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Applied Digital Corporation (NASDAQ:APLD), which operates data centers where companies place their hardware in them while APLD provides operational and maintenance services, is coming off a generally mixed quarter. However, based upon building out its capacity, it has the potential to grow at a strong pace if it can execute on its strategy.
Applied Digital recently changed its name to be more in line with its goal of expanding beyond companies operating in the cryptocurrency space, which will diversify its customer and revenue base. This will lower its risk exposure to one industry or large companies as a percentage of revenue, along with mitigating geographic risk.
Along with its current date facilities, the company is working on building out two new data centers that have the potential to boost revenue and earnings based upon expectations they’ll generate as much as $100 million in adjusted EBITDA annually.
Most recently, the company announced it is planning to build a new data center in North Dakota to host its first non-crypto related business. The “specialized processing center” will be used by a company for machine learning.
In this article, we’ll look at some of the company’s recent numbers, the implications of its new data centers, and what an expanding and diverse customer base will mean for the long-term outlook of APLD.
Recent numbers
Revenue in the fiscal first quarter of 2023 was $6.9 million, in line with the high end of its guidance.
Adjusted EBITDA in the reporting period was negative $(1.9) million, within the guidance range of adjusted EBITDA of negative $(1.8) million to negative $(2.2) million. Taking into account its Jamestown, North Dakota data center only operated at 50 percent capacity during the majority of July and August because of equipment failure at a substation supplying power to the facility, the numbers next quarter should be better.
Management stated that in its second fiscal quarter its Jamestown facility should generate about $12 million in revenue, assuming it runs at full capacity.
The cost of revenues in the quarter was $6.1 million, with $4.1 million of that associated with $4.9 million in energy costs used to generate its hosting revenues. The other $1.2 million in costs were from $400,000 in personnel expenses and $800,000 in depreciation and amortization expenses.
Operating expenses in the fiscal first quarter of 2023 were $5 million, of which $4.1 million was in SG&A costs, another $600,000 was in stock-based compensation (“SBC”), and the remaining $300,000 in depreciation and amortization expenses.
Adjusted net loss in the reporting period was $(3.4) million, or negative $(0.04) per share. Net loss in the quarter was $(4.5) million, or $(0.05) per share.
Adjusted gross profit in the quarter was $1.7 million or 25 percent of revenue. Adjusted EBITDA for the fiscal first quarter of 2023 was negative $(1.9) million.
At the end of the fiscal first quarter of 2023 the company held cash and equivalents of $40.8 million and $14.7 million in debt.
Impact of its business model
Something investors should take into consideration is the business model of Applied Digital Corporation, which is one of hosting only. It provides a more predictable fee-based revenue stream, as well as less volatility on the bottom line.
Over time, that could also result in limitations on top line growth, but as it expands its capacity, that should also produce consistent earnings. I believe that will result in the company eventually throwing off some nice free cash flow on a steady basis. That time isn’t here yet, but it’s going to come if the company successfully executes on its strategy.
Beyond its general business model, another element in the mix is the company usually enters into long-term contracts with its customers, which will empower the consistency in its performance as it increases its data center capacity.
If we were to only look at the limitations associated with the physical data centers and their capacity, it could generate some concerns on its growth trajectory in the years ahead, but with strong demand and the potential to add more centers as the company is able to, the future growth potential of APLD in the years ahead looks compelling. But first it must work its way through the current risks associated with building out the two new facilities it’s building out at this time.
The two new facilities
With demand for data center business APLD is building continuing to rise, it is working on building out two new facilities; one 180-megawatt facility in Ellendale, North Dakota, and another 200-megawatt facility in Garden City, Texas.
When these become operational, the total hosting capacity of the company to 500 megawatts.
What’s compelling about this is the capacity from the two new facilities has been already contracted out with multi-year contracts, and when they are fully operational, are projected to generate approximately $100 million in adjusted EBITDA on an annual basis.
When considering where the company stands today, that will be a huge tailwind going forward. The process for approval in the Texas facility has taken some time because of APLD being among the first companies going through the flexible load program in Texas. What that means practically is, it has had to work with three agencies during the process.
In the worst-case scenario, APLD management sees it taking until early February 2023 before the facility would be turned on.
The major risk here is the delay in performance in the near term for the company if it takes longer than expected to go operational with the Texas facility.
Conclusion
I like the business model of APLD and believe it’s competing in a market sector that has plenty of growth ahead of it.
Its business model is based upon long-term contracts that generate consistent fees, and while it is limited per facility on a geographic basis, there is plenty of room for growth from the crypto market and other companies seeking similar services, now and in the future.
The company is taking steps to diversify its revenue streams across geographies, various companies, and in different industries, which over time, should remove a lot of potential risk in the long term.
Once its two new facilities are fully operational, and based upon their already being fully contracted out, APLD is going to produce some significant numbers beyond where it stands today.
The risk in the near term is in regard to Texas, which hasn’t fully approved the facility yet. While management believes there’s not going to be a problem there outside the time factor in the approval process, it still isn’t approved until it’s approved.
Even upon approval, it’ll temporarily result in lower performance until all its larger facilities are open and running.
The fact Applied Digital Corporation is winning that much business in a corporate environment that has been increasingly tight with money because of economic concerns over 2023 underscores the tremendous demand and value its business is offering to companies.
For that reason, I see APLD having a lot of potential over the long term. Once its facilities are fully running, it’s going to be a tremendous tailwind for Applied Digital Corporation.
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