Core Scientific, Inc. (CORZ) Earnings Call Transcript & Summary

Hello, and welcome to the Core Scientific, Inc. Fiscal Fourth Quarter and Full Year 2023 Earnings Conference Call. My name is Harry and I'll be coordinating your call today. [Operator Instructions]. I will now hand you over to Steven Gitlin, Senior Vice President, Investor Relations and Marketing at Core Scientific to begin. Please go ahead.

Good afternoon, ladies and gentlemen, and welcome to Core Scientific Fiscal Year 2023 Earnings Conference 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, forecast, performance or achievements and may contain words such as believe, anticipate, expect, estimate, intend, project, plan or words or phrases with 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 time-sensitive information that is accurate only as of today, March 12, 2024. The company undertakes no obligation to make any revision to any forward-looking statements contained in our remarks today or to update them to reflect the events or circumstances occurring after today. Joining me today from Core Scientific are CEO, Mr. Adam Sullivan; and Chief Financial Officer, Ms. Denise Sterling. We will now begin with remarks from Adam Sullivan. Adam?

Thank you, Steve, and good afternoon. I'd like to begin by highlighting a few key points to help frame Core Scientific's leading position in our industry. As illustrated on Slide 3, Core Scientific is one of the largest Bitcoin miners in North America, earning more Bitcoin than any other listed company in 2021, 2022 and 2023. Moving now to Slide 4. We generated $502 million in revenue in 2023, more than any other listed miner in North America. We own our 724 megawatts of infrastructure. That translates into 23.2 exahash as of December 31 and 25.2 exahash as of February 29. We are diversifying our hosting customer base beyond Bitcoin Mining into high-performance computing with our recently announced contract host CoreWeave, and we are well positioned for the happening continuously improving our fleet efficiency with a pathway to delever our balance sheet, a plan to add more than 20 x exahash of self-mining cash rate over the coming years, and I believe we have the best team in our industry. This being my first earnings conference call since taking the role of CEO. I'd like to express my gratitude to our Board members and our leadership team for their support. I'd also like to acknowledge the hard work and dedication of every member of the core scientific team. You stay focused during the restructuring process, you maintained our market leadership position, and you bring our values to life every single day. The restructuring lasted through the entirety of 2023 and it was not an easy period for the company, but we persevered learned from the experience and have built what I believe to be the best company in our industry. One of the main reasons I joined Core Scientific in 2023 was the quality of the team and its ability to scale its owned infrastructure rapidly and efficiently. It was the first company to energize 100, 250 and 500 megawatts per Bitcoin mining in North America at a time when very few came anywhere close to that scale and even fewer method growth targets. And by only our own infrastructure, we can deliver financial, operational and strategic advantages that I will address later. It's a privilege for me to lead this company, and I'm incredibly grateful and excited about this opportunity. Building on strong momentum from 2023, Core Scientific and entered a site new chapter in our history. On today's call, I will speak to 3 key elements of this new chapter. The strength of our fundamental business, our preparations could happen and the opportunities ahead of us. Denise Sterling will then share some key financial and operational metrics before I return for closing comments, and then we'll take your questions. Now let's talk about the strength of our business, highlighted on our earnings presentation. A total of 19,274 bit points were mined in our data centers, 13,762 by self mining for our account or than any other public listed mine or North America. We operated the largest infrastructure for Bitcoin mining in North America with 724 energized megawatts. We ended 2023 with 16.9 exahash with self-mining hashrate and 6.3 exahash of hosting hash rate for a total of 23.2 exahash. We demonstrated superior productivity earning higher than average Bitcoin for energized exahash. We are at Bitcoin Miner, and we develop and operate data centers. Less known is that we create technology solutions that support large fleets of computers. But as emphasized on Slide 5, will be really do 24/7 365 is transform energy to high-value compute with superior efficiency at scale. We do this by designing, building and operating high power digital infrastructure in which hundreds of thousands of computers operate with high uptime and high productivity. The high-value compute we focus on today is Bitcoin mining, and our position in this market is strong. Owning our 724 megawatts of infrastructure shown in more detail on Slide 6, results in a lower cost to mine than if we relied on others to host our miners because we don't have to pay anyone a margin above their hosting costs. We have an organic growth plan for completing another 372 contracted megawatts of partially built infrastructure at our 2 Texas sites and incremental cost per megawatt of only about $200,000 or less than half of the cost of greenfield infrastructure. We plan to fund that growth from operating cash flow, a lesson we learned from our experience prior to our restructuring. This new infrastructure represents more than 20 exahash of new hash rates planned for the coming years. In addition to our strong operational results in 2023, we also delivered strong financial results, starting with revenue of $502 million. While we experienced a net loss for the year of $247 million was mostly driven by $119 million in reorganization items associated with our restructuring, which are now mostly behind us. In 2023, we generated strong adjusted EBITDA of $170 million, up from negative $10.7 million in the prior year. We generate cash flow by earning and selling Bitcoin efficiently. Beyond our financial performance in 2023, which Denise will review in more detail, we also took the opportunity to evaluate our business carefully during our restructuring and made a number of changes that have strengthened our