IREN Q1 2027 Earnings Call Transcript
IREN (NASDAQ:IREN) reported first-quarter financial results on Thursday. The transcript from the company’s first-quarter earnings call has been provided below.
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Summary
IREN reported significant growth, with AI Cloud revenue of $200 million for the September quarter, up 183% quarter over quarter and contributing to total revenue of $228 million.
The company highlighted its strategic approach to securing land and power, with over 30,000 acres supporting over 5 gigawatts of secured power and 35 gigawatts in development across three continents.
The future outlook includes a 0.3 gigawatt expansion nearing completion, with more than $4 billion of operating ARR targeted for early 2027. The company noted flexibility in its expansion pace based on market conditions.
Operational highlights included a 127% increase in operating capacity and an AI Cloud gross margin of 86%, in line with previous quarters.
Management emphasized the strength of its vertically integrated model, which allows for flexible growth planning and supports strong customer demand, including new contracts with significant prepayments covering GPU CapEx.
Full Transcript
Daniel Roberts (Co-Chief Executive Officer)
Cash funded to date and unencumbered. Third and final land and power more than 30,000 acres across global markets supporting both over 5 gigawatts of secured power and more than 35 gigawatts in development. Many of those are early stage and not all of them will convert to grid connection agreements. Securing land and power ahead of demand is what we’ve done since day one and it’s why the platform today spans three continents. Most companies do one of those three, we do all three, which keeps more of the economics with us, gives us more ways to fund growth and more control over delivery.
Demand for compute hasn’t slowed since quarter end. We’ve signed contracts at $22 million of annualised revenue per megawatt of IT load on a five year term and in excess of $40 million per megawatt on a shorter duration contract. Importantly, the five year agreement also includes a customer prepayment covering approximately 90% of the associated GPU CapEx. We’ve also expanded our AI cloud contract further with the same leading AI frontier lab and contracted H100s at double the original pricing.
That’s the pricing backdrop for contracting our Vera Rubin capacity. Capital markets have become more selective in the last few weeks and the questions have undoubtedly moved from how big the contract is to whether it can be delivered, financed and run at a profit. Those are the right questions and this quarter for us answers them. Horizon 1 went from civil to an Nvidia exemplar validated GB300 cluster in about 14 months. JLL puts the global average at 18 months to build a 50 megawatt data center. And that’s the building alone. We delivered the build and the cluster inside four months faster than that benchmark. I’ll come back to what that last stage involves.
Operating capacity rose 127% in the quarter to 0.1 gigawatts. We raised 19 billion in the 12 months to September including 6.5 billion of GPU financing since May. At six to nine and a half percent our AI cloud ran at an 86% gross margin in line with last quarter. Now this is where IREN differs from a typical NEO cloud. We don’t lease someone else’s data center and carry the liability on our balance sheet. We secure the power, we develop the land, we build the infrastructure and we deploy the compute.
Each deployment leaves us with long term assets we own. Owning the power, the land and the data centers also means we set the pace. We want to build as fast as demand allows, but we’re not obligated to develop every site at once. The power is secured and the data centers are ours. So we don’t sign contracts or raise capital to cover lease payments. Investment and contracting decisions are made on risk adjusted returns, financing conditions included and the economics justify building.
During the quarter, average revenue per megawatt on our three and five year contracts continued to increase, now supporting GPU paybacks of around 18 months or even lower depending on the level of customer prepayments at Mackenzie. Customer prepayments and GPU financing together covered more than 100% of the associated GPU CapEx. The contracts signed since quarter end reinforce that picture. Attractive pricing alongside customers funding a substantial portion of the GPU CapEx and as we add capacity we’re strengthening how we deploy and how we operate it.
Our work with Nvidia and the Mirantis and Cordrant AI teams is improving how we provision, manage and support these environments. Existing customers are renewing and expanding with us, new logos are proving demand and the renewals are proving ongoing delivery. Now to delivery on the ground. Slides 13 and 14 of the presentation show progress site by site on our targeted expansion to 0.8 gigawatts by the end of 27 and data center expansion beyond that. The initial 0.3 gigawatts is in the final stages and construction for further capacity is underway across six sites. That last mile is the most complex. It’s the part you don’t see from the drone photos: GPUs racked, miles of fibre pulled, whole clusters connected and tested, and the data center business handing over to the AI cloud business.
The expertise behind these deployments is also shaping the next generation of AI factories. Led by our Chief Innovation Officer John Gross, we’re working closely with Nvidia to advance data center design and develop even faster ways to build. That work also means getting more out of the sites we already own, using power headroom within existing connections to support more compute. Mackenzie is the example. 100 megawatts of power secured, mass grading now started for new liquid cooled data centers built to the same design we’ve already delivered. Slide 17 shows the pipeline behind the data center and AI cloud businesses I just described. Our development team keeps originating sites ahead of the next phase of growth. Those more than 30,000 acres span North America, Europe and Asia Pacific. That gives us choices about where we serve customers and where we progress sites as local conditions allow.
