Core Scientific, Inc.

Good afternoon, ladies and gentlemen, and welcome to Core Scientific's full fiscal year 2021 earnings call. This is Stephen 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 Private Securities Litigation Reform Act of 1995. Forward-looking statements include, without limitation, any statement that may predict, forecast, indicate, or imply future results, 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. including but not limited to economic, competitive, governmental, and technological factors outside of our control that may cause our business strategy or actual results to differ materially from the forward-looking statements. For further information on these risks, we encourage you to review the risk factors discussed in Core Scientific's definitive proxy statement filed with the SEC on January 3, 2022, and other subsequent filings we file with the SEC from time to time. including our annual report on Form 10-K for the year ended December 31st, 2021, and our current report on Form 8-K filed on January 24th, 2022. As such, discussion may be updated or amended from time to time in our subsequent filing with the SEC. Our remarks today contain references to various non-GAAP financial measures, including adjusted EBITDA, which should not be viewed as a substitute for comparable measures presented at US GAAP. for reconciliation of such measures to their most comparable u.s gap measures please refer to our earnings release this afternoon we also furnished a slide presentation with our earnings release and posted the presentation on our website at corescientific.com in the events and presentation section of the investors section of our website the content of this conference call contains time sensitive information that is accurately accurate only as of today march 29 2022 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 this conference call. Joining me today from Core Scientific, our Chief Executive Officer, Mr. Mike Levitt, and Chief Financial Officer is Mr. Michael Trufek. We will now begin with remarks from Mike Levitt.

Mike? Thank you, Steve. On behalf of the more than 250 employees of our company, we want to thank all of you for listening in to our very first earnings call, and we want to welcome you to our call. Our team has built a rapidly growing and profitable business. We're laser-focused on executing our plan and on delivering results. We take a very long-term approach to our business, and although we've been developing large-scale blockchain infrastructure for over five years now, we believe that we're still in the early days of our industry's development. Our key messages today are our financial results are strong, we've developed market leading scale in those short five years, and we're well positioned to achieve our objectives. We've organized our remarks today around a few topics, who we are and what we do, our performance, and Core Scientific's outlook. At the conclusion of my remarks, we will be happy to take your questions. Over the course of today's presentation, I'll refer to the earnings presentation Steve mentioned that we have posted to the events and presentations page located in the investor section of our website, CoreScientific.com. Core Scientific is a financial technology company focused on developing and managing the infrastructure for our rapidly evolving financial system. We mine digital assets for our own accounts, We host and operate miners for our customers, and we develop blockchain technology-based financial products. We mine more Bitcoins and host more miners than does any other publicly traded company in the United States. In 2021, we mined more than 5,700 Bitcoins for our own account, the most Bitcoin ever mined in a year by a publicly traded US company. In the first two months of 2022, we produced more than 2,000 Bitcoins. At that pace, we will more than double our 2021 production. We held more than 7,000 Bitcoins in our accounts as of the end of February. The infrastructure, operations, and proprietary software management system we developed supports both our self-mining and hosting operations. As of the end of February, we operated 7.7 exahash of computing capacity for our hosting customers. Our balanced self-mining and hosting business model provides a steady US dollar revenue stream and cash flow from hosting through multi-year contracts with our customers and upside exposure to Bitcoin price appreciation from our self-mining activities. We own our infrastructure. Our facilities include five data centers with additional centers in development. We prefer to locate our data centers in opportunity zones in proximity to non- or low-carbon-emitting power sources such as hydroelectric, wind, solar, or nuclear. Our data centers are geographically dispersed to mitigate risk. A map showing the location of our facilities is on slide six of the presentation. As I mentioned, we are a technology-focused company. We developed a proprietary software management system called Minder to monitor and manage the computers in our facilities. Minder flags computers performing outside of specified parameters so we can power cycle them automatically or dispatch an on-site technician to investigate further. The combination of Minder, our proprietary engineered facility designs, and our trained technicians results in high miner uptime, maximizing productivity of our self-mining, and hosting miners. Our miner software, when