CleanSpark ($CLSK) FY 2025 Earnings Call

Thank you, Matt. I'd like to start by reviewing the numbers for the entire 12-month fiscal period, which was a landmark year for CleanSpark. Our revenue grew more than 100% year-over-year to $766.3 million with almost 8,000 Bitcoin produced. The major driver of this increase was due to a combination for our growth in Exahash and Bitcoin price. Our full-year gross margin was 55% which we're particularly proud of given that this was the first full year post halving. These margins remained relatively in line with the prior year which is attributed to the significant increases in efficiency our fleet had over the last 12 months. Also contributing to our gross margin consistency is our average marginal cost per Bitcoin, which was slightly below $43,000 for the fiscal year. While our average revenue per Bitcoin was approximately $98,000, our margins and cost per bitcoin represents the strength of our infrastructure quality, our world-class teams and commitment to managing our business to profitability and margin rather than any single operating metric. Our high margins translated to an adjusted EBITDA of over $800 million which I must point out does not adjust for certain non-cash items such as the mark-to-market on fair value of Bitcoin. When normalized by excluding our gain on the fair value of Bitcoin the adjusted EBITDA from operations would be approximately $305 million which represents a net margin of approximately 40%. Additionally, the combination of increases in margins and fair value of the 13,000 plus Bitcoin we have on the balance sheet contributed to a significant positive net income of about $365 million. Looking at the most recent quarter performance, we also saw significant gains between the third and fourth quarters. Our revenue increased by approximately $25 million or 13% in Q4 versus Q3 and our margins increased two points to 56.5%. It is important to note that we achieved 50 exahash in June and while that remained our operational high for the fourth quarter, we still experienced increases in revenues and margins because of favorable mining economics during the quarter. Our high uptime also allowed us to capture periods of significant appreciation in Bitcoin price. In the fourth quarter, we recognized a slight net loss compared to the third quarter. This was due to a much larger gain on fair value of Bitcoin during the third quarter and non-cash tax adjustments recorded at our fiscal year end. Our adjusted EBITDA margins also saw similar changes which is inclusive of the non-cash mark-to-market adjustment on fair value of Bitcoin. However, when adjusting any non-cash mark effect, our normalized adjusted EBITDA was $97 million for the fourth quarter, a 25% increase over the $78 million normalized in the third quarter. This translates to margins of 43% and 39% respectively. Going forward, we do expect that our professional fees, payroll, and G&A line items will increase as we execute on our AI strategy. Additionally, I will point out that the AI data center business comes with stable cash flows and high margins, both of which will help CleanSpark through the peaks and valleys of Bitcoin mining economics. Our escape velocity translates to operating leverage. We have developed scaled data center infrastructure that is delivering revenue and margin necessary to self-sustain and further support incremental investment in AI data center capabilities as we evolve into a power, land, and compute platform. Turning our attention to the balance sheet, I want to point out that we are one of the first, if not the only company which has a scaled cash flowing business that is also using Bitcoin as a productive capital asset. The utilization of our Bitcoin stack resides in a team we refer to as digital asset management or DAM. The fourth quarter was the first full quarter of DAM activity and we are extremely excited to share in more detail the steps we have taken in our crawl phase. Two initial strategies rolled out by DAM are our spot plus and yield strategies. Both utilize covered calls but spot plus is designed to optimize for the cash needs of the business while yield is designed to generate go forward risk adjusted output from our treasury holdings. Given that we are monetizing a significant portion of our monthly Bitcoin production, the spot plus strategy delivers a tactical uplift to cash generated on a weekly, monthly, and quarterly basis. This program functions smoothly because of the consistent output from our world-class operations and strong uptime. We are able to utilize this approach because of the investment we have made in making DAM a true institutional-grade platform. It began with a comprehensive RFP for a range of products that you have heard us discuss on protocols and executing these option overlays requires a disciplined approach to risk management. Rather than selling Bitcoin through the spot market, we utilize at or near the money covered calls to generate both option premium and realized proceeds if and when we ultimately get called away on these contracts. Our yield strategy utilizes covered calls as well, but instead of high delta short duration, we shift delta and extend or latter term to reduce the likelihood of exercise. Under our yield program, we saw an annualized yield of approximately 12% on a blended basis. In addition, as we scale our strategy and increase the volume, we believe there's room to incrementally increase the annualized yield and cash generated potentially significantly. While the fourth quarter represents a period when we were still in the crawl phase of the strategy, we were nonetheless able to generate a total of $9.3 million in premiums. To illustrate what that represents, our average spot Bitcoin sales price for the quarter was $111,721. However, when considering the additional premiums generated per Bitcoin of $4,184, the all-in effective cash generated per Bitcoin was almost $116,000, a material uplift. One of the early wins for the DAM team was the successful monetization of costless