Yahoo Finance Hut 8 Mining Corp. (NASDAQ:HUT) Q4 2023 Earnings Call Transcript
Hut 8 Mining Corp. (NASDAQ:HUT) Q4 2023 Earnings Call Transcript March 29, 2024
Hut 8 Mining Corp. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good afternoon 2023 Financial Results Conference Call. [Operator Instructions] Please note that this event is being recorded and a transcript will be available on Hut 8's website. In addition to the press release issued earlier today when filed, you can find Hut 8's transition report on form 10-K on the company's website at www.hut8.com under the company's EDGAR profile at www.sec.com, and under the company's SEDAR plus profile at www.cedarplus.ca. Unless noted otherwise, all amounts referred to during the call are denominated in US dollars. Any comments made during this call may include forward-looking statements within the meanings of the applicable securities laws regarding Hut 8's Corp and its subsidiaries. The statements made reflect current expectations 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, factors discussed in Hut 8 Form 10-K for the year ended December 31, 2023, and the Company's other continuous disclosures documents. Except as required by applicable law, Hut 8 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 Hut 8's website.
I would like to turn the call over to Asha Janut, CEO of Hut 8.
Asher Genoot: The second half of 2023 was an inflection point for Hut 8 Corp. On November 30, Hut 8 Mining Corp. and US Bitcoin Corp completed a merger. Our thesis was to combine the operating scale and discipline of US Bitcoin Corp with the strong balance sheet, access to capital markets and liquidity of Hut 8 Mining Corp. Our results this period clearly demonstrate the strength and potential of the combined business. First, for some context, from an accounting perspective, US Bitcoin Corp. acquired Hut 8 Mining Corp. We adopted the Hut 8 brand name in Ticker, but our historical and year end financials represent US Bitcoin Corp's results through November 2023 and the combined company's results for the month of December 2023.
With that, I'll turn to our results for the period. Our revenue grew 32% year over year to $60.6 million for the six month period ending in December 2023. Today, 68% of our revenue is generated by our digital assets mining or self mining business. While we remain committed to growing this business, we are equally excited to further diversify our revenue stream across other business lines like managed services, high performance computing and AI. During this period, we were also net income positive. Our adjusted EBITDA grew 386% year over year. Even excluding the impact of revaluing our bitcoin holdings to fair value, our adjusted EBITDA would have still more than doubled year over year. Our results for the fourth quarter of 2023 are yet another indication that this is a new chapter for Hut 8.
Our revenue for the three month period grew 212% year over year to $38.9 million. Our gross margin for the business expanded to 47% and our net income was $10.6 million for the three month period. Most importantly, we did this all without raising any external capital during the period and have set the business on a new trajectory without diluting our shareholders. Going into the merger, US Bitcoin Corp. acknowledged the need for an extensive operational overhaul of the legacy Hut 8 Mining Corp. Business. With our post merger restructuring program now well underway, we are confident that we can continue to drive costs down across the organization and increase cash flows in the coming quarters. The market value of our bitcoin holdings was approximately $557 million as of February 29, with a bitcoin price of approximately $61,000.
Based on the 9110 bitcoin we have held at the time, we had the second largest treasury amongst publicly traded miners in one of the top six largest treasuries amongst all public companies, alongside MicroStrategy, Tesla, Coinbase, Marathon and Galaxy. We intend to manage our holdings efficiently to fund growth through direct sales option strategies and other creative approaches to maximize shareholder value. At the same time, we recognize that our treasury provides proxy exposure to bitcoin appreciation for our shareholders and we will deploy our holdings with discipline. The next item I want to discuss is our debt. Thoughtfully structured strategic debt enables us to invest in growth and generate strong returns on invested capital without diluting shareholders.