We don’t need every market to move at the same pace. Where we build is just as important as how we build. We focus on rural locations with appropriate setbacks from neighbours and engage with communities and regulators before progressing grid applications to understand local priorities from the outset. Our recently announced 900 megawatt Redbank site is a good example of this in Australia. We hire locally, we work with local suppliers and we prioritise bringing water to site for our closed loop cooling systems to reduce reliance on local supplies. We want our projects to bring lasting jobs and investment to these communities while respecting the needs of the people who live there. We’re being deliberate about how we grow, contracts with customers who renew, returns that justify the capital and the financing attached to each deployment.
With that, I’ll hand over to Anthony to walk through the numbers and how we’re funding the next phase.
Anthony Lewis (Chief Financial Officer)
Thanks, Dan, and good evening, everyone, and thank you for your attendance. Starting with our results, we delivered another quarter of significant growth in AI Cloud revenue supported by continued execution. AI Cloud revenue was 200 million for the September quarter, up 183% quarter over quarter, reflecting the continued deployment and monetization of our data center and GPU capacity. Total revenue was 228 million, up 66% quarter over quarter, with Bitcoin mining revenue falling to 28 million.
As we continue to actively decommission Bitcoin mining hardware ahead of GPU installations, we aim to substantially complete this transition by the end of this quarter. Gross margin before depreciation and amortization was 80%, up from 76% in the prior quarter as AI Cloud revenue represented a larger share of total revenue. AI Cloud gross margin before depreciation and amortization was 86%, consistent with the prior quarter. Adjusted EBITDA was 66 million, representing a margin of approximately 29% compared with 14% in the prior quarter.
Operating expense, including SG&A and R&D, was 224 million, up 96 million quarter over quarter, reflecting an increase in cash operating expense of 33 million as we added the Mirantis operations from the middle of the quarter and continued to significantly expand headcount to support our growth, and after stock-based compensation of 63 million. After taking into account other items including depreciation, amortization, financing costs, and other expenses and income, that gave a net loss for the quarter of 263 million.
The results demonstrate our ability to convert our infrastructure investments and customer commitments into revenue-generating operating capacity. As Dan mentioned, a 0.3 gigawatt expansion is nearing completion, with the associated ramp to more than 4 billion of operating ARR expected to extend into early 2027, primarily due to customer-requested design changes and supplier timing. We expect ARR to grow meaningfully beyond that level as additional capacity comes online through calendar year 2027. However, we’re not providing a specific target at this stage, as both the level of ARR and its timing will depend on the contracts that we sign and when capacity comes online and deployments are accepted.
Now, looking towards the December quarter specifically, we exited September with 1 billion of operating ARR, one quarter of which we expect to recognize as revenue during the second quarter. We do not expect material revenue contribution from incremental Horizon and McKenzie capacity, most of which will arrive late in December or early calendar year 2027. For the December quarter, we expect cash operating expense, including SG&A and R&D, to increase approximately 50 to 60 million sequentially.
Before turning to balance sheet and funding, I’d like to spend a few minutes walking through recent contracting activity and how prepayments support our funding plan and generate enhanced paybacks and returns on our investments. As Dan covered, demand for our AI Cloud services remains strong, and we’re seeing attractive opportunities across hyperscalers, Frontier, AI Labs, and other customers. During the quarter, three-year pricing was at 19 to 23 million per megawatt of IT load, and five-year pricing at approximately 17.
And as Dan noted, after the quarter end we have signed contracts at 22 to 40 million per megawatt. This demand backdrop gives us the ability to be selective about the contracts we sign and how we structure them. Customer prepayments are an important part of our model. As Dan mentioned, some recent contracts have included customer prepayments representing up to 90% of associated GPU CapEx. Prepayments reduce upfront funding requirements and help align capital deployment with contracted demand. Combined with equipment financing, they can substantially reduce the amount of corporate capital required for a deployment and reduce the cash payback period on total investment.
The table on slide 9 of the accompanying presentation illustrates this point. For a hypothetical 1 megawatt liquid-cooled deployment for around 60 million of CapEx—one third for the data center and two thirds for GPUs—and customer prepayments of 0 to 90% of the GPU costs: on a five-year contract at 20 million per megawatt and with a prepayment covering 50% of GPU CapEx, we get a payback on the GPUs of 18 months, and if we include the cost of the data centers the payback is around three years.
These are illustrative, and deal economics and payback periods will ultimately vary by customer, hardware, and contract structure, but it shows that our focus is not simply on how much revenue we can attract; it’s on how efficiently we can fund that revenue and the returns it generates. Now turning to the strength of the balance sheet, at September 30th we had 20.6 billion of total assets, including 12.3 billion of property, plant, and equipment. That includes 6 billion of unencumbered data center assets. Cash totaled 5.8 billion, including 2.3 billion of restricted cash set aside primarily to finance GPU deployments. Total debt was 10.2 billion, largely in low-coupon convertible notes and with maturities concentrated in 2032 and beyond.