Bitcoin repurchase options received as part of a Bitmain procurement contract from the third quarter. This was an excellent example of how our investment in the digital asset management function can help us to complete the arc of opportunities driven by our world-class mining operations. While our mining operations drove leverage in preferential terms to obtain mining rigs, DAM was able to monetize that option which would have otherwise have expired worthless driving $7 million of additional cash to the balance sheet. Due to the performance of DAM to date, we have increased the volume of transactions subsequent to our fiscal year end. In October alone, we traded more contracts than the total number of contracts traded during the entire fourth quarter. Additionally, we generated over $5 million in cash premiums for the month of October alone. The last leg of our current strategy involves writing puts. The put transactions we enter into are cash secured, primarily using the premiums previously generated under the spot plus and yield programs. While this cash corpus is still growing, we saw annualized returns of 8% on the put strategy. These three strategies do two things. First, they integrate into our operating business with the enhanced sale of production and second create a capital flywheel as they relate to our balance sheet. I would also like to add that the results we are seeing in DAM do not necessarily translate directly to telling the story via US GAAP accounting. While all pieces are reflected across the income statement and balance sheet, there are certain punitive treatments of non-cash mark-to-market valuations at contract expiry. What we think is important about these tables that once again CleanSpark is at the cutting edge of real non-hyperbolic strategies paired with full market-leading transparency. These tables can be found in the management's discussion analysis section of our form 10K. I want to note that US GAAP rules separate the accounting for covered call exercises into two different line items for what is in substance a single transaction. These two line items on the income statement are loss on derivative contracts and gain on fair value of Bitcoin. This is important because there are two sides of the same transaction. For example, the difference between the spot price at expiry and the strike price is shown as a loss on derivative contracts while the corresponding markup in Bitcoin value to the spot price is recorded separately as a gain on fair value of Bitcoin offsetting that non-cash loss with a non-cash gain. Taken together, they reflect the economic outcome of our covered call program, which continues to generate attractive risk-adjusted returns. I also want to point out that the Bitmain option was effectively costless to us. However, GAAP required us to bifurcate a portion of the ASIC contract to the option value even though the contract didn't explicitly state a value. That value of $6.8 million was recorded at contract inception in the third quarter. As the option ultimately expired out of the money, had we not taken steps to monetize the option, we would have had a non-cash write off of that $6.8 million. However, instead, we generated almost $7 million of cash on that option, which under GAAP considered it to be a net gain of approximately $200,000 even though we ended up with $7 million more cash in the bank at the end of the day. Your overall takeaway is that the digital asset management strategy has met and in fact exceeded our expectations thus far and become a second source of cash generation to the business. We are looking to increase the size of our team to allow for greater volume and more complex derivative trades which we believe will not only grow the total cash generated from premiums but also maintain attractive yields. On a final note, I'd like to take some time discussing our capital strategy. Our focus is on building a capital stack which minimizes dilution. This starts with the sale of monthly Bitcoin production to cover a monthly opex. We also have Bitcoin backed lines of credit with a total capacity of $400 million. We will continue to use the lines of credit opportunistically in the marketplace for creative acquisitions. And as we previously mentioned, we issued a $1.15 billion convertible note with a coupon of 0% and a conversion premium of 27.5%. Proceeds from this transaction were used for several purposes. First, we bought back $460 million of our stock, which represents a reduction in our outstanding shares of 10.9%. The stock buyback not only helped facilitate the convert, we saw this as a bet on ourselves as we see our valuation increasing given the opportunities in front of us. Second, we used over $200 million from that raise to pay off our lines of credit. It's important to note that we have access to the full $400 million line available to draw down at any time on terms we continue to believe are market leading. The remaining net proceeds from the transaction will be used to do what we have a proven track record of doing and that is hunting for power and land. The acquisitions of power and land such as the most recently announced transaction in Celeste, Texas are expected to be permanently used for our AI data center strategy. While we are in the early innings of our AI data center journey, the market is moving quickly and so is CleanSpark. Our conversations with offtakers are ongoing and it is not a matter of if but when we will have our first customer. Details regarding financing of our data centers will be coming in future periods. However, I will tell you this, there is an abundant amount of capital at a much lower cost of capital than previously available to our mining business. Our venture in AI data centers will open new pools of capital, allowing us to benefit from the significant levered rates of return the market is providing. To close out another strong and defining quarter for CleanSpark and to discuss how these results position us for what's next, let's return to our chairman and CEO, Matt Schultz.

