Core Scientific, Inc.

Greetings and welcome to the Core Scientific Third Quarter Fiscal Year 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce to your host, Steve Glutton, Senior Vice President, and Director of Investor Relations. Thank you, Steve. You may begin.

Good afternoon, ladies and gentlemen, and welcome to Core Scientific's Third Quarter Fiscal Year 2024 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 Safe Harbor provisions of the Private Securities and Litigation Reform Act of 1995. Forward-looking statements include, without limitation, any statement other than historical or current facts that predict or indicate future events or trends, forecasts, performance, or achievements, and may contain words such as believe, anticipate, expect, estimate, intend, project, plan, or words or phrases with similar meaning. 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 a special note regarding forward-looking statements contained in the company's current report on Form 8-K filed today and the earnings release and slide presentation contained therein. Today's presentation is available on our website at corescientific.com in the events and presentation section. The content of this conference call contains information that is accurate only as of today, November 6, 2024. The company undertakes no obligation to update statements made today to reflect events or circumstances occurring after today. Joining me today from Core Scientific are CEO, Mr. Adam Sullivan, and Chief Financial Officer, Mrs. Denise Sterling. We will now begin with remarks from Adam Sullivan.

Thank you, Steve, and good afternoon. Last quarter, I summarized the progress we have made during this transformational year for Core Scientific. This quarter, I am delighted to report that our progress continues. We have substantial momentum going into the remainder of the year with our improved positioning for growth and value creation, and we see favorable market fundamentals driving strong demand for high-power data center infrastructure. I'll begin today's call with a summary of our recent achievements before briefly highlighting our third quarter financial performance. Denise will then review our third quarter financials, providing more details on the significant improvement in our capital structure before I describe our plans for the balance of the year and beyond. We