Over the 12 months to September 30th we secured 19 billion of funding across a range of sources, including customer prepayments and secured GPU financing. Taking into account the balance of this financing which is yet to be drawn down, we have a total of approximately 9 billion of cash and undrawn commitments to fund growth. In terms of outlook for CapEx, we spent a total of approximately 5 billion in the quarter. Our planned CapEx for the remainder of the fiscal year is approximately 15 billion. This is down from the prior estimate, reflecting the flexibility to pace data center and GPU CapEx. So with cash and committed funding sources of 9 billion, that leaves 6 billion of additional planned CapEx to be funded. With this updated plan, we expect to see deployments of Childress air-cooled capacity spread across calendar year 2027, which were previously expected to be more front-loaded.
We’ll target additional investments in support of longer-term capacity targets, and we’ll continue to adjust our plan based on a range of factors including the fundraising environment, contracting and customer requirements, and other factors. As Dan noted, that’s the strength of our vertically integrated model, which gives us maximum flexibility to adjust our planning to different conditions. Now turning to the funding plan, as shown on slide 19 of the presentation, with 10 billion of unencumbered data center assets projected at the end of FY27 and 6 billion of unencumbered GPUs before further secured financing, and cash flows supported by multi-year contracts with high-quality customers—two thirds of our backlog being Microsoft and Nvidia as investment-grade counterparties—that gives us substantial funding options across data center financing, GPU prepayments and financing, and other corporate-level initiatives, indicatively 12 to 15 billion as against the 6 billion to be funded.
And that’s in addition to other capital market sources such as convertibles and equity, which leaves us very well placed to fund our FY27 growth and beyond. Touching on a few aspects of our plans more specifically: regarding our data center financing priorities, as you’d expect, a near-term focus will be Horizons 1 to 4, which service the Microsoft contract. We continue to advance a number of parallel initiatives, taking into account its advanced stage of construction and delivery, the underlying AAA-rated cash flows from the Microsoft contract, and the high-quality long-term physical infrastructure.
From a GPU perspective, as previously discussed, prepayments will continue to be a core pillar of our overall funding strategy. Across the portfolio, we are targeting total financing for GPU CapEx, including prepayments, of 90% of associated GPU CapEx. This is consistent with our previously announced investment-grade and non-investment-grade GPU financings, where we secured funding of circa 95% and greater than 100%, respectively. In terms of near-term priorities for GPU financing, we have advanced workstreams underway for the Childress air-cooled deployments.
These will be anchored by the Nvidia and Leading Lab contracts, the latter of which was recently expanded. In addition to data center and GPU financing activities, you can expect other corporate-level initiatives over time, and we will continue to maintain an appropriate balance of debt and equity funding as the platform scales. In closing, this quarter showed our ability to convert infrastructure investment and customer commitments into operating capacity and high-margin revenue, and we feel very well placed to continue to scale the business with the ability to tailor growth to external conditions.
With that, I’ll turn back to Dan.
Daniel Roberts (Co-Chief Executive Officer)
Thanks, Anthony. So, finish where I started on delivery. We’re delivering across three layers of our business: securing land and power, building data centers, and bringing AI Cloud capacity into service. By June next year we expect to have $25 billion of data center and GPU assets. We raised $19 billion in the 12 months to September. The capacity behind the more than $4 billion of ARR is fully funded. The additional $6 billion of planned expansion CapEx sits against $12 to $15 billion of sources before converts or equity.
We also have the flexibility to pace or accelerate that investment. We’ll keep building where contracts, funding, and returns justify it. The next milestone for us is the more than 4 billion of operating ARR. It’s funded and it’s targeted for January. Thank you for joining us. We’re happy to take your questions.
OPERATOR
Thank you, ladies and gentlemen. As a reminder, to ask a question please press star one one on your telephone, then wait for your name to be announced. To withdraw your question, please press star one one again. Please stand by while we compile the Q&A roster. Our first question comes from the line of Paul Golding with Macquarie. Your line is open.
Paul Golding (Analyst)
Thanks so much for taking my question, and congrats on all the progress in the new leasing. I wanted to ask: there’s been a lot of press around the delivery of the Microsoft capacity. I was wondering, Dan, if you could give any additional color there on some of the dynamics you discussed in the prepared remarks—maybe parse out how much of the supplier delay related to the change orders, or if they’re unrelated—and just any other clarity around some of that commentary we’ve been hearing in the marketplace.
Thanks so much.
Daniel Roberts (Co-Chief Executive Officer)
Thanks, Paul. Absolutely. So as we announced back in August, Horizon 1 was handed over to Microsoft and, subsequent to that, they made a request to reconfigure and upgrade some of the network infrastructure. The purpose of that was really to enable the 200 megawatts of capacity to service these latest-generation frontier models. And, you know, this market moves very quickly, right. So signing the contract back in 2025, not everything was contemplated.
So, look, we said yes, of course, no problems. You know, we’re here to say yes to customers, not no. As a result, there will be a small delay. We’re targeting January. As we noted in the release, it does depend on supplier timing and it’s been a tough year for suppliers and reliability of deliveries. So there is every chance that moves to the end of February. But in terms of the construction progress, we’re in a good spot. Horizon 2 is built, power’s on at the rack. In all three halls, the GPUs are racked. The fiber’s in; Dell is actually commissioning now.
