Hut 8 Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
August 13, 2024

There are 7 speakers on the call.

Operator

Good morning, and welcome to Hutt 8's Q2 20 24 Financial Results Conference Call. After today's presentation, there will be an opportunity to ask questions. Please note that this event is being recorded and a transcript will be available on Hutt 8's website. In addition to the press release issued earlier today, you can find Hutt 8's quarterly report on Form 10 Q on the company's website at www.hutt8.com, under the company's agroprofile@www.sec.com and under the company's SEDAR Plus profile at www.sedarplus. Ca.

Operator

Unless noted otherwise, all accounts referred to during the call are denominated in U. S. Dollars. Any comments made during this call may include forward looking statements within the meaning of applicable securities laws regarding HUD A Corp and its subsidiaries. The statements may reflect 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.

Operator

These risks and uncertainties include, but are not limited to, factors discussed in HUD-eight's Form 10Q for the 3 6 months ended June 30, 2024 and Form 10 ks for the year ended December 31, 2023, as well as the company's other continuous disclosure documents. Except as required by applicable law, HUD-eight undertakes no obligation to publicly update or review any forward looking statements. During the call, management may also make reference to certain non GAAP measures that are not separately defined under GAAP, such as adjusted EBITDA. Management believes that non GAAP measures taken in conjunction with GAAP financial measures provide useful information for both management and investors. Reconciliations between GAAP and non GAAP results are presented in the tables accompanying the press release, which can be viewed on HOT 8's website.

Operator

I would now like to turn the call over to Ashar Janu, CEO of HOT 8.

Speaker 1

Good morning, everyone. Thank you for joining us today as we look back at an incredibly important quarter for Hut 8. In any market, businesses must navigate the inevitable ebbs and flow of macro headwinds and tailwinds. In Bitcoin mining, the network having is amongst the most powerful of these forces. While we cannot control forces like the having, we can't control how we respond to the challenges they create.

Speaker 1

We believe the hallmark of an enduring business is the ability to create value across market cycles. Today, our business is more resilient than ever. Our results this quarter demonstrate that we have delivered on the commitment we made 6 months ago when I became CEO to center the business on operational excellence and bottom line economics. I'll share the highlights now and Chenif will discuss our results in detail. As a reminder, the current period reflects the combined company's performance, while the comparison period reflects U.

Speaker 1

S. Bitcoin Corp. Performance as a standalone business prior to the merger. Our revenue grew 72% year over year to $35,200,000 for the 3 months ended June 30, 2024. Net loss attributable to Hut 8 for the quarter was $71,900,000 versus a loss of $1,700,000 in the prior year.

Speaker 1

And adjusted EBITDA was a loss of $57,500,000 versus $14,800,000 in the prior year. Both net loss and adjusted EBITDA reflect a loss on digital assets of $71,800,000 in accordance with the new FASB fair value accounting rules. So these figures only help part of the story. Despite the impact of the housing on top line production and revenue, we achieved significant gross margin expansion in our digital assets mining business from 34% to 46% year over year. Even with the 71% increase in network difficulty over the same period, our relentless focus on bottom line economics enabled us to deliver 12 points of gross margin expansion.

Speaker 1

This success stems from the ambitious program we launched 6 months ago, which included the shutdown of our underperforming Drumheller sites, the energization of our new Salt Creek sites, the relocation of our fleet from hosted to own facilities and the rollout of our proprietary energy curtailment software Reactor. These initiatives have materially improved our unit economics. In the Q1, our blended costs across self mining and hosted operations was $0.053 per kilowatt hour. In the second quarter, after exiting third party hosted facilities, implementing our operating technology and upgrading our infrastructure, this figure decreased to $0.032 a 40% reduction quarter over quarter. Furthermore, our average cost of energy per kilowatt hour, which reflects self mining only, decreased 21% over the same period.

Speaker 1

Assuming all other factors remain constant, the cost of mining Bitcoin would increase by 100% immediately after a halving event. We limited the increase on our average cost of mining to just 7% quarter over quarter, bringing it to $26,232 What is most notable is that we accomplished this with one of the oldest fleets in the industry, averaging 31.7 joules per terahash. Now consider the transformational potential of a large scale fleet upgrade. Next generation miners operating at 12joulesperterahash could revolutionize our economics, potentially increasing deployed hash rates across our existing infrastructure by more than 2.5x. I'll return to this idea later.

