Applied Digital Corp. Q3 FY2025 earnings call

• Data Center Hosting Business: Currently operates 286 megawatts of fully contracted data center hosting capacity in two North Dakota locations at full capacity. Bitcoin prices strong, optimistic about business.
• HPC Hosting segment: Achieved milestones like transactions with Macquarie Asset Management (up to $5B investment) and Sumitomo Mitsui Bank Corporation ($375M financing). Ellendale campus construction on schedule with first building expected to generate revenue in calendar fourth quarter 2025, second in end of calendar Q2 2026, third in calendar Q1 2027.
• Cloud Services Business: Board determined to review strategic options as Cloud Business seen as competitor to Data Center Business leasing discussions, and transition to data center REIT could lower cost of capital. Technical issues in Cloud Services resolved.

Fiscal third quarter 2025 revenues were $52.9 million, up 22% from prior comparable period. Data Center Hosting segment generated $35.2 million in revenue, while Cloud Services segment contributed $17.8 million.

• Macquarie and SMBC transactions strengthen financial position and capital for data center build-out. Ellendale campus construction on schedule. Cloud Services technical issues resolved and expected to ramp up.
• Expect update on leasing discussions for Ellendale campus near term.

• Macro-environment beyond control could cause actual results to differ from forward-looking statements.
• High cost of capital was a challenge, though recent transactions helped.
• Risk of non-renewal of Bitcoin hosting contracts.

Q: Good afternoon, everyone. First on the sale of the Cloud Services Business. Can you remind us, what the updated split would be between on-demand versus contracted and how you're thinking about total value there?

A: Yes. Nick, in the quarter, so we had four of our six clusters in -- remaining in reserve contracts and two moved to on-demand and the two in on-demand generated a small amount of revenue later in the quarter. But as Saidal mentioned, we've rectified the technical issues there and expect that to ramp up in the current quarter but that's the split currently.

Q: And just to clarify, none of the clusters today are in Applied data centers. So there wouldn't be a structure where you would still operate some of the capacity for those GPUs, correct?

A: That's correct.

Q: My second question was just on the DTC Hosting Business. Where does this business fit in the long term? And especially, as you remain focused on converting to a REIT structure later down the road?

A: Yes. So I think that the DTC assets will fit in a REIT structure and I think there is a long-term match between HPC Data Center capacity and Bitcoin hosting capacity. Nick, when you look at the sites that we're operating, so let's look at Ellendale just specifically. So 400 megawatts of critical IT load, that it moves to 530 of total utility load. But that won't be -- all of that power needs to be available at all times, but typically these run in the 70%, maybe at the high end 80% of capacity on an average basis and so that leaves a significant amount of power that would go unused and I think that's a really great match for Bitcoin facilities that have that ability to dynamically adjust the load at a site. So I would expect that to remain at Ellendale for us and I would expect actually for us to take a hard look at that at new sites as well to potentially add some Bitcoin capacity to be matched with the HPC capacity. But I look at those businesses as effectively one business.

Q: This is Thomas Shinske on for Brett. Thank you for taking my question. So first, I guess, you mentioned Macquarie and SMBC are playing an instrumental role in finding potential leasing partners for Ellendale. I guess with their involvement, are you seeing faster diligence timelines or improved leasing momentum because of their support?

A: I think the way I would -- excuse me, phrase that is, that we've seen more interest and -- but with the people who are already there, I think that it has significantly increased the comfort level with our ability to complete construction and operate facilities with kind of world-class financing partners in the mix.

Q: And then just on CapEx, I guess, can you provide an update on your expected capital needs over the next 12 to 18 months and whether the current construction of Ellendale is being built in line with past projections of CapEx?

A: Yeah. So this is Saidal speaking. So in terms of CapEx projections, you are correct. It's in line with past projections. Now, we will always measure the whatever impact, if any tariffs will have for the second and third buildings and adjust accordingly. But as of now, it is in line and then we prior have kind of pointed out. In terms of the CapEx cadence, you're running anywhere from $30 million to $50 million a month in terms of actual CapEx for the first building.

