Applied Digital Corp. has initiated a process to explore strategic alternatives for its cloud services business, including a potential sale, as the company seeks to eliminate friction with hyperscale data center customers.

The decision, disclosed during the company’s third-quarter fiscal 2025 earnings call on April 14, comes after Applied’s board determined that selling or separating the cloud unit—which provides high-performance computing infrastructure for AI applications—is in the best interest of shareholders.

Company executives cited customer perception as a key driver behind the move.

“Our cloud business is typically viewed as a competitor” by potential data center tenants, Chairman and CEO Wes Cummins said during the call. “While it hasn’t derailed any discussions, it is a point of friction.” He added that transitioning to a pure-play data center model would lower the company’s cost of capital, particularly if it were to consider converting to a real estate investment trust (REIT) structure in the future.

Applied also highlighted favorable market conditions as a motivating factor.

“Recent industry developments, including a large competitor completing their IPO, make this an opportune time to explore strategic options,” Cummins said, a reference to the CoreWeave IPO.

Another bitcoin hosting company, Soluna, terminated its GPU-as-a-service agreement with Hewlett Packard Enterprise earlier this month, citing market conditions.

Applied Digital’s cloud services business generated USD 17.8m in revenue in the third quarter, down sequentially due to a transition from reserved contracts to an on-demand model that temporarily reduced capacity utilization. Four of the company’s six GPU clusters remain under reserve contracts, with two now operating in an on-demand configuration. Technical issues during the switch to a multi-tenant architecture have since been resolved.

The cloud services business accounted for approximately USD 54.7m of Applied’s USD 177.5m in total revenue over the first nine months of fiscal 2025.

The company recently netted a USD 375m bridge loan from SMBC, and struck a deal for up to USD 5bn of investment from Macquarie.

Applied reiterated its expectations for securing a hyperscale tenant at its Ellendale, North Dakota campus. The company anticipates the 100 MW first building will be “ready for service and ready to begin generating revenue” in 4Q25. Applied expects one tenant will lease the initial 400 MW of capacity at Ellendale, though it envisions future expansion beyond that mark starting in 2028.

Cummins acknowledged that securing the tenant has taken longer than expected. A prior hyperscaler that had entered into an exclusivity agreement, believed to be Microsoft, ultimately backed out.

“While securing our lease for our Ellendale campus is taking longer than expected, customer interest remains high,” he said.

Applied Digital ended the quarter with USD 261.2m in cash and equivalents and USD 689.1m in debt. Adjusted EBITDA was USD 10m.

The company said it will provide updates on the cloud divestiture process and Ellendale leasing as developments unfold. Its stock dropped almost 10% in post-market trading on April 14, trading down to USD 4.85 per share and a USD 1.2bn market cap.