Applied Digital Rides Hyperscaler Wave Amid Rising Costs

Applied Digital Corporation ((APLD)) has held its Q2 earnings call. Read on for the main highlights of the call.

Applied Digital’s Earnings Call Signals Strong Growth Amid Rising Costs and Execution Risks

Applied Digital Corporation’s latest earnings call painted a broadly positive picture dominated by rapid growth, major commercial wins and a solid liquidity position, tempered by a GAAP net loss, rising financing costs and execution risk around a massive buildout. Management highlighted transformational hyperscaler lease deals, a sharply expanding pipeline and improving unit economics in its hosting business, while acknowledging that elevated costs, higher interest expense and the uncertainty around new deals and a planned spinout will remain key areas for investors to monitor.

Explosive Revenue Growth and Improving Profitability Metrics

Applied Digital reported total revenue of $126.6 million for its fiscal Q2 2026, a 250% jump from $36.2 million a year earlier, underscoring the pace at which its data center strategy is scaling. While the company still posted a GAAP net loss of $31.2 million, or $0.11 per share, adjusted EBITDA came in at $20.2 million, and adjusted net income was roughly breakeven at about $0.1 million (rounded to $0.00 per share). The swing toward positive adjusted profitability, even with aggressive growth spending, suggests that the underlying economics of the business are improving as revenue scales, though investors will need to keep an eye on the gap between adjusted metrics and GAAP results as development activity accelerates.

Transformational Hyperscaler Leases Build a Massive Revenue Backlog

The centerpiece of the call was the announcement of large-scale leases with major hyperscale customers that together represent 600 MW of capacity across the company’s North Dakota campuses and about $16 billion in prospective lease revenue. The largest of these is a 400 MW lease with CoreWeave, expected to generate roughly $11 billion over approximately 15 years. A second, investment-grade hyperscaler has signed for about 200 MW, representing around $5 billion of lease revenue over a 15-year term. These deals effectively create a long-duration, utility-like revenue stream that, if executed as planned, can significantly de-risk future cash flows and provide the financial foundation for the company’s ambitious expansion plans.

Hosting Segment Shows Operating Leverage

Applied Digital’s data center hosting segment continued to show resilience and operating leverage. The segment delivered $41.6 million in revenue, up 15% year over year, alongside roughly $16 million of segment operating profit on $131 million of assets. That profit profile on a relatively modest asset base highlights the efficiency of the hosting model and supports the company’s thesis that its infrastructure can generate attractive returns as utilization increases. For equity investors, the segment’s performance provides a proof point that the company can generate consistent cash flow even as it pivots more heavily into long-term leasing to hyperscalers.

Robust Liquidity and Layered Financing Structure

The company ended the quarter with a sizable $2.3 billion in liquidity, including cash, cash equivalents and restricted cash, giving it a strong buffer to fund ongoing construction and expansion. Management detailed a multilayered financing framework that includes a $100 million development loan facility (with the first draw already taken), $900 million drawn from a $5 billion preferred equity facility, and a $2.35 billion private offering of 9.25% senior secured notes due 2030 aimed at financing the Polaris Forge campus. This capital stack, while meaningfully increasing leverage and interest obligations, provides the resources needed to execute on multiple large-scale data center projects in parallel.

Construction Progress and Operational Milestones at Polaris Forge

On the execution front, Applied Digital hit a key milestone by bringing Polaris Forge 1 to ready-for-service status on schedule, energizing 100 MW in the first of three contracted buildings at the campus. Management emphasized the use of modular and prefabricated designs to compress construction timelines and lower costs for the remaining buildouts. The broader campus program is expected to roll out through 2026 and 2027, with additional buildings slated to come online as customer demand ramps, positioning the company to convert signed leases into recurring revenue over the next several years.

Pipeline Acceleration and Advanced Site Discussions

Beyond its signed agreements, the company highlighted growing momentum in its pipeline. Management reported advanced discussions on three additional sites totaling roughly 900 MW of capacity, driven in part by increased inbound demand from hyperscalers after the two marquee lease announcements. They expect additional campus starts as early as 2026, with each campus designed to scale to at least 2 GW. If even a portion of these advanced discussions convert into contracts, Applied Digital could be on a path to managing several gigawatts of capacity by the early 2030s, significantly expanding its addressable revenue base.

Strategic Moves: Cloud Spinout and Technology Investments

The company is also reshaping its corporate structure and technology footprint. Applied Digital announced a non-binding letter of intent to spin out its Applied Digital Cloud unit into a new entity, “ChronoScale,” which Applied Digital expects to retain a majority stake in. The cloud business currently generates about $60 million in trailing 12-month revenue and holds $313 million in assets, suggesting that a successful spinout could unlock strategic and potentially valuation benefits by separating the capital-intensive infrastructure platform from the more service-oriented cloud operation. In parallel, the company invested $15 million in Corintis, a liquid cooling technology provider, and is pursuing partnerships, including with Babcock & Wilcox, to accelerate power solutions—moves aimed at strengthening its technical edge and ensuring access to critical power and cooling infrastructure.