Q: And then one more, if I may, on the Bitcoin hosting business, I guess, could you provide clarity on when those contracts are up for expiration and if you see any risk in your large client potentially rolling off at the expiration of those contracts?

A: There's always the risk of non-renewal. I don't expect that to be the case, but I believe at Ellendale, we have roughly two years left on those contracts. I have to double-check that and Jamestown is roughly the same.

Q: Hi. My first question is on the kind of the remaining steps to complete the Ellendale facility. I think you said that kind of fourth quarter would be running, but what's sort of left there and how much CapEx is left to go just in that facility?

A: Yeah, I think -- so you know the good guidepost for CapEx spend. It's generally for Tier 3 data centers anywhere in the range of $10 million to $13 million per megawatt. So we're building 100 megawatts of critical IT load for the Ellendale, the first building. When I think about what's left, as you can see from some of our social media updates, the building, and a lot of the OFCI, the equipment is landed. Right now, it's a lot of the -- what I'd like to call the finishing touches as well as building out the generator plant, the back of power gen, et cetera. I'd refer to in our queue we -- a lot of PP&E particularly within the segment disclosures showed the spend in the assets as of February on the balance sheet. Yeah. And Rob, just to add to that, so we have been, I believe since February commissioning equipment at the facility. So you go through a fairly lengthy commissioning process. The facility will start landing IT equipment in the July, August timeframe and then you have the deployment of the IT equipment and this equipment as you probably know requires a significant amount of cabling and networking. So you have that piece of it as well to go for our customer but we will just to think about that we should start landing equipment, like I said, July, August and then start cabling, racking, cabling, and have this ready to go. The expectation is to start actually turning on in October.

Q: And then in terms of selling the Cloud Business, what's sort of your sense on the plans there? You start marketing it now and hope to have it sold by kind of year end or any kind of inside outside in terms of timeline there?

A: That process, Rob, has just started. I don't think we're prepared to give any update or any expectation on what that might be. I think there's a lot of different ways that could go and a lot of different structures that we could participate in. I wouldn't think of it as just a sale. We're evaluating everything there. But I think it's just too early for us to give any real meaningful comments on that.

Q: Hey, guys. Thanks for taking my questions. On the AI Cloud business, did you get any inbounds pre making this announcement about putting the asset up for sale?

A: I can't make a comment on that, Darren.

Q: Fair enough. And then a clarification, moving from a single-tenant to multi-tenant and the technical issues, was that a prior inter-quarter in the February, you guys just reported, meaning is kind of trued up starting the May quarter?

A: Yes, the issues were resolved there in the -- I think the first or second week of March. So it should be resolved for the majority of the May quarter.

Q: Got it. And then just one last one, if I may. The existing hyperscalers you've been talking to sort of post-Macquarie has disposition about data center build change at all just given kind of the current macro environment. Maybe has anything changed in the last three to four, five weeks?

A: Yes. I wouldn't say it changed in that timeframe necessarily. What I would say in general, Darren, is for the last year for us and then I've talked to a lot of CEOs that have been operating in this space for a lot longer than we have. But when you're dealing with a group of five or six potential customers, maybe seven potential customers, what -- it's a fairly concentrated market from that perspective and you have just kind of patterns of one of those companies is very aggressive and one is, not very aggressive in the market. So I would say, what we have seen over the past year and one of the things that has taken longer for us to get to where we want to be on the final lease is, just you see demand rotate between the hyperscalers and what I would say, overall is we see demand at least what it was, if not higher than it was three months ago when we had our call in January, but it's not always the same players. So you just see it kind of rotate between and there's a lot of I think pretty obvious dynamics in the market where you could guess as to, why that is. There are some really big end users of GPU capacity that have a lot of plans that have been announced over the past few months. So I think that's one of the things that drives it, but my understanding is it's also just not uncommon for some of these to consume a lot of data center capacity, take a break, and then come back.

Q: Hey guys, thanks. And while you covered demand a little bit, Wes, for the 100 megawatts, are you still talking to multiple hyperscalers for that? Or has that been kind of narrowed down to one hyperscaler you're negotiating with? And if you could talk a little bit about pricing trends the last 90 days, what are you seeing?