So there’s one integrated test there. Horizon 3 has got all the GPUs on site, all three halls energized. Horizon 4’s GPUs are delivering in the coming weeks. So, yeah, we have noticed the speculation, but it’s a great relationship. I think in some ways it’s a testament to the relationship and the business model that we were able to pivot and be flexible around this network infrastructure. So I’ll give you one example. If we were a different type of business, where we were an asset like neo-cloud with a colocation partner, I’m not sure Microsoft would have made the same request because, as a cloud provider, you would then need to go back to your colocation provider and ask for those changes.
So, look, is the 31st of December—would we have loved to hit it? Absolutely, very close. But it’s looking like it’ll be January, potentially February, depending on supplier performance.
Paul Golding (Analyst)
Thanks so much for that color, Dan. Oh, sorry—just wanted to follow up on those points, if I may. How should we think about the CapEx per megawatt then as it relates to maybe some of this upgraded networking gear? Is that equation changing at all in terms of that 14 to 16, or is this something that we might expect to be more pervasive across the leasing that’s already been done in terms of change orders? How should we think about that and, you know, any tenant responsibility to cover any change orders along those lines?
Thanks so much.
Daniel Roberts (Co-Chief Executive Officer)
So the CapEx—the incremental CapEx associated with the network upgrade—is entirely immaterial against the backdrop of the CapEx for the broader cluster. We’re talking new cables, labor, and just a different methodology in terms of implementation. So I wouldn’t get caught up on that. In terms of what it gives us, it’s effectively upgrading the full 200 megawatts for those latest-generation cutting-edge use cases. And also, importantly—I should have mentioned—we’re then compounding that learning into all our other sites under construction.
So I guess this is a benefit of being at that leading edge, delivering. We’ve always said you need to be doing things to learn how to do things in a way. So the more you do, the more you learn, the more those learnings compound and roll into the platform more broadly, which is what we’re seeing at the moment.
Paul Golding (Analyst)
Great, thanks so much.
OPERATOR
Thank you. Our next question comes from the line of Brett Knobloch with Cantor Fitzgerald. Your line is open.
Brett Knobloch (Analyst)
Hi, guys, thank you for taking my question. Maybe to start, there’s been a lot of talk recently about modular data centers, and I’m curious if you guys are looking into that at any one of your sites that span across the globe. I know Nvidia is coming out with their own modular products. Appear, I think, is, you know, signed a powered land lease for that product, if I had to guess. Is that something you’re looking at, or do you guys want kind of your own design and build, or are you flexible on that?
Daniel Roberts (Co-Chief Executive Officer)
This is something we’ve actually been looking into for quite some time, and we’ve got dedicated teams internally—specifically set up in the last nine months—who are dedicated to construction methodologies and making things quicker and easier. Central to that are a couple of key concepts. One is modularization and the ability to plug and play more components on site—having that standardized methodology, standardized supply chain—so that it does become more plug and play, and moving a lot of the construction off site into factories where it’s more scalable.
So the modular design is something that we’ve been looking at for quite some time. We’ve got a very close relationship with Nvidia. As you’d all be well aware, we’re talking to them about the different designs—whether or not that specific DSX modular design is implemented the way that has been presented is something we’re working through—but certainly the concepts and the overall North Star of trying to make construction simpler, quicker, easier, reduce labor requirements on site is absolutely where the industry and we are heading.
Brett Knobloch (Analyst)
Awesome. And then I guess if I could just follow up on how you guys are thinking about maybe contract duration. I know you guys are signing maybe a barbell approach—long, short—pricing and economics kind of vary between the both, but in this environment where funding is a concern, is having more IG-backed customers an emphasis for you, or do you not view it that differently if you’re signing deals with customers that are prepaying for the entirety of the CapEx in some cases?
Thank you.
Daniel Roberts (Co-Chief Executive Officer)
Good question. The answer is both. They’re not mutually exclusive, and you alluded to the barbell approach. So we’ve got a $20 billion backlog of customer contracts at the moment, and it’s been very deliberately constructed where two-thirds of that is investment grade. So we’re talking the likes of Microsoft, Nvidia—$4 trillion credit standing behind that. And then, yes, there is a portion that is a lower credit, but they tend to go hand in hand with higher prepayments, as you mentioned, and are central to our broader strategic objective of servicing the broader ecosystem.
So we’re very happy with the investment-grade counterparties. We’ve got a fantastic relationship with Microsoft, a really good relationship with Nvidia, and we’d love to continue servicing their requirements. But equally, in parallel, we’ve said for quite some time it’s important to be servicing the broader ecosystem. So I feel like we’ve constructed that customer book deliberately and in a position that leaves us in a good spot today, where we’ve got forecast $25 billion in data center and GPU assets at 30 June next year against that sort of credit profile, which dovetails into the financing and how we look to grow from here.
Brett Knobloch (Analyst)
Awesome. Thank you.
OPERATOR
Thank you. Our next question comes from the line of Joseph Vafi with Canaccord Genuity. Your line is open.
