an enterprise data center environment, so no.

[Kevin Dede, analyst]

Okay. The holding strategy, have you reviewed that and lay the capital requirements and the market environment?

[Jaime Leverton, executive]

Yes. I -- we've actively been reviewing the strategy and are very committed to it. I think holding Bitcoin is the right move. We have our capital requirements funded. Our Bitcoin is currently unencumbered, though there always is an option if we wanted to raise capital by using a portion of the Bitcoin as leverage. That's always an option for us to do so.

But, no, selling Bitcoin in this environment to ultimately buy machines, would yield less Bitcoin in the long term than the value of just holding on to the Bitcoin that we have today?

[Kevin Dede, analyst]

Okay. The loans that you have, the Bitcoin loans that you have, what's your intent there given your Bitcoin balance? You consider expanding them? Or how are you reviewing that?

[Jaime Leverton, executive]

Are you talking about our yield program or the yield accounts that we have with Galaxy and Genesis...

[Kevin Dede, analyst]

Exactly. Yes. Just we're looking towards your thinking on that now?

[Jaime Leverton, executive]

So our thinking hasn't changed, although it is something that we're consistently evaluating. Yields are around the 2% range right now. We continue to have 1,000 Bitcoin with each of Galaxy and Genesis. But again, it's something we're constantly evaluating.

[Kevin Dede, analyst]

Plans for the balance, the -- what is it about 4,400 plus -- yes, are you looking to that asset in any way that might generate yield?

[Jaime Leverton, executive]

Not at present, although we are going through an exercise to really look at our entire treasury management program. But at present, we don't have any plans to do anything differently with those Bitcoin that are held in custody.

[Kevin Dede, analyst]

Okay. Last question for me, Jaime, please. Have you kicked around using machines outside of MicroBT?

[Jaime Leverton, executive]

We always kick around everything, Kevin, you know me. We like to make sure that we -- we're in all of the right conversations. We test a ton of different types of equipment. There are some new entrants coming, as you know, and we're excited to see what may come out of those providers as well.

[Operator]

And we have no more questions.

[Jaime Leverton, executive]

Okay. Thank you all for your time and again for your patience this morning, definitely never a dull moment in our world. Again, thank you so much. Have a great day, everybody.

[Operator]

Thank you. Ladies and gentlemen, this concludes today's conference. Thank you for participating. You may now disconnect.