We believe our three tranches of debt are healthy and manageable with balanced maturity profile and favorable repayment terms. We are committed to maintaining a strong balance sheet as we prepare for opportunities to invest post having. We are equally committed to strengthening our operations. Since I took over as CEO, we have focused tirelessly on driving efficiencies through a comprehensive restructuring program. First and foremost, we have implemented US Bitcoin Corp's operating principles and proprietary technology across all our post merger facilities. This means we now only mine bitcoin when it is profitable, using our proprietary energy management software to curtail operations when the cost of energy exceeds expected revenues. ' Our software drives significant cost savings by using a set of algorithms to automatically Adjust the energy consumption of each individual miner in our managed fleet of approximately 260,000 machines.
As an illustrative example, with our software, our realized cost of energy in ErCot West Lode zone during the period would have been $0.2.6 [ph] per kilowatt hour instead of $0. 5.9. This is the savings of more than 50% with a curtailment rate just under 9%. Our average cost of mine in bitcoin, excluding hosted facilities, was $16,353 for the six months ended December 2023. Our average cost to mine a bitcoin, including hosting facilities, was $18,815. Our average self mining energy rate was less than $0.4.5 [ph] per kilowatt hour and our average hosting rate was $0 6.3 [ph] per kilowatt hour. We continue to focus on driving down our cost of mine in bitcoin and our realized cost of energy. Earlier this month, we announced the closure of our Drumheller site.
Our plan to relocate efficient miners and retire inefficient miners is already underway. This is expected to one, increase our cash flow, two, reduce our cost of mine in bitcoin and three, drive a pro forma increase in our bitcoin mine per exahash of approximately 11%. The pro forma 44 bitcoin mine per operational exahash in February, excluding Drumheller, puts us in the top quartile of public minor performance during the month. Reflecting on the last seven weeks since I took over, I recognize the considerable time and effort we have spent on restructuring the business. While there's still work to do, I'm proud of the progress we have made. We continue to mine when profitable while focusing on top line revenue growth and cost reduction across the business.
Looking ahead, we are focused on two key pillars, strengthening and growing our self mining business and continuing to diversify our broader business. We have already made significant headway on both pillars and remain confident in our ability to execute. First is strengthening and growing our self mining business. In an asset intensive commodity business like mining, being a low cost operator is a key source of sustainable competitive advantage. As I detailed earlier, we are dedicating significant time and effort to improving our cost structure. We also recognize that many of our peers have announced expansion plans, including forecasts, to reach 20 exahash this calendar year what sets us apart is that we have already proven that we can build and operate at scale.
As of the end of February, we had approximately 27 exahash under management across our self mining, hosting and managed services business lines. For us, the question is not if we can scale, but when and how. Unlike in 2021, miners are not in short supply. If purchasing miners today at market prices would generate the highest return on capital, we would do so. But we believe a new generation of miners with a more efficient iteration of the three nanometer node is on the near horizon. We expect this generation to be followed shortly by an evolution to a two nanometer node with further improvements in efficiency. With the having quickly approaching, we are being thoughtful about the best time to upgrade our fleet and scale our operation. On the other hand, we believe energy capacity and infrastructure will continue to be a scarce resource across industries.
We have worked tirelessly to secure new megawatts with energy partners and we currently have more than 1100 energy development capacity under exclusivity. This represents nearly 63 exahash of capacity if filled with current generation miners. I look forward to updating you on our progress on these growth plans in the coming quarters, particularly as it relates to self mining exahash targets. Furthermore, we believe our ability to build sites quickly and cost effectively without sacrificing quality is unmatched. We will continue to execute decisively on accretive opportunities, just as we did recently with our acquisition of the 63 megawatt Salt Creek facility. Speaking of which, we are on track to Energize Salt Creek with miners hashing in April, less than three months after breaking ground at the greenfield site, we are recording some of the fastest build out times in the industry.
Thanks to our best in class development team, we expect to complete the project for less than $275,000 per megawatt, undercutting recent M&A transactions in the space by more than 40%. We are confident that this site, like the broad book site designed and built by us, Bitcoin Corp. Will be able to achieve hash rate efficiencies amongst the highest in the industry. Now I'll move on to the second pillar, which is continuing to diversify our broader business. This includes managed services, high performance computing, AI and power generation. I'll discuss each of these in turn. First is managed services. When we created the managed services business, we believed we could take our experience scaling us Bitcoin Corp and build a suite of turnkey solutions for institutions seeking project level exposure to bitcoin mining.
