BitFuFu - Q1 2024

Transcript

Operator (participant)

Ladies and gentlemen, thank you for standing by for the BitFuFu first quarter 2024 earnings conference call. At this time, all participants are in listen-only mode. After the management give their prepared remarks, there will be the question and answer session. As a reminder, today's conference is being recorded. I would now like to turn the meeting over to your host for today's call, Mr. Charley Brady, Vice President of Investor Relations for BitFuFu. Please proceed, Mr. Brady.

Charley Brady (VP of Investor Relations)

Thank you, operator. Good morning, ladies and gentlemen, and welcome to BitFuFu's first quarter 2024 earnings call. The company's financial results were released earlier today and are available on the BitFuFu investor relations website at ir.bitfufu.com, as well as on the GlobeNewswire.com website. Joining me today on the call are Mr. Leo Lu, Chairman and CEO, and Calla Zhao, Financial Controller, who will both be available to take your questions in the Q&A session that follows our prepared remarks. Before we begin, please note that the discussion today will contain forward-looking statements made under the Safe Harbor Provisions of the U.S. Private Securities Litigation Reform Act of 1995. Statements that are not historical facts, including statements about the company's beliefs and expectations, are forward-looking statements. Forward-looking statements involve risks and uncertainties that may cause actual results to differ materially from management's current expectations.

Potential risks and uncertainties include, but are not limited to, those outlined in the company's public filings with the SEC. The company does not undertake any obligation to provide any forward-looking statement except as required under applicable law. We will be discussing Non-GAAP financial information on this call. The company is providing that information as a supplement to information prepared in accordance with accounting principles generally accepted in the United States or GAAP. You can find a reconciliation of these metrics to the company's reported GAAP results in the reconciliation table provided in today's earnings release. I will now turn the call over to Leo Lu, the company's Chairman and Chief Executive Officer.

Leo Lu (Chairman and CEO)

Thanks, Charley, and welcome to BitFuFu. Hello, everyone, and thank you for joining us today for our first quarter earnings call. First quarter total revenues grew significantly year-over-year, increasing 149% to a record of $144 million. Additionally, as of March 31, 2024, our hosting capacity increased to 644 MW across 29 sites on three continents, representing a 26% year-over-year increase from the first quarter of 2023. That, as you know, the most significant business lines for us are cloud mining solutions and self-mining operations. Let me start with cloud mining. As discussed in our last earnings call, BitFuFu's business model is differentiated from traditional self-mining companies due to our cloud mining solutions, which directly complement our self-mining operations. This business model provides several key advantages over a purely self-mining business.

Cloud mining reduces the volatility of revenue created by sharp swings in the price of Bitcoin and greatly enhances our ability to generate cash flow. This is due to the fact that we pre-sell hash rate at a fixed price, thereby accelerating cash collection and providing upfront working capital to expand and scale up our operations, while also providing a hedge against the price volatility of Bitcoin by locking in revenue regardless of where the price goes. According to recent data from Frost & Sullivan, the global market for cloud mining solutions is highly concentrated, with the top five players accounting for 75% of the market in terms of revenue in 2023. We believe BitFuFu is the largest player in this segment, with a third of the market. In 2023, BitFuFu ranked first in terms of its four-year growth rate among the major global cloud mining players.

BitFuFu has experienced significant growth over the past 4 years as the value proposition of our cloud mining services increasingly gains traction. The one-stop service we provided to customers is a more efficient and convenient way for customers to mine Bitcoin and a more profitable way for them to acquire Bitcoin at reasonable costs. During the first quarter, demand for cloud mining services continued to grow, driven in large part by the increase in the price of Bitcoin. According to Frost & Sullivan, the number of cryptocurrency holders globally has increased from 68 million in 2019 to 580 million in 2023, representing a compounded annual growth rate of over 70%.

In the meantime, revenue from cloud mining solutions globally increased from $270 million in 2019 to $500 million in 2023, representing a compounded annual growth rate of almost 17%. Looking forward, the number of cryptocurrency holders globally is expected to reach 6.4 billion by 2028, representing a compounded annual growth rate of over 50% from 2023. At the same time, revenue from cloud mining solutions globally is expected to reach $1.2 billion by 2027, representing a compounded annual growth rate of around 19% from 2023. As the largest player in the global cloud mining solutions market, we are confident in our ability to continue growing revenue as we acquire more users and expand the number of miners with the strong support of our partner, Bitmain....