organization highlighted on Slide 7. We emerged with a stronger balance sheet and a pathway to delever further based on convertible debt conversion and warrant exercises. We instilled rigor and discipline in capital allocation, crafting our organic growth plan funded out of operating cash flow. We reduced our spending and implemented a hedging strategy on power to manage our downside risk. We've rationalized our [ Hosting ] business, reducing the number of customers to a smaller set of financially strong companies in implementing new contracts designed to create more value for our shareholders through proceeds sharing. We also paid off our debt financing, utilizing free cash flow well in reorganization, and we completed a successful oversubscribed equity rights offering prior to our emergence. Lastly, we strengthened our self-mining business in a number of important ways that I will detail shortly. Across these and other areas, we made tremendous progress over the past year and now having reflected on NASDAQ are excited at the opportunity to remain at the forefront of [ Dixon ] Mining North America. Now let's discuss the upcoming have. In our business, scale is important, but it's insufficient. We must deploy our resources and operate the superior efficiency to address the inherent volatility of our industry and the upcoming avenue particular. Publicly reported data shows that our hashrate utilization based on the number of Bitcoin we earn per average energized exahash has exceeded the average for our peer group in the last 12 months and is shown on Slide 8. It's much easier to operate efficiently with a small operation in much more difficult at scale. We continue to deliver superior efficiency at scale. Efficiency is critical to any business. To prepare our business better for the volatility we expect around having, we've accomplished the following shown on Slide 9. We continue to deploy new Bitcoin miners to expand our hashrate and replace older, less efficient machines. By doing so, we improved fleet energy efficiency to 27.94 fuels per terahash by December 31, 2023, and at the end of February 2024 to 26.79 per terahash. We've accelerated delivery and deployment of our 2.5 exahash of new S21 through the first half of the year, which will improve our fleet efficiency even further. Levering our strong software development capabilities, we deployed our own proprietary burner to miners to generate greater profitability and create greater flexibility. We are able to optimize the machine performance based on power price changes as well as weather and facility level variables such as temperature, wind and pressure. This results in greater profitability and varying levels of economics, creating greater profitability at both lower and higher cash prices. We have optimized our fleet by reallocating miners to different locations based on their energy efficiency, aligning them with individual data center environmental conditions in [ PowerICS ]. We implemented a power hedging strategy for the first time to minimize the impact of energy price volatility on our financial performance, and we've conducted rigorous scenario planning to determine what responses deliver the best results based on a variety of having driven cash price assumptions. Our focus on efficiency has delivered positive financial results. In 2023, we reduced cash operating expenses by 27% year-over-year. We will continue to manage expenses carefully, work to improve efficiency and continue preparing for the expected cash price of for [indiscernible]. The strength of our business, combined with our focus on efficiency in preparation for the having position us very well to remain a leader in the Bitcoin mining industry. The fact that we own our own infrastructure and possess unique capabilities and talent position us very well for emerging opportunities in other areas of high-value compute. Owning our infrastructure provides financial, operational and strategic advantages. First, owning our infrastructure lowers our cost to mine, producing self-mining gross profit of 25% in 2023. It also gives us the flexibility to quickly and easily restruct our miners to generate higher hashrate in the same operating power, increasing our productivity and profit. Second, because it's our infrastructure, we can develop and deploy the new technology solutions that I mentioned earlier that help us boost productivity and operating efficiency. This includes firmware, power management software and fleet management software. These solutions enable us to participate in programs offered by the utilities in different locations that can generate value for us. There is so much more we can do with our deep technical capabilities that would be difficult or impossible to do if we did not own our own infrastructure. And third, we believe that the value of our owned infrastructure will only increase over time as the demand for available high-power term generation sites grows with the rapid growth of HPC and AI cloud market, we believe that more opportunities will emerge to host clients such as CoreWeave. To that point, our new multiyear hosting contract with CoreWeave, an industry leader in GPU accelerated workloads is valued at more than $100 million over the term of the contract. This new contract diversifies our hosting customer portfolio and enhances our potential to increase shareholder value by expanding our hosting business to customers engaged in important growing segment of the compute market. As a reminder, we hosted GPUs in our data centers for several years and even built a Tier 3 data center within one of our sites. Also, the majority of our data center operations team and its leaders come from the data center industry, providing us with a deep understanding of the requirements and operating mechanics of infrastructure to service high-performance computing. In fact, our Head of Data Center Operations, built and ran the very data center we have leased to host CoreWeave when he worked for HP. Let me make it clear. We are fully focused on picking mining at scale. At the same time, we are uniquely positioned to address these emerging high-value compute hosting opportunities as they evolve, representing strategic optionality for us and for you, our shareholders. With that as an overview of the state of the business, I'd like to invite Denise Sterling to provide some context to key financial and operating results in 2023. Denise?