Thanks for the question, Paul. Our tune around the Bitcoin stack really hasn't changed, right? To give you context, we consciously have stacked Bitcoin quite rapidly over an 18-month period, and that brought us to about 13,000 Bitcoin on the balance sheet. And we believe that we're one of the only companies using it in the strategic way that it should be used as a capital asset. So, I think going forward, what you can count on from us is a few things. One, we'll continue to monetize the Bitcoin stack through yield strategies to generate some cash. Two, we'll continue to borrow against it to be opportunistic to draw down on cash to make sure that we're nimble in the marketplace and take advantage of accretive acquisitions. And we've always said that we're not ideological about the Bitcoin balance. We're very strategic. And so if there comes a point in time where we needed to or we felt that the right thing to do was to part with that Bitcoin balance through sales, we most certainly would do that and we were open to do that. Because again we built this entire company and even the financial wherewithal on optionality. But I'll tell you that with those sales comes punitive tax treatment because we have mined those at such a low basis we'll have to pay, we'll be a cash paying taxpayer on those items. So, we take those into account when we're looking at the stack, but overall we'll continue to use this as a form of non-dilutive capital.

About a million bucks. To do the same for AI and HPC, according to the reference architecture required by the major chip manufacturers, it's closer to 10 million. We also know that the mechanical, electrical, and plumbing, the MEP solution, is a pretty extensive, pretty robust buildout because you've got all those trades working inside a facility at the same time.

Building these in a factory increases the speed to market by an order of magnitude, and the initial representations are that it saves us anywhere from 10 to 15% over a stick-built in the field of deployment. So we believe there's cost savings and speed to market that give us a very unique competitive advantage.

Thanks, Paul.

Happy Thanksgiving, Greg.

Hey, John, thanks for the question. I'll tell you this about the financing. And I mentioned it in my prepared remarks, is that there's, you know, new pools of capital that are going to be available to us at much lower cost of capital. So, we feel really good about that. We know we're going to introduce at some point secured debt into the capital stack. So, we're closely monitoring, you know, the deals that are going on and the debt markets. But I'll tell you the focus really first is to get that, you know, high credit quality tenant in there to make sure that we can get the best deal possible because as you know, levered IRR is significantly higher, you know, the higher the loan to value is. But I also tell you that, you know, while we might expect to get debt at about an 80-85% LTV over time, we have no problem also bringing a little bit more equity to the table, maybe at a 60 to 70% LTV for the first project or two. Yes, that will decrease our levered IRR just a bit, but it also produces cash flows in the year which would also be helpful. But ultimately to us it's really going to come down to execution, for which we still think that the industry hasn't proven. But we're going to see that over the next 12 to 18 months, particularly as we bring our land and power to market. So, you know, I don't have a specific answer for you right now, but I'll tell you that we are confident that there's a number of options for us to get financing at attractive prices and get the levered IRR that this market's offering.

Thank you.