Earnings Transcript for CORZ - Q4 Fiscal Year 2023

Operator: Hello and welcome to the Core Scientific Incorporated 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.

Steven Gitlin: Good afternoon, ladies and gentlemen, and welcome to Core Scientific's 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 statement 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 Exchange Commission, and the special note regarding forward-looking statements contained in the company's current report on Form 8-K filed today, and the earnings release and slide presentation contained therein. Today's presentation is available on our website at corescientific.com in the events and presentation section. The content of this conference call contains 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, Mrs. Denise Sterling. We will now begin with remarks from Adam Sullivan. Adam?

Adam Sullivan: Thank you, Steve, and good afternoon. I'd like to begin by highlighting a few key points that 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 31st and 25.2 exahash as of February 29th. We are diversifying our hosting customer base beyond bitcoin mining into high performance computing with our recently announced contract with CoreWeave. And we are well positioned for the halving, continuously improving our fleet efficiency with a pathway to de-lever our balance sheet, a plan to add more than 20 exahash of self-mining hash 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 stayed focused during the restructuring process, you maintained our market leadership position, and you bring our values to life every single day. The restructuring lasted for the entirety of 2023. It was not an easy period for the company, but we persevered, learned from the experience, and it 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 own infrastructure rapidly and efficiently. It was the first company to energize 100, 250, and 500 megawatts for bitcoin mining in North America at a time when very few came anywhere close to that scale and even fewer met their 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 has entered an exciting new chapter in our history. On today's call, I will speak to three key elements of this new chapter

Denise Sterling: Thank you, Adam. It's good to be here with 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 non-cash impairment adjustment to the depreciable base for our deployed self-mining units, $67.1 million of lower equipment sales costs 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 non-cash 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. [indiscernible] power cost averaged $4.04 in 2023. We project power costs in 2024 of between $4.05 and $4.07. We currently operate in both regulated and unregulated markets. 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 established the processes necessary to engage in hedging at a larger scale and at other locations. Today, we operate two 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 hash rate. 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 halving is the composition of our self-mining fleet. As Adam indicated, our fleet-wide average energy efficiency was 26.79 joules per terahash as of February 29, 2024. And we expect continued improvements 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 is 13% S19, 71% S19 Pro and S19J Pros, and 16% S19J XP. Now I'd like to discuss the strength of our balance sheet and cash commitment. 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 non-convertible 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 and 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 the 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 1 Warrants would also result in the issuance of an additional 98 million shares. As summarized on Slide 16, the pathway to completely de-levering our balance sheet based on the performance of our company and company stocks 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-mined in 2023 of $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, cost divided by our self-mining fleet hash rate in terahash. Our cash-based cash costs in 2023 was $3.98 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 carried forward, which will reduce future cash taxes. Now I'll turn the call back to Adam to discuss our expectations for 2024.

Adam Sullivan: Thanks, Denise. As previously indicated in the business plan filed with the core, 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 hash rate of 21.8 exahash. To summarize, Core Scientific remains a leader in bitcoin mining with a strong business, significant progress preparing for the halving, 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 has engaged, aligned, and laser focused on operating effectively and achieving our growth plans. We are excited about how well Core Scientific is performing in positions. 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'll take your questions.

Operator: 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. Joe, your line is now open.

Joe Flynn: Hi guys. Looking into the first quarter with the stronger bitcoin prices and hash price, and given that you guys have the benefit of having scale already and high hash rate 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 with that cash, what's the balance between investing in growth, holding cash for a rainy day into the halving. And also as it relates to your decision to pay cash interest or pick interest.

Adam Sullivan: Yes, thanks, Joe. Priority number one for us is executing on the business plan. So we've laid out the next -- the growth for the next 72 megawatts to add on to our base of 724 megawatts. And we believe that by executing on that business plan, it will provide a pathway to de-leveraging 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 course 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 deliver our balance sheet over the course of 2024.

Joe Flynn: Great. And then kind of question on the power prices. Looks like you guys saw a benefit there with $4.04 per kilowatt hour based probably on lower natural gas prices. But I guess I want more color on maybe your existing power agreements, whether those are pretty set in stone or are there further opportunities to get fixed price PPAs? And then also if you could just expand on your hedging strategy, you can hedge additional megawatts. That'd be helpful.

Adam Sullivan: Yes, of course. I mean, let's take a look at the power markets more broadly first. I mean, 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 $4.04. We have a split between regulated and unregulated markets inside of our portfolio. We're operating in five 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 costs 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 provide 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 extra on those types of opportunities. And so you saw the first one that we executed on over the course of the winter in Texas.

Operator: Thank you. Our next question today comes from the line of John Todaro of Needham & Company. John, your line is now open.

John Todaro: Great. Thanks for taking my question guys. A little bit newer this 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 kind of 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 kind of expected CapEx, if you were to get into the business on maybe a larger scale, kind of what is the cost per megawatt you would be thinking about?

