Good afternoon, ladies and gentlemen. Thank you for joining today's Core Scientific's First Quarter Fiscal Year 2024 Earnings Conference Call. My name is Tia, and I will be your moderator for today's call. [Operator Instructions] I would now like to pass the call over to your host, Steve Gitlin. Please proceed.

Good afternoon, ladies and gentlemen, and welcome to Core Scientific's First Quarter Fiscal Year 2024 Earnings Call. This is Steven Gitlin, Senior Vice President of Investor Relations for Core Scientific. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session after management's remarks. As a reminder, this conference is being recorded for replay purposes. Before we begin, please note that on this call certain information presented contains forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include, without limitation, any statements other than historical or current facts that predict or indicate future events or trends, forecasts, performance, or achievements and may contain words such as believe, anticipate, expect, estimate, intend, project, plan, or words or phrases of similar meaning. Forward-looking statements are based on current expectations, forecasts and assumptions that involve risks and uncertainties that may cause actual results to differ materially. For further information on these risks and uncertainties, we encourage you to review the risk factors discussed in the company's annual report on Form 10-K filed with the Securities and Exchange Commission and the special note regarding forward-looking statements contained in the company's current report on Form 8-K filed today and the earnings release and slide presentation contained therein. Today's presentation is available on our website at corescientific.com in the Events and Presentations section. The content of this conference call contains information that is accurate only as of today, May 8, 2024. The company undertakes no obligation to update statements made today to reflect events or circumstances occurring after today. Joining me today from Core Scientific are Chief Executive Officer, Mr. Adam Sullivan; and Chief Financial Officer, Mrs. Denise Sterling. We will now begin with remarks from Adam Sullivan. Adam?

Thanks, Steve. I'll start today's call with a high-level summary of our positioning as we enter 2024 and some highlights of our exceptional first quarter performance. I will then hand the call over to Denise Sterling to review our first quarter financials. After Denise's remarks, I'll take some time to talk about the current industry environment and our strategy to drive continued growth and value creation for 2024 and beyond. We will then take your questions. Core Scientific is a market leader positioned for growth. Slide 3 summarizes the position of strength from which we operate today, highlighted by the following key points: First, we operate the largest owned bitcoin mining infrastructure in the industry in terms of operating megawatts, comprising approximately of 745 megawatts of operational power and contracts for a total of up to 1.2 gigawatts of power. Next, we own and control every structure, every transformer in every concrete pad in our 7 mining data centers. Finally, we have the experience, track record, and team to monetize our infrastructure for the highest value uses into secured additional infrastructure opportunistically. We started our business by identifying high-power sites with attractive power rate that could support emerging high-value compute applications. We focus on designing and building efficient low-cost proprietary infrastructure for bitcoin mining operations that offered attractive hosting opportunities for third parties. When the price of bitcoin increased, we use our expertise to mine for our own account. We invested in mining equipment and expand the geographic footprint of our infrastructure, increasing our revenue and the ROI of our original infrastructure investment. You can see our current infrastructure footprint on Slide 4. Our industry-leading infrastructure has allowed us to produce more bitcoin than any other public company for the last 3 years through our self-mining business shown on Slide…

Thank you, Adam. As Adam stated, our first quarter performance was strong across all financial metrics, driven by favorable fundamentals and outstanding execution. Total revenue for the fiscal first quarter of 2024 was $179.3 million and consisted of $150 million in digital asset mining revenue and $29.3 million in hosting revenue. Segment economics are highlighted on Slide 10. Digital asset mining revenue of $150 million for the fiscal first quarter of 2024 exceeded mining cost of revenue of $81.6 million by $68.4 million, representing a gross margin of 46%. Digital asset mining revenue of $98 million for the same period in the prior year, exceeded mining cost of revenue of $72.7 million by $25.4 million, resulting in a gross margin of 26%. Gross profit increased by $43 million, demonstrating a significant improvement quarter-over-quarter. The quarter-over-quarter increase in digital asset mining revenue of $51.9 million was driven primarily by a 134% increase in the price of bitcoin and a 20% increase in our self-mining hashrate driven by the deployment of an additional 18,000 new generation mining units. The increase in digital asset mining cost of revenue of $8.9 million for the fiscal first quarter of 2024 was primarily driven by an increase in depreciation expense resulting from the deployment of our new self-mining unit and an increase in payroll and benefits costs associated with merit and market adjustments made during the quarter. Power costs were relatively flat quarter-over-quarter as the increase in power consumption associated with the deployment of the additional self-mining units was offset by a 3.8% decrease in our power cost per kilowatt hour, which declined to $0.043 from $0.044 per kilowatt hour for the same period in the prior year. As a reminder, digital asset mining cost of revenue consists primarily of direct production cost of mining operations.…

