Core Scientific Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
May 8, 2024

There are 11 speakers on the call.

Operator

Good afternoon, ladies and gentlemen. Thank you for joining today's Core Scientific First Quarter Fiscal Year 20 24 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. I would now like to pass the call over to your host, Steve Titlin.

Operator

Please proceed.

Speaker 1

Good afternoon, ladies and gentlemen, and welcome to Core Scientific's Q1 fiscal year 2024 earnings call. This is Stephen Gitlin, Senior President of Investor Relations for Core Scientific. 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 statement 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 with similar meaning.

Speaker 1

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 ks 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 ks 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.

Speaker 1

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?

Speaker 1

Thanks, Dave.

Speaker 2

I'll start today's call with a high level summary of our positioning as we enter 2024 and some highlights of our exceptional Q1 performance. I'll then hand the call over to Denise Sterling to review our Q1 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.

Speaker 2

Slide 3 summarizes the position of strength from which we operate today, highlighted by the following key points. 1st, we operate the largest owned Bitcoin mining infrastructure in the industry in terms of operating megawatts, comprising approximately of 7.45 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 and every concrete pad in our 7 minuteing data centers. Finally, we have the experience, track record and team to monetize our infrastructure for the highest value uses and to secure additional infrastructure opportunistically. We started our business by identifying high power sites with attractive power rates that could support emerging high value compute applications.

Speaker 2

We focus on designing and building efficient low cost proprietary infrastructure for Bitcoin mining operations that offered attractive hosting opportunities for 3rd parties. When the price of Bitcoin increased, we used 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 5.

Speaker 2

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 this 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 without the development, planning, regulation, construction, permitting and supply chain timelines associated with Greenfield HPC sites. According to Bank of America Research, power demand from data centers is expected to double in the next 3 to 5 years. With this in mind, we'd like to frame 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.

Speaker 2

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 3 to 5 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.

Speaker 2

Moving forward, we will continue to seek out low cost abundant power for Bitcoin mining as our entry point and we'll 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 will discuss this further after Denise's comments. So now let's review our strong Q1 results summarized on Slide 6.

Speaker 2

We entered 2024 with strong momentum from 2023, continuing to set the pace for our industry by earning 2,825 bitcoin in the Q1 more than any other listed miner. Our leading bitcoin production generated 100 $50,000,000 in revenue plus $29,000,000 from our hosting business for total revenue of $179,000,000 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 $211,000,000 and adjusted EBITDA was $88,000,000 up 118% year over year. We exited the quarter with healthy liquidity consisting of $98,000,000 in cash and cash equivalents and $16,000,000 in restricted cash.

Speaker 2

Shortly after the end of the quarter, we deployed capital to pay down $19,000,000 in debt associated with outstanding mechanics cleans and funded $1,000,000 project at our Denton data center to add 72 megawatts of infrastructure. Throughout the Q1, we continued to deliver strong cash 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 F21s completing the deployment of 2.5 exahash in April and improving our average miner efficiency to 25.78 joules per teraash. We are waiting to make countercyclical minor purchases to take advantage of improved pricing after the recent HAVN. We are already seeing that dynamic take shape with post HAVN pricing lower than pre HAVN.

Speaker 2

In March, we entered into a contract for high performance compute hosting at our new Austin data center, which we have leased. Importantly, we delivered a 16 megawatt data center to our client, Corweave, 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 pulling 18 miles of fiber and 500 miles of copper cable, removing 1500 wraps 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 Q1 has positioned us well to continue building on our momentum and capitalizing on the significant growth opportunities we see ahead.

Speaker 2

Now, I'll turn the call over to our CFO, Denise Erlin.

Speaker 3

Thank you, Adam. As Adam stated, our Q1 performance was strong across all financial metrics driven by favorable fundamentals and outstanding execution. Total revenue for the fiscal Q1 of 2024 was $179,300,000 and consisted of $150,000,000 in digital asset mining revenue and $29,300,000 in hosting revenue. Segment economics are highlighted on Slide 10. Digital asset mining revenue of $150,000,000 for the fiscal Q1 of 2024 exceeded mining cost of revenue of 81,600,000 by $68,400,000 representing a gross margin of 46%.

Speaker 3

Digital asset mining revenue of $98,000,000 for the same period in prior year exceeded mining cost of revenue of $72,700,000 by $25,400,000 resulting in a gross margin of 26%. Gross profit increased by $43,000,000 demonstrating a significant improvement quarter over quarter. The quarter over quarter increase in digital asset mining revenue of $51,900,000 was driven primarily by 134% increase in the price of Bitcoin and a 20% increase in our self mining hash rate driven by the deployment of an additional 18,000 new generation mining units. The increase in digital asset mining cost of revenue of $8,900,000 for the fiscal Q1 of 2024 was primarily driven by an increase in depreciation expense resulting from the deployment of our new self mining units 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 $0.04 per kilowatt hour for the same period in the prior year.