Thank you, Adam. It's good to be here to you today. I'll begin by highlighting key income statement items. On a year-over-year basis, 2023 revenue of $502.4 million declined by $138 million or 22% from $640.3 million in 2022. $130 million of that decline was due to reducing the number of customers in our hosting business to improve its margin profile and sustainability and exiting the equipment sales business in 2023, which had contributed meaningfully to revenue in 2022. Cost of revenue decreased by $253 million, down 40% to $378.9 million from $631.9 million for the fiscal year 2022. The decrease in cost of revenue was primarily attributable to $128.1 million of decreased depreciation driven by a fiscal 2022 noncash impairment adjustment to the depreciable base for our deployed self-mining units, $67.1 million of lower equipment sales cost due to our exit from the equipment sales business in 2022, $41.8 million of lower power costs and lower stock-based compensation of $20.7 million as prior year included accelerated vesting of awards as well as a decrease in equity awards granted during fiscal year 2023. As a result of our focus on efficiency, as Adam indicated, we reduced our cash operating expenses by 27%. This improvement was mainly the result of a significant reduction of professional fees and a decrease in headcount and related personnel costs as we streamlined our organizational design to increase our operating efficiency. Our net loss decreased by $1.9 billion or 89% from $2.1 billion in 2022 to approximately $246.5 million in 2023. This decrease was driven mainly by a decline in noncash impairments of $1.9 billion, an improvement in gross margin of $115.1 million, lower operating expenses of $144.9 million, partially offset by bankruptcy-related reorganization expenses of $191.1 million in 2023. 2023 adjusted EBITDA of $170 million increased by $180.7 million from a negative $10.7 million in 2022. As a percentage of revenue, 2023 adjusted EBITDA grew to 34% of revenue versus a negative 1.7% in 2022. Because power is our single largest component of our cost of revenue, I'd like to provide some additional background. We have power contracts with grid operators for each of our data centers. These contracts vary in price and terms. [ Fleet by ] power cost averaged $4.44 in 2023. We project power costs in 2024 of between $4.5 and $4.7. We currently operate in both regulated and unregulated market. In regulated markets, we are limited in our ability to manage the risk of power prices. In Texas, we implemented a hedging strategy for the first time on 50 megawatts of power to our Pecos data center. While stable winter power prices did not result in significant savings from this strategy in 2023, we protected ourselves against downside risk and we establish the processes necessary to engage in hedging at a larger scale and at other locations. Today, we operate 2 segments, self-mining and hosting. As shown on Slide 12, in 2023, our self-mining to hosting mix was 76% to 24%. We plan to expand our self-mining fleet as we add infrastructure capacity as well as refresh our less efficient miners to increase efficiency and productivity. As we expand our self mining fleet, we expect the mix to change over time. Our 2023 self-mining and hosting gross margins were 25% and 22%, respectively, as compared to 1% and 2% in 2022. The significant improvement in year-over-year self-mining gross margin was due to decreases in depreciation and stock-based compensation and an increase in our self-mining hashrate. The significant improvement in our hosting gross margin was due to the rationalization of our hosting business that Adam addressed earlier. A critical driver to our operating efficiency and the preparation for the having is the composition of our self-mining rate. As Adam indicated, our fleet-wide average energy efficiency was $26.79 per terahash as of February 29, 2024, and we expect continued improvement as we deploy new S21 miners this year. As of the year-end 2023, we operated approximately 158,000 miners in our self-mining fleet. The model mix shown on Slide 13, with 13% S19, 71% S19 Pro and S19j Pro and 16% S19j XP. Now I'd like to discuss the strength of our balance sheet and cash commitments. As illustrated on Slide 14, we reduced our debt by approximately $400 million at emergence to $608 million as compared to just over $1 billion at the end of 2023. $260 million of our debt at emergence consisted of secured convertible notes and the remaining $348 million included several nonconvertible instruments. We have summarized the terms of these debt instruments on Slide 15, including facility size, interest rate, maturity and conversion as applicable. Slide 16 illustrates our pathway to reducing and potentially eliminating our debt. First, a stock price of $5.83 will put the convertible notes in the money at a price of $7.79 will trigger their mandatory conversion. Full conversion of these notes will result in an issuance of an additional 45 million shares and a $260 million reduction in debt to $348 million, assuming no other changes. Next, the exercise price of a tranche 1 warrants is $6.81. Because these are cash warrants, their full exercise would result in approximately $670 million in cash to Core Scientific, half of which we are required to use to pay down our debt. As our net debt following the equitization of our secured convertible notes, amounts to $348 million, the receipt of $670 million would be more than sufficient to clear the balance sheet, assuming no other changes. The full exercise of tranche [ Wind's warms ] would also result in the issuance of an additional 98 million shares. As summarized on Slide 16, the pathway to completely delevering our balance sheet based on the performance of our company and company stock is within our reach. We have structured our 2024 plan to fund our operations and growth out of operating cash flow, including debt service, which is summarized on Slide 17. We expect to pay a total of $71 million, $31 million in principal and $40 million in interest and debt amortization in 2024. The majority of our existing debt matures in 2028 and 2029. Please refer to Slide 15 for the terms associated with our debt instruments. Adam previously discussed our infrastructure expansion plans over the coming years. In 2024, we plan to spend approximately $20 million to complete 72 megawatts of infrastructure in Texas, which we will fund out of operating cash flow. Operating cash flow will also fund the cost of new miners to be deployed and energized from that 72 megawatts. Moving now from CapEx, let's review our mining economics summarized on Slide 18. Our total cash cost to self-mine in 2023 was $14,982 which represents our direct cash expenses of power of $12,528 and facilities operations cost of $2,454 allocated based on the percentage of our fleet dedicated to self-mining divided by total Bitcoin self-mine in 2023 at 13,762. Another way to look at this is by calculating the cash-based cash cost, which represents the cash expenses of power and facilities operations costs divided by our self-mining fleet cash rate in terahash. Our cash rate cashcost in 2023 was $0.398 per terahash. Again, we expect our operating cash flow to be sufficient to support operating expenses, debt service and CapEx associated with organic growth plan in 2024. We are modeling a statutory effective tax rate of approximately 23% for 2024. We also have more than $300 million in net operating loss carryforwards, which will reduce future cash taxes. Now I'll turn the call back to Adam to discuss our expectations for 2024.

