APLD - 4Q Review
Unpacking guidance
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APLD released 4Q earnings last night. The stock performed well, +14%. The key highlight was the huge guidance. In this post I will run through how the numbers make no sense.
Unpacking Guidance
The company provided the following guidance:
Below I breakdown the company’s revenue contribution from individual assets to bridge to 2024 guidance.
Jamestown, North Dakota (JT) - 100MW
JT has been operating since 2022. It has ~100MW of capacity and has been running at full capacity over the past two quarters, according to comments made on the company’s 3Q and 4Q earnings calls. Here is a snip for the 3Q call.
So at full capacity the facility generates ~$14m of revenue per quarter. Lets call it ~$60m/year for 100MW. This is running at full capacity now and should contribute ~$60m in revenue in 2024.
Ellendale, North Dakota (ED) - 180MW
Ellendale was fully energized in the last quarter, though the company didn’t comment on its capacity utilization. We know that this facility has been 100% contracted by Marathon. According to Marathon’s website, they are operating all of the installed units, but have additional planned capacity. So judging from this, the facility appears to be operating at ~86% capacity. I’m not sure exactly what the hold-up is to get more installed. I suspect that the company’s expectation is that it will continue to ramp to full capacity this year.
Garden City, Texas (GC) - 200MW
The GC facility is still not fully operational. Marathon has installed its miners there (reminder, Marathon is taking a bit less than half of the facility - 90MW of the total 200MW available). The company expects that it should energize in the coming days/weeks. Given that the company has a May year-end, we can probably assume that at best the facility will be fully operational for 3 quarters this year if it energizes and ramps in August.
Total Contribution
The company noted on the call that it expects $300m of revenue and $100m of EBITDA (~33% margin) from the three facilities once fully ramped.
My rough math - taking the $60m of JT for 100MW and using that as a basis for the other two facilities - is more or less around the mark.
The EBITDA margin makes sense if you are talking about purely segment margins, because then EBITDA is effectively equal to Gross Profit. Below we can see that GP Margins, ex D&A, are in that 32-35% range running at full capacity.
So given this, below are my forecasts for 2024
BTC Hosting Forecasts 2024
In the below example, I asume the following:
JT runs at 100% capacity.
ED runs at 95% capacity over the year - it is currently at ~86% according to Marathon’s website, so I assume that they switch on additional miners throughout the course of the current quarter, and run it at 100% for the remaining three quarters.
Garden City runs at 75%. I assume that it energizes in the coming week and then ramps up over the course of the August to run at 100% for the rest of the year. Marathon’s equipment is already installed, and presumably their other customers equipment is also.
This gets us to ~$253m revenue and $83m in adjusted Gross Profit (excluding D&A) - which is effectively segment EBITDA.
Now we have to add in overheads for the entire business. I’ve been pretty generous here, and effectively assumed that there is no increase in SG&A from 4Q’s annualised figure, despite the fact that the company is trying to stand up an AI business and hiring for that aggresively.
I’ve also been generous and excluded SBC and D&A.
Annualizing the $6.2m in 4Q adjusted SG&A gives an annual figure of ~$25m.
Working backwards from the midpoint of guidance - $395m of sales and $200m of Adjusted EBITDA, we get the following projections for the AI Business.
So, in order to hit guidance (based on my projections above), the company needs to generate $142m of revenue from the AI business in 2024, at effectively a 100% EBITDA margin. And that’s all without adding a single dollar of cost to SG&A from their 4Q run-rate. So, effectively, no hiring for the AI business.
Character AI, the company’s first AI customer who has just finished onboarding, has signed a contract for up to $180m over 24 months, which is expected to be fully operational by the end of the year. This contract would be worth $90m/year, if it had run at full capacity. Even if they managed to ramp the customer up by the end of next month to 100% capacity, it would still fall short of the required AI revenue requirement by ~50%.
The second “mystery customer” is expected to ramp up later in the year. That customer is worth ~$150m/year. So if we get that fully ramped by the end of November, it can contribute ~$75m for the year. Put those two together, and the company can hit its revenue forecast if all goes to plan.
How, exactly, it plans to hit its 100% EBITDA margin is unclear - especially considering that a large chunk of this revenue will be hosted using Colo facilities, meaning that they need to pay both fees and energy costs to the co-location provider.
Lets not forget that the company’s new AI business model is effectively buying machines and leasing them out. It is a very capital intensive business - the largest cost will be depreciation, and it will need to fund these costs also through interest bearing liablities. Pre-payments is not free money - it must eventually be replaced in the capital structure. It makes no sense to exclude D&A or interest costs and I would urge investors to pay attention to the GaaP economics of the business, not EBITDA. But I digress…
In the company’s investor deck from May 2023 (and even on the 4Q call), they even stated that Colo EBIT margins were expected to be 40%, and next-Gen HPC at 40-50%. Let’s leave aside that this would imply the company is more profitable that AWS for a second.
It shall be interesting to witness the real economics of the AI business as it ramps up - and I’ll eat my humble pie if the company hits its guidance. In fact, I’ll even consider going long if someone can explain the math to me.
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