Speaker 3

As a reminder, digital asset mining cost and 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 $29,300,000 exceeded hosting cost of revenue of $20,100,000 for the fiscal Q1 of 2024 by $9,300,000 resulting in a 32% gross margin. Hosting revenue of $22,600,000 for the same period in the prior year exceeded hosting cost of revenue of $16,200,000 by $6,400,000 representing a 28% gross margin. Hosting gross profit increased by $2,800,000 or 44% quarter over quarter driven by the onboarding of proceed sharing clients beginning in this fiscal Q2 of 2023.

Speaker 3

Hosting cost consists primarily of direct electricity cost and data center operating cost. Operating expenses for the fiscal Q1 of 2024 totaled $16,900,000 as compared to $24,200,000 for the same period in the prior year. The decrease of $7,300,000 was primarily attributable to lower stock based compensation of $13,300,000 due to forfeitures during the quarter, partially offset by a $3,400,000 increase in personnel and related expenses and a $1,700,000 increase in advisor fees related to the reorganization incurred during the fiscal Q1. Net income for the fiscal Q1 of 2024 was $210,700,000 as compared to a net loss of $388,000 for the same period in the prior year. Net income increased by $211,100,000 driven primarily by a decrease of $143,000,000 in reorganization items, which included $143,800,000 associated with the extinguishment of pre emergence obligations in excess of the amount settled post emergence, lower Chapter 11 financing cost of $11,100,000 partially offset by a $12,800,000 increase in claimant related bankruptcy professional fees and a $60,100,000 mark to market adjustment on our warrants and contingent value rights.

Speaker 3

Non GAAP adjusted EBITDA for the fiscal Q1 of 2024 was $88,000,000 as compared to non GAAP adjusted EBITDA of $40,300,000 for the same period in the prior year. This $47,700,000 increase was driven by a $58,600,000 increase in total revenue and a $1,100,000 decrease in impairment of digital assets, partially offset by a $4,400,000 increase in total cash based operating expenses, a $4,100,000 increase in cash cost of revenue, a $3,000,000 increase in realized losses on energy derivatives and a $500,000 decrease in gain from sales of digital assets. Our power contracts vary in price and terms. As mentioned previously, our fleet wide power cost averaged $0.043 per kilowatt hour in the Q1. We continue to expect average power cost in 2024 to be between $0.045 and $0.047 per kilowatt hour.

Speaker 3

At the end of the Q1, 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 0.85 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 S-twenty one deployment in April.

Speaker 3

As of March 31, 2024, we operated approximately 1 173,000 minuteers in our self mining fleet. The model mix shown on Slide 11 was 10% S-nineteen, 64% S19 Pro and S19 J Pro, 24% S19 J XPs and 2% S21. Now I'd like to discuss the strength of our balance sheet. Cash and equivalents at the end of the Q1 was $98,000,000 dollars up from $50,000,000 at the end of 2023 and does not include an additional $16,000,000 in restricted cash. Slide 12 compares our Q1 capital structure to year end 2023.

Speaker 3

At the end of 2023, total debt was just under $1,000,000,000 As of March 31, 2024, total debt was $608,000,000 a decrease of $390,000,000 The reduction in debt for the quarter was driven mainly by the equitization of legacy debt and the settlement of prior claims. As a reminder, a share price of $6.81 puts our tranchelin warrants in the money and their full exercise would provide us with $670,000,000 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 $260,000,000 off our balance sheet. Now I'll turn to our CapEx plans. In the Q1, we made all payments due this year on miners we ordered and have deployed in 2024.

Speaker 3

We anticipate purchasing additional miners in 2024 to complete our planned refresh and to achieve our 21.8 exahash stealth 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 2nd 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 $4,500,000 in CapEx associated with our new Austin HPC data center, which was not previously included in our 2024 CapEx plan.

Speaker 3

Now I'll turn to a review of the mining economics summarized on Slide 13. Our direct cash cost to mine a Bitcoin in the Q1 was $18,915 This consists of power cost of $15,977 and a cash based facilities operations cost of $2,938 allocated based on 77% of our fleet dedicated to self mining and divided by total Bitcoin self mined in the Q1 of 2,825. Another way to look at this is by calculating the cash based cash cost of these same items, which represents the same cost expressed as a cost per terahash per day. Our total cash based cash cost in the Q1 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.

Speaker 3

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 $300,000,000 in net operating loss carry forwards, which will reduce our future cash taxes. Our share count as of March 31, 2024 is approximately 182,000,000 shares. And now, I'll turn the call back to Adam to discuss our expectations for 2024.

Speaker 3

Adam?

Speaker 2

Thanks, Denise. Before we turn to Q and 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 removed from the latest halving, we have seen a normalization of the record high transaction fees immediately after the halving. Hash 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 3 to 6 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.