Thanks, Denise. As previously indicated in the business plan filed with the court, we expect the following results in 2024. We plan to complete 72 megawatts of partially built infrastructure at our Denton, Texas data center for a total of 796 megawatts by the end of 2024 and self-mining hashrate with 21.8 exahash. To summarize, Core Scientific format leader in Bitcoin mining with a strong business, significant progress preparing for the having and with potentially significant opportunities in other forms of high-value compute hosting. We took the opportunity during our restructuring to improve our company and our team is engaged, aligned and laser-focused on operating effectively and achieving our growth plans. We are excited about how well Core Scientific is performing and physicians, and we look forward to updating you on our progress against our goals over the course of this year. I am confident in the ability of our outstanding team to achieve superior results that earn your trust. Thank you for your time today, and now we will take your questions.

We will now begin the question-and-answer session of today's call. [Operator Instructions]. Our first question today is from the line of Joe Flynn of Compass Point.

Looking into the first quarter with the stronger bacon prices and cash price and given you guys have the benefit of having scale already and high hashrate utilization, you guys should be able to build a pretty strong cash position here. So, my question is on just near-term plans going forward, but that cash, what's balanced between investing in growth, holding cash for rating a day into the having and also as it relates to your decision to pay cash interest or pick interest.

Yes. Thanks, Joe. Priority #1 for us is executing on the business plan. So, we've laid out the growth for the next 72 megawatts to add on to our base of 24 megawatts and we believe that by executing on that business plan, it will provide a pathway to deleveraging for us. Priority 2 is paying down debt. That's definitely something that we've been eyeing as we've been looking forward over the parts of 2024. But really, our top priority right now, execute on the business plan, continue operating with the best efficiency across the market, and we believe that will provide a pathway for us to delever our balance sheet over the course of 2024.

Great. And then a question on the power prices. It looks like you guys saw a benefit there with $4.4 per kilowatt hour based probably on lower natural gas prices. But I guess one more color on maybe your existing power agreements whether those are pretty [indiscernible]? Or are there further opportunities to get fixed price PPAs? And then also if you could just expand on your hedging strategy, if you can hedge additional megawatts, that would be helpful.

Yes, of course. I mean let's take a look at the power markets more broadly first. Power right now in the United States is a very competitive game. Bitcoin miners are competing against well-funded technology companies that are less sensitive to pricing. We view that as a big opportunity for us as a business, which we can talk about later. But going back to Bitcoin mining, our power prices over the course of 2023 were $0.44. We have a split between regulated and unregulated markets inside of our portfolio. We're operating in 5 different states. The unregulated market is Texas. And so, a lot of our power prices are fixed, some of them have components that can fluctuate with different pricing like natural gas. And so, we definitely have an eye towards further hedging programs like the one that we did at our Pecos location. But right now, what we're really focused on is not necessarily only achieving lower cost per Bitcoin but it's also really focusing on areas where we can have high utilization. It's something that we really pride ourselves on and believe provides a better return on capital for the investments that we've made, not only in our infrastructure, but also our miners. So, the power programs that we're participating in across regulated markets right now, it's some intermittency in exchange for lower power prices and in Texas, in particular, looking at more short-dated fixed-price PPAs that give us the opportunity to capitalize on different market environments. That's what we're seeing across the state of Texas, power prices are changing rapidly. And that's something that we want to be able to have the flexibility to [ exon ] those types of opportunities. And so, you saw the first one that we executed on over the course of the winter in Texas.

Our next question today comes from the line of John Todaro of Needham & Company.

A little bit newer to the story, but would love to get a little bit more color on the CoreWeave contract. Any additional details you can drill down into there such as the operating margin profile we should be thinking about? And then as you do think longer term, is this a business you would like to get more into? And then just expected CapEx, if you were to get in the business on maybe a larger scale, what is the cost per megawatt you would be thinking about?

