Applied Digital (APLD) Q1 2027 earnings review
Applied Digital's rent rose, but interest costs now exceed it
Applied Digital's second AI factory building started paying rent on time, while the cost of building the next ones grew faster. Rent rose 49% from last quarter because the new halls earn the same rate as the first. But interest on the debt behind them came to $77 million, more than the rent. Construction spending ran at three times what the finance chief signalled.
| Rent from AI factory tenants | $65.8M $44.1M last quarter |
|---|---|
| Revenue | $341.9M +322% from a year ago |
| Spent on construction | $2.07B about $600M the finance chief indicated |
| Live capacity outlook | 300 MW by end of 2026 250 MW live today, 1,410 MW under lease |
⚖️ Verdict: 🟢 Bullish
The story got better because the second building converted into rent at the same rate as the first, the test the landlord case rests on. The bad news: no new lease arrived, so the $36 billion of contracts did not grow, and borrowing ran far ahead of plan.
The question now is whether rent can outrun the cost of the money that builds it. If the next campus switches on by December and lenders keep cutting the coupon, rent covers interest within a year; if not, more shares fill the gap. The next debt coupon and Polaris Forge 2's first rent will tell.
🐂 Bull Case
Rent From the New Building Arrived on Schedule
Applied Digital builds large data centers, which it calls AI factories, and leases them to cloud companies for fifteen years. Rent starts only once a building is switched on. For two quarters the rent line sat at $44.1 million.
On July 1 the North Dakota landlord switched on half of its second building at Polaris Forge 1, the campus leased to CoreWeave. Rent rose 49% from last quarter, and the other half went live on October 1.
- Rent per megawatt: about $0.44 million a quarter, the same rate as the first building, by our math
- Net operating income, rent minus running costs: $58.8 million, or 89% of rent
- Live capacity: 175 megawatts at quarter end, against 1,410 under lease
This matters because the case rests on each new megawatt earning the same rent as the first, and it did. But only one tenant pays rent so far, and the next campus has a different customer.
What to watch: the rent line next quarter, which carries three months of 250 megawatts. By our math it should approach $100 million; a figure well short would mean the new halls are not billing in full.
Operations Now Produce Cash Before Construction Costs
Until this quarter the day-to-day business consumed cash, before any construction spending. Operating cash flow turned positive at $63.9 million, against an outflow of $81.5 million a year ago. Rent and construction billing now cover payroll, overhead and the interest paid in the period.
Profit before interest, depreciation and one-offs, excluding the ChronoScale cloud subsidiary, reached $64.4 million. That is 21% of the revenue the company counts as core, up from 18% last quarter, so each rent dollar lifts the margin.
What to watch: operating cash flow next quarter, when fit-out billing at Polaris Forge 1 should fall as the building completes. A second positive quarter would show the rent alone can carry the overhead.
Positives this quarter didn't test
Three standing drivers of the case got no numbered reading in this release. The company signed no new lease and priced no new debt in the three months. Each one waits on a disclosure that would move it.
- Tenant quality: three of five campuses are leased to investment-grade cloud companies; a new lease would show whether that share holds.
- Borrowing cost: the $1.59 billion of 7.000% notes closed at par; the coupon on the next issue will show whether lenders keep cutting the rate.
- Power supply: Base Electron "could add multiple gigawatts of new power in the Dakotas over time", the company said. A lease signed against that power would be the first proof.
🐻 Bear Case
Construction Billing Still Makes Up Half of Revenue
"Our goal is to establish Applied Digital as the category leader in the design, construction, deployment, and operation of purpose-built AI factories," said chief executive Wes Cummins. Revenue this quarter mostly reflects construction. Tenant fit-out, installing a customer's equipment and billing the cost back, brought in $183.5 million.
That is 54% of all revenue, and by our math it earned a margin of about 4%. So the 322% revenue growth says more about how much construction happened than about rent.
- Fit-out share of revenue: 54%, against 59% last quarter
- Rent share of revenue: 19%, up from 17% last quarter
- Cost of sales: 85% of revenue, up 12 percentage points from a year ago, on fit-out costs and depreciation of the new halls
This matters because fit-out revenue stops when a building is finished, and Polaris Forge 1 is more than half built. Revenue can therefore fall from one quarter to the next while rent keeps rising.
What to watch: the split of revenue into rent, fit-out and recoveries next quarter. A fit-out figure that falls while rent rises would confirm the shift toward the landlord model.
Interest Costs Now Exceed the Rent
Applied Digital pays for its buildings with borrowed money before tenants pay rent. Interest expense reached $77.4 million, up from $8.0 million a year ago, on "an increase in debt arrangements between the periods", the company said. That is more than the rent the finished buildings earned.
