Core Scientific, Inc. (NASDAQ:CORZ) Q1 2024 Earnings Call Transcript May 11, 2024

Core Scientific, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: 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. All lines will be muted during the presentation portion of the call, with an opportunity for questions-and-answers at the end. [Operator Instructions] I would now like to pass the call over to your host, Steve Gitlin. Please proceed.

Steven Gitlin : 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 Presentation 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?

Adam Sullivan: 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 will 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 seven 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.

A close-up of a laptop with a Bitcoin ecosystem monitor running in the background.

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 three years through our self-mining business shown on Slide 5. We now believe our infrastructure is well-positioned to take advantage of the enormous demand for power and infrastructure required for high performance compute, and we see that as the next major growth opportunity for our business. With the demand for ready high-power sites increasing rapidly our infrastructure can be repurposed to provide access to HPC with healthy development, planning, regulation, construction, permitting, and supply chain time lines associated with greenfield HPC types. According to Bank of America Research, power demand from data centers is expected to double in the next three years to five years.

With this in mind, we would like to bring today's conversation around a simple central theme. Owning and controlling all our valuable high-power data center infrastructure gives us a significant advantage at a time when the demand for such infrastructure exceeds the available supply. Our high power data center infrastructure places us in a uniquely valuable position where we can balance our portfolio between bitcoin mining and alternative compute hosting to maximize cash flow, minimize risk and maintain significant exposure to bitcoin's upside potential. We can offer clients a shorter time to power as compared to them waiting potentially three years to five years for new greenfield data center capacity to come online. We see this as a powerful mix that provides the potential for multi-year high visibility cash flows to buffer against the inherent volatility of bitcoin pricing.

And because we own and control our infrastructure, we can optimize for the allocation of our infrastructure portfolio, investing in bitcoin mining position us well and we now have the opportunity to maximize the value of these assets. Moving forward, we’ll continue to seek out low-cost abundant power for bitcoin mining as our entry point and will constantly evaluate the market for a way to pair that power with another higher value use case. With Bitcoin mining as our base business, our infrastructure becomes the platform upon which we will continue to grow and optimize. We have created a unique business opportunity for us and for you, our shareholders, to monetize our own infrastructure for both bitcoin mining and HPC hosting. I’ll discuss this further after Denise's comments.

So now let's review our strong first quarter results summarized on Slide 6. We entered 2024 with strong momentum from 2023, continuing to set the pace for our industry by earning 2,825 bitcoin in the first quarter, more than any other listed miner. Our leading bitcoin production generated $150 million in revenue, plus $29 million from our hosting business for total revenue of $179 million, up 49% year-over-year. Nearly all our key financial metrics reflect strong performance in the quarter. Our gross margin was 43%. Operating margin was 31%. Net income was $211 million and adjusted EBITDA was $88 million up 118% year-over-year. We exited the quarter with healthy liquidity, consisting of $98 million in cash and cash equivalents and $16 million in restricted cash.

Shortly after the end of the quarter, we deployed capital to pay down $19 million in debt associated with outstanding Mechanic's Liens and fund a $1 million project at our Denton data center to add 72 megawatts of infrastructure. Throughout the first quarter, we continued to deliver strong hash rate utilization which remains higher than the average for our peer group and for scaled miners illustrated on Slide 7. We also continue to refresh our self-mining fleet with new S21, completing the deployment of 2.5 exahash in April and improving our average miner efficiency to 25.78 joules per terahash. We are waiting to make countercyclical miner purchases to take advantage of improved pricing after the recent halving. We are already seeing that dynamic take shape with post halving pricing lower than pre-halving.

In March, we entered into a contract for high-performance compute hosting at our new Austin data center which we [released] (ph). Importantly, we delivered a 16 megawatt data center to our client, CoreWeave more than 30 days ahead of schedule, helping them accelerate their time to power, which refers to how long it takes to establish operations and service their clients. Upgrading this data center was no small task and required a team effort to completely reconfigure 118,000 square feet of compute space, including [point 18 miles] (ph) of fiber and 500 miles of copper cable, removing 1,500 racks and installing 4,500 new PDU strips. Our team's performance was nothing short of spectacular. As we look to the remainder of 2024, we are confident.

Our outstanding first quarter has positioned us well to continue building on our momentum and capitalizing on the significant growth opportunities we see ahead. Now I'll turn the call over to our CFO, Denise Sterling.

Denise Sterling: 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. These direct production costs consist of electricity and data center operating costs, which includes salaries stock-based compensation and depreciation of property, plant, and equipment. Hosting revenue of $29.3 million exceeded hosting cost of revenue of $20.1 million for the fiscal first quarter of 2024 by $9.3 million, resulting in a 32% gross margin. Hosting revenue of $22.6 million for the same period in the prior year exceeded hosting cost of revenue of $16.2 million by $6.4 million, representing a 28% gross margin. Hosting gross profit increased by $2.8 million or 44% quarter-over-quarter, driven by the onboarding of proceed-sharing clients beginning in the fiscal second quarter of 2023.