Speaker 2

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 U. S. Power prices over the coming years.

Speaker 2

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, I continue to build out our owned infrastructure, particularly through the completion of our Texas projects. 2nd, 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 this significant opportunity in HPC Hosting.

Speaker 2

I'll describe each of these in more detail, starting with our partially built infrastructure at our 2 Texas sites. At these sites, we have 372 megawatts that require an investment of about $200,000 per megawatt on average to complete. These 3 72 megawatts can support more than 20 exahash of mining capacity over the next 3 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.

Speaker 2

We are currently on track to energize the 72 megawatts in Denton by the end of our Q2. We expect to purchase the remaining miners to achieve our refresh and Hashtag expansion goals later this year. 2nd, 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 7 45 megawatts of infrastructure, if we were to refresh all of our prior generation S19, S19 Pro and S19J Pro Miners with S21s, we would be able to increase our existing hash rate by more than 10x a hash without adding any new infrastructure. We are already seeing improved mining equipment economics in this post having environment.

Speaker 2

We are also working with multiple technology companies to develop and deploy new lower cost minor 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 per core wave. As discussed earlier, buyers of advanced GPUs for workloads such as AI cloud and high performance computing have a 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 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 scale data centers and we have a team from the data center industry leading our operations.

Speaker 2

We are in regular discussion 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 $7,000,000 $12,000,000 per megawatt. Based on our current assumptions, we project the cost to convert 1 of our high power Bitcoin mining data centers into a Tier 1 HPC data center at between $5,000,000 $8,000,000 per megawatt. Even saving $1,000,000 per megawatt represents a $100,000,000 in construction savings for a 100 megawatt data center.

Speaker 2

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 PowerUp Debt 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 debt that prevent us from holding Bitcoin today. Based on industry data, we target Tier 1 HPC hosting revenue on the order of $1,400,000 to $1,600,000 per megawatt per year with gross margin of 75% to 80%. Power cost and utilities are direct pass through declines.

Speaker 2

The complete conversion of 500 megawatts of Bitcoin mining infrastructure to HPT hosting would likely take 3 to 4 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 and 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.

Speaker 2

It also built the platform for an alternative compute business that provides significant multi year steady cash flows with strong financial returns. The potential to optimize our asset portfolio across these 2 attractive and high value compute areas is only available to us because we own and control all our infrastructure, we could not be better positioned to capture the opportunity in these 2 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.

Speaker 2

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.

Operator

The first question comes from the line of Joe Flynn with Compass Point. Please proceed.

Speaker 4

Hi guys. Thanks for the question. 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, startups? Just any color you could provide there would be helpful.

Speaker 2

Yes, of course, Joe. I would say our target base right now is mainly around our goal to have prepaid revenues part of this contract. So then having the client pay for the CapEx So 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.

Speaker 4

And just drilling down to the economics you guys mentioned, it looks like the existing Correvive contract was roughly 100 dollars per megawatt hour and the number you just gave is closer to $150 to $170. Just kind of curious is that $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 would be great.

Speaker 2

Yes, of course. So our target for or what we laid out is really our target for conversions of sites. And so when we talk about things like the existing Correvio deal or any conversion of existing space, where we lease and then sublease 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.

Speaker 2

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 that's on the back of about $1,400,000 to $1,600,000 in revenue per megawatt.

Speaker 4

Okay, great. Thanks guys.

Operator

Of course. Thank you. The next question comes from the line of Lucas Pipes with B. Riley Securities. Please proceed.

Speaker 5

Thank you very much, operator. Thank you for all the detail in the prepared remarks and presentations. Adam, I also want 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 conversion.

Speaker 5

So 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?

Speaker 5

And how do you compete against that? Thank you very

Speaker 6

much. Of

Speaker 2

course. Thanks, Lucas. I'm going 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 on the existing infrastructure side, they have a very hard time competing with the part of the industry that we're focused on today.

Speaker 2

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 20, 28, 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.

Speaker 2

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 on the electrical infrastructure that you could see.

Speaker 5

Thank you, Adam. 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 don't why haven't we seen M and A yet? What's your take on that?

Speaker 2

Lucas, if I might just follow-up on your question, you're referring to M and A in our industry itself?

Speaker 7

Yes. Well,

Speaker 5

specifically what I'm referring to on Slide 8 is a forward EV to EBITDA multiple for data center companies 20 times. You cite 9 to 14 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 and A from the data center side to the Bitcoin mining side to date? Would appreciate your thoughts on that.

Speaker 2

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 month lead time for traditional data center. So just having access to the power is a significant advantage and is 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.

Speaker 2

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.

Speaker 5

Adam, I appreciate your perspectives. Best of luck. Thank you very much for all the color.

Speaker 2

Thanks, Lucas.