As of March 31, 2024, BitFuFu managed 28.6 exahash of mining capacity, compared to 18.8 exahash on March 31, 2023, representing an increase of 52% year-over-year and accounting for 5% of the total network hash rate as of March 31, 2024. The average fleet efficiency of the miners under our management was 22.3 joules per terahash as of March 31, 2024, compared to 26.6 joules per terahash as of March 31, 2023, reflecting our flexibility to adjust and optimize mining equipment to maximize profitability with our asset-light strategy. The approval of digital asset ETF by the SEC and SFC has significantly expanded the addressable market for digital assets and resulted in a significant increase in the price of Bitcoin.

This directly contributed to growth in our self-mining operations, both in revenue and in profit in the first quarter of 2024. We continue to focus on optimizing our cost structure and capital allocation strategy to improve profitability. We continued our strategy to reduce hosting and power costs by exploring opportunities to either acquire existing facilities or build new suitable mining infrastructure in the United States and other attractive geographies. We are currently in negotiations with operators of existing mining facilities on the potential for joint ventures or acquisitions. We are also considering greenfield projects. Some of these projects have made meaningful progress and are in the final stages. We rigorously evaluate every potential opportunity, meticulously assessing the risks involved in the acquisition process and subsequent operations, and its environmental impact and access to renewable energy sources.

Proactive measures are taken in advance to mitigate identified risks and safeguard the interests of our shareholders. We will keep the market updated on our progress and will announce any significant progress we make. In our pursuit of future power supply resources and renewable energy, we have adopted a comprehensive approach that aligns with our strategic vision of reducing operational costs, increasing revenue streams, achieving carbon-neutral operations, and vertical integration. We are exploring off-grid opportunities to hedge against grid dependency and the fluctuating cost of power, which we believe is crucial for stabilizing our operations. We are particularly focused on flare gas, which remains underutilized by the industry. In the United States, there is estimated to be between 400 and 500 thousand million cubic feet per day of flare gas, translating to 1,200-1,400 MW of potential power that is currently being wasted.

The approach, which we describe as turning waste into watts, converts this flare gas into power, may reducing the energy costs of miners while enhancing profitability for natural gas suppliers. We are excited to announce the launch of our first small-scale flare gas deployment in Texas, in partnership with one of the region's most proactive developers. Following a successful proof of concept, we expect the project to be fully operational by the end of 2024, where it will lower our mining costs and increase our gross margins. We look forward to providing additional details on this project in the coming quarters. As we drive growth across our business, we are also looking at opportunities to offer additional products and services that are conducive to the development of the industry overall.

For example, we developed a mining facility management system that was initially deployed on mining facilities operated and maintained by BitFuFu and other partners. Currently, this system manages over 50,000 mining rigs. This system helps us enhance and refine miner management, including the timely detection of mining rig failures, potential risks, and the ability to directly adjust the operating mode of the machines to optimize their profitability. In the future, by providing this system to more mining facilities and partners, we believe we can increase BitFuFu's brand recognition and expand our partnerships and resources. A lot has happened since the quarter ended, in particular, the fluctuation in the price of Bitcoin and the halving. The recent Bitcoin halving is a pivotal event for the entire industry.

While it impacts the overall output of Bitcoin mining by reducing block rewards, we have deep industry experience and have already factored the halving into our long-term business planning. Over 88% of the mining capacity we manage comes from the S19 XP model, with an average fleet efficiency of 22.3 joules per terahash, which has a low risk of being unprofitable in this environment. We continue to look for opportunities in many emerging regions where electricity prices are relatively low and mining rigs can move freely. In addition, we also believe the halving reinforces Bitcoin's scarcity. This scarcity factor has historically supported an increase in Bitcoin prices, which helps offset the impact on profitability from lower block rewards. In summary, BitFuFu had a very strong quarter. We are actively taking steps to reduce operational costs, increase margins, and decrease our carbon footprint.

Our ability to generate cash and strengthen our balance sheet ideally positions us to capitalize on growth opportunities going forward. These factors combine to form what we believe is a compelling strategy that will create long-term sustainable shareholder value. Now, let me turn the call over to Calla, who will cover the financial details of the quarter.

Calla Zhao (Financial Controller)

Okay, thanks, Leo. We experienced significant growth and achieved record financial results in the first quarter of 2024. For the quarter ended March 31st, 2024, total revenue was $144 million, representing an increase of 149% from $58 million in the same period of 2023. Net income was $35.3 million, a significant increase when compared to $2.7 million in the same period of 2023. This resulted in earnings per share of $0.22, compared to $0.02 during the same period last year. Let's dig into the details. Revenue from cloud mining solutions was $81.5 million, an increase of 181% from $29 million in the same period of 2023.