Speaker 1

If there's a takeaway, it's this. We prioritize fundamentals above all else and we invest capital only when we believe that will create enduring shareholder value. This philosophy has guided us in the past and will continue to guide us in the future. Every quarter, we step back to assess our performance and measure our progress. All the while, we continue to play the long game.

Speaker 1

Building a resilient, generational business requires nothing less. In that vein, let's turn to our strategic priorities for the coming quarters. Our business is built on a vertically integrated platform spanning hard assets, products, services, capabilities and technology. We think about this platform as a stack of 3 interconnected layers. The foundation of our platform is the power layer, comprising assets like interconnects, land and electrical assets.

Speaker 1

The second layer is digital infrastructure, comprising purpose built data centers and other load resources. And the 3rd layer is compute, comprising application specific hardware for energy intensive technologies like Bitcoin Mining and AI Compute. Think of the power layer as our operating system, the digital infrastructure layer as our app store and the compute layer as the applications we power. Power, digital infrastructure and compute. Each layer of our platform addresses a distinct market with unique challenges, opportunities, economics and return profiles.

Speaker 1

Together, they form a vertically integrated platform poised to see the much larger generational opportunity at the intersection of energy and technology. We aim to maximize long term value creation by playing across the value chain and delivering a differentiated value proposition at each layer of our platform. This model is central to our approach to resource allocation, competitive differentiation and growth. The broader implication is that we do not view ourselves merely as Bitcoin mining or AI business. We are a power business.

Speaker 1

Our aim is to maximize low capacity secured in our power layer for the long term. What we do with that power to maximize returns across our digital infrastructure and compute layers will evolve over time as markets and technologies evolve. With that in mind, let's discuss our strategic priorities at each layer. First, the power layer. We believe high quality power assets will become increasingly valuable as the demand for energy to support Bitcoin mining, AI and other emerging technologies continues to rise.

Speaker 1

Our goal is to build a scaled power portfolio capable of meeting this demand across existing and new technologies. To that end, we are aggressively advancing our gigawatt scale development pipeline. Our team strives to deeply understand the demands of our load profile and how they impact power markets. Deep domain expertise in both power and technology enable us to place Lowe strategically, unlocking access to what we believe are the most attractive development opportunities in the market. In building our portfolio, we prioritize quality as much as scale.

Speaker 1

Our deep market connectivity and strong deal flow allow us to be highly selective. We optimize across critical drivers of value, including scale, cost of acquisition, cost of power, term of power and term of site control to construct a portfolio that commands a market premium and drives long term value creation. Our gigawatt scale pipeline is evidence of the effectiveness of our strategy. Since the merger, we have converted 2 68 Megawatts of high quality greenfield capacity from this pipeline, expanding our total power footprint to 13 22 Megawatts. In the Q2, we energized 63 Megawatts of this capacity at our Salt Creek site and we are now finalizing plans for our recently announced 205 Megawatt Greenfield site in the Texas Panhandle.

Speaker 1

The Panhandle site exemplifies our approach to portfolio development. With 205 Megawatts of immediately available power capacity, it can support digital infrastructure at scale. It is adjacent to a wind farm and benefits for some of the lowest locational wholesale power prices in North America. During periods of low wind generation, it will be able to draw power directly from the aircraft grid, ensuring a reliable supply for use cases like Bitcoin Mining and AI. Long term power access and site control further enhance the site's potential value.

Speaker 1

Our Power First thesis, differentiated strategy and scale development pipeline were instrumental in securing our recent partnership with CoQ. Their $150,000,000 investment together with their expertise, resources and relationships will enable efficient high velocity growth of our power portfolio. The impact of this partnership is already evident in the enhanced quality and volume of our deal flow. We look forward to sharing updates on committed projects as they materialize. Next, let's turn to the visual infrastructure layer.

Speaker 1

Today, this layer of our platform comprises Bitcoin Mining Facilities and HPC data centers. In the future, it may include other forms of infrastructure as use cases for our power assets evolve. In this layer, we aim to extend the competitive advantage we have developed in the speed, capital efficiency and quality of our infrastructure development. This means we'll continue to strengthen our internal development capabilities with a focus on continuous innovation and value engineering. As demand for AI compute continues to rise, we see a clear opportunity to leverage our capabilities to capture this demand.

Speaker 1

We are actively exploring projects of multi 100 megawatt scale with potential JV partners and customers. At the same time, Bitcoin mining will continue to be an integral part of our strategy. The low cost and high velocity with which we can build Bitcoin mining infrastructure enables us to recoup our initial CapEx quickly and generate strong unlevered returns. This allows us to more aggressively underwrite and acquire large scale power assets, maximizing the volume of load capacity we secure for the long term. In parallel, it creates the optionality to transition the capacity to use cases like AI, which generally requires longer lead times to commercialize.

