Bit Digital, Inc. (BTBT) Earnings Call Transcript

Hello, and welcome to the Bit Digital acquisition of Enovum Data Centers Conference Call. Good morning, good afternoon and good evening, depending on where you're joining us from. Thank you for being here. [Operator Instructions] Also as a reminder, today's conference is being recorded. I will now hand it over to your host, Cameron Schnier, Head of Investor Relations at Bit Digital. Cameron, the floor is yours.

Thank you. Good morning, and welcome to the Bit Digital acquisition of the Enovum conference call. Joining us on the call today are Sam Tabar, Chief Executive Officer; and Erke Huang, Chief Financial Officer. Billy Krassakopoulos, CEO of Enovum, will also be present on the call. Before we begin, please note that this call is being webcast and recorded. Today's press release and accompanying investor presentation can be found on our website. I would like to remind all participants that some of the statements we will be making today are forward-looking. These matters involve risks and uncertainties that could cause our results to differ materially from those projected in these statements. Our comments today may also include non-GAAP financial measures. Additional details and reconciliation to the most directly comparable GAAP financial measures can be found in our 20-F filing and other SEC filings, which are on our website. After our prepared remarks, we will open the call up for questions. [Operator Instructions]. I will now turn the call over to Sam to discuss the transaction. Sam?