Joseph Vafi (Analyst)
Hey, guys, terrific results. Thanks for taking my question. Totally appreciate your comments. Dan, about the vertical integration here and your ability to, you know, dial up or dial down development and rollout—just maybe against that backdrop, could you provide maybe some color on things that you look at in the market that may gate your development pace of development? Maybe things that you look at that might result in you dialing it down or dialing up—pace of development, supply chain, financing, demand, ability to physically develop the infrastructure, or other things.
Daniel Roberts (Co-Chief Executive Officer)
Thanks, Joe. So we’ve been chatting since our IPO five years ago—almost to the date coming up. And I think what we’ve seen over that time, and the three years of our history prior to that, is we’ve continued to build up this asset base with a strong foundation for the long term. This was never short-term vision. It was founded eight years ago with a long-term vision around this digital exponential demand for compute. So we thought it appropriate today to disclose a little bit more about that development portfolio.
We’ve got 30,000 acres of land now secured globally underpinning 5 gigawatts of secured grid connection and another 35 gigawatts of prospective grid connections. And every layer has been built on top of every preceding layer. So there’s the land and power. We then have cash-funded every bit of our data centers to date—not an ounce of debt against it. So it’s cash-funded $6 billion today, forecast to go to $10 billion by the 30th of June. And then we buy the GPUs on top of that. The benefit of this model is we aren’t a WeWork business model in the sense we’re not sitting in between a provider of infrastructure and a user of the compute that leverages that infrastructure.
Because we own and control our own destiny—I know these are words that you’ve heard many times over the last five years—we are in full control. We can flex up, we can flex down. And this goes to global diversification of projects, being able to throttle up and down depending on the local environment. It goes to availability of capital, it goes to strength of demand. And then I think that’s a really good segue just to comment on the market environment that we’re seeing. It’s actually incredible when we look at how the markets are behaving, but then look at what’s happening at a customer level and the actual substance and fundamentals of our business model, like the demand. I know we tend to say this each quarter, but I’ll reiterate it again: it has never been stronger. And as we just announced—these are deals that were signed this week, so this isn’t old information—we just had a customer agree to fund 90% of the GPU CapEx.
We signed a short-term deal at $40 million per megawatt. We had one of the leading frontier AI labs—the same one we announced previously a couple of months ago—expand their capacity again. And also, I think it’s worth noting that we have some older-generation H100s where we just recontracted those old units at double the original pricing. So the demand for compute, the supply issues that we’re all seeing, is creating this exceptional opportunity at an underlying business level. And the dislocation with financial markets is really stark at the moment. And I guess the benefit of our model is we can be patient. We can work through these market dynamics and be ready to flex up our growth once the financial market.
Joseph Vafi (Analyst)
That’s great color, I appreciate it. Dan, thanks very much.
OPERATOR
Thank you. Please stand by for our next question. Our next question comes from the line of Greg Lewis with BTIG. Your line is open.
Greg Lewis (Analyst)
Yeah, hi. Thank you, and good afternoon or good morning. Thanks for taking my questions. I did have a question, and Daniel, I think you were talking about it—alluding to it—with the flexibility around the spending. But as we look at where CapEx for fiscal year 27 stands today, it’s come down from the previous quarter, which looks to be down from the quarter before that. So just kind of as we think about that flexibility around the CapEx, what’s kind of driving that?
If you could provide some more color around why that looks like it’s ticking down for this year.
Daniel Roberts (Co-Chief Executive Officer)
Good question. And it absolutely is ticking down. We have deliberately flexed it down and it’s not because we want to and it’s not because we need to because of a lack of growth opportunities. The demand is there, the customers are there, the sites, the 30,000 acres, the 5 gigawatts of secured power, all the ingredients are there. It’s purely and simply financial markets in the current state and capital needs to be respected in the current environment and we’re not going to grow at all costs.
We’re going to find that middle ground based on the availability of funding, the cost of funding to throttle that growth curve. As we noted in the deck in our prepared remarks, we don’t sign 20 year colocation agreements where we’ve got a 20 year liability. We haven’t signed $100 billion TCV contracts with AI Labs. We haven’t signed up to tens and tens of billions of GPU capex and created this business model where we need to go and raise money at all costs.
In fact that perception around a NEO cloud in inverted commas, I feel like we’re diametrically opposed in terms of our core underlying business model which has been constructed literally from the ground up. The land, the power, the data centers, cash funded and the strength and resilience of that platform allows us to ride the volatility in financial markets but be poised to capitalize when it returns. And it’s a pity because the demand signals are there. As I mentioned, all those data points are this week, like this is live. So what’s happening at a business level is very disconnected from what we’re seeing in the market.
Anthony Lewis (Chief Financial Officer)
Yeah, I’m happy to jump in with some additional detail there. And obviously we don’t comment specifically on individual contracts, but. No, no, broad range is fine. Yeah, I mean the reference that Dan gave on the H100s to doubling the price that they were previously being leased at, that is now for a multi-year term that that additional pricing has been locked in for. So it’s not that we were able to double capacity by selling on an ultra short-term contract. This is genuine long-term contracting for those H100s that has still resulted in a doubling in price. And as Dan alluded to, I mean that is just indicative of the strength of the market at the moment and the level of demand that there is.