Thanks, Denise. Before we turn to Q&A, I'll spend some time walking through our strategic priorities for the rest of the year and the macro environment factors driving these priorities. Now that we are 3 weeks from the latest halving, we have seen a normalization of the record high transaction fees immediately after the halving. Cash price has declined to around $0.05, and we are seeing a small decline in global network hashrate. Barring any dramatic and sustained increase in hash price over the next 3 to 6 months, we expect to see inefficient hashrate drop off the network as some machines are turned off and as operators seek new homes for their miners. We expect some difficulty decreases throughout this process, and we expect year-end hashrate to be higher than current levels. Speaking more broadly, in 2024 and over the next few years, we anticipate increased competition for blocks as scale miners continue to invest CapEx to increase their hashrates. We also expect to see increases in U.S. power prices over the coming years. The question for Core Scientific now is how can we best grow our business and continue to create economic value for our shareholders at a time when the value of our owned infrastructure is increasing? For Core Scientific, the answer comes in 3 parts. First, by continuing to build out our owned infrastructure, particularly through the completion of our Texas projects; second, by expanding our hashrate through fleet refresh and emerging miner options. And finally, as I discussed, we are focused on leveraging our owned infrastructure to capture the significant opportunity in HPC hosting. I'll describe each of these in more detail, starting with our partially built infrastructure at our 2 Texas sites. At these sites, we had 372 megawatts that require an investment of…

[Operator Instructions] The first question comes from the line of Joe Flynn with Compass Point.

On the HPC front, with the 500 megawatts of potential infrastructure capacity, I was curious like what kind of customers are you currently having conversations with, whether they be hyperscalers, data center operators, start-ups? Just any color you could provide there would be helpful.

Of course, Joe. I would say our target base right now is mainly around our goal to have prepaid revenue as part of this contract, so them -- having the client pay for the CapEx. That definitely narrows the scope of potential clients, but that definitely puts it in the range of large tech companies that are looking at the development of their AI segments. So that's really our focus right now is mainly around large tech companies with a focus on AI, where the demands are for application-specific infrastructure.

And just drilling down to the economics you guys mentioned, it looks like the existing CoreWeave contracts was roughly $100 per megawatt hour. And the numbers you just gave closer to $150 to $170. Just kind of curious, is that the $150 per megawatt hour level, is that with these existing agreements where the CapEx will be prepaid? And really just any other color you could provide on the margin profile, that would be great.

Yes, of course. So our target for -- what we laid out is really our target for conversions of sites. And so when we talk about things like the existing CoreWeave deal or any conversion of existing space where we leased and then subleased to a potential client, our total revenue and our margin profile would be a bit different and a bit lower. Our focus going forward is really on the conversion of sites. And so what we've laid out are based on discussions with potential clients as well as industry data that's helping guide us really to the answer. And so what we're looking at on the margin side is really that 75% to 80% is really what we're targeting today. And now it's on the back of about $1.4 million to $1.6 million in revenue per megawatt.

The next question comes from the line of Lucas Pipes with B. Riley Securities.

Adam, I also wanted to ask about the HPC opportunity. And you mentioned kind of 3 to 5 years for greenfield. And if I understood you right, you mentioned 3 to 4 years for your conversions. Is that correct? And maybe more importantly, kind of what is the process for developing greenfield? I'd like to understand kind of the competition. So if someone comes in looking at a greenfield, how long does it take power? How long does it take to construction? And how do you compete against that?

Of course, and thanks, Lucas. I want to start with the second part of the question. What we're seeing from traditional operators today, traditional data center operators they have long-dated contracts, 10 years or greater. And so for on the existing infrastructure side, they have a very hard time competing with the part of the industry that we're focused on today. And then going forward, they've sold forward, I would say, at least 3 to 5 years of capacity at which they've locked up. And so converting any of that in the short term is very difficult for them. Now if you look forward right now, you're seeing some of the large tech companies securing power of 2028, 2029, 2030, that's just to secure the power aspect. You tack on top of that, a lot of supply chain constraints for equipment luckily that we already own. So in the traditional data center industry, it's at minimum 3 to 5 years for them to really start attacking this industry. From our perspective, what we're looking at, we said 3 to 4 years to fully develop the 500 megawatts. We mentioned we're going to have incremental capacity come online throughout that time period, and that's mainly driven by the fact that we have a lot of the long lead items already owned inside of our business today. And a lot of those constraints are around the electrical infrastructure that you could see.

To follow-up on this. In your presentation, you show that valuation arbitrage between some of the leading bitcoin miners and data center companies. In light of everything discussed, why haven't we seen M&A yet? What's your take on that?