Yes. Let me address the first part of the question first. We're excited about bringing CoreWeave back to the client, and they were a client from 2019 to 2022, and CoreWeave's become a major brand in the space, but they knew our capabilities and know that we're well positioned to support them. This first deal that we signed with the Austin location. Our operations team has high familiarity with that site. Many of the team members that we have actually built and operated that site when they worked for HP. So how we're thinking about this business right now, it's a natural hedge against the Bitcoin mining business. This is priced, how you'd see traditional data center deals price charging a fixed per kilowatt fee, the chart regardless of whether that that capacity is utilized and a pass-on things like power and utilities. We believe this deal is going to be accretive to 2024. And it's going to provide a strong return on the CapEx that we spend on the upgrades and the expansion of the electrical infrastructure at that site. The interesting part for us is how we're thinking about it going forward and really what we're seeing in this market, there's low availability of high megawatt power or high megawatt sites with firm generation power. And right now, infrastructure is a 3- to 5-year game. And on the power side, it's at least 2 years out you go to any site today. We have the unique advantage where we can convert facilities that we have with a much lower time frame. So, we're looking at executing contracts with companies that have a preference for gaining capacity on sooner rather than later. And right now, we're in a very interesting intersection between Bitcoin mining and HPC, where we can be extraordinarily competitive on future site development, whether that's the 370 megawatts to complete on the Bitcoin mining site or whether it's on any of the existing infrastructure that we have, which is 300 megawatts within our existing footprint that have the potential to convert to HPC-like locations, given their proximity to meter metropolitan areas and also access to low latency to those metropolitan areas. So, for us, we're looking forward to this business really from 2 perspectives. The first is continue to execute on the Bitcoin mining site with the first result infrastructure that we have. And then part 2 is looking at improving our business by improving the margins of our Bitcoin mining business by shifting potentially some of our existing sites, to this new HPC business where we can have long-term fixed-price contracts that give us the opportunity to provide greater stability and free cash flow.

Great. And sorry if I missed it, when is the revenue from the contracts start kicking in?

We expect the revenue from the contract for this to start showing up on our income statement at some point over the next few months. So that's something we'll look forward to over the course of the next few earnings calls.

Our next question today is from the line of Lucas Pipes of B. Riley.

Adam, my first question is on the fleet upgrade. Can you remind us the timing of the exahash additions in general, the size of the opportunity? And then I think you mentioned the CapEx budget earlier on the call, but if you could just refresh that as well, I would appreciate it.

Sure. Good to hear from you, Lucas. So, let's talk about the minor refresh more broadly first, and we'll dig in. So, on a minor refresh basis, what you see in our existing portfolio is a consistent roll into newer generation issues. That's why our average machine fleet today is about 26.79 fuels per terahash. But we're looking at consistent role into newer generation machine and to do it on a more consistent basis. that's how we're thinking about this business going forward is constantly having the ability to refresh into lower CapEx cycles. Because if you refresh all from machines at once, you're essentially creating maturity walls for that next CapEx cycle where you have to refresh your in tighter fleet. So, you're seeing the first few deals that we've announced, the XP deal that was part of our emergence. And then the S21 deal that was also announced in January, the S21 deal, that was an opportunity where we actually were able to accelerate the delivery based on accelerating payments for that contract. And so, we're actually pulling forward some of those deliveries to earlier part in Q2 of this year. So, as we look forward to the rest of this year, we're going to look for more consistent machine purchases, and we're going to be updating the market as we go forward. But we'd be looking to pay for those out of operating free cash flow has been played out in our business plan. On the infrastructure side, we're putting up 72 megawatts of infrastructure at Denton. That's going to cost us $20 million to complete that site or to complete those next 72 megawatts. And so that would be paid for over the course of 2024.

Got it. And then on Slide 18, I have a question on how to think about the operational cost. You show $0.65 for terahash. And I assume that this is mostly a fixed cost. So, as you refresh net miners and at exahash, this doesn't really increase linearly, but I would appreciate your thoughts on how to think about that number going forward in a rising exahash environment.

Yes, of course. So, when you look at that on Page 18, referencing the $0.65 in hash cost. Part of that is definitely a fixed cost of the operations team. But then there are also parts that are variable as well related to facility level expenses that are outside of the cost of power. So, these are direct costs that are incurred and some of it would scale as we continue to scale our infrastructure fleet. But in terms of the amount of operating costs, this is something that we would expect to achieve operating leverage on going forward as we continue to increase the size of our infrastructure.

Our next question today is from the line of [ Rosemarie Sison of OTN Capital Group. ]

I was curious about whether you would comment on the plan that was part of your bankruptcy filing, whether you believe that you -- are those numbers still in line with your expectations at least for the current year?

Yes. So, the guidance that we gave at the end of the call was that our guidance is in line with our business plan. So, developing the next 72 megawatts of infrastructure and the 21.8% exahash expected in our fleet by year end of 2024. So. from the perspective of the business plan, we're really focused on that from a CapEx perspective and focused on it from a growth perspective. So those are really the 2 key areas that we believe will be consistent along with our business plan that was filed.

Okay. And do you expect that there could be any change in your power cost going forward? I mean, you obviously mentioned the cost that you expect coming up. Is that set in stone? Or could there be variability to that power cost?

We gave guidance of $0.45 to $0.47. There is potential to be a bit of a range on power prices, but this is something where we have high confidence in our ability to execute that range that we provided for this year. You look back to previous years, there are events that can cause changes in natural gas pricing that can have potential effects not only in current years but future years. But right now, we have high confidence in our ability to execute on the existing guidance that we provide related to power prices.

Our next question today is from the line of Joseph Vafi of Canaccord Genuity.