Speaker 1

I want to emphasize once more that we are not merely a Bitcoin mining or AI business. We are a power business and we monetize our power on an asset by asset basis with a focus on driving the highest returns on any given project. In this way, our strategy mirrors the model of a private equity firm managing a diverse portfolio of independent businesses underpinned by a single thesis and platform. With that said, we are currently in discussions for a large scale partnership for our site in the Texas Panhandle, which can power up to 205 megawatts of NVIDIA Blackwall GPUs or up to 16.5 exahash of next generation ASIC miners. With engineering, procurement and construction efforts underway, we anticipate energizing the site in the first half of next year.

Speaker 1

Stay tuned for more. A brief note on our managed services business, which extends our expertise in infrastructure design, construction and operations to 3rd party partners. Moving forward, we will pause business development in this segment as we focus on scaling our own portfolio. However, it remains a key driver of economies of scale. With this in mind, we have restructured our agreement with Ionic Digital to better align incentives.

Speaker 1

The revised agreement features a fixed fee of $15,000,000 per year with future upside opportunities for every new site we build or manage. Finally, the compute layer. The 3rd layer of our platform comprises application specific hardware such as ASICs and GPUs. Building a business as a fast moving compute layer requires significantly larger capital investments and assets with significantly shorter lifespans. While this entails greater risk, it also offers the potential for greater reward.

Speaker 1

It is within this layer that we can capture the lucrative economics offered by emerging technologies like Bitcoin Mining and AI Compute. As technologies evolve, the compute applications that drive the highest returns on our power assets may also evolve. Building for the long term means, we are closely monitoring the development of nascent energy intensive technologies. Our objective is to remain agile and responsive as technologies advance so we can capture new market opportunities far into the future. That said, let's focus on the present.

Speaker 1

Today, we believe Bitcoin mining and AI compute generate the highest returns on large scale low capacity and digital infrastructure. Given the scale of our power footprint and development pipeline, we are confident in our ability to establish a strong position in both markets. Across our platform, we adhere to disciplined capital deployment strategy, investing only when expected returns surpass a high hurdle rate. This discipline shapes how we scale our compute layer. In Bitcoin Mining, this focus has driven our efforts over the last two quarters to optimize unit economics and maximize returns of our existing ASIC fleet.

Speaker 1

With the recent leap in machine efficiency from 18 to 12 joules per terahash, the slowing pace of chip evolution, we now believe it is the right time to upgrade our fleet. We are actively negotiating with manufacturers and project financing partners to formalize a plan. In AI, this commitment shaped the launch of our GPU as a service vertical, which is on track to go live within the coming weeks. Our first cluster of 1,000 NVIDIA H100 GPUs will be hosted at a Tier 3 data center in Chicago, reducing the capital commitment required for market entry. Our customer, an AI cloud developer, has secured exclusive access to our first cluster under a 5 year agreement that provides for fixed infrastructure payments plus revenue sharing.

Speaker 1

Executing on our strategic priorities at every layer will require disciplined strategic capital allocation making a strong balance sheet crucial. At the close of the quarter, we held $175,500,000 in cash and 9,102 Bitcoin valued at $570,500,000 on our balance sheet, nearly $750,000,000 in total. Equally central to our approach is the judicious use of debt to maximize returns while minimizing shareholder dilution. As we continue to build the business, our purpose is clear, to maximize shareholder value. This means we will continue to take a holistic approach to structure the business, drive down our cost of capital and deliver outsized returns.

Speaker 1

I'll end my remarks today on the top of our most important asset, our people. Intellectual capital fuels everything we do. We believe that capturing the generational market opportunity we see at the intersection of energy and technology will require exceptional intellect, discernment and grit. Because of this, building the right team is one of our highest priorities. Last week, we announced that Sean Glennon will join Hut 8 as Chief Financial Officer on August 21.

Speaker 1

During his 13 years with Citigroup, Sean advised on more than $80,000,000,000 in M and A and Capital Markets activity across power, utilities and renewables. We are thrilled to welcome him to the organization as we scale our platform with a focus on creative structuring and disciplined capital allocation. In May, we welcomed Victor Sema to the team as Chief Legal Officer. Before joining Hut 8, Victor was Chief Legal Officer of Sextera Technologies, a global data center company with 2,300 customers in 60 data centers across more than 30 markets as of its last full year financial report. His extensive experience at the intersection of digital infrastructure, M and A and corporate securities has enhanced our ability to grow aggressively while maintaining uncompromising standards for risk management and downside protection.