Hosting costs consist primarily of direct electricity costs and data center operating costs. Operating expenses for the fiscal first quarter of 2024 totaled $16.9 million as compared to $24.2 million for the same period in the prior year. The decrease of $7.3 million was primarily attributable to lower stock-based compensation of $13.3 million due to forfeitures during the quarter, partially offset by a $3.4 million increase in personnel and related expenses and a $1.7 million increase in advisory fees related to the reorganization incurred during the fiscal first quarter. Net income for the fiscal first quarter of 2024 was $210.7 million as compared to a net loss of $388,000 for the same period in the prior year. Net income increased by $211.1 million, driven primarily by a decrease of $143 million in reorganization items, which included $143.8 million associated with the extinguishment of pre-emergence obligations in excess of the amount settled post emergence, lower Chapter 11 financing cost of $11.1 million, partially offset by a $12.8 million increase in claimant related bankruptcy professional fees and a $60.1 million mark-to-market adjustment on our warrants and contingent value rates.

Non-GAAP adjusted EBITDA for the fiscal first quarter of 2024 was $88 million as compared to non-GAAP adjusted EBITDA of $40.3 million for the same period in the prior year. This $47.7 million increase was driven by a $58.6 million increase in total revenue and a $1.1 million decrease in impairment of digital assets, partially offset by a $4.4 million increase in total hash rate operating expenses, a $4.1 million increase in cash cost of revenue, a $3 million increase in realized losses on energy derivatives and a $0.5 million decrease in gain from sales of digital assets. Our power contracts vary in pricing terms. As mentioned previously, our fleet-wide power cost averaged $0.043 per kilowatt hour in the first quarter. We continue to expect average power cost in 2024 to be between $0.045 and $0.047 per kilowatt hour.

At the end of the first quarter, our self-mining to hosted mining mix was 77% to 23%, respectively. We plan to increase the efficiency of our self-mining fleet through ongoing miner refresh and additional hash rate to achieve our 2024 goal. As we expand our self-mining fleet, we expect our hosting mining mix to decline over time. Our fleet-wide average energy efficiency was 26.85 joules per terahash as of March 31, 2024, and 25.78 joules per terahash as of April 30, 2024. The improvement was due to the completion of our S21 deployment in April. As of March 31, 2024, we operated approximately 173,000 miners in our self-mining fleet. The model mix shown on Slide 11, was 10% S19, 64% S19 Pro and S19j Pro, 24% S19j XP and 2% S21. Now I'd like to discuss the strength of our balance sheet.

Cash and equivalents at the end of the first quarter was $98 million up from $50 million at the end of 2023 and does not include an additional $16 million in restricted cash. Slide 12 compares our first quarter capital structure to year-end 2023. At the end of 2023, total debt was just under $1 billion. As of March 31, 2024, total debt was $608 million a decrease of $390 million. The reduction in debt for the quarter was driven mainly by the equitization of legacy debt and the settlement of prior plans. As a reminder a share price of $6.81 puts our tranche warrants in the money and their full exercise would provide us with $670 million in cash, allowing us to pay down debt and to build our cash balance. A share price of $7.79 triggers the mandatory conversion of the convertible notes, which would clear $260 million of our balance sheet.

Now I'll turn to our CapEx plans. In the first quarter, we made all payments due this year on miners we ordered and have deployed in 2024. We anticipate purchasing additional miners in 2024 to complete our planned refresh and to achieve our 21.8 exahash self-mining hash rate goal. The precise amount and timing of this purchase will ultimately depend on us finalizing the details of our HPC strategy. In April, we announced the start of the expansion project at our Denton, Texas data center where we are increasing our operational power by 72 megawatts to 197 megawatts, an expansion of more than 50% by the end of our fiscal second quarter. The capital expenditures associated with this expansion were included in our 2024 CapEx plan and were paid in April of 2024.

We will incur an incremental $4.5 million in CapEx associated with our new Austin HPC data center, which was not previously included in our 2024 CapEx plan. Now I will turn to a review of the mining economics summarized on Slide 13. Our direct cash cost to mine a bitcoin in the first quarter was $18,915. This consists of power cost of $15,977 and a cash based facilities operations cost of $2,938, allocated based on the 77% of our fleet dedicated to self-mining and divided by total bitcoin self-mine in the first quarter of $2,825. Another way to look at this is by calculating the cash-based cash costs of these same items, which represents the same cost expressed as a cost per tera hash per day. Our total cash-based, cash cost in the first quarter was $0.326 per terahash.

In summary, we expect operating cash flow to be sufficient to support operating expenses, debt service and CapEx associated with our organic growth plans in 2024. And now a few housekeeping items. We continue to model a statutory effective tax rate of approximately 23% for 2024. We also have more than $300 million in net operating loss carry forwards, which will reduce our future cash taxes. Our share count as of March 31, 2024, is approximately 182 million shares. And now I'll turn the call back to Adam to discuss our expectations for 2024. Adam?