Maybe I would just focus a little bit more on the upcoming having. I know you mentioned in your prepared remarks, your operating cost per Bitcoin. Clearly, at these spot prices you're going to remain profitable on a halving of that. Just wanted to drill down a little bit into some of your thoughts or how you're planning your operations for the year, maybe your expectations on perhaps where network difficulty may go post having? I know that's pretty hard to forecast and then if you look at your mining fleet, I guess, would you be unplugging any of your miners post having versus where you are now?

Yes. I appreciate that, Joe. So, let's cover our preparations of having first. We think about it in really 3 distinct buckets, operations, software and energy. On the operations side, obviously, we're looking first at a minor refresh. We have the 2 previous announcements as we look to refresh and lower our average tools per terahash. The second part is that we've actually been relocating our machines based on their efficiency within our portfolio of facilities based on the power price in other environmental conditions to allow us to maximize profitability. So that's really point 1 on the operations side. On the software side, we've rolled out new modes to adapt to changing economic conditions. So that's both overclocking and under blocking and providing us the opportunity to rapidly move our average tools for terahash even lower based on changing economic conditions, which can extend the life and improve the profitability of our machines based on different half price assumptions. Lastly, we talked a little bit about this earlier. But on the energy side, we've been working with all of our power providers to develop more advanced strategies that potentially increase intermittency in exchange for lower power prices. And so that's something that we've been working on, given our experience working with some of the largest utilities in the United States to be able to introduce new types of programs and work collaboratively with our energy providers to be able to lower our average power costs. So that's really point one. We definitely completed significant and rigorous scenario planning around many different hash price assumptions. So, we feel we're very prepared for this upcoming half. Now point 2 is definitely an interesting question related to our expectations around the havings. Bitcoin price will influence how much cash rate stays online post-app, Bitcoin prices were to stay flat to where they are today, you would expect to see less hash rate come offline and if the Bitcoin was at 50,000. So, as the starters, I believe, based on what we're seeing from the data, previous generation units that are on the network, let's call it 38 cools per terahash or later, which represents probably somewhere between 10% to 15% of the hash rate comes offline as they're not profitable anymore. The next step is to understand the efficiency mix versus power prices to really provide what the next step of machines that are going to come off-line around the having. What I mean by that is how our older generation units and newer generation units allocated amongst the varying power prices on the Bitcoin network. So that's really the next step to understand how much more cash rate may come offline. And then the last question here is how long do unprofitable miners stay online? The answer could be some of them shut off immediately, but the truth is, many of them may stay online and hopes that network difficulty drops and minor margins improve. So, for us, the way we're thinking about this upcoming having, at minimum, we're expecting somewhere in the range of about a 10% to 15% difficulty drop. And we believe based on the shift that we made across our portfolio that we would have our existing minor fleet be profitable across our portfolio, and that's something that we worked really hard to achieve.

That's really helpful. And then just one more question on the having. I know you're focused on larger hosting customers. How are you looking at having positive or negative effects on your hosting business and your strategy there?

Yes. So, it's interesting. We're going to having with high hash prices, and it really gets to be known what the has price will be post having. But if cash prices stay high and older generation units stay online, infrastructure in this industry is going to be extraordinarily constrained. This is something that we like to capitalize on the business. And we always say that our hosting business is really optionality that we have inside of our infrastructure portfolio to capitalize on moments in time with infrastructure trades at a premium. And so, there are different outcomes that could potentially occur post having, but we're in constant dialogue with potentially large hosting clients to host the newest generation of machines that could provide us either strategic opportunities, for instance, our hosting agreement with Bitmain or different types of financial opportunities like the proceed sharing arrangements that we announced last year that provide us economic benefits similar to self-mining. And we like those types of opportunities going forward. And so, we're going to continue to be very opportunistic on the hosting side as we evaluate new and larger hosting clients that we could fit inside of our portfolio.

Great. Thank you very much. Our next question today is from the line of Kevin Dede of H.C. Rainwater.

Thanks for having me, Adam and Denise. Appreciate it. I would want to piggyback up Joe's question, how your competitors align the hosting business. And I think you tried to get to this, but can you withstand a hosting arrangement to that same $0.04 hash cost level? And at what point or what hash price would you have to make some drastic changes to the arrangements that you have with your existing customers?

We've been really cognitive of this over the course of 2023. And so, one of the main focuses we had over the first of 2023 was ensuring that the hosting clients that we took on were financially strong companies and we're providing us with the newest generation machines. So, as we moved into 2024, obviously, with having coming up next month, we wanted to ensure that we are in a position where we felt comfortable with not only our hosting counterparties, but also the mix that we are hosting for them. So, where we stand today is we have a very strong hosting portfolio. We're evaluating new opportunities in the hosting mix to potentially add to our base. And going forward, we're always going to use hosting as an opportunistic business. And if economics change dramatically like we've seen in the course of 2022, we would be able to replace hosting clients with newer generation equipment and new hosting clients to be able to refit those existing and open slots to be able to increase the profitability of that business once again.

Could you dig in a little bit, Adam, on the infrastructure costs associated with the HPC business given your excitement of work with CoreWeave again. You mentioned, and I totally agree that your infrastructure has great value. But the machine or the bills you have at Denton aren't necessarily amenable to running HPC machine. So, could you give us an outline on how you would convert existing infrastructure or build out future infrastructure to address that?