Our thesis was validated by the market and we grew the business to more than 680 megawatts under management in less than five months. Today, our partnership with Ionic Digital alone generates more than $20 million in cash revenue per year. In addition to cost reimbursements and equity incentives, Managed services is a powerful growth engine. It eliminates the need to deploy large amounts of capital to achieve economies of scale. It subsidizes the cost of our mining business across our operations and our partners operations, driving improvements in key cost metrics. And it generates a diversified stream of fiat cash flow that is de risked relative to hash price volatility. Managed services is the only proven offering of its kind. As demand for flexible load increases across institutions, governments and renewable energy producers, we are positioned to capture this demand as the partner of choice for infrastructure development and operations.
We continue to focus on refining our offering, driving top line growth and executing on margin expansion opportunities. Turning now to high performance computing. The second area of diversification. The reality is that our HPC business is currently subscale. However, we believe there's an opportunity to streamline the business and use it as a platform to design, build and operate AI specialized data centers. Today, we are focused on performing a thorough review of the business and developing a plan to achieve growth and profitability. The third area of diversification is AI. Our conviction is that demand for AI compute will continue to rise, leading to substantial growth in demand for underlying GPU hardware. In October 2023, we placed a $40 million purchase order for our initial GPU cluster.
Based on current market rates, we believe a deployment of 1000 Nvidia H 100 GPU's has the potential to generate nearly $30 million in top line revenue per year. We continue to monitor the market as demand increases and will seize opportunities to scale accordingly. We plan on sharing an update on this growing division in the coming quarter. And the final area is power generation. In February, we completed our acquisition of the Validus assets. We continue to believe in the underlying thesis of vertical integration that drove the transaction, but our strategy for maximizing the value of these assets has shifted. These are some of the few non contracted merchant power plants available in Ontario, making them more valuable to many players in the energy sector.
As a result, we are actively working with Macquarie, our joint venture partner, to explore strategic opportunities to maximize our return. Taking a step back our near term goal is to continue building a profitable, diversified business during fiscal year 2024. As one of the largest shareholders of Hut 8, I am more determined than ever to set a strong foundation for a lasting generational business. We have a strong balance sheet that enables us to grow while reducing the need for external capital and limiting shareholder dilution. Our new treasury strategy allows us to use our bitcoin holdings creatively with the goal of achieving a lower cost of capital for each project we pursue. Our diversified revenue stream and portfolio of CapEx light and CapEx heavy businesses gives us the ability to make the right bets at the right time, and our team has a single minded focus on building a best in class operating business.
In closing, we are profitable today and we continue to drive down costs across the organization. We are committed to growing our self mining business and diversifying our broader business, and we are relentlessly focused on maximizing shareholder value. With that, I'll turn it over to Shenif to review the financial results in detail.
Shenif Visram: Thanks, Asher. Before we review the financial results, I want to take a few minutes to explain what you will see in our numbers. Our year end financials are unique due to a number of factors. Firstly, we completed the merger on November 30, so we only have one month of combined company financials for the month of December. Secondly, while the merger between the two companies was a merger of equals from an accounting perspective, US Bitcoin Corp. Or us BTC was deemed the acquirer of Hut 8. Lastly, there was a change of year end for the accounting acquirer USBTC from June 30 to December 31. As a result of these changes, we are filing transition period financial statements as a bridge between USBTC's last year end, which was June 30, 2023, and Hut 8'S new year end, which is December 31, 2023.
The outcome of this is a six month set of financials. In today's call, we will be discussing the audited financials for the six months ended December 31, 2023 compared to USBTS six month unaudited ended December 31, 2022. In addition, we will discuss the December 31, 2023 balance sheet for the company on a combined basis. Turning now to the results, we generated revenue of $60.6 million in the six months ended December 31, 2023, which represents a $14.6 million increase from $46 million in the same period of the prior year. The year over year growth of 32% was driven by strong performance in our digital asset mining or self mining segment, the continued ramp up of our managed services business, and one month of the newly acquired high performance computing business.