OPERATOR
Thank you. As a reminder, ladies and gentlemen, to ask the question that’s star 11 on your telephone. Our next question comes from the line of Michael Donovan with Compass Point. Your line is open.
Michael Donovan (Analyst)
Hi guys, thanks for taking my question. Go back to your commentary on flexing when looking at your sites. How do you think about prioritizing sites such as Oklahoma and Spain if financing is the governor?
Daniel Roberts (Co-Chief Executive Officer)
So there’s a portfolio of sites. Obviously our philosophy and mentality has always been cheap call options without that sounding the wrong way. So it’s about building optionality on top of a strong foundation. And what you find is through the value creation curve all the way from development of land and power through to buying the computers. There is an inverse correlation between time and the amount of money you need to spend to preserve that time to compute that we keep talking about.
And to be a bit more specific around that, keeping projects ticking along is cheap and then it starts to get more expensive. So signing a land option is relatively cheap. Buying the land is relatively cheap. Spending money on a grid connection then becomes a little bit more, civils, land clearing, laying down concrete foundations. You can see how the capex starts to grow as your time to compute gets closer. So what we’ve done throughout our history is make lifetime decisions around capital allocation, where we preserve optionality around that.
So construction activity is happening at six sites at the moment. That’s likely to expand in the short term and then it comes to capital availability. And as I’ve mentioned a few times, we note what’s happening in financial markets. But there are a lot of options for us on the capital side, even beyond what we’ve tried to outline in a lot of detail in our slide deck today. A lot of our background comes from private markets, real assets, infrastructure funds, the depth of capital generally in the world, whether it’s listed or unlisted.
I believe the fundamentals and what we’re seeing in terms of customer demand will prevail and we’re having a lot of conversations around funding it. My personal view is that this dislocation between the fundamentals and the market sentiment at the moment is unlikely to persist very long. We are prepared if it does, but there are a number of options that we can continue monetizing that 5 gigawatts, even in the absence of an equity market recovery.
Michael Donovan (Analyst)
Appreciate that you mentioned working with Nvidia to increase the speed of site development. Are you also utilizing Nvidia software to eke out more power? And if so, how? What commentary can you give around efficiency gains and perhaps more GPUs being able to be deployed at a given site?
Anthony Lewis (Chief Financial Officer)
Yeah, I’m happy to jump in and give some additional color there. So one of the reasons why we are working so closely with Nvidia is they are not just focused purely on the chip side of the business, but they are looking at the broader data center as the unit of compute. And you hear Jensen talking about this a lot. It’s no longer just the chips or the servers, it’s how that entire integrated data center unit functions to ultimately produce compute.
And there are a number of elements within that, part of it is software. And we have been looking at some of the Nvidia software, which is called Max LPS, to enable more nameplate GPUs per megawatt than you would have if you just limit the GPUs to the exact power envelope. And the reason that you’re able to do that is the vast majority of time GPUs are actually operating under 100% of their nameplate power draw. And obviously if you’re just sizing to the nameplate power draw, that means you have stranded megawatts.
A lot of the time what their software allows you to do is actually oversubscribe the GPUs and in the rare instances where they are all operating near nameplate capacity, the software will actually step in to make sure that you throttle the GPUs so you’re not exceeding nameplate capacity. So that’s one example where you’re able to get additional GPUs per grid-connected megawatt. Another example is Nvidia is doing a lot of work around the temperatures at which you can operate.
And to the extent that you’re able to operate at a higher temperature, it means you can direct less of your grid-connected megawatts towards cooling infrastructure and more of your grid-connected megawatts to the actual underlying IT compute. So those are a couple of examples, but there are numerous other elements that we continue to refine and work on with Nvidia.
Daniel Roberts (Co-Chief Executive Officer)
And I think just to add to those comments, there’s also the physical infrastructure advantage as well. The fact that we own the grid connections, the data centers and the opportunity to optimize beyond the software envelope rather than being stuck in the middle between an infrastructure provider and the end customer. So a lot of this is why we are being asked to upgrade clusters, because we can and we have that execution capability. It’s a lot of the reason why we are getting expansion contracts from leading AI Frontier Labs and getting a lot of this customer traction because they have confidence in our ability to execute because we own and control all the stack. And I think that data point in the deck really sums it up. We delivered Horizon 1 data centers and GPUs, our first ever liquid-cooled data center. We delivered it in 14 months versus an 18 month industry standard for just the data centers.
So it’s really hard to understate the value of that physical infrastructure. And I know we’ve been talking about it for a while, but I think this market, particularly on the customer side at least, is really starting to appreciate it.
Michael Donovan (Analyst)
That’s helpful. Color, thank you very much.
OPERATOR
Thank you. Our next question comes from the line of Mike Colonise with HC Wainwright. Your line is open.
Mike Colonise (Analyst at HC Wainwright)
Hi Dennis, thank you for taking my question. So just curious, what portion of the 500 megawatts of planned incremental data center capacity for 27 is now contracted for after the recent deals you signed here? And just curious how we should think about future contract signings relative to, you know, phased data center deployments next year as you look to fill out this remaining capacity and how do you balance that with, you know, capital potential backup.