Thank you, Cam. As a reminder, there is a deck published on our website that I'll be referring to. Bit Digital has acquired Enovum Data Centers, a Montreal-based owner, operator and developer of high-performance computing data centers. This acquisition vertically integrates Bit Digital's HPC operations with a fully operational and leased Tier 3 data center in a major city. It brings a variety of existing and potential colocation customers, a strong pipeline of expansion opportunities and the seasoned team with a proven track record to lead development. This also allows Bit Digital to offer new services like colocation and on-demand computing, complementing our existing GPU offerings. Slide 3 in the deck features some key points about this transaction. The total consideration for the acquisition was CAD 62.75 million, which approximates to approximately USD 46 million. The acquisition was completed on a debt-free basis, funded by CAD 56 million in cash and approximately 1.6 million shares issued solely to key management who rolled over a significant portion of their existing ownership from Enovum into Bit Digital. Both parties are now focused on mutual value creation for our newly combined entity. From our perspective, this was a great deal and transformative for Bit Digital. Why? Because we solved a major gap in our portfolio by adding an operational 4-megawatt Tier 3 data center at a price similar to greenfield development, but on a much faster time line. We also gained a cash flowing business with the diversity of customers. Finally, we've got a seasoned team to operate the business and to develop a strong pipeline of expansion sites. Let's take a step back and discuss what led to this transaction for Bit Digital. Bit Digital was one of the first bitcoin miners to announce an operational HPC business. We have had an actual cash flowing business since January 2024. Previously, our HPC business only covered one piece of the HPC value chain, often referred to as GPU-as-a-Service, effectively renting out GPU computing power to clients. It was clear to us early on that to expand this business, we should have our own Tier 3 data center. We honed in early on the M&A route versus greenfield development. We wanted to accelerate the outcome and get the expertise in operating and developing HPC data centers. Enovum vertically integrates Bit Digital's HPC business into the colocation services sector of the value chain. This creates the potential of significant synergies. Bit Digital may now capture even more margin from HPC customers versus hosting them with third-party data centers. Also, Bit Digital will now enjoy greater operating flexibility. We can now co-locate our owned GPU inventory in Enovum data centers and offer capacity to customers on a just-in-time basis. This is really important where time to market is key. We now have a co-location revenue stream to go along with our GPU-as-a-Service business. We can also place our own GPUs in our data centers, boosting revenue per megawatt compared to hosting third-party GPUs. We plan to offer on-demand computing, which will be useful when GPUs finish their contracts, but still have years of operational life, repurposing them for on-demand use should extend their revenue potential. This move strengthens our competitive position, allowing us to offer an integrated GPU cloud solution. Bit Digital now has 3 business units: one, HPC data center operations with colocation revenue; two, our GPU cloud business with GPU-as-a-Service revenue; and three, digital assets, which includes bitcoin mining and ETH staking. Our GPU-as-a-Service business will remain flexible. But having our own capacity gives us more control and allows us to offer space to customers with higher margin capture. Slides 5 and 6 in the presentation deck provide an overview of Enovum's existing data center referred to as Montreal 1. This is a 65,000 square foot facility in the heart of Montreal and is leased through 2036 with two 5-year extension options. The site is powered by nearly 100% hydro. It was built to Tier 3 standards with 2N redundant power distribution, 2N diesel generator redundancy, 2N UPS and N+1 cooling. It features high-density server racks designed for generative AI workloads. The facility is currently fully leased to a diverse customer base. There are currently 13 different customers at the facility, mostly representing AI or GPU cloud-related end markets. There is an average of 30 months remaining under the customer contracts, and we anticipate future colocation contracts to be between 4 to 12 years. This facility contributes around 1.6 million of revenue to Bit Digital in the fourth quarter of this year. Turning to Slide 9 which features our expansion road map and growth pipeline. Importantly, both our existing data center and all pipeline sites are in major metropolitan areas. We see significant value in having data centers in highly populated areas. They offer the greatest advantage for inference models where minimizing latency is crucial. We are positioning the company to accommodate inference workloads. This posture represents the long-term future of generative AI's demand for compute. Enovum's development pipeline totals 288 megawatts. Of this, 93 megawatts are under LOI with respective landlords. Notably, all sites in the pipeline will be designed to feature direct-to-chip liquid cooling, a key consideration for supporting the latest chip designs. Our immediate development plans are to bring an additional 8 megawatts online by 2Q 2025 across 2 sites. This includes a new 4-megawatt site, which we expect to complete for just under $20 million. This below market cost is a core aspect of our development strategy. We select sites with existing infrastructure to reduce costs and speed up time to market. On average, we anticipate per megawatt build costs to be around $8 million across the entire pipeline. We plan to bring an additional 20 megawatts online by the end of 2025 and project over 80 megawatts operational by the end of 2026. Important to note that we won't build on spec without firm customer commitments nor will we proceed if financing terms aren't favorable. Our near-term focus is on bringing smaller sites online. In the first half of 2025, we plan to activate several sub-5-megawatt sites. We believe this approach better balances financing, customer demand and cash flows by concentrating on smaller development projects. In the latter half of the pipeline, we have larger sites in the 50 megawatts range. Those will depend on securing customer commitments before beginning construction. We have strong indications of demand with Enovum's customer pipeline representing over 200 megawatts of demand across a diverse mix of current and prospective clients. This development pipeline is ambitious and will require capital. However, we believe this growth cadence is readily achievable given our visibility into the pipeline, customer demand and our ability to source key components. This isn't the only potential use of capital for Bit Digital. Our GPU cloud business also has ambitious growth plans requiring near-term capital and ongoing investment throughout 2025 and beyond to scale. Moving forward, we will carefully weigh capital allocation for each business, focusing on which opportunity offers a better return profile at any given time. This selective approach will also allow us to be more strategic about the GPU contracts we pursue. To support our HPC capital needs, we've engaged an investment bank to explore debt financing alternatives that could expand Bit Digital's capital resources. While we can't share specifics at this time, we are in advanced stages on the process and confident in securing debt financing from a prominent counterparty in the very near term. Fortunately, we have a strong balance sheet to help us finance the development pipeline. As of the end of September 2024, we had $104 million of cash and over $220 million of total liquidity, including the value of digital assets. We currently have 0 debt. By the way, it's worth noting that the Enovum acquisition has been structured to optimize tax outcomes and allow for a potential REIT election. Slide 11 highlights key Enovum employees that have joined the Bit Digital team. Retaining these individuals will help ensure operational continuity in existing site and support the development of our expansion pipeline. These employees bring decades of collective experience in managing and developing Tier 3 data centers, building a critical gap and Bit Digital's capabilities. They have successfully developed data centers for some of the largest companies in the world. It's better to have a seasoned team with established brand equity running our colocation business rather than attempting to manage it ourselves. They have satisfied customers who trust their ability to deliver on promises. They also have a pipeline of new customers eager to work with them. Their experience means we can avoid the common pitfalls of starting a new business and skip the steep learning curve. We are excited to mutually work towards making Bit Digital one of the premier AI colocation and GPU cloud companies in the world. It's challenging for us to provide comprehensive guidance at this time, but I will do my best to inform your models. We expect to refine these expectations over time. At a high level, we expect the existing 4-megawatt data center to contribute somewhere between $4 million to $4.5 million of EBITDA in 2025. Bringing on an additional 8 megawatts online by 2Q 2025 could result in a run rate EBITDA of around $13 million. Scaling to 32-megawatts by the end of 2025 could result in an annualized run rate above $45 million. These figures are approximate and assume the IT load is contracted to customers, which, of course, will inform our development cadence. We will [indiscernible] expectations over time and to reiterate, CapEx decisions will be made holistically while contemplating capital needs for our GPU cloud business. Slide 13, the final slide of the presentation deck illustrates EBITDA multiples for select companies categorize as pure-play miners, hybrid miners and data center REITs. The distinction between pure-play and hybrid miners has become increasingly blurred lately with most miners signaling HPC ambitions. The key takeaway is that we aim to achieve a valuation more aligned with data center REITs than with pure-play Bitcoin miners. Before this acquisition, our valuation multiple was even less than a pure-play Bitcoin mining stock, which, to us, is a bit strange, given we currently have the highest percentage of HPC revenue in the industry. We're not just looking for a higher valuation, we want to invest in areas where we can confidently predict returns. We view mining as an attractive call option for our company, but our growth capital will be deployed towards expanding our HPC business. Thank you. I will now open the line for questions.

[Operator Instructions] We will now go to our first question.

It's Mike Grondahl with Northland. Can you hear me?

Yes, Mike, loud and clear. Yes, we can hear you.

Okay. My first question is just on the 4 megawatts. I think that's already in place and then the incremental 8 megawatts by 2Q '25, is the ball rolling on that? Like contracts signed and everything nailed down? And then as a follow-up to that, where are you roughly on the incremental 20 megawatts?