A: So I would say -- so let me hit pricing first. So on pricing, I would say, the last 90 days have been fairly stable. I would say, if you look on a year-over-year basis, it's increased year-over-year and that's to our comment of updating kind of our financial expectations for the campus versus what -- I think the last time we talked about that was roughly a year ago, when we give an update on the leasing activity there. So that -- so pricing up year-over-year, but I would say generally stable on the data center front in the last 90 days and then on -- to the other question about who we're talking to, just to fur that, we've made a lot of progress over the past three months since our last call, but we continue to have multiple discussions and what I would say about that is there's ongoing discussions with basically all of the hyperscalers, and it's not necessarily just Ellendale. We have discussions about our campus in South Dakota as well as other campuses, where we've also made a significant amount of progress on pushing forward with campus number two for ourselves. So those conversations are just constant. I won't comment on how far down the path we are with one in particular.

Q: Got it. And then, the decision to pursue a sale of the Cloud Business. You kind of talked about some of your hyperscale customers kind of view that as a friction point or potential competition. And you talked about how it doesn't fit into the REIT structure and the recent CoreWeave IPO. Would you say, there was a fair bit of pressure from your hyperscale potential customers to exit that business? I'm just trying to understand if that was a little bit more external driven or internal driven?

A: So I would say your last comment there is a fair comment, but also we've spoken publicly about this a fair amount that the -- these are -- we've structured these as two separate businesses. They're two separate businesses. It's two different customer bases and now we think is the time to separate those businesses, whether that be from those types of pressures or just what's going on in the market from you've had a couple of GPU Cloud businesses come public in the past six months. So I think it's just the right time for us, but we've always structured these that they would eventually be separate businesses and we just think it's the time to move towards that separation.

Q: Got it. And then do you still see that Cloud Business is roughly $110 million to $120 million annual business?

A: Yes. After the on-demand portion ramps back up, it should be -- I expect it to be in that neighbourhood where it was back in the previous quarter, and as the piece of on-demand is increasing the customer base and then also typically you get higher pricing for on-demand versus reserve contracts. And I do think is, if you look at the H100s that we have as those reserve contracts all roll off, those will go into an on-demand model. You can do reserve contracts, in my opinion, on newer generation, there's -- you could do some reserve contracts, you're not doing two years again, but you probably do six months or maybe one year of additional reserve contracts. But I think this market is just moving more and more to an on-demand model and so, we're -- we started adapting to react to that.

Q: Thank you. Just a question on the sale process. With your potential lessors having issues with the ownership, are they good with a -- an in-process sale? Would they require a definitive agreement? I'm just curious how significant they would view this?

A: Sure. There's no -- there's -- I'll be clear, there's no hard requirements on any of this. But like I said, I think this is just the right time for us to do this for both of the businesses, quite frankly. So you enable the cloud business to continue to grow, whether in a separate form from the combined company and then allow us to really focus on the large-scale data center business.

Q: I know you've been carrying some third-party data center capacity that was unused. I'm curious, how that part is involved in this process?

A: Yeah, well, you know, that can go or I will tell you that third-party data center capacity that's at 2023 pricing, in my view is a very valuable asset that we have. We've been asked about from third parties about getting that capacity from us. So I view that as one of the big assets of this business is, anyone who takes that business has immediate growth potential with available data center capacity that is at attractive pricing, like I said, it's 2023 pricing versus 2025 pricing.

Q: Hey guys, thanks for taking my question. Two here and maybe we'll start with the AI Cloud business. So 2023 pricing, that's interesting. How long is, I guess, left on those leases? And then one other -- what other piece would effectively be, there is the GPUs, is there anything else that would kind of get sold off in that process?

A: So this is Saidal. So on the data center leases, they're generally five to seven years with extensions. So that's a perception on that and then I'll let Wes talk about the other assets. Those are the primary assets that you've used in the data center capacity and then obviously, team some software like I said, the business we built at separate from the data center business. There's no real overlap in store group. So, it -- from that perspective of separating it out, it will be going to be easy for us as a seller and a potential buyer.