Yes, Luca, if I might just follow-up your question, you're referring to M&A in our industry itself?

Yes. Well, specifically what I'm referring to on Slide 8 is a forward EV-to-EBITDA multiple for data center companies 20 time, you cite 914 times multiple for the highest multiple bitcoin miners, certainly consistent with some of the data I've looked at. Why haven't we seen M&A from the data center side to the bitcoin mining side to date? I would appreciate your thoughts on that.

Yes. No, it's a great question. I think Morgan Stanley put out a very good report related to the opportunity that bitcoin miners actually have today given the fact that just on electrical equipment alone, it's at least 36 months lead time for traditional data center. So just having access to the power is a significant advantage and it's actually a much higher value to traditional data centers and really the valuations that we're seeing bitcoin mining infrastructure traded today. I wouldn't rule that out, traditional data centers are definitely trying to find ways to bring power online more quickly. What we're seeing across a number of reports is that data center capacity is going to double over the course of the next 6 years. So I think that's something that we're still in the early stages. I would imagine that companies throughout the industry are having those types of conversations. From our perspective, we're focused on executing this because we believe we can drive a significant amount of short-term and long-term value for our shareholders.

[Operator Instructions] The next question comes from the line of Kevin Dede with H.C. Wainwright.

So Adam, maybe you could offer a little operational insight. I know the hash price has trended down, right, maybe a little bit lower than you expected or had modeled. I'm wondering, and I know you said that you expect miners to come off and you look for the next difficulty adjustment this week and 2 weeks beyond. Is there anything that you're doing sort of in-house to maximize the performance of the fleet?

Thanks, Kevin. I think it comes down to really 2 items. And the first is comes down to operations. Prior to halving, we actually moved our machines based on their efficiency amongst our sites based on their power contracts, really to prepare for a time period that could be much worse than what we're seeing today in terms of the $0.05 hash price level. The second part is our in-house software development team has developed a significant amount of firmware around the ability to adjust machines on a minute-by-minute basis amongst different types of firmware settings. And really, what that does is it allows us to change our efficiency of our machine fleet and it allows us to do that based on power prices at each of our sites as well as prevailing hash price metrics. And so for us, that provides a significant advantage over our peers who have outsourced much of that capability set, whereas we've been able to integrate really all 3 parts of the software stack, the energy management, the fleet management and the firmware, all into a single software stack that allows us to provide a significant amount of control greater than our peer set today.

At what point would you consider developing fresh megawatts to address the HPC market versus conversion? And how would you balance that infrastructure spend vis-a-vis 10 or so exahash that you could gain in improving your fleet?

Yes. We're in a very unique position today where we have infrastructure that could support both bitcoin mining and HPC hosting. Obviously, bitcoin mining is the platform for which we're able to expand into new markets and find new sites. And on the contract side for the HPC business, our focus today is really on customers who are able to prepay for that CapEx. And so as we evaluate new opportunities, it's going to come down to a month-by-month, quarter-by-quarter basis in terms of how we allocate capital, but we'll continue to -- we'll be able to continue to grow our bitcoin mining exahash over the course of the next few years. Yes, as you mentioned, we have a 10 exahash opportunity just within our existing footprint today, if we were to upgrade our machines to the newest generation. And so what we're looking at is an exciting opportunity to bitcoin mining site and a very exciting opportunity on the HPC side.

The next question comes from the line of Greg Lewis with BTIG.

Adam, I was kind of curious on your thoughts to Kevin's question where you kind of addressed your firmware and your stack. You mentioned other miners using third-party solutions. As I think about your firmware solution that you're using internally, is there an opportunity potentially to bring that out into the market and have other smaller miners be potential customers, i.e., is this a potential other revenue stream for Core?

Yes. Thanks for the question. This is something that we've evaluated in the past, potentially rolling out to a broader market. We view this as a significant competitive advantage over our peers. And what we've seen over the past few years in terms of the development of software is that we've continued to lead the path in terms of our development. And so from our perspective, we're going to continue to keep this as our proprietary in-house software so that we can maintain that competitive advantage over our peers as we continue to grow. I think one important note on that as well is that our peers when they're running third-party software, they're paying a pretty significant development fee to the ultimate owners of that firmware. That's a fee that we're able to not pay and actually generate greater gross profit than our peers on the same machine type at holding all the variables constant.

And then I also wanted to follow-up on the HPC opportunity. I mean, you mentioned the ability for prepaying, I guess, prepaying is one thing, and that's obviously, it sounds like the ideal solution. But what about approaching it using your existing infrastructure with a joint venture? Is that something that could make sense? Or at this stage in the game, it's something that we're not really interested in bringing on a partner?