Yes, absolutely. I mean we've been in contact with some of the largest providers of cards in the industry to be able to work on how to retrofit existing facilities. This is something that's not uncommon in the data center industry. You see brownfield infrastructure being converted to data centers. And if you take a look at our designs for our facilities, they're actually just pared back data centers that have been developed over the course of the data center industry many years ago. So, we believe our infrastructure base, and we completely agree there would be additional costs related to converting some of our existing facilities. But we believe with the counterparties that we're in discussions with, that there would be opportunities for CapEx to be partially covered as part of the contractual arrangements with our clients, given the fact that there's such a high time preference right now to get infrastructure online more quickly. These companies have to prove that they can scale. They have to prove that they can bring machines online. And that's something that we can provide given our advantage of owning our own infrastructure today. So, this is something that we've been in deep discussions with a number of different companies, and we're really excited about the opportunities that exist over the course of not only 2024, but beyond that. I touched on infrastructure is a 3- to 5-year game. But power right now at bare minimum is 2-plus years away for these data center companies. So, this is a big opportunity for us to be able to execute on to be able to bring down the time to market for a number of these companies. And there are a number of opportunities on the infrastructure side that can be brought in to help bring that existing infrastructure that we have, really up to the needs of the clients that we've been speaking to.

Just a real quick one for Denise. How are you thinking about implementing the new FASB on mark-to-market in your Bitcoin holdings?

Yes. No, it's a great question, Kevin. And as you know, we actually stopped holding Bitcoin on our balance sheet in 2022. We actually will adopt as of 1.1 '25 or '24, I apologize. But it really doesn't have a significant impact on us. We did see a significant improvement in our adjusted EBITDA as we talked in our prepared remarks, and that was really based on the fact that we saw the change year-over-year in the impairment. So, while our competitors are actually seeing a significant improvement as they are taking into consideration the actual ability to write up their asset base. As you can see by our financial results, there really wasn't significant difference between where we are today and the application of the new standard.

Our next question today is from the line of Jack Chan of Imperial Capital.

Do you guys see any opportunities for JVs or partnerships perhaps to accelerate the self-mining growth plan or perhaps to also accelerate the growth of the high compute business?

Yes. Thanks, Jack. I mean right now, what we're well focused on is focus on actual plan. Our business plan laid out our continued growth, be it funding that out of operating free cash flow. There may be opportunities going forward that we may evaluate on the HPC side related to joint ventures. But this is something that we believe the team we put together over the course of the past few years, you have to think about the team that we've developed in-house. We've built a team that's scaled and developed the largest infrastructure base in North America for Bitcoin mining. And this team is coming from the traditional data center industry that has an opportunity to execute on a very unique opportunity that will exist over the course of the next 3 to 5 years. And so right now, we're really just focused on building this out organically, finding good partners and good clients that will work with us given our ability to execute more quickly. And so that's really our focus today on the HPC side. And on the Bitcoin mining side, this is something we're the largest at point mine in North America. I mean something that you need to remember is we've been setting the pace in 2021, 2022, 2023, we mine more Bitcoin than any miner in North America, and it appears we're setting the pace again in 2024.

Appreciate that. On the interest rate for your converts, how you're thinking about the cash pay versus the [ Toggle option ]? And will there be an announcement on such?

This is something that we evaluate and we can evaluate on a quarterly basis. And so that's something that we're still evaluating today for the first round at the end of Q2. So, we'll be able to provide more updates to the market as we make decisions around whether we're choosing the 6% cash, 6% pick or the 10% cash.

Yes. And the only other thing to add is, as we've actually detailed out our debt service on Slide 17, just to make sure that it's clear, we do actually anticipate in the projections that we have included on Slide 17 that we are looking at the option of the 6% cash and 6% PIC. But as a suggested it's going to be a quarterly decision going forward.

Our next question today is from the line of Greg Lewis of BTIG.

Thank you, everybody, Adam, I was hoping you could talk a little bit about how you're thinking about allocating capital. I mean, clearly, you've been upgrading the rig fleet sub-27 [indiscernible] terahash. But as you think about deploying those incremental dollars, how are you weighing the benefits of just getting better efficiency out of your existing infrastructure and executing that long-term infrastructure expansion, which you laid out in the presentation?

Yes. Right now, we're hyper focused on executing our business plan. Right now, exiting on that business plan is definitely putting additional cash on balance sheet, given where mining economics are today. And so, we're having that opportunity prior to this upcoming having to put additional cash on balance sheet for us to feel more comfortable around playing through different types of hot price scenarios. I mentioned earlier, Priority 2 is paying down debt. But the path to deleveraging that is embedded in our capital structure today is an opportunity for us to be able to fully delever based on strong execution of our company. And so, what that really looks like is we have $600 million in debt, about just over $600 million. We have a $250 million convert. That is a mandatory conversion feature. And so that leaves up $340 million in regular way debt. We have $670 million on full exercise that Tranche 1 warrant and so right now, all of those, the tranche 1 warrant, the conversion, the mandatory conversion of the convertible note, those are all things that are within reach. If we just start trading somewhat closer to the mean of our peer group in our industry. So, we believe upon strong execution of our business plan, continuing to outperform will the opportunity to pay down the debt through that pathway and the optionality that's embedded in our capital structure. And so really, that's our focus right now. Execute, cash on balance sheet and work towards a pathway to deleveraging and moving to a positive net cash position.