Digital assets mining revenue totaled $41.5 million in the six months ended December 31, 2023, versus $25.7 million in the same period of the prior year. Total bitcoin mined in the current period was 1244 versus 1273 in the prior period. The growth in revenue was due to an increase in the average price of bitcoin, mined from approximately $20,200 during the six months ended December 31, 2022 to approximately $33,300 during the six months ended December 31, 2023. Managed services revenue totaled $12.6 million in the current period versus $2.6 million in the prior period. $12.6 million of revenue in the current period includes $9.6 million in fees and $3 million in cost reimbursement versus $1.5 million in fees and $1.1 million in cost reimbursements in the prior period.
The company began providing managed services for third parties in November 2022. As a result, the current period of six months ended December 31, 2023 reflects the full six months of activity in revenues, whereas the comparative period of six months ended December 31, 2022 reflects less than two months of activity. High performance computing, colocation, and cloud revenue totaled $1.1 million in the six months ended December 31, 2023. The revenue of this segment relates to the legacy Hut 8 business and was acquired as part of the merger with Hut 8 Mining Corp. And hence represents one month of activity. The prior year includes no revenue from this segment. Other revenue totaled $5.4 million in the current period versus $17.6 million in the prior period.
Current period other revenue consists primarily of hosting services revenue from our alpha site. Other revenue from the prior period consisted of $14 million in hosting services revenue and $3.6 million in mining equipment sales. One of Hut 8'S hosting clients defaulted on his contract during the six month ended December 31, 2022, which resulted in a termination of the contract without an obligation to refund. Hut 8 recognized the remaining deferred revenue of $13.1 million with respect to this client. I will now review costs and expenses. Cost of revenue for digital asset mining in the six months ended December 31, 2023 was $26.5 million versus $23.2 million in the same period of the prior year. This reflects an increase in electricity utilized due to higher network difficulty and hosting costs from additional miners online, partially offset by lower average cost of power.
Our cost to mine of bitcoin, excluding hosted facilities, during the six months ended December 31, 2023 was $16,353. This includes electricity offset by curtailment, credit and electricity cost reimbursement. Our cost of mine at bitcoin, including wholesale facilities, was $18,815. These cost to mine numbers include our net share of the King Mountain JV. Cost of revenues for managed services for the current period was $3.4 million compared to $1.1 million in the prior period. The cost of revenue primarily consists of reimbursable payroll and other site operating costs. The increase in cost is due to the full six months of activity for the current period, six months ended December 31, 2023, compared to less than two months of activity in the prior period.
Managed services gross margins were 73% in the current period versus 59% in the prior period. Cost of revenue for high performance computing, colocation, and cloud in the six months ended December 31, 2023 was $0.7 million. This reflects one month of activity in line with the revenue reported for this segment. The prior year includes no cost from the segment. Depreciation and amortization expense was $10.6 million in the current period versus $11.8 million in the prior period. The decrease in depreciation and amortization expense was primarily driven by the lower net book value of plant and equipment after the recognition of a non cash impairment charge during the six months ended December 31, 2022 as part of the annual impairment testing, partially offset by additional depreciation associated with property and equipment acquired as part of the merger.
General and administrative expenses were $37.6 million in the current period versus $10.6 million in the prior period. Stock based compensation increased by $9 million primarily due to the acceleration of certain stock options and the issuance and immediate vesting of certain restricted stock awards as part of the business combination. Current period SG&A was also impacted by a non recurring state tax provision taken for $9.6 million related to a facility bill in Texas. In addition, we incurred $2.4 million of transaction costs related primarily to the business combination. The remainder of the year over year increase is due to an increase in headcounts to support the growth of the company as well as the inclusion of one month of legacy Hut 8, SG&A.