This growth was primarily due to an increase in the average selling price of cloud mining services and increase in repeat purchases from existing customers and new customers. Revenue from existing customers was $76 million, and from new customers was $5.5 million, accounting for 93% and 7% of revenue from cloud mining solutions, respectively. Despite the impact from the halving in April, which will lower overall mining output going forward, we maintain a dynamic approach to our product mix to attract customers with different risk preferences in the past year, past quarter. Our Nasdaq listing in early March, and our commitment to upholding the highest standards of transparency and compliance, significantly strengthened the trust that customers place in BitFuFu. This has directly supported our rapid acquisition of new users.

Additionally, our VIP tiered management system has helped maintain a high repeat purchase rate among our existing customers by providing customized services and marketing measures. Revenue from Bitcoin self-mining operations was $60 million, representing an increase of 117% from $27.7 million in the same period of 2023. The increase was primarily driven by the optimization of mining operations and favorable market conditions. The average hash rate used for self-mining increased by 70% year-over-year, and the average price of Bitcoin increased by 134% year-over-year. However, growth in our self-mining capacity was partially offset by an increase in blockchain difficulty for Bitcoin mining, leading to a decrease in Bitcoin output per terahash.

Bitcoin production from our self-mining operations in the first quarter of 2024 decreased 11% to 1,106 Bitcoins, from 1,239 Bitcoins in the same period of 2023. As of March 31, 2024, total mining capacity under management was 28.6 exahash, among which 26 exahash were from leased miners, 2.1 exahash were from our self-owned miners, and 0.5 exahash was from customer-hosted miners. In Q1 2024, 66% of the average daily mining capacity was used for our cloud mining solutions, with the remaining 34% used for self-mining operations. This is compared to the same period in 2023, in which 55% of the average daily mining capacity was used for our cloud mining solutions, and 45% for self-mining operations.

Our business strategy is to dynamically adjust and optimize the mix of cloud mining and self-mining operations over different cycles to enhance profitability, sustain growth, and increase long-term shareholder value. As a percentage of total revenue during the first quarter of 2024, cloud mining solutions accounted for approximately 66%.... Bitcoin self-mining operations accounted for just under 42%, and hosting services accounted for 2%. Total cost of revenue was $122.7 million, representing an increase of 121% from the same period of last year. The increase was in line with the expansion of cloud mining solutions and self-mining operations in the quarter. The average cost to mine Bitcoin from self-mining operations were around $39,000 per Bitcoin, representing a 76% increase from the $22,000 per Bitcoin during the same period last year.

This increase was primarily due to the increase in the price of BTC, which led to higher costs for procuring hash rates or leased miners. Additionally, increased blockchain difficulty also resulted in lower Bitcoin output per unit of hash rate. However, the increase in mining revenue due to the higher price of BTC more than offset increased BTC mining cost per unit. This resulted in self-mining gross margin increased to 27.6% in the first quarter of 2024, from 2.6% in the same period of 2023. Currently, we do not hold any mining facility assets, and our self-owned mining equipment accounts for a relatively small proportion of the total equipment under management. As a result, around 90% of our costs during the quarter were variable and consisted primarily of electricity, hosting, and leasing costs.

This asset-light strategy typically implies higher profit flexibility, quicker deployment, and lower costs to turn around. However, it also exposes us to risks, including increasing leasing costs due to BTC market fluctuations and increasing electricity and hosting fees from our partner mining facilities. Going forward, we will focus on optimizing our cost structure and striking the right balance between CapEx and OpEx. The overall gross profit margin was 15%, compared with 4% in the same period of 2023. In 2023 and 2024, to attract cloud mining customers and expand our market share, we adopted a competitive pricing strategy. Due to the approval of BTC ETFs and improved market sentiment during the quarter, the price of BTC increased significantly, leading to an increase in the gross profit margins of self-mining business to around 28%.

Sales and marketing expenses were $0.4 million, flat compared to the same period in 2023. Despite the 181% year-over-year increase in revenue from cloud mining solutions, the company did not increase spending on advertising and proportional activities during the quarter due to strong market demand. General and administrative expenses were $1.9 million, an increase of 111% from $0.9 million in the same period of 2023. This increase was mainly due to a $1.2 million increase in legal and other consulting expenses associated with our public listing on Nasdaq in March 2024 and other business development activities.