combined with our other technologies, also gives us the ability to power down computers in any of our facilities to support the local electrical grid when required. For example, in the summer, when many homes and businesses run their air conditioning, the demand for power soars The local grid may need to shed power in order to avoid brownouts or turning on expensive, higher carbon generating peaker plants. By powering down our operations, we help relieve pressure on the grid. Our ability to curtail power consumption rapidly and as needed by our power providers enables us to secure more favorable power contracts. It's a way for us to be a good neighbor. and serve as a large energy buffer for the local grid and community. We believe in supporting local utilities as they balance the needs of their customers and seek to add more renewable energy to their grids. We believe that net carbon neutral operation is important for the communities in which we operate, for our industry, and for the greater good. We achieve net carbon neutral status by purchasing renewable energy certificates based on our consumption of energy from carbon-emitting sources. In addition to our self-mining and hosting businesses, we also have a team of over 30 blockchain and financial technology experts who are developing innovative products at the intersection of blockchain finance and AI. While its financial impact is not yet material, we engage in network services such as staking and keeping to determine what innovative products and services may lead to the expansion of the blockchain ecosystem and to new business opportunities. With expertise in technology, data center operations, development, power, construction, and financial services, we're focused on creating long-term value for our shareholders. I encourage you to visit our website and review the credentials and background of our senior management and board and of all of our team members. We have built a position at the leading edge of blockchain technology and digital assets in a very short time, but we're just getting started. Let's now take a look at our financial performance. 2021 was, as I said, a year of strong results for our company. You can turn to page four of our earnings presentation to see the highlights. In 2021, we generated revenue of $544.5 million, net income of $47.3 million, and adjusted EBITDA of $238.9 million. We grew our total hash rate from less than 3x a hash to 13.5x a hash by the end of 2021. Looking at total 2021 revenue by segment, you can turn to page 7 of the presentation. You'll see our equipment sales were $248.2 million, or 46% of revenue, digital asset mining, $216.9 million, or 40%, and hosting, $79.3 million, or 14% of revenue. This slide also shows segment revenue by quarter, illustrating our significant capacity ramp throughout 2021 and the favorable impact it had on our adjusted EBITDA. The increase in equipment sales revenue is driven by higher demand for new generation, more efficient mining equipment. That said, equipment sales will become less significant in the future, and self-mining and hosting will represent an ever-increasing share of our revenue. The increase in digital asset self-mining revenue last year was driven by an increase in our self-mining hash rate from less than 1.5x a hash at the end of 2020 to 6.6x a hash. The increase in hash rate resulted from investments in infrastructure and in new miners. In 2021, we mined a total of 5,769 Bitcoins. At the end of 2021, we held 5,296 Bitcoins. The number of held Bitcoins increased to 7,355 at February 28th of this year. Hosting revenue increased in 2021 as a result of new customer hosting contracts for miners deployed during the year. Slide eight provides detail of the quarterly and annual income statement items. Cost of revenue increased by $254.7 million from 2020 to $305.6 million. This increase was primarily attributable to an increase in the cost of equipment sold to customers and to higher power consumption driven by increased self-mining and hosting activity. Let's turn now to our operating expenses. 2021 research and development expenses totaled $7.7 million, an increase of approximately 50 percent over 2020, driven by higher personnel and related costs. Sales, marketing, general, and administrative expenses totaled $64.7 million, a threefold increase over 2020. This increase was largely driven by higher stock-based compensation, public company readiness investments, and higher personnel and related costs. Non-operating expenses, including interest expense, loss on debt from extinguishment, and other non-operating expenses net totaled $68.4 million, an increase of $62.5 million from 2020. The increase in non-operating expenses was mainly due to higher interest expense related to several capital raises, including a senior secured credit facility and several equipment financing agreements. and a non-cash accounting adjustment to fair value of our private placement convertible notes. Income tax expense totaled $15.8 million. Net income for 2021 was, as we mentioned, $47.3 million as compared to a net loss in 2020 of $12.2 million. 