Speaker 1

Both Sean and Victor bring incredible sector depth and functional mastery to our management team. They recognize the urgency of our thesis and they know what it will take to build a market leading energy infrastructure platform spanning power, digital infrastructure and compute. We are excited to harness their talent to strengthen our team, propel our business forward and create lasting value for our shareholders. These beginnings also mark an end. I want to thank Shanif Visran for his significant contributions to Hut 8 as CFO.

Speaker 1

Shinif has laid the crucial groundwork of operating excellence, financial discipline and prudent capital management required to build a truly great business. We are deeply grateful to him and wish him the best as he steps down to focus on his family. With that, I'll turn it over to Chenif one last time to review the financial results in detail.

Speaker 2

Thank you, Asher. Before we review the financial results, I wanted to remind you that U. S. Bitcoin Corp. Was deemed the accounting acquirer in the merger.

Speaker 2

And as a result, the historical figures in our income statement for Q2 2023 reflect U. S. Bitcoin's standalone performance. Results for Q2 2024, however, reflect the performance of the combined company. With respect to our balance sheet, Q2 2024 will be compared to year end 2023, both of which reflect the combined company's performance.

Speaker 2

Turning now to our results. We generated revenue of 35 $200,000 during the quarter versus $20,500,000 in the prior year period, which represents a $14,700,000 increase. The year over year increase was driven in part by growth in our Managed Services segment. Digital Asset Mining revenue was $13,900,000 for the current period versus $15,900,000 for the prior year period. Revenue decline was primarily driven by a decrease in Bitcoin mined due to the having and an increase in the network difficulty.

Speaker 2

Also during the Q2, we relocated miners from the Kearny and Granbury sites to the Alpha and Salt Creek sites and completed initiative at Salt Creek to fortify the upstream electrical infrastructure supporting the facility. This led to temporary downtime, which impacted our digital asset mining revenue in the quarter. Managed services revenue was $9,000,000 in the current period versus $4,700,000 in the prior year period and includes $6,000,000 in management fees, dollars 1,600,000 in cost reimbursements and $1,400,000 in the form of customer equity versus $3,100,000 from fees and $1,600,000 in cost reimbursements in the prior year period. The growth in managed services revenue was driven primarily by management fees related to our agreement with Ionic Digital. During the current period, we received only 1 month of management fees for Kearney and Granbury compared to the prior year period in which 3 months of management fees were received.

Speaker 2

We exited both the Kearny and the Granbury sites during the quarter. High performance computing colocation and cloud revenue was $3,400,000 for the current period. The revenue for this segment relates to the legacy Hut 8 business that was acquired as part of the merger with Hut 8 Mining Corp. And as a result, the prior year period includes no revenue from this segment. Revenue for this quarter consists mainly of recurring revenue.

Speaker 2

Other revenue was $8,900,000 for the current period versus nil in the prior year period. Current period other revenue consists of $3,600,000 in equipment sales, dollars 2,400,000 in hosting reimbursement, dollars 1,400,000 in hosting services revenue and $1,500,000 in power revenues from our natural gas power plants in Ontario. I'll now review our costs and expenses. Cost of revenue for digital asset mining for Q2 2024 was $7,500,000 versus $10,500,000 in the same prior year period. The decrease of $3,000,000 was driven by a decrease in costs after completing the relocation of our fleet from hosted to owned sites, including to our new site Salt Creek, which has a favorable energy profile, the implementation of our proprietary curtailment system, resulting in more efficient management of our energy costs and credits from participation in ancillary demand response programs.

Speaker 2

Despite the having an increased network difficulty, digital asset mining gross margins grew to 46% in the current period compared to 34% in the prior year period. Cost of revenues for managed services for the current period was $3,100,000 versus $1,500,000 in the prior year period. Cost of revenues consist primarily of reimbursable payroll and other site operating costs. The $1,600,000 increase was driven by a $1,000,000 increase in reimbursable payroll costs and a $600,000 increase in other sites operating costs driven by the addition of the 5 Ionic sites. Cost of revenues for high performance computing, colocation and cloud for the current period was $2,500,000 versus nil in the prior year period.