Research and development expenses were $0.4 million, a decrease of 20% from $0.5 million in the same period of 2023, primarily due to lower payroll costs for technical and development employees. There were no impairment losses on digital assets during the quarter, compared to $1.7 million during the same period of 2023. That is because of the adoption of fair value accounting loss on digital assets. Starting from January 1, 2024, the company implemented the early adoption of FASB fair value accounting rules, ASU 2023-08, and started to measure its digital assets by their fair value. The company recognized a revenue gain on Bitcoin of $11.8 million. That has yet to be realized as of March 31, 2024.

Gain on sales of digital assets was $13.1 million, compared to $4.5 million during the same period of 2023, primarily due to the increase in the volume of Bitcoin sold and an increase in the difference between the selling price and the carrying value of Bitcoin sold in part, in the first quarter of 2024. The remaining Bitcoin we hold will be retained for further potential capital appreciation, reflecting the careful and strategic management of our digital asset portfolio and ability to capitalize on favorable market conditions. Net income was $35.3 million, a significant increase from $2.7 million in the same period of 2023. Adjusted EBITDA grew 431% to $49.9 million from $9.4 million in the same period of 2023.

Now I would like to discuss the strength of our balance sheet. As of March 31, 2024, we had cash, cash equivalents, and digital assets of $163.7 million, compared with $76 million as of December 31, 2023. The increase in cash and cash equivalents were mainly due to the funds raised in connection with our business combination and listing on Nasdaq in March 2024. The increase in the balance of digital assets was due to the fair value gain on Bitcoin. For the Bitcoin we obtained from our self-mining operations, we adjust our BTC holding strategy based on our working capital needs and market conditions, such as the Bitcoin price and short-term price outlook. Overall, we have adopted a relatively conservative approach.

We sell a portion of our daily mining rewards on the same day to cover our hosting costs, including electricity costs. This approach ensures our cash flow remains healthy and secure. Additionally, selling daily also help maintain an average selling price for the Bitcoin, avoiding the need for sell large amounts at low Bitcoin prices to supplement cash flow. Beyond that, we hold the remaining mining profits in the form of Bitcoin, waiting for potential price appreciation. However, we may fine-tune this strategy and could choose to purchase more Bitcoin or increase our Bitcoin sales when we have attractive financing or investment plans. Our debt to assets ratio was 62% as of March 31, 2024. We continuously monitoring market conditions, liquidity requirements, and risk management strategies to optimize our holdings and protect the interest of our shareholders.

With that, I would like to turn the call back over to the operator to begin the Q&A section. Thank you.

Operator (participant)

Thank you, dear participants. As a reminder, if you wish to ask a question, please press star one one on your telephone keypad and wait for your name to be announced. To withdraw your question, please press star one one again. Please stand by, we'll compile the Q&A roster. This will take a few moments. Now we're going to take our first question for today. The question comes to line of Kevin Dede from H.C. Wainwright. Your line is open, please ask your question.

Kevin Dede (Managing Director)

Thank you very much for having me on the call. I'm curious to hear your view of the overall environment post-halving. If you could give us some insight on how you've seen power and lease costs change and what you think your target exahash will be for 2024?

Leo Lu (Chairman and CEO)

Okay. One second. Hello, I'm Leo, and over 88% of the computing power managed by BitFuFu comes from the S19 XP model, which has a power efficiency of 21.5 joules per terahash. And this is a low risk of being shut down. On the cloud computing power, we have already solved the risk of unprofitability from the cloud mining operations is borne. However, please note that this doesn't mean customers will necessarily incur losses after the halving event, as we have already factored in the potential impact of a halving in the pricing of our cloud computing power effects.

Charley Brady (VP of Investor Relations)

Hey, hey, Kevin, this is Charley. What was the other part of your question?

Kevin Dede (Managing Director)

Well, I was wondering what your target exahash level would be this year, and maybe you could give us some insight on the mix. Right, I understand how revenue broke down, but it's not clear how exahash break down, the 28.6, cloud versus self.

... And where you think that number goes this year?

Leo Lu (Chairman and CEO)

Yeah. We aim to presently scale up our mining capacity over the next few years to capture growth opportunities while maintaining balance sheet strength. We're expecting our mining capacity to grow in double digits annually over the next three years.

Kevin Dede (Managing Director)

Okay. Thank you very much.

Operator (participant)

Thank you. Now we're going to take our next question. The question comes from the line of Hunter Diamond from Diamond Equity Research. Your line is open. Please ask your question.

Hunter Diamond (CEO)

Hi. Firstly, congratulations on the very strong results. My question relates to: how are you looking to balance growth and profitability versus, you know, you're a profitable company, but you also want to continue expanding facilities. So how are you looking to balance those two objectives at a high level?

