Applied Digital Corporation (APLD) Earnings

Management highlights

- Major Contract and Pipeline Progress - Signed leases for five new campuses, three in the past four months, bringing total contracted long-term lease value to $36 billion, with $20 billion of that signed in Q4 2026. - All signed contracts cover 1.41 gigawatts of contracted critical IT load, with 80% of total contracted revenue leased to a single high investment grade hyperscaler, bringing investment grade customer share of total contracted revenue to ~76% (meeting the company's 70% target). - The company is actively marketing an additional 1.7 gigawatts of new capacity, and is in advanced negotiations for 250 megawatts of expansion leases with two existing investment grade customers, which would add over $6 billion of additional contracted revenue (with the potential for more at higher market rates). - Existing campuses have clear visibility to expand to over 5 gigawatts of total critical IT load by 2032. - Execution and Operating Model - Delivered 100 megawatts of Polaris Forge 1 on time and on budget in fall 2025, followed by an additional 75 megawatts at the same campus on schedule recently; all current construction projects remain on time and on budget, outperforming industry norms where 90% of projects over $1 billion are delivered late or over budget. - Uses a repeatable franchise model with standardized core leadership structure, proprietary design, and established supply chain to enable scalable, efficient builds across diverse geographies. - Maintains an industry-leading on-time delivery track record as a key competitive differentiator. - Power Infrastructure Strategy - Partners with Base Electron (in which Applied Digital holds a ~10% ownership stake) to develop 1.2 gigawatts of front-of-meter natural gas power generation in North Dakota's Bakken Shale region, which offers abundant low-cost energy, a cool climate, and a business-friendly environment. - This power generation will unlock expansion at existing North Dakota campuses and enable new development, creating a hard-to-replicate competitive advantage. - ChronoScale Separation - Completed the separation of ChronoScale, its accelerated cloud compute business, which began trading on NASDAQ under ticker CHRN in May 2026; Applied Digital retains 96% ownership, allowing shareholders to continue participating in its upside. - ChronoScale has hired high-profile senior talent from Tesla and Supermicro, extended an existing customer contract at higher pricing, begun demonstrating its secure enterprise AI platform to potential partners, and is pursuing large long-term reserve contract opportunities. - Financing Achievements - Secured multiple large financing facilities during and after the quarter, including $2.15 billion in 6.75% senior secured notes, a $300 million senior secured bridge facility, a $550 million revolving credit facility, and $1.59 billion in 7% senior secured notes. - Reduced the cost of debt by 225 basis points on recent note placements compared to earlier issuances, establishing a repeatable, increasingly efficient financing model.

Guidance

- The company previously targeted a $1 billion annual net operating income run rate within five years (set one year prior to the call). Management now expects to achieve this run rate one year from the call, three years ahead of the original schedule. - Revenue, EBITDA, and NOI are expected to see significant stepwise growth in coming quarters as additional contracted capacity comes online, from the current base that only reflects the initial 100 megawatts online in Q4. - CapEx is expected to be ~$600 million in the upcoming quarter, with CapEx run rate increasing further as construction advances at new campuses. - Initial Base Electron power capacity is expected to come online in 2029 and 2030, with further ramping after that. - Management expects the additional 250 megawatts of expansion leases to be signed at materially higher lease rates than existing contracts, potentially with longer durations, leading to higher total additional contracted revenue than the current $6 billion estimate.

Segment performance

In the fiscal fourth quarter ended May 31 2026 (continuing operations only): 1. HPC Hosting Business: Generated $203 million in total revenue, broken down as $152.4 million from tenant fed-out services, $44.1 million from base rent, and $6.5 million from tenant recoveries. This segment represented 78.5% of total company revenue for the quarter. Net Operating Income (NOI) for HPC base rental was $39.9 million, representing a 91% NOI margin. 2. Data Center Hosting (Bitcoin mining hosting): Generated $37.3 million in revenue, which was materially consistent year-over-year. It is the highest return on asset business in Applied Digital's portfolio, generating $12.5 million in segment operating profit on $113.8 million in reported assets for the quarter. This segment represented 14.4% of total company revenue. 3. ChronoScale (separated cloud/accelerated compute business): Generated $18.8 million in revenue (consolidated in Applied Digital's results as Applied Digital holds 96% post-separation). ChronoScale is excluded from non-GAAP results due to its independent public strategy. This segment represented 7.3% of total company revenue. Total company revenue for the quarter was $258.7 million, a 407% increase from the prior comparative quarter. Total services revenue was $208.2 million, and data center rental/other revenue was $50.6 million.