Operator

Thank you. The next question comes from the line of Kevin Dede with H. C. Wainwright. Please proceed.

Speaker 8

Thank you. Hi, Adam, Denise. Thanks for having me on. So Adam, maybe you could offer a little operational insight. I know the hash price has trended down, right?

Speaker 8

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?

Speaker 2

Thanks, Kevin. I think it comes down to 2 really two items. And the first comes down to operations. Prior to the 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.

Speaker 2

And really what that does, 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 three 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.

Speaker 8

At what point would you consider developing fresh megawatts for HP to address the HPC market versus conversion? And how would you balance that infrastructure spend visavis 10 or so ex to Hash that you could gain in improving your fleet?

Speaker 2

Yes. We're in a very unique position today where we have infrastructure that can support both Bitcoin Mining and HPC Hosting. Obviously, Bitcoin Mining is a platform for which we're able to expand to 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.

Speaker 2

But we'll continue to we'll be able to continue to grow our Bitcoin mining ex Hash over the course of the next few years. As you mentioned, we have a 10x Ash 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 in the Bitcoin mining side and a very exciting opportunity on the USBC side.

Speaker 8

Thanks, Adam.

Operator

Thank you. The next question comes from the line of Greg Lewis with BTIG. Please proceed. Yes.

Speaker 9

Hey, thank you and good afternoon and thanks for taking my questions. And Ana, I was kind of curious on your thoughts, Kevin's question where you kind of addressed your firmware and your stack, you mentioned other miners using 3rd 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

Speaker 2

be potential customers I. E.

Speaker 9

This a potential other revenue stream for Chorus?

Speaker 2

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

Speaker 6

continued to lead the pack in terms of our development.

Speaker 2

And so from our can maintain that competitive advantage over our peers as we continue to grow. 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 3rd 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 their variables constant.

Speaker 9

Okay, super helpful. And then I also wanted to follow-up on the HPC opportunity. I mean, you mentioned the ability for prepaying. I guess as prepaying is one thing, and that's obviously sounds like the ideal solution. But what about approaching it using your existing infrastructure with a joint venture?

Speaker 9

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?

Speaker 2

Yes. I would say the way we look at it right now and really what excisis modes is utilizing the prepaid revenue structure allows us to own that infrastructure free and clear after that prepaid revenue is run off. Owning this infrastructure at 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 equipment or 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.

Speaker 2

And so from our perspective, really the capital is the only other part of that that's necessary to execute. If we can get that from our client base, that will provide us a significant advantage going forward.

Speaker 9

Okay. Super helpful. Thank you.

Operator

Thank you. The next question comes from the line of Tyler D'Amato with BTIG. Please proceed.

Speaker 10

Yes. Hey, guys. Thanks for taking the question. Adam, I just wanted to follow-up really quickly on the prepayment from the HBC customers.

Speaker 8

I mean, do you have

Speaker 10

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?

Speaker 2

Yes, of course. I think what we're looking at right now is really on the 100% payment term. 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 contract.

Speaker 10

Great. That's all I had. Thanks for closing the loop on that. Appreciate the time.

Speaker 2

Of course. Thank you.

Operator

Thank you. The next question comes from the line of Lucas Pipes with B. Riley Securities. Please proceed.

Speaker 5

Thank you very much for taking my follow-up question. Hopefully really quick. The $1,400,000 to $1,600,000 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%.

Speaker 5

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.

Speaker 2

Thank you, Lucas. Yes, so the 1.4 to 1.6 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 passed 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 those on that per megawatt number that's given to that 1.4 to 1.6 number.

Speaker 5

Got it. 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.

Speaker 2

Absolutely right, Lucas.

Speaker 5

Adam, I really appreciate it. Thank you so much and best of luck.

Speaker 2

Thanks very much.

Operator

Thank you. The next question comes from the line of Kevin Dede with H. C. Wainwright. Please proceed.

Speaker 8

Thanks. Me again. 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 in a favorable mining economics?

Speaker 2

Hey, Kevin. I'll take that question. So really how we're thinking about it today. Yes, of course, the $19,000,000 that we paid off early in the Q2 was related to mechanics' rooms to build out that 72 megawatts at our Genting facility. We have some additional debt service over the course of this year that will pay down some additional principal.

Speaker 2

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. We believe it's more accretive to our bottom line.

Speaker 8

Perfect, Adam. Appreciate that nuance. Thanks for sharing.

Speaker 2

Of course. Thank you, Kevin.

Operator

Thank you. The next question comes from the line of Jack Cheng with Imperial Capital. Please proceed.

Speaker 7

Hi, thanks for taking the question. 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?

Speaker 2

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.

Speaker 2

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.

Speaker 7

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

Speaker 2

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.

Speaker 5

Thank you.

Operator

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

Speaker 1

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

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Earnings Conference Call
Core Scientific Q1 2024
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