Q2 2025 Earnings Summary
- Significant Growth Pipeline: Applied Digital has a substantial growth pipeline with 1.6 gigawatts of potential data center capacity outside of their Ellendale campus, with power availability in 2026 and 2027, indicating strong future expansion opportunities.
- Strong Financial Backing: The company secured a $5 billion perpetual preferred equity financing facility from Macquarie Asset Management, providing the equity needed to construct over 2 gigawatts of high-performance computing data center capacity. This significant funding supports future growth without diluting shareholder equity at the parent company level.
- Favorable Market Conditions: The pricing environment is strong, reflecting robust demand from hyperscalers for data center capacity, which benefits Applied Digital's business prospects and supports higher returns on investment.
- The company has invested over $700 million in the Ellendale campus , with expectations to recoup over $300 million , but the investments are a moving target , and there is significant debt repayment involved. This indicates a high capital expenditure with uncertain returns and repayment obligations.
- The exclusivity with the first potential hyperscaler customer has expired without securing a deal , and being a first-time supplier has led to longer than expected times to secure customers. This suggests potential difficulties in client acquisition and delays in generating revenue.
- The cost of capital is high, with a 12.75% dividend on preferred equity , which may impact profitability. While management expects returns to be above the cost of capital, the high cost in a capital-intensive business could pressure margins.
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Macquarie Investment and Funding
Q: How does the Macquarie deal affect your funding and pipeline?
A: The partnership with Macquarie provides significant funding, allowing us to finance over 2 gigawatts of our pipeline for 2025-2027. This moves financing to the asset level, reducing the need for equity dilution at the public company. It gives us a clear roadmap to finance future projects, and the backing from a well-known partner helps finalize leases with hyperscalers by addressing the last hurdle of being a first-time supplier. -
Progress with Hyperscalers
Q: What's the status of discussions with hyperscalers?
A: We are in varying stages of progress with multiple hyperscalers. The process is more accelerated now since we have prepared everything from technicals, design, fiber, and power. The Macquarie partnership helps address the last hurdle of being a first-time supplier, enhancing our optimism about finalizing a lease. -
Investment in Ellendale and Cash Proceeds
Q: How much have you invested in Ellendale, and how much can you pull out?
A: We have invested over $700 million in the Ellendale campus. Assuming project financing upon lease signing, we expect to pull in excess of $300 million of cash proceeds back to the parent company. The net investment is a moving target as we continue to invest in the project. -
Pipeline and Future Projects
Q: What's the outlook for your pipeline beyond Ellendale?
A: Beyond Ellendale, we have approximately 1.6 gigawatts in our pipeline across other campuses with power availability in 2026 and 2027. We are already marketing these campuses, with first power available in 2026. -
Pricing Environment
Q: How is the pricing environment with hyperscalers?
A: The pricing environment reflects strong demand from hyperscalers. Recent data center spending indicates robust market demand. -
Macquarie's 15% Ownership
Q: How does Macquarie's 15% ownership in the HPC business work?
A: Macquarie will own 15% of our HPC subsidiary on an asset-by-asset basis. For each project they fund, that asset goes into the HPC subsidiary, and they receive 15% ownership. -
Return vs. Cost of Capital
Q: Do you expect returns above your cost of capital?
A: Yes, we fully expect returns to be well above our cost of capital. The preferred equity is a portion of the capital, with the rest coming from our equity and project-level financing at favorable rates. -
Ellendale Capacity Allocation
Q: Will Ellendale's capacity be split among customers?
A: It could be split, but we strongly believe it will be a single customer for the entire campus. -
Lease Signing Dates
Q: Is there a required lease signing date for the facility?
A: The February 15 date is for completion of other items, not the lease signing. The outside date for lease signing is maybe in June. -
Learnings from Hyperscaler Process
Q: What have you learned from working with hyperscalers?
A: We've learned that being a first-time supplier takes longer, but once approved by a customer, future processes accelerate. Preparation and having all data and knowledge ready makes the diligence process smoother. -
Preferred Equity and ROFR
Q: How does the ROFR on preferred equity work?
A: We aim to finance everything at the asset level with the preferred equity. There's no restriction on raising equity at the parent company level.