Risks & headwinds

- Power availability and the timing of new power generation and transmission projects are the primary constraint on company growth, with expansion of existing campuses contingent on the completion of new power capacity from Base Electron and other regional projects. - Global supply chain capacity for critical data center construction components is a second major constraint on growth, creating limits to how many campuses the company can develop simultaneously. - Labor market constraints and regional differences in labor availability and site preparation costs can push development costs into the higher end of the company's 11-13 million per megawatt cost range, particularly for new campuses with upfront infrastructure costs. - Volatility in AI sector funding and market sentiment towards AI infrastructure could impact equity valuations and financing conditions. - New campus development carries higher upfront costs for infrastructure like substations and site preparation, which can increase per-megawatt costs relative to expansion at existing campuses. - If the company fails to meet contractual service level agreements (SLAs), customers retain the right to cancel their leases, impacting long-term revenue.

Analyst Q&A

• Q: Why did Applied Digital sign the three recent large 810 megawatts leases, and how do their yields compare to peers? /

  A: The primary strategic goal was to build a durable foundation of contracted revenue from high-quality investment grade customers, which achieves the company's target of 70%+ investment grade contracted revenue. Management notes that the contracted lease rates are in the middle to high end of the market range for direct, large-scale leases with this type of investment grade customer. Pricing on recent leases reflects market conditions from when negotiations began, and future leases will reflect the higher market rental rates that have been seen in recent months. The fixed long-term contracts with solid SLAs create a stable base for future growth. (219 characters)

• Q: What is the company's strategy for lowering and managing its cost of capital across debt and equity? /

  A: Direct long-term leases with investment grade hyperscalers create predictable returns, unlike shorter-duration backstop leases that face refinancing uncertainty after 5 years. The company uses a three-part flywheel model: 1) initial funding from corporate cash flows and the low-cost (silver plus 225 bps) newly secured revolving credit facility; 2) Macquarie funds 75% of required equity through a $5 billion program with a mid-teens IRR, which is far less costly than issuing undervalued common stock or large convertible debt offerings that create credit and equity overhang; 3) site-specific construction debt is replaced with cheaper permanent financing once construction risk is removed. The company maintains conservative leverage (sub 7x net debt to annualized NOI) which further supports lower borrowing costs. (498 characters)

• Q: What are the primary constraints (governors) on Applied Digital's growth, and what is the company's AI thesis amid current market caution? /

  A: Power availability timing and supply chain capacity are the two biggest growth constraints; construction execution is well dialed in, with build times dropping from 24 months for the first building to under 12 months for subsequent buildings. Regarding the AI market, the company focused intentionally on long-term durable contracts with high investment grade hyperscalers, avoiding more volatile standalone AI model companies that have seen significant market swings. Regardless of whether AI develops towards open-source or closed models, all models require massive amounts of foundational compute capacity, so demand for AI infrastructure remains extraordinarily robust regardless of technology direction. (412 characters)

• Q: When will Base Electron power capacity come online, and what share of the 1.7 gigawatts being marketed is for existing customers vs new customers? /

  A: The initial 1.2 gigawatts of Base Electron capacity is expected to come online in 2029 and 2030, with further expansion after that. Expansion of North Dakota campuses relies on both Base Electron generation and other regional utility/transmission projects, including the upcoming JEDX transmission line. Nearly all of the 1.7 gigawatts currently being marketed is expected to be leased to new customers. (263 characters)