2021 adjusted EBITDA was $238.9 million an increase of $232.9 million from 2020. Scaling our business requires capital. We've financed our growth and operations primarily through the sale of equity or equity linked securities, debt, equipment financing, and cash generated from operations. Total cash, cash equivalents, and restricted cash was $131.7 million at the end of 2021. This total does not include the approximately $200.7 million in net cash proceeds received from the merger when we became a public company on January 20th of this year. The carrying value of the 5,296 Bitcoins held as of December 31 was $224.8 million. Cash used in operating activities, investing activities, and provided by financing activities totaled $56.7 million, $423.8 million, and $603.5 million respectively. During 2021, we entered into agreements to purchase digital asset mining equipment totaling approximately $584 million, of which $326 million was paid as deposits for equipment scheduled to be delivered in 2022. This left a balance of $258 million for mining computers to be delivered in 2022. Our primary uses of capital are to purchase new miners and to build our data center infrastructure. Going forward, continued growth will require additional capital. We're mindful of the diluted impact of additional equity as we pursue opportunities to fund our continued expansion. An important element of our capital market strategy is to expand our flow to provide greater liquidity and trading volumes in our stock. We believe that enhanced liquidity will make our equity more attractive to large institutional public equity investors who require those higher trading volumes. Our board's recent decision to release the pre-public shareholder lockup was based on the desire to introduce existing shares into the market from our large number of long-time investors. Supporting our industry's future, the president's recent executive order is a welcome step forward in our view. Rather than rushing into adopting regulations or legislating new laws, the administration is first seeking to learn about the digital assets ecosystem and develop a policy framework through a broad interagency process. We believe this is a positive development as the government generally regulates that which it seeks to preserve and foster. We look forward to continuing to add our voice to the process of producing sensible regulations that promote continued innovation and leadership in US blockchain technology development. Looking ahead, we've established for 2022 a few goals. First, profitable growth. We hope to maintain our leadership position in blockchain infrastructure and digital asset mining. Our business is profitable and our scale provides us with the ability to remain profitable as the network hash rate and competition grow. Second, scaling our business efficiently. We regularly review our processes to find ways to operate more efficiently. Our ability to grow our hash rate and business requires constant focus on process improvement, training, and cost management. Third, investing in the development of new products and capabilities. The blockchain ecosystem is still at a very early stage and evolving rapidly. Our technology team is exploring products and services beyond mining and staking to evaluate areas of future opportunity and near-term investment. In terms of quantitative goals for 2022, highlighted on slide nine of the presentation, we anticipate year-end total hash rate of 40 to 42 exahashes split roughly evenly between self-mining and hosting. Our growth will not be perfectly linear as we continue to deal with global supply chain issues, but we believe that we can achieve our year-end objectives. We think that approximately 30% of our 2022 infrastructure development will be completed by the end of the second quarter. We remain comfortable with our previously stated 2022 goals illustrated on slide 10 in our earnings presentation. We ended 2021 with a total of 13.5x a hash. The midpoint of our 2022 hash rate expectation is 41x a hash. leaving us with 27.5x a hash to bring online by receiving, installing, and activating new miners for our hosting customers and for self-mining. As of December 31, 2021, we had contracts in place for self-miners and hosted miners representing 23.2x a hash, or approximately 84% of our 2022 goal. Demand for our hosting capacity remains strong. We plan to continue providing monthly updates as we execute our plans. Additionally, we intend to post our daily self-mining totals on our website beginning in early April. In closing, I'd like to thank my extraordinary, very hardworking, dedicated colleagues, now numbering over 250. They have built an incredible company. Thank you to our customers and to those who possess the courage and conviction to invest alongside us in the very early days. And thank you to our shareholders who appreciate the value of the business we've built and see the potential of our company. We are more excited about our future today than we have ever been, and we look forward to speaking with all of you as we continue this incredible journey. We will now take your questions.

Thank you, Mike. We'll now begin the question and answer session. If you have a question, please press star and then one on your touchtone phone. If you wish to be removed from the queue, please press the pound or the hash key. If you are using a speakerphone, you may need to pick up your handset first before pressing the numbers. We respectfully ask that you limit your questions to two, and please re-enter the queue to ask further questions thereafter. Once again, to ask a question, please press star and then 1 on your touch-tone phone. And today, our first question comes from Chris Brendler of DA Davidson. Chris?