Leo Lu (Chairman and CEO)

Yeah. Um-

Calla Zhao (Financial Controller)

Okay, it's Calla. So I will take the question. Yeah, in general, we remain confident in our opportunity for growing organically. Yeah, as mentioned by Charley, we expect our mining capacity to grow in the double digits annually over the coming 2 or 3 years. And regarding the gross margin profits and actually, it's affected by the fluctuation of Bitcoin prices and blockchain difficulties, which was similar to traditional miners. Important to know that positive impact of our cloud mining solutions and our other business lines have on can reduce the volatility of the gross margin, especially when compared to the volatility of Bitcoin price. So, we... Our... Sorry, let me...

Our priority is to optimize the return on invested capital through prudent execution of our strategy roadmap, and we will maintain the flexible in adjusting our capacity expansion based on dynamic miner availability and economics.

Hunter Diamond (CEO)

Great. No, thank you. I appreciate the additional color, and congratulations again on the results.

Calla Zhao (Financial Controller)

Thank you.

Operator (participant)

Thank you. Dear participants, as a reminder, if you wish to ask a question, please press star one one on your telephone keypad. And now we're going to take our first question. The next question, my apologies. And the question comes from the line of John Roy from Water Tower Research. Your line is open. Please ask your question.

John Roy (Managing Director)

Great. I wanted to talk about a little bit. I know you're doing the flare effort, which I commend you on out there. You know, Galaxy is up there, of course, saying West Texas is the best dirt for mining. Do you span-

Leo Lu (Chairman and CEO)

Well-

John Roy (Managing Director)

expect to span significantly in West Texas?

Leo Lu (Chairman and CEO)

Yes.

John Roy (Managing Director)

Okay.

Leo Lu (Chairman and CEO)

Yeah.

Charley Brady (VP of Investor Relations)

Well, you had mentioned. Hold on. He's, he's answering a little bit more.

Leo Lu (Chairman and CEO)

A little more. Yeah, yeah. Yes, we are venturing into flare gas operations. Yeah. Strategies that convert waste into energy, aligning with our industry's move towards sustainability, with the initial developments planned in Texas. This initiative not only supports our environmental commitments, but also diversify our energy portfolio to ensure a stable, upgraded power supply. Yeah, and by converting waste gas into valuable resources, we create additional revenue opportunities and a move towards energy and self-sufficiency. Yeah. Thank you.

John Roy (Managing Director)

Yeah. One more quick question. On the broader double-digit, you know, growth over the next few years, do you expect to grow faster than the industry?

Leo Lu (Chairman and CEO)

Sorry, can you repeat again?

John Roy (Managing Director)

Sure. You had mentioned double-digit growth over the next few years, and I believe you'd mentioned industry growth somewhere around 19%.

Leo Lu (Chairman and CEO)

Mm-hmm.

John Roy (Managing Director)

Are you expecting to grow faster than the industry?

Charley Brady (VP of Investor Relations)

I don't think, Charley, we want to get into specific growth rate for Bitmain. We said we're gonna grow double digits, right? So you can factor that into whatever your market growth rate is based on that.

John Roy (Managing Director)

All right, great. Thank you so much. Excellent quarter. Thanks, guys.

Leo Lu (Chairman and CEO)

Thank you.

Operator (participant)

Thank you. Now we're going to take our next question. The question comes from the line of Kevin Dede from H.C. Wainwright. Your line is open. Please ask your question.

Kevin Dede (Managing Director)

Yeah, thanks very much. I understand 29 facilities. I was wondering if you could give us sort of a range of their size, and from a megawatt perspective, how big are some of the large ones, and how small are the small ones? And then maybe give us a view to the pilot, the size of the flare gas pilot you're running and how large you think you could grow that to.

Leo Lu (Chairman and CEO)

Yeah, we don't have information in front of us right now, but we can have Charley follow up with you directly after the call to provide more details.

Kevin Dede (Managing Director)

Wonderful.

Charley Brady (VP of Investor Relations)

And Kevin, just, just specific to the flare gas project in Texas, you know, it's a, it's a pilot phase program right now, so we're, you know, we're still in the process of collecting data. And I think we'll, we'll probably putting out more information as we, as we gather that data. So stay tuned in future quarters. And I'll circle back with you after the call to give you a more specific question about the range of the, the size of those, those various sites across the states.

Kevin Dede (Managing Director)

Yeah. Also love to hear some insight on power costs, too, as you're, as you're digging around back there, Charley. Appreciate it. Thank you very much, gentlemen.

Leo Lu (Chairman and CEO)

Thank you.