Speaker 2

Finally, cost of revenue for other for the 3 months ended June 30, 2024 was $7,500,000 and consists primarily of $3,200,000 in cost of hosting services revenue, of which $3,100,000 electricity costs, dollars 2,000,000 in cost of equipment sold and $2,300,000 in cost of power revenues. Cost of revenue for other was nil in the prior year period. Depreciation and amortization expense was $11,500,000 for the current period versus $4,100,000 for the prior year period. The increase was driven primarily by property and equipment acquired as part of the merger and as part of the Far North acquisition. Also as discussed last quarter, we adjusted the useful life of some of our mining equipment, which led to an increase in depreciation expense of $1,500,000 in Q2, 2024.

Speaker 2

General and administrative expenses were $17,900,000 for the current period versus $5,200,000 for the prior year period. The increase in SG and A was driven by a $6,700,000 increase in stock based compensation, a $2,400,000 increase in salary and benefits due to the headcount added as part of the merger and additional team members brought on to support the growth of the business. A $2,000,000 increase in general marketing office and other expenses due primarily to the relocation of miners from Kearny and Granbury to Alpha and Salt Creek and also driven by increases related to additional headcount and cost centers acquired as part of the business combination. A $1,000,000 increase in insurance expenses, a $1,000,000 increase in professional fees for corporate development related items, a $700,000 in investor relations and regulatory related expenses due to becoming a publicly listed entity and $700,000 in restructuring costs. Losses on digital assets were $71,800,000 for the current period and nil for the prior year period.

Speaker 2

The decrease was due to a decrease in market value of our Bitcoin holdings from the last reporting period to the current reporting period in accordance to ASU 20,203, effective July 1, 2023, which required us to recognize our digital assets as fair value with changes recognized in net income during the reporting period. The price of Bitcoin on March 31, 2024 was $71,289 compared to the price of Bitcoin on June 30, 2024 of $62,668 such that the decrease in Bitcoin price during the quarter resulted in the loss of $71,800,000 Other income totaled $14,400,000 in the current period versus an expense of $2,300,000 in the prior year period. The increase of $16,700,000 was due primarily to a $17,200,000 unrealized gain on derivatives driven by a mark to market gain on covered call options sold during the Q2 and a $700,000 foreign exchange gain, partly offset by a $900,000 decrease in equity in earnings of an unconsolidated joint venture and a $400,000 increase in interest expense. Loss from discontinued operations was $1,700,000 in the current period versus nil in the prior year period. On March 6, 2024, we announced the closure of our drum helder site in Alberta, Canada in connection with our restructuring and optimization initiatives designed to strengthen financial performance.

Speaker 2

The $1,700,000 loss was related to the closure of Drumheller. Next, I will discuss net income. Net loss attributable to the company for the quarter was $71,900,000 versus $1,700,000 in the prior year period. The current period net loss attributable to the company includes a $71,800,000 loss on digital assets as we previously early adopted the FASB accounting standards for crypto assets. Turning now to adjusted EBITDA.

Speaker 2

Adjusted EBITDA for the quarter was a loss of $57,500,000 versus income of $14,800,000 in the prior year period, a decrease of $72,300,000 The decrease was primarily driven by the $71,800,000 loss on digital assets. Adjusted EBITDA stayed constant otherwise as the impact of the having and the planned downtime at the Salt Creek site to fortify the upstream electrical infrastructure supporting facility was offset by the impact of optimization efforts and additional profitable revenue from managed services. Finally, I'll discuss our balance sheet. We closed the quarter with $175,500,000 in cash. In Q2, 2024, we entered into a convertible note purchase agreement with the fund managed by Cotu Management LLC, providing for the purchase and sale of a convertible note in the principal amount of $150,000,000 Our Bitcoin holdings are market fair value and totaled $570,500,000 as at June 30, 2024 based on 9,102 Bitcoin held in reserve.

Speaker 2

Of this total, 5,022 Bitcoin valued at $314,800,000 remained unencumbered at the end of the quarter. Our total debt excluding leases was $328,800,000 as at June 30, 2024. During the quarter, we entered into the COTU agreement for a principal amount of $150,000,000 Our coin based loan agreement was also amended during the quarter, extending the maturity date by 1 year. Of the $328,800,000 of total debt outstanding, dollars 114,300,000 is debt that is to be repaid based on a sweep of cash generated from the assets acquired with the debt with no minimum monthly repayment. We believe this level of debt is manageable as we execute on our growth plans.