Our next question today is from the line of Darren Aftahi of ROTH MKM.

But Adam, I'm curious, 2 things on your agreement with CoreWeave and the broader strategy there. So first, have you expanded megawatts into HPC, does CoreWeave have a roper on that? Or is it up for grabs?

Any future development that we make. We mentioned the 300 megawatts of opportunity within our existing infrastructure base, that's up for grabs. From the perspective of we have a great relationship with CoreWeave. We've been in discussions with a number of other counterparties. And for us, it comes down to a decision of working with, given the contracts are longer dated or 7 years. That's an alternate for most pickled mining companies, but the data center industry, that's really the standard. And so, we're going to be working with these clients over a number of years. We would want to diversify our customer base over time. And so, we're evaluating a number of different opportunities. And you have to remember, right now, there's a high time preference in this industry to get capacity online more quickly. And so, opportunities that allow for our clients to be able to bring capacity online more quickly or the types of contracts that we'd be looking to execute on.

And then when you look at return on invested capital and you talked about retrofitting some of these buildings, like how does that calculus work and looking at an HPC or AI or ML client with a longer-term time horizon relative to going down the BTC path?

Yes. I mean the way we're thinking about it right now is there's refresh cycles on machines as well on Bitcoin mining machines. And so, there's always additional dollars that need to be spent over the course of time even to maintain a profitable mining business at any given site so we're definitely evaluating different types of contracts with potential clients that allow for them to pay for some or a majority of that CapEx. And so it provides us an opportunity to get a strong return on the invested capital that we would be making. And so that's really something that we've been evaluating. It was obviously something that we evaluated on the first deal that we signed with CoreWeave we believe we'll have a return on that invested capital inside of a year.

Our next question today is from the line of [ Josh Siber ] of [indiscernible].

Look, I want to get a little more color on how you're thinking about energy, especially as you expand into Texas, how are you thinking about navigating the Texas energy?

Thanks, Josh. I mean, we've been in Texas for a number of years, and we have 2 sites in Texas. So, we have our Denton facility and our Pecos locations. So, the way we're thinking about power in the say of Texas, over the course of the past few years, you've seen long-term fixed price PPA increase over the course of time. Even renewable PPAs have increased over the course of the past few years. And so, the opportunities to go longer dated today aren't as opportunistic for us as looking at shorter-dated PPAs. Those also provide greater flexibility around collateral and margin. And so, we've been looking at executing the shorter-dated fixed-price PPAs that provide us the coverage to any potential downside risk as power prices could move in either direction, but it also provides us the opportunity to be able to be much more planful around the types of machines that we put at those sites because the power prices are constantly changing over the course of time, that influences the efficiency of the machines that you're putting there. And so, we're very well versed in allocating machines based on site-level profitability based on changing economic conditions. And one of the things that we're really proud of. We've built our own energy management software in-house. This qualifies us with even the highest program inside of Texas, which are some of the most stringent requirements across the United States, and we've been able to qualify for all of them. And so that's something that we believe is unique to us. All of that capability is in-house. We're not relying on third-party software providers for that. So not only do we feel we have a good strategy on the power hedging side, but also our internal capabilities are exceptional in this industry.

Great. I appreciate it. That's very helpful color. Switching gears a little bit to the HPC side of things. I was wondering if you guys have considered cloud compute. And if so, what may you expect with the direction on colocation costing?

Yes, you have to think about what we're really good at. We're really great at building infrastructure at scale rapidly and better than anyone else. That's something that we've proven over the course of the past few years in the Bitcoin mining side, building infrastructure that's better than the rest of the industry and faster than the rest of the industry. And that's what we're really good at. Our design and development team on the infrastructure side comes out of the traditional data center industry. And so, we're thinking about our core competencies here. Our core competencies are designing, developing and operating digital infrastructure at scale with great efficiency. And that's something that we really try ourselves on that we've been able to execute on better than anyone else in Bitcoin mining, and we're expecting similar results on the digital infrastructure side as well.

Our next question today is from the line of Lucas Pipes of B. Riley.

First, Adam, sorry if I missed it, but what's the CapEx budget for the miners in '24?

For the company, that's something that we haven't announced yet. That's something that we're currently working through, and we're going to be opportunistic over the course of 2024 related to how miners are priced post having. What I can say right now is the XPs and the S21 that we've ordered so far for this year that have been announced, we've made all of the payments required in 2024 on both of those deals. So, we're very comfortable from where we're at today. The only planned CapEx on the infrastructure side is the $20 million related to the Denton expansion, and we'll continue to evaluate future minor purchases as we go through the having.

This will conclude the question-and-answer session for today. So, I would like to hand back to Steve Gitlin for any closing remarks.

Thank you very much, Harry, and thank you all 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.

This concludes today's call. Thank you all for joining. You may now disconnect your lines.