Yes, I would say the way we look at it right now and really what it says this most is utilizing the prepaid revenue structure allows us to own that infrastructure free and clear after that prepaid revenue drop. Owning this infrastructure, whether it's at the end of the contract or whether it's after that prepaid revenue is paid off, will give us significant advantage in terms of being able to refinance that infrastructure and potentially pull some capital out to fund future growth. And so we view this as we have the technical capabilities in-house. We have the infrastructure base. And so from our perspective, really, the capital is the only other part of that that's necessary to execute. And if we can get that from our client base, that will provide us a significant advantage going forward.

The next question comes from the line of Tyler DiMatteo with BTIG.

I just wanted to follow-up really quickly on the prepayment from the HPC customers. I mean, do you have a threshold level in mind? And I guess like what's the lead time you're thinking about for that payment and then maybe rolling it down?

Yes, of course. I think what we're looking at right now is really on the 100% payment terms. So for the total CapEx bill receiving 100% of that from our potential clients. I think some high-level guidelines here to think about in terms of how we're thinking about it is really not utilizing more than 50% in any given year towards the revenue that we could be generating. And I think that really brings us to a point where we're still able to experience significant free cash flow generation off of these megawatts even with the prepaid structure rolling off over the course of the contract.

The next question comes from the line of Lucas Pipes with B. Riley Securities.

The $1.4 million to $1.6 million that you mentioned, Adam, is that including the pass-through on power? And I think you mentioned another pass-through, if you could remind me of that. And so for the EBITDA margin, I think you mentioned 75% to 80%, that would be still kind of straight on top of that revenue line. Just wanted to make sure I didn't miss anything there.

Thank you, Lucas. Yes. So the $1.4 billion to $1.6 billion, that is not inclusive of the pass-through power and utilities. And so when you think about that number, that's really the lease rate on a per megawatt basis for the entirety of the year. All of the other expenses that are incurred are pass-through to the client. And so when you think about the 75% to 80%, we like to think about that as the gross margin on that per megawatt number that's given to that $1.4 million to $1.6 number.

So that, call it, 20%, 25%, those would be more or less maintenance costs of the site, security, fixing the plug, a leak here and there. So that's kind of the way to think about it?

Absolutely right, Lucas.

The next question comes from the line of Kevin Dede with H.C. Wainwright.

Denise, you mentioned 2 stock price thresholds for warrant conversion and the flood of cash that would offer you and perhaps clearing the balance sheet at that point. Could we take a step back and think about that process without the stock moving? I mean at what point would you consider retiring debt given cash generation and favorable mining economics?

Kevin, I'll take that question. So really, how we're thinking about today -- yes, of course, the $19 million that we paid off early in the second quarter was related to Mechanic's Liens to build out that 72 megawatts at our Denton facility. We have some additional debt service over the course of this year that will pay down some additional principles. As we evaluate the evolving market that we're in today, what we believe, based on our analysis, is that it's better to put capital towards growth than paying down debt at this point. And so we're going to continue to fund growth, and that may change over the course of the next month, the next quarter. But today, our focus is on continuing to fund the growth of this business. So we believe it's more accretive to our bottom line.

The next question comes from the line of Jack Chan with Imperial Capital.

On the HPC, curious to know if the potential clients reached out to you directly or did you reach out to them? And how much of the 500 megawatts would be potentially taken by these clients you're in talks with?

Yes. Thank you for your question. I would have to say it's a bit of a mix of both. People recognize the platform that we've built. They know the locations of our sites, and they know the capabilities that we have on our internal team. You look at our operations team up and down, coming almost directly from the data center industry with decades of experience across each member. And so that is experienced at the traditional data center industry as well as the tech industry know and they know many of our team members very well. And so it was a bit of a combination of both inbound as well as some outbound calls to certain partners that we knew may be interested. Our goal right now is to repurpose about 500 megawatts to HPC. And really, what we're focused on is trying to accomplish this potentially depending on how negotiations and discussions go with potential clients over the course of the next 3 to 4 years. And so that's really what we're focused on today, executing on our growth plan, not only in the bitcoin mining side but also on the HPC side.

And I think you said the timing of a potential deal could be in this year or did I mishear that?

Yes, that's something that we're going to be updating the market as these negotiations, conversations evolve. So as we get to more definitive decisions around this, we will be announcing that to the market.

There are no additional questions left at this time. I will hand the call back over to Steven Gitlin for closing remarks.

Thank you, Tia. With no further questions, we thank you for your attention and your interest in Core Scientific. An archived version of this call, all SEC filings, and relevant company and industry news can be found on our website, corescientific.com. We wish you a good day, and we look forward to speaking with you again following next quarter's results.

That concludes today's conference call. Thank you. You may now disconnect your lines.