Speaker 2

During the Q2, we continue to focus on improving our operational efficiency and driving down our cost base and are beginning to see these efforts materialize in our financials. Subsequent to the quarter close, we announced the first conversion from our pipeline of development opportunities under exclusivity with the announcement of a 205 megawatt site in the Texas Panhandle. With respect to AI and high performance computing, we expect to begin recognizing revenue in our new GPU as a service vertical in the Q3. As we continue to convert our development pipeline and engage in discussions regarding fleet upgrade, we will prioritize disciplined growth and capital allocation driving toward our North Star of maximizing shareholder value. I wanted to conclude my comments today on a personal note.

Speaker 2

As Asher shared, I have made the difficult decision to step down from my role as CFO for personal reasons. This decision was based solely on my need to dedicate more time to my family. My tenure at Hut 8 has been both rewarding and enjoyable and I've continued to have utmost confidence in the team's ability to execute on its ambitious vision for the future of the company. I want to thank Asher and our Board for their support as I made this decision. At the same time, I would like to welcome Sean to Hut 8.

Speaker 2

I believe the team and finance organization is in good hands with him as CFO and look forward to following the company's continued success. I will now turn it over to Sean, who will make some short remarks before we continue with Q and A.

Speaker 3

Thanks a lot, Chen. I'm thrilled to hit the ground running with the Huttig team next week and look forward to meeting many of you as I embark on my new role. After nearly 2 decades in financial services, including 13 years in the Power, Utilities and Renewables Group at Citi, transitioning to the corporate world was not a decision I made lightly. However, the opportunity to join what I believe is the best positioned company at the center of the megatrends shaping the power and digital infrastructure sectors was one I couldn't pass up. As I got to know the Hut 8 organization, I was incredibly impressed by the team's talent, drive and passion for what they are building.

Speaker 3

Under Asher's leadership, it is evident that every member of the team believes they are building a generational business. Having worked with hundreds of companies and management teams in my career, I can say with confidence that finding this type of environment is rare, but it jumps off the page once you see it. Building a generational business is no small feat in any industry, but building 1 in an industry that necessitates ingenuity, domain expertise, disciplined capital allocation and scale is even more of a challenge. At Hut 8, I am confident that I am joining a team more than capable of rising to the occasion. From a strategic perspective, Hut 8 is defining a new market segment by harnessing large scale energy infrastructure to empower the acceleration of technological progress, particularly on the digital infrastructure front.

Speaker 3

My experience advising on transactions involving some of the largest players in power, utilities and renewables brought me face to face with a tremendous market opportunity at the intersection of power and high performance computing. I was fortunate to have a seat at the table with executives shaping this landscape. As these discussions unfolded, it became increasingly evident that incumbent data center operators and developers do not have sufficient infrastructure nor resources to meet the power capacity required to facilitate the advancement of AI. More importantly, they are not well equipped to provide what hyperscalers demand timely access to multi 100 megawatts worth of long term reliable low cost power. I believe that Hut 8, however, is uniquely positioned to solve this critical challenge.

Speaker 3

Specifically, the Hut-eight team has positioned itself for this opportunity by executing on a thesis that prioritizes the acquisition of new load capacity. What further piqued my interest was learning that Asher and Mike had scaled the business pre merger to 7 30 megawatts of power capacity with a little over $100,000,000 in equity capital. It pointed to an extremely disciplined approach to allocating capital and generating returns on investment, a mentality I plan on upholding in my new role as CFO. As competition in the power markets intensifies, am particularly excited to work closely with the corporate development team as it continues to build and convert its pipeline of assets, drawing on deep experience at companies like NextEra, InBenergy, JPMorgan and GE Energy among others, this team has the expertise and track record required to sit across the table from counterparties that hold the key to new load capacity, many of whom are the likes of my former clients and speak their language. They understand the nuances of the commercial challenges faced by generation counterparties and know how to structure partnerships that solve these challenges.

Speaker 3

This is the type of deal making environment I have prided myself on fostering throughout my career. More broadly, I believe the focus on disciplined growth, operating excellence and data driven decision making that underpins this organization forms a strong foundation on which I plan to build. I am fortunate to enter the organization at a time when restructuring and optimization efforts are well underway, but will nonetheless bring a fresh set of eyes to identify areas for further improvement and efficiencies. And as the business continues to scale and diversify, I'm confident that my skill set, Rolodex and the strategic powerful business lens through which I plan to approach my role will drive significant value to our shareholders. I want to thank Asher, Sheneff and the entire team for the opportunity to play an instrumental role in Hut 8's next chapter.

Speaker 3

I believe this is merely the beginning of a period of exponential growth for the company and look forward to providing an update on our progress next quarter.