Adam Sullivan: Yeah, let me address the first part of the question first. We're excited about bringing CoreWeave back to the client. They were a client from 2019 to 2022. And CoreWeave has 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 price, how you'd see traditional data center deals price charging a fixed per kilowatt, see the charge regardless of whether that capacity is utilized and a passer on things like power and utilities. We believe this deal is going to be a trigger to 2024, and it's going to provide a strong return on the CapEx that we spent 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 three to five year game. And on the power side, it's at least two years out to 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 getting capacity on sooner rather than later. And right now we're at a very interesting intersection between bitcoin mining and HPC where we can be extraordinarily competitive on future site development. Whether that's the 372 megawatts to complete on the bitcoin mining side 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 major metropolitan areas and also access to low latency to those metropolitan areas. So for us, we're looking forward to this business really from two perspectives. The first is, continue to execute on the bitcoin mining side with the partially developed infrastructure that we have. And then part two 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.

John Todaro: Great. And sorry if I missed it. When does the revenue from the contract start kicking in?

Adam Sullivan: 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.

John Todaro: Got it. Thank you.

Operator: Our next question today is from the line of Lucas Pipes at B. Riley. Lucas, your line is now open. Please go ahead.

Lucas Pipes: Thank you very much, operator. Good afternoon, everyone. Thanks for the update. Good to hear your voice. Adam, my first question is on the fleet upgrade. Can you remind us kind of the timing of the exahash additions in general, kind of 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. Thank you.

Adam Sullivan: 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 role into newer generation machines. That's why we have machines, our average machine fleet today is about 26.79 joules per terahash, but we're looking at consistent role into newer generation machines 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 of the machines at once, you're essentially creating maturity walls for that next CapEx cycle where you have to refresh your entire 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 mission 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 flows and laid 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.

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

Adam Sullivan: Yeah, of course. So when you look at that on Page 18, referencing the $0.65 in hash costs. 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.

Lucas Pipes: All right. I appreciate it. I'll turn it over for now and best of luck. Thank you.

Operator: Our next question today is from the line of Rosemary Sisson of Odeon Capital Group. Rosemary, your line is now open.

Rosemary Sisson: Yes, thank you. Thank you for taking the questions. 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 kind of in line with your expectations at least for the current year?

Adam Sullivan: 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 two key areas that we believe will be consistent along with our business plan that was filed.

Rosemary Sisson: Okay. Thank you for that. 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 kind of set in stone, or could there be variability to that power cost?

Adam Sullivan: We gave guidance of $4.05 to $4.07. 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.

Rosemary Sisson: All right, great. Thank you very much.

Adam Sullivan: Thanks, Rosemary.

Operator: Our next question today is from the line of Joseph Vafi of Canaccord Genuity. Joseph, your line is now open.

Joseph Vafi: Hey, everyone. Good afternoon, and thank you for taking a couple of my questions. Maybe we'll just kind of focus a little bit more on the upcoming halving. I know you mentioned in your prepared remarks, your operating costs per bitcoin. Clearly at these spot prices, you're going to remain profitable on a halving event. 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-halving. I know that's pretty hard to kind of forecast, but -- and then if you looked at your mining fleet, I guess, would you be unplugging any of your miners post-halving versus where you are now. Thanks a lot.

Adam Sullivan: Yes, I appreciate that, Joe. So let's cover our preparations of avian first. We think about it in really three distinct buckets. Operations, software, and energy. On the operations side, obviously, we're looking first at a minor refresh. We have the two previous announcements as we look to refresh and lower our average joules 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 and other environmental conditions to allow us to maximize profitability. So that's really point one 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-clocking and providing us the opportunity to rapidly move our average joules per terahash even lower based on changing economic conditions, which can extend the life and improve the profitability of our machines based on different hash 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 cost. 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 habit. Now point two is a definitely interesting question related to our expectations around the halving. Bitcoin price will influence how much hash rate stays online post-hash. If bitcoin prices were to stay flat to where they are today, you would expect to see less hash rate come offline than if the bitcoin was at $50,000. So as a starter, I believe based on what we're seeing from the data, previous generation units that are on the network, what's call it 38 joules per terabyte 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 offline around the halving. 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 hash 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 in hopes that network difficulty drops and miner 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 miners fleet be profitable across our portfolio. And that's something that we've worked really hard to achieve.

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

Adam Sullivan: Yeah. So it's interesting, right? We're going to a halving with high hash prices, and it's really yet to be known what the hash price will be post-halving. But if hash 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 that are premium. And so there are different outcomes that could potentially occur post-halving, but we're in constant dialogue with potentially large hosting clients that host the newest generation of machines that could provide us either strategic opportunities, for instance like our hosting agreement with Bitmain, or different types of financial opportunities like the proceeds 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.

Joseph Vafi: Great. Thank you very much.

Adam Sullivan: Thanks, Joe.

Operator: Our next question today is from the line of Kevin Dede of H.C. Wainwright. Kevin, your line is now open. Please go ahead.