Be great to get your thoughts there.
Daniel Roberts (Co-Chief Executive Officer)
So in terms of the 0.5 gigawatts, we haven’t guided specifically on that, the exact composition, but within that it’s, it’s clear that Nvidia is a proportion of that capacity. It’s clear that another good credit with one of these leading AI Frontier Labs is another credit behind that. So we’ve got the air-cooled at Childress that’s rolling out in 2027. And then we’ve got VRs arriving later in the year. So the latest generation liquid for both Childress and Sweetwater one.
And I think that’s where we’re particularly excited. We haven’t mentioned on this call, but the supply of VRs next year is exceptionally scarce and we’re seeing a lot of interest and that’s something that’s really exciting us in terms of the prospective economics on it. But most of the near term activity we’re seeing is on the air-cooled at Childress.
Mike Colonise (Analyst at HC Wainwright)
Thanks for the color, Dan, and best of luck with the remaining deployment. Sir.
OPERATOR
Please stand by for our next question. Our next question comes from the line of Michael Ning with Goldman Sachs. Your line is open.
Michael Ning (Analyst)
Hey, good afternoon. Thank you for the question. I just have two, if I may. First, just on the change in the CAPEX outlook, could you just talk a little bit about that flexibility that you mentioned? And why does the change in the CAPEX outlook not change the expectation in terms of data center capacity kind of targeted for year end 2027? And then second, I just wanted to ask that in the event there’s some sort of community opposition that results in a delay, could customers kind of exit any leases or get any of their kind of GPU deposits back if there were, you know, something that caused a substantial delay?
Thank you.
Daniel Roberts (Co-Chief Executive Officer)
Sorry, would you mind repeating the first half of that question? I got the community opposition.
Michael Ning (Analyst)
Yeah, yeah. So the first part of the question was just on the capex reduction for the year. Thank you. Yeah. Why is, you know, how does the capex come down but the kind of planned capacity kind of stay the same. Thank you.
Daniel Roberts (Co-Chief Executive Officer)
I think the simplest answer to that is it’s indicative of the investment in the 35 gigawatts of development that we’re pursuing. You know, we’re not here for 200 megawatts of Horizon 1. We’re not even here for the 5 gigawatts of secured power where we’ve got a vision, we want to pursue it, we’ve got the ability to flex up and down the capital spend. But it goes back to what I was saying earlier around long-lead items and getting ahead of things. So starting fresh now and looking for large-scale power, if you can find it, you are into the 2030s very comfortably.
So it’s important we keep that 35 gigawatts ticking away. But equally in the presentation where the CAPEX becomes more meaningful, the long-term developments, not overly material. You can see we’ve started building across many, many sites and we haven’t provided guidance for 2028 other than we’ve said that we’re constructing capacity to be available then. So there is the opportunity to flex up and down the cadence of CAPEX spend and the pace of growth across all of those sites.
And when you see the market turn the way it has in the last few months, the first thing we do is just pace that construction and pace that CAPEX spend and just hold it off and wait for market conditions to turn. So this is the flexibility of the model when you own and control everything and we’re not building into 20-year co-location liabilities where we’re building assets and we get the choice when and how to build on top of those assets rather than be forced to double down when markets aren’t conducive.
In terms of the community opposition, I mean when we say opposition, our view is what we’re seeing is entirely sensible. AI is an unknown and I think data centers are the physical manifestation of AI and this big thing that’s happening in the world. And I think whether it’s Texas, whether it’s Australia, whether it’s Spain, everywhere, all we’re seeing is people wanting to ensure that data centers pay their own way and do the right thing. And it feels completely reasonable.
You know, we hire locally, we work with local suppliers, we prioritize bringing the limited water we need for our closed-loop systems from off site. I think everyone wants these projects to bring lasting jobs and investment to these communities and respect the needs of the people that live there. So I think we’re just going through that period where the size and scale of the opportunity and the end market for AI—I think what we’re seeing at a political and community level is indicative of the size of the market and the growth that we’re growing into.
And there’s a sensible desire to just make sure that’s done properly.
Kent
The one other comment I’d add to that as well is we take into account these issues from day one of our development, including the siting of the projects themselves. So if you look across our fleet of projects, these are not data centers that are located in urban environments that have specific near-term impacts on residential areas with construction noise and operational noise. Our data centers are located in regional areas where the additional economic development that is brought in by these projects is enormously beneficial for those local communities.
And we work very closely with those local communities all the way from, as Dan mentioned, local hiring, use of local contractors, to community grants programs, and also in the case of new developments, community consultation and education. So this is something that we literally build into our development process from day one.
OPERATOR
Thank you. Our next question comes from the line of Jonathan Peterson with Jefferies. Your line is open.
Jonathan Peterson (Analyst at Jefferies)
Oh great, thanks. Maybe first question, maybe we’ll stick on the same topic. Curious if you could remind us, at Sweetwater, I know you have conditional baseload approval. Is your expectation still that you get final interconnection approval in December? And then are there any other outstanding permits or just anything that we should think about in terms of bringing Sweetwater online?