GAAP Loss and Rising Interest Costs Highlight Financial Trade-offs

Despite the growth backdrop, Applied Digital’s GAAP results reflect the cost of its expansion. The company reported a GAAP net loss of $31.2 million, with interest expense climbing to $11.5 million from $2.9 million a year earlier—an increase of nearly 300%—as it took on additional debt to fund development. The expensive 9.25% senior secured notes due 2030 further lock in a high cost of capital in the near term. While management views these instruments as bridge financing to be refinanced at lower rates once assets are operational and de-risked, the current interest burden will weigh on earnings and cash flow metrics until refinancing is achieved or EBITDA grows sufficiently to offset the costs.

Surging Costs of Revenue Pressure Near-Term Margins

Total cost of revenues soared to $100.6 million from $22.7 million year over year, a roughly 343% increase driven largely by $69.5 million of tenant fit-out services recognized this quarter. These fit-out activities—essentially custom build work tied to the new leases—depress near-term gross margins but are a necessary step toward activating high-value, long-term contracts. Investors should interpret this cost spike as front-loaded infrastructure spending to enable future lease revenue rather than as a structural deterioration in unit economics, though it does create volatility in reported margins over the buildout period.

Higher SG&A Reflects Growth and Stock-Based Compensation

Selling, general and administrative expenses climbed to $57 million from $26 million a year earlier, an increase of about 119%. A sizable $23.8 million of this was attributed to accelerated stock-based compensation, with the remainder driven by higher professional services and personnel costs associated with scaling the business. While stock-based compensation is non-cash, it is dilutive to shareholders and a factor that investors typically monitor closely. The step-up in SG&A underscores the organizational build required to manage multi-gigawatt campus development but also raises the bar for future revenue and profit growth.

Lease Accounting Creates Cash vs. Revenue Timing Mismatches

The company flagged that lease accounting rules are creating timing differences between cash received and revenue recognized. Under ASC 842, Applied Digital recognized $12 million in lease revenue for the quarter, while it collected about $8 million in cash from the leases. Such timing mismatches are common in long-term leasing arrangements and do not necessarily reflect issues with underlying cash generation, but they complicate the comparison between GAAP revenue and cash flow. Management indicated that they will continue to clarify these dynamics for investors as lease revenues scale.

High-Coupon Debt Amplifies Leverage Risk

To fund the construction of Polaris Forge and other projects, Applied Digital issued $2.35 billion of 9.25% senior secured notes due 2030—a substantial debt load at a relatively high coupon. This move sharply increases the company’s leverage and locks in a significant interest obligation over the medium term, unless the company can refinance at lower rates as projects mature. While the notes provide critical capital to execute on large contracted leases, they also magnify financial risk if timelines slip, costs overrun or demand fails to materialize as expected.

Execution, Scale and Spinout Risks Remain Front and Center

Management repeatedly acknowledged that execution risk is a central challenge as the company ramps construction across multiple large campuses. Issues ranging from supply chain constraints and weather disruptions to the availability of skilled personnel could affect delivery timelines. Additionally, many of the opportunities highlighted—particularly the additional ~900 MW in advanced discussions and the ChronoScale spinout—remain non-binding or contingent. Letters of intent, preliminary site talks and project-level deals may not convert to finalized contracts on the anticipated schedule, or at all, which adds uncertainty to the long-term growth narrative despite the strong current pipeline.

Forward-Looking Outlook: Lease Ramp, Capacity Growth and Refinancing Ambitions

Management guided that lease revenues should begin ramping meaningfully next quarter, supported by Polaris Forge 1 reaching ready-for-service with 100 MW energized and the two major hyperscaler deals totaling 600 MW and approximately $16 billion in prospective 15-year lease revenue. Additional buildings are expected to come online across 2026 and 2027, underpinning what the company characterizes as significant revenue growth over the next 18 to 24 months. Longer term, Applied Digital reiterated a goal of surpassing $1 billion in NOI within five years and outlined a roadmap to potentially reach about 5 GW of capacity by 2030–2032, with each campus capable of scaling to at least 2 GW. On the balance sheet, the company expects to maintain a strong liquidity and financing posture, supported by its $2.3 billion cash position versus $2.6 billion of debt (largely maturing in 2030), roughly $2.1 billion in equity capital, and multiple funding facilities. A key element of the strategy is to refinance project debt at lower rates once buildings are fully operational and cash flows are stabilized.

In sum, Applied Digital’s earnings call framed a company in the midst of a high-risk, high-reward expansion cycle: it has secured landmark hyperscaler leases, is rapidly scaling revenue and adjusted profitability, and holds substantial liquidity to fund growth, yet it is also absorbing heavy upfront costs, elevated SG&A and a rising interest burden while navigating execution and contractual risks. For investors focused on the data center and AI infrastructure theme, the story is increasingly about whether management can deliver projects on time and on budget to convert its sizable pipeline and backlog into durable cash flows that justify the current leverage and valuation.