Adam Sullivan : Thanks, Denise. Before we turn to Q&A, I will 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 three weeks removed 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 hash rate. Barring any dramatic and sustained increase in hash price over the next three months to six months, we expect to see inefficient hash rate 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 hash rate to be higher than current levels.

Speaking more broadly, in 2024 and over the next few years, we anticipate increased competition for blocks as scaled miners continue to invest CapEx to increase their hash rates. We also expect to see increases in US 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 three parts. First, by continuing to build out our owned infrastructure, particularly through the completion of our Texas projects; second, by expanding our hash rate 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 two Texas sites. At these sites, we had 372 megawatts that require an investment of about $200,000 per megawatt on average to complete. These 372 megawatts can support more than 20 exahash of mining capacity over the next three years when complete. And as mining technology yields higher efficiencies and hash rate per megawatt, that total hash rate will increase. We can also dedicate a portion of this new infrastructure to HPC hosting depending on customer needs and opportunities. We are currently on track to energize the 72 megawatts in Denton by the end of our second quarter. We expect to purchase the remaining miners to achieve our refresh and hash rate expansion goals later this year.

Second, we are taking advantage of mining market economics and new miner suppliers to expand our hash rate cost effectively, both through refreshing our fleet and expanding our rack space. For perspective based on our current 745 megawatts of infrastructure, if we were to refresh all of our prior generation S19, S19 Pro and S19j Pro miners with S21, we would be able to increase our existing hash rate by more than 10 exahash without adding any new infrastructure. We are already seeing improved mining equipment economics in the post-halving environment. We are also working with multiple technology companies to develop and deploy new lower-cost miner technology with higher energy efficiency that will offer greater procurement options. And third is our emerging alternative compute business launched with our successful deployment of 16 megawatts of data center capacity for CoreWeave.

As discussed earlier, buyers of advanced GPUs for workloads such as AI cloud and high-performance computing having limited supply of infrastructure options and often face significant and costly delays in the availability of new data center capacity. Core Scientific has more than 500 megawatts out of our total 1.2 gigawatts of contracted power that can be utilized for alternative compute workloads based on geographic proximity to major cities and fiber lines. Further, we have a successful track record of efficiently managing large-scaled data centers, and we have a team from the data center industry leading our operations. We are in regular discussions with customers in the space and expect to build out this part of our business further over the course of the year.

We think it's important to help frame the economics of this potentially significant business opportunity as follows: Based on industry data, the cost to build a new Tier 1 HPC data center ranges between $7 million and $12 million per megawatt. Based on our current assumptions, we project the cost to convert one of our high-power bitcoin mining data centers into a Tier 1 HPC data center at between $5 million and $8 million per megawatt. Even saving $1 million per megawatt represents a $100 million in construction saving for a 100-megawatt data center. We are pursuing clients that are able to prepay for construction CapEx as an offset against a portion of their monthly hosting payments. We aim to become a market leader in providing digital infrastructure for high-performance computing.

The cash generating power of that business will enable us to keep some of our bitcoin production on our balance sheet in anticipation of future increase to the extent that we have cleared certain debts that prevent us from holding bitcoin today. Based on industry data, we target Tier 1 HPC hosting revenue on the order of $1.4 million to $1.6 million per megawatt per year with gross margin of 75% to 80%. Power costs and utilities are direct pass-through to clients. The complete conversion of 500 megawatts of bitcoin mining infrastructure to HPC hosting would likely take three to four years, but we expect to begin generating revenue earlier as capacity comes online incrementally during that process. HPC hosting provides stable revenue and gross profit.

This is important for Core Scientific because it will provide stability and a greater degree of revenue predictability, which can also help moderate the variability in our bitcoin mining results against the more dynamic mining backdrop. As we consider these three points, we see a transformational opportunity to balance our portfolio in business between highly efficient bitcoin mining at scale and alternative compute hosting. Our bitcoin mining business generates profitable cash flow and preserves our exposure to the upside potential in bitcoin price. It also built the platform for an alternative compute business that could provide significant multiyear steady cash flows with strong financial returns. The potential to optimize our asset portfolio across these two attractive and high-value compute areas is only available to us because we own and control all our infrastructure.

We cannot be better positioned to capture the opportunity in these two growing markets. We will provide more details about our emerging alternative compute hosting business when we reach any definitive agreements. Our Board, our leadership team and I are more excited than ever about Core Scientific and our growth plans. We truly believe that by executing on our balanced strategy of bitcoin mining scale and alternative compute hosting, we can enhance value for all our stakeholders, both in the near and long-term and deliver compelling financial results that will unlock tremendous value in our company. Thank you all for your engagement and attention, and thank you to our customers, industry partners, and all our teammates for your ongoing efforts and support.

We will now take your questions.

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