The company implemented the new FASB fair value accounting rules which led to a $32.6 million gain on the reevaluation of our bitcoin holdings in the current period. For our company, the impact of this implementation was lower relative to the size of our bitcoin stack due to the business combination since legacy Hut 8 was acquired by US bitcoin. From an accounting acquirer perspective, the opening balance sheet for legacy Hut 8 was fair valued as of November 30. As a result, the implementation of the new policy only created a gain in the appreciation of bitcoin price from November 30 to December 31. The company expects that our net income in future quarters will be impacted by the fluctuations in bitcoin price as we fair value our bitcoin assets.
The prior year included $63.6 million impairments of a long lived asset where the current period did not have any such impairments. Other expenses totaled $4.5 million in the current period versus $15.2 million in the prior period. Total interest expense was lower by $3 million, mainly due to the NIDIG [ph] debt restructuring in February 2023. In addition, the company booked $6.2 million in equity for our 50% share of the King Mountain JV, which is accounted for under the equity accounting method. The next item is net income. Net income in the six months ended December 31, 2023, was $6.2 million versus a net loss of $81.3 million in the prior period. Prior year net loss included an impairment of long lived assets of $63.6 million. In the current period the company opted for the early adoption of the new FASB fair value accounting rules, which resulted in a gain of $32.6 million.
I will now turn to adjusted EBITDA. Adjusted EBITDA in the six months ended December 31, 2023 was $62.3 million versus $12.8 million in the prior period, an improvement of $49.5 million. This improvement is mainly due to the gain on the fair valuation of our bitcoin stack of $32.6 million, higher revenue from our managed services business, and the inclusion of our share of the King Mountain JV. And finally, I'll discuss our balance sheet. Our balance sheet remains healthy. We closed the fiscal year with $30.5 million in cash. Our bitcoin holdings are marked at fair value and totaled $388.1 million as of December 31, 2023, based on 9195 bitcoin held in reserve. Of this total, 6813 bitcoins valued at $287.6 million were unencumbered as of December 31, 2023.
Our total debt was $187.4 million, of which $126.2 million is to be repaid based on a cash fleet and has no minimum monthly repayment. The first tranche held by Coinbase is a $50 million loan collateralized by 2382 bitcoin as of December 31, 2023. In January 2024, we took a subsequent draw for an additional $15 million, which was also collateralized by bitcoin, bringing our total encumbered to 2572 bitcoin. With the recent appreciation of bitcoin prices earlier this month, we were able to reduce our encumbered bitcoin against a $65 million loan to 1872, freeing up 700 bitcoin. In tandem, we are exploring the opportunity to write a covered call on the newly unencumbered bitcoin. We believe the premium generated will be considerable, offsetting our interest expense on the loan and significantly reducing the effective interest rate.
In a downside scenario, the call would be struck generating additional sales proceeds. In an upside scenario, we would retain a significant portion of cash and reclaim our bitcoin. This trade demonstrates how our new treasury strategy enables us to generate value without direct reselling our holdings or diluting equity. The second tranche held by Anchorage is $44.4 million with a five year term cash flow fleet structure and end of term balloon payment. This debt is collateralized by a portfolio of machines from our self mining fleet and requires monthly payments only when the machines are profitable. This structure eliminates the risk of a fixed payment structure, which contributed to widespread defaults in 2022. And the third tranche held by our JV partner, Nextera, is $81.9 million with a five year term.
This tranche features a cash flow sweep on JV distribution, no minimum payments for the next four years, and enter the balloon payment secured solely by the interest in our JV, it exemplifies why we are so bullish on project level financing. It is highly accretive, non dilutive, and has no recourse to the parent company. Finally, in an effort to increase the transparency of our reporting to the market and our shareholders, our 10-K filing provides additional unaudited information, including an eight quarter history of unaudited financials spanning the three month ended March 31, 2022, to the three months ended September 30, 2023 of USBTC, plus the three month ended December 31, 2023, which includes two months of USBTC only and one month of combined company and a business combination footnote which shows pro forma financial information on the consolidated results of operations of USBTC and hired Mining Corp.
As if the transaction occurred as of July 1, 2022 with pro forma adjustments. That concludes my commentary. I will turn the call back to our operator.
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