I would like to very proudly hand that question over to Billy, who is the CEO of Enovum.

So the 8 megawatts for Q2, a lot of it has been procured. Customers are under LOI, and we confidently feel that we can deliver those sites for them by end of Q2 2025. The incremental capacity for the rest of 2025, sites are secured under LOI being converted to lease, and we are confident in delivering that as well. Supply chain issues on the customer end will be a major hurdle that they have to overcome to match the timing that these sites will be coming online.

Got it. And maybe for both of you, how would you characterize the demand environment out there? Maybe if Billy could answer for Enovum, and Sam, I don't know, just any update on the BTBT GPU-as-a-Service kind of demand environment.

We are seeing a very strong demand on the colocation side for HPC GPU-as-a-Service type users. Speed to market is key. Users are either in the middle of procuring their hardware or planning their deployments for 2025 and looking for capacity to match those deliveries. The last 6 months to a year, we've had very strong demand in this area.

Yes. And with respect to our GPU-as-a-Service business, we still think that we can achieve our target by the end of the year. There are, as mentioned before, a pretty [ pregnant ] pipeline of opportunities. But these are highly customized deals. So we've already announced two. There is something that's going to be announced with respect to the second one in the near-term future. But we do have the sales team now, which is fortunate. We didn't have one before, we built this entire business without a sales team. And we're really looking forward to producing more wins. There is a lot of demand out there, but there is also a cognitive overload. We've been -- we hired a sales team. We've acquired and vertically got integrated. So we've been running 100 miles ahead in building a very bright future.

Great. Great. And maybe just lastly, Sam, how are you thinking about CapEx funding this growth and kind of margin?

I'd like to hand that over to Erke. And I'll add to that, of course.

So the CapEx, we anticipate to fund -- each megawatt is roughly $8 million and for each megawatt, that would bring us based on current contracts little over $1 million EBITDA. So that's why we are looking at for funding the colocation business. And also on the synergy side, Bit Digital, we are looking to be one of tenants in Enovum's as well. So there's definitely a very good synergy between us.

Yes, nothing to add on that.

Got it. And margins, on a slide, I mean, it looks like the gross margins are sort of 60% to 80%. Is that the right way to think about it?

Yes, it depends on the customer, Mike. And we do expect some fixed cost absorption over time for the EBITDA profile to raise, but near-term sub that growing over time?

Will take our next question. Please state your name and company before posing your questions.

Kevin Dede, Wainwright. Congrats, Sam, Cam, Erke, I'm glad that you were able to put this deal together. Lots of questions. I don't know how much time you give me. I guess first question is for Billy. How old is this facility in Montreal? Give us some details on the locations and the other one's is Enovum exclusively in Montreal -- I'm sorry, Quebec? What's your prognosis on the power? I understand that -- or power availability, I understand that there have been some concerns voiced by the Bitcoin miners that the government isn't so happy about turning over so much power to bitcoin mining. I was just wondering how you view that from the HPC lens. Maybe you can give us some insight on GPU acquisition and building out the GPU-as-a-Service versus the hosting vertical where your customers are bringing their own machines. And maybe, Sam, to you, give us an update on your first HPC customer given their quandary and rolling out the latest NVIDIA chip. And one last one on Boosteroid, just I wasn't sure if that's the one you were alluding to in your commentary.

Yes. Let me just answer the last couple of questions. First of all, I can't discuss those 2 things just yet. There is certainly a lot of work happening on both ends. And -- but we will announce in the near term further updates on both clients. So I just wanted to scratch that off your list, Kevin, in terms of other questions. We will get back to you in a public format very soon on those 2 clients. But you asked a smattering of a bunch of other questions. I can't quite -- maybe just take it one at a time. What was the -- if you could just repeat one or two and then we can answer and then we can go on to.

I was curious about Billy's perspective on [ La Regi ]. I'm wondering about where these other sites are. Whether or not the power deals are in place, I think that's probably my overarching concern given what we've heard from the Bitcoin miners in Quebec. I was wondering how old that facility was in Montreal. And I'm wondering how you're thinking about buying your own GPUs to support the GPU-as-a-Service versus hosting your clients' machines.

The Montreal 1 facility was brought online mid-2021 and upgraded throughout to be able to host this new profile of end user, high density, high service, high demand. To the second question, the sites that we're looking at in our pipeline span across Canada. So we're looking at sites in Western Canada, Ontario, British Columbia. We do have projects in Montreal as well, where we have secured power. As Sam stated in his presentation, we'd like to focus on smaller sites that allow us to get to market faster, speed is key for these types of users. So we do have a couple of smaller sites coming online in the Montreal, Quebec area where power has already been procured for these, and the pipeline spans across Canada.

Okay. So you don't see any power hurdles for getting to that first 8 megawatts that you're targeting for the second quarter next year?

We do not.

Okay. And then is it fair to assume the same for the full 20 that you expect in 2025?

We do not as well. That includes projects in Montreal as well, smaller type projects that I talked about, but it also includes projects across Canada, Western Canada, mostly British Columbia.