Construction spending also ran far ahead of the pace management signalled in July. Purchases of property and equipment came to $2.07 billion, against roughly $600 million indicated, so the builder drew on cash and borrowed more.
- Cash paid for interest: $242.9 million, including payments on the new notes
- Total borrowings: $6.4 billion, up 28% in three months
- Debt net of cash: $2.7 billion, up from $1.1 billion in May, by our math
- Cash on hand: $3.7 billion, under two quarters of building at this pace
This matters because the leases fix delivery dates, so spending cannot slow without penalties. Every extra point of interest comes out of the rent shareholders count on. What to watch: the coupon on the next debt raise, likely before February. A coupon below the 7.000% of the June notes would show lenders still see the rent as safe.
Shareholders Keep Paying in New Shares
Applied Digital funds part of its growth by issuing shares and convertible preferred stock, so each holder owns a smaller slice of the future rent. The weighted share count rose 14% from a year ago, and shares outstanding grew 3% in this quarter alone.
- New preferred stock sold: $275 million of Series G
- Dividends paid in extra securities rather than cash: $60.1 million
- Stock pay left out of adjusted profit: $59.4 million, or 17% of revenue
The adjusted loss of $4.1 million looks small because it leaves out that stock pay, but the shares still dilute everyone else. What to watch: the share count in the next filing. Another quarter of 3% growth would make dilution a standing cost of the model.
Risks this quarter didn't answer
Six standing risks got no new numbers in the press release, and one of them read flat. Each has a disclosure that would settle it, mostly in the quarterly filing or on the call.
- New leases: contracted value stayed at $36 billion; the next lease and its rate will show whether demand still rises.
- Customer concentration: CoreWeave remains the only tenant paying rent; the revenue-by-customer note will show the split.
- Base Electron, the power company partly owned by insiders: a new power agreement and a $56.1 million warrant loss; the related-party note will give terms.
- South Dakota site: no mention of the sales tax exemption that has gated it since 2025.
- Incentive units and the class action: litigation expense of $1.2 million, no further detail.
- Five campuses at once: the first megawatts at Polaris Forge 2 will test the second site.
👓 Other Themes
Applied Digital Signs for Power in Two Countries
"Power remains the gating factor for AI infrastructure", the company said, and it secured two new sources after the quarter. It signed for up to about 1 gigawatt of potential capacity in Finland, which it calls "a measured, opportunistic step". It also agreed to buy power from an approximately 1,200 megawatt gas plant Base Electron will build in North Dakota. Neither carries a tenant yet.
💲 Other KPIs
Flat for a third quarter: $37.8 million against $37.9 million a year ago. Growth of 15% two quarters earlier has faded to nothing. Both North Dakota sites run full, so this business cannot grow without new capacity, and the company now treats it as a steady cash source.
Money owed by customers doubled in three months, from $56.3 million in May, while revenue rose 32%. The balance is growing much faster than sales as fit-out billing to the newer tenants builds up. Cash from that billing arrives a quarter or so behind the revenue.
Deferred revenue, cash customers have paid for service not yet delivered, rose to $39.2 million from $4.7 million in May. The balance has swung widely over the past year as tenants prepay for fit-out work. The jump points to billing ahead of delivery at the newer campuses, not a lasting change.
🔮 Guidance
Unchanged. The plan still has the first halls at Polaris Forge 2, the campus leased to an investment-grade cloud company, switched on by December. Polaris Forge 1 already runs 250 megawatts. By our math that leaves about 50 megawatts to come from the new campus, a 20% rise in three months. The delivery record so far is three for three on dates.
❓ Key Questions
What rent per megawatt do the three newest campuses earn?
Rent at Polaris Forge 1 is about $0.44 million per megawatt a quarter, by our math. The three newest campuses carry $20 billion of leases with no disclosed rate or build cost, so their returns cannot be checked.
How much construction cost remains, and how much is funded?
Spending of $2.07 billion in one quarter, against $3.7 billion of cash, leaves under two quarters of building. The company has not said what the 1.41 gigawatts will cost to finish or how much of that money is committed.
What are the terms of the Base Electron power agreement?
Officers and directors own part of Base Electron, and the company lost $56.1 million on a warrant tied to it. The price, term and approval process for the new power purchase agreement are not disclosed.
When does Polaris Forge 2 start billing rent?
The plan gives December for first capacity but no date for rent to begin. The phases at Polaris Forge 1 billed within the quarter they went live; the second campus and second tenant have not shown that yet.
How much more preferred stock will the company sell?
Shares outstanding rose 3% in a quarter as $275 million of Series G preferred came in and earlier stock converted. The facility was raised to $2 billion in June; the remaining capacity and planned pace are not stated.