Kent
So just to be clear, at Sweetwater—so Sweetwater 1, which is our 1.54 gigawatt project—that is already connected to the grid. So I’m not quite sure what the December date was that you were referring to, but that project is already grid connected. As we announced a couple of months ago, both Sweetwater 1 and Sweetwater 2 were included in the batch 0—or, sorry, the baseload—of the batching process. So that means all of the capacity, the 2 gigawatts across those sites, is secured.
In addition to that, we had a number of other projects that qualified for the Batch 0 process as well. As we mentioned at the time, we only announce batch projects once they actually sign binding grid interconnection agreements, and so we plan to announce those projects in due course. But we do have additional projects outside of Sweetwater that are included as well. I’d also note for both Sweetwater 1 and Sweetwater 2, those projects are already well under construction. As Dan pointed out during the presentation, you can see very clearly the status of those. But there is a significant amount of construction work on site already underway, and we obtain the relevant permits throughout the construction process. So hopefully that gives you a bit more color as to the status of each of those projects.
Jonathan Peterson (Analyst at Jefferies)
Yeah, that’s great. Sorry for mixing up the dates. Another question here. Can you talk to us about the cost of purchasing new GPUs and how that’s trending? And do you see GPUs being available to you as long as you can bring data center infrastructure online? And I guess how do you expect those costs of purchasing GPUs to trend in the coming quarters? I guess, in other words, what I’m trying to get at is will the cost to purchase GPUs catch up to where you’re leasing them at today, or do you expect these very short payback periods that persist for a while?
Anthony Lewis (Chief Financial Officer)
So I think it’s well publicized that there continue to be supply challenges throughout the industry, in particular SSDs and RAM. So various forms of memory have been constrained for quite a while. There are other components that continue to be constrained. And in that environment we would expect to continue to see GPU pricing increase over time. And obviously that is driven by the end-user customer demand. So again, it’s always interesting to see these dynamics where ultimately the customer demand is just so strong that that is what is causing price increases.
In terms of hardware, what we see on the pricing side with customers is that any price increases flow through immediately to hourly pricing on the contracts. And so the payback periods continue to at least remain where they are. And we’ve actually seen a shrinking of some of the payback periods over the past six months as that market demand continues to come through. So to answer your question, in short, yes, the payback periods very much remain the same as hardware price increases come through.
Daniel Roberts (Co-Chief Executive Officer)
Maybe just to add to that as well, if we kind of fast forward and think about our strategy and capital allocation, that’s part of the reason we deliberately haven’t acquired 100% of the GPUs for next year. We see it as right-way risk. So if you scenario map where we’re at in the market at the moment, if financial markets remain weak in terms of sentiment, and if construction and execution continue to be challenging across the industry, then it may well be that GPUs will fall in price just to reflect the lack of power points, purely and simply.
And then we think it’s right-way risk because if markets recover, they start charging—worst case, it’s correlated—and maybe we’ve got to pay a slight premium for the GPUs, maybe we’ve got to wait two or three months. But it comes back to this central thematic around it’s time to compute, it’s time to those data, to those power points. So prioritizing the physical infrastructure, commencing construction across all these sites around the world, and preserving that optionality.
If the markets are good, we’ll be able to afford the GPUs. We’ll be able to afford to wait an extra couple of months on the supply. But if markets remain muted, we’re going to be very pleased that we haven’t overcommitted on the GPU CAPEX and we’re keeping the platform growth ticking along in the background.
Jonathan Peterson (Analyst at Jefferies)
Great. Appreciate the color. Thank you.
OPERATOR
Thank you ladies and gentlemen. I’m showing no further questions in the queue. I would now like to turn the call back over to Dan Roberts, Co-Founder and Co-CEO, for closing remarks.
Daniel Roberts (Co-Chief Executive Officer)
Thanks everyone. To close. So Horizon 1 has been handed over to Microsoft with NVIDIA Exemplar status—14 months from civils against an 18-month industry benchmark—and Horizons 2 to 4 are now nearing completion. The more than 4 billion of contracted ARR, I should say, is funded and now targeted for January. Perhaps it extends to the end of February this quarter. We’re very proud. AI Cloud revenue almost tripled and our operating ARR reached a billion dollars.
Our backlog is over 20 billion with two-thirds of it investment-grade counterparties. Demand, as we’ve mentioned many times on this call, has frankly never been stronger. In the last few days we’ve contracted with a leading frontier AI lab to expand their existing capacity with us. We signed a new five-year contract at about $22 million a megawatt, with that customer prepaying 90% of the GPU CAPEX. We signed a short-term contract at $40 million a megawatt. And importantly, older-generation H100s we just re-contracted at double the original contract price.
We own the land, the power, the data centers under all of it, which is what lets us set the pace. Thank you all for your time. The next milestone for us is the 0.3 gigawatts targeted for January. Thank you.
OPERATOR
That concludes today’s conference call. Thank you for your participation. You may now disconnect.
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