Operator

Our first question comes from John Tedera with Needham. Your line is open.

Speaker 4

Great. Thanks for taking my question, guys, and congrats on all the improvements going on here. First on the HPC business, I guess I have 2 questions related to HPC, but one on the 1.1 gigs in the pipeline, I guess just where do we stand on grid interconnect approval for all of it? And then my second question, it seems like to me that 205 Megawatt site could be all for HPC, correct me if not. And then just what are we kind of thinking on timeline for groundbreaking on that site as well as what's in the pipeline through the end of calendar 2024?

Speaker 1

Thanks, Sean. Good to hear from you. The pipeline all the assets that we have in our pipeline and assets that we have today, even if they're behind the meter, are grid connected. I know there was some confusion when we announced the Texas Panhandle site that this was a behind the meter wind farm and it didn't have grid connectivity. That site is aircon approved, has a substation available and can pull power as long as our data center is built and we have the connection into the substation.

Speaker 1

And so that site today, we're having conversations with customers about a HPC AI build, but we're also having discussions with them about other sites in our pipeline, which may be more interesting from them from a kind of fiber connectivity standpoint, that's a little less rule. And so we're having active discussions in the multi 100 Megawatt size in regards to AI expansion and looking at both our current fleet and also our expansion pipeline.

Speaker 4

Got it. Okay. Thank you for that. I sure appreciate it.

Operator

Thank you. And our next question comes from George Sutton with Craig Hallum Capital. Your line is now open.

Speaker 5

Hey, good morning guys. Thanks for taking my questions. This is Logan on for George. I wonder if we could just start with relative to that GPU as a service vertical, has anything changed with the agreement there? I mean, in the last quarter you were talking about fixed income and then maybe a revenue share.

Speaker 5

And on top of that, is that something you guys will look to expand here in the future? Are you comfortable with where you are right now?

Speaker 1

We have the same structure that we announced with them. So it's on a 5 year contract with the customer. It's a fixed base fee with a rev share model in terms of sharing on the economics in their real time on demand marketplace. We are currently looking at financing on a go forward basis. And so as I kind of focus our business on growth, we're looking at what is the best way to finance this, not just parent level balance sheet, but also project level financing.

Speaker 1

So we'll share growth plans aligning and in parallel with financing updates as well.

Speaker 5

Got it. And then I know in the press release, I think in your remarks, you talked about upgrading the fleet. Any sense of how much of the fleet you'll look to upgrade? And then maybe just do you have any ideas on the trajectory of the mining margin? I know you guys made some good progress here on the energy costs, but maybe just some thoughts going forward on that.

Speaker 1

We're really excited by the progress we've made since I took over in February. If you look, our cost of power this last quarter was $0.032 per kilowatt hour. I think that's one of the most competitive in the market today. So our power cost of mine of Bitcoin was $26,232 and that was based on a fleet efficiency of 31.7. The new S.

Speaker 1

Generation machines from bitumen are 12 joules per terahash for MicroVT around 16 joules per terahash. That's over 50% reduction in efficiency from where we are today. And so with all else remaining equal, you'll see that same reduction in the cost of mine of Bitcoin. So the fundamentals of what is our power cost, how is our infrastructure running, I think we continue to show the market and continue to optimize as a company and now replacing machines with newer generation machines. And I think the most recent announcement on the 12 joules per terra hash is a step function from where we were.

Speaker 1

The most kind of recent machine was around 17, 18 joules per terrajoules per terrajoules per terrajoules per terrajoules was a huge leap forward. And we're having active discussions today around the fleet upgrade as our machines kind of start going towards their end of life and as we look at selling those and refreshing the fleet that is existing on our infrastructure and then net new growth for new machines for new sites that we have in our pipeline. And so we've shared with the market that our intent is to continue to grow our power infrastructure and that means being a leader both in the growing and emerging AI sector in multi 100 Megawatt builds, but also a leader within the Bitcoin mining sector, which we've grown on our power footprint, but we haven't grown on our overall exahash and we'll continue to show growth there in the near future.

Operator

Our next question comes from Mike Colonese with H. C. Wainwright. Your line is open.

Speaker 6

Hi, good morning guys. Asher's team, congrats on all the progress. Really good to see here. Just a

Speaker 1

couple for me. You mentioned

Speaker 6

in the release that and just spoke on it about the fleet upgrades. If you could just provide a little bit more specifics than what you just mentioned as it relates to a timing perspective. As for roughly how long do you think it will take for a full upgrade of your sites after signing a purchase order? And if you could just remind us of the total developed megawatts in the portfolio that is wholly owned by Hut today?