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

Adam Sullivan: Yeah, we've been really cognitive of this over the course of 2023. And so one of the main focuses we had over the course of 2023 was ensuring that the hosting clients that we took on were financially strong companies and were providing us with the newest generation machines. So as we moved into 2024, obviously, with a halving coming up next month, we wanted to ensure that we were 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.

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

Adam Sullivan: Yeah, 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 paired 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 that it 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 as a three to five year game, but power right now, at bare minimum, is two 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.

Kevin Dede: Just a real quick one for Denise. How are you thinking about implementing the new FASB on mark-to-market and your bitcoin holdings?

Denise Sterling: Yes. 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 -- 1/1/24, 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 a significant difference between where we are today and the application of the new standard.

Operator: Thank you. Our next question today is from the line of Jack Chan of Imperial Capital. Jack, your line is now open. Please go ahead.

Jack Chan: Hi. 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?

Adam Sullivan: Yes, thanks, Jack. I mean, right now, what we're really focused on is, focused on execute our business plan. Our business plan laid out our continued growth via funding out of operating free cash flow. There may be opportunities going forward that we may evaluate on the HPC side related to join ventures, but this is something that we believe the team we've put together over the course of the past few years, you need 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 three to five 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 bitcoin mining 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.

Jack Chan: 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?

Adam Sullivan: This is something that 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.

Denise Sterling: Yeah, 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% pick. But as Adam suggested, it is going to be a quarterly decision going forward.

Operator: Our next question today is from the line of Greg Lewis of BTIG. Greg, your line is now open. Please go ahead.

Gregory Lewis: Hey, thank you everybody. Thanks for taking my question. 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, 20 -- sub 27 joules terahash. But as you think about, deploying those incremental dollars, how are you weighing the benefits of just using, getting better efficiency out of your existing infrastructure and executing that long-term infrastructure expansion which you kind of laid out in the presentation.

Adam Sullivan: Yes, right now we're hyper-focused on executing our business plan. Right now, executing 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 halving to put additional cash on balance sheet for us to feel more comfortable around playing through different types of hash price scenarios. I mentioned earlier, priority two is paying down debt. But the pathway to deleveraging that is embedded in our capital structure today is an opportunity for us to be able to fully de-lever 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 $260 million convert, that is a mandatory conversion feature and so that leaves about $340 million in regular way debt. We have $670 million upon full exercise of 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, we'll have the opportunity to pay down the debt through that pathway and that optionality that's embedded in our capital structure and so really that's our focus right now. Execute, put cash on balance sheet and work towards a pathway to de-leveraging and moving to a positive net cash position.

Gregory Lewis: Super helpful. Thanks, Adam.

Adam Sullivan: Thanks Greg.

Operator: Our next question today is from the line of Darren Aftahi of Roth MKM. Darren, please go ahead.

Darren Aftahi: Hey, guys. Thanks for taking my question. I didn't look at a live call, so excuse my -- if any of this has already been asked. But Adam, I'm curious -- a few things on your agreement with CoreWeave and then the broader strategy there. So first, if you expanded megawatts into HPC, does CoreWeave have a ropher on that or is it up for grabs?

Adam Sullivan: 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, they're seven years, that's an eternity for most bitcoin 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 are the types of contracts that we'd be looking to execute on.

Darren Aftahi: Then when you look at return on invested capital and you talked about retrofitting some of these buildings, like how does that calculus work in looking at an HPC or AI or ML client with a longer term time horizon relative to going down the BTC path. Thanks.

Adam Sullivan: 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 majority of that CapEx. And so it provides us an opportunity to get 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.

Operator: Our next question today is from the line of Josh Schimmer of Cantor Fitzgerald. Josh, your line is now open.

Josh Schimmer: Yes, hi guys. Thanks for taking my questions today. Look, first, I'd love 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 market?

Adam Sullivan: Yeah, thanks Josh. I mean, we've been in Texas for a number of years, and we have two sites in Texas. So we have our Denton facility and our Pecos location. So the way we're thinking about power in the state of Texas, over the course of the past few years, you've seen long-term fixed-price PPAs 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 these 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. Right, because if 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 for even the highest programs 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 those. 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-edging side, but also our internal capabilities are exceptional in this industry.

Josh Schimmer: Great, appreciate it. That's a 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 made you stick with the direction on transportation and cloud space?

Adam Sullivan: Yeah, you have to think about what we're really good at, right? You know, 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. 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 need -- 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 pride 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.

Operator: Our next question today is from the line of Lucas Pipes of B. Riley. Lucas, your line is open. Please go ahead.

Lucas Pipes: Thank you very much for taking my follow-up questions. First, Adam, sorry if I missed it, but what's the CapEx budget for the miners in 2024?

Adam Sullivan: 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 minors are priced post-halving. What I can say right now is, the XP's and the S21's that we've ordered so far for this year that have been announced, we've made all 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 halving.

Operator: Thank you. This will conclude the question-and-answer session for today. So I would like to hand back to Steven Gitlin for any closing remarks.

Steven Gitlin: 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.

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