Speaker 1

Thanks, Mike. We're in active discussions with the manufacturers today and different financing mechanisms in order to power the fleet upgrade that we think is the most economic way. If you look at hash price over the last little bit alone, I mean, the last 3 month period, you have hash price that have ranges in the $60 per petash per day down to as low as $36 So right entry point, right pricing and right financing is critical to us as we look at the fleet upgrade with this new generation machine. If we look at the overall amount of megawatts that we have, we have a pretty robust pipeline today. In regards to our wholly owned megawatts, We have about a gigawatt including the joint ventures.

Speaker 1

As you know, with King Mountain, it's a fifty-fifty joint venture ownership. And so we have a strong pipeline there and then we have the natural gas generation facility. So today, we have the 4 operating sites, including the expansion site, plus the King Mountain joint venture that are active Bitcoin mining facilities in addition to our pipeline.

Speaker 6

Got it. Got it. And switching over to HPC business, if you could just share what your utilization rate of your deployed GPUs is right now? And I think you mentioned previously that you're expecting a $20,000,000 annual run rate revenue from the business. Does that assume 100% utilization?

Speaker 1

That does not assume 100% utilization. That's based on the on demand rates we're seeing from our partner and the average utilization that they've had across their fleets. So we'll share more of those numbers as we go into the coming quarters and their online and operational and the financials start hitting our reporting metrics.

Speaker 6

Got it. If I could just squeeze one more in, Asher, on the HPC side. So you talk about the GPU as a service model, which you currently have operating. As we look at future expansion opportunities, I know you talked about evaluating all different types of opportunities, whether it be co location or somewhat similar to what you're doing now with owning the GPUs. I guess, what does that look like in terms of your go to market strategy?

Speaker 6

Are you leaning to one side versus another based on some of the market dynamics today?

Speaker 1

We see it as 2 separate opportunities. The GP as a service model, we have a full team that's running that business unit today. They are both looking at expansions with customers with the supply chain with NVIDIA and also from a financing perspective on a project level, equity and debt perspective. And so that's well underway. The team is building out and they're growing.

Speaker 1

At the parent level, we're spending a lot of time working on these the demand pull that we see that a lot of the industry and the market is talking about, which is these large scale customers with multi 100 megawatt demand for contiguous clusters. And we think a lot of our sites fit within those parameters of what they're looking for from a power availability perspective. It hits the fiber requirements that they have and we have the ability to give them the land requirements that they need as well. And so we're in active discussions there and that looks more like a co location deal, where we'd have a customer and a tenant lease and we'd be providing them a data center built to suit for that customer on a long term agreement.

Speaker 6

Got it. I appreciate all the color and thanks for taking my questions.

Speaker 1

Thanks, Mike.

Operator

Thank you. I'm showing no further questions at this time. This concludes today's conference call. Thank you for participating. You may now

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Key Takeaways

  • Hutt 8 delivered 72% year-over-year revenue growth to $35.2 million in Q2, but reported a net loss of $71.9 million (and adjusted EBITDA loss of $57.5 million) largely due to a $71.8 million non-cash fair-value write-down on its Bitcoin holdings under new FASB rules.
  • Operational excellence initiatives—shutting underperforming sites, energizing new facilities (Salt Creek), relocating to owned data centers and deploying proprietary “Reactor” curtailment software—reduced blended power costs from $0.053 to $0.032 per kWh and boosted mining gross margins from 34% to 46% year-over-year.
  • The company’s vertically integrated “power – digital infrastructure – compute” platform now spans 1.32 GW of power capacity (including 268 MW converted since the merger), with 63 MW energized at Salt Creek and plans underway for a 205 MW Texas Panhandle greenfield site supported by a $150 million COTU partnership.
  • In the compute layer, Hutt 8 is negotiating a fleet upgrade to next-gen ASIC miners (12 J/TH) to more than double hash efficiency and has launched a GPU-as-a-service offering with 1,000 NVIDIA H100s under a five-year revenue-share contract.
  • With $175.5 million in cash and 9,102 BTC valued at $570.5 million (totaling nearly $750 million) on the balance sheet, plus access to convertible debt, Hutt 8 emphasizes disciplined capital allocation and judicious leverage to fund its growth.
A.I. generated. May contain errors.
Earnings Conference Call
Hut 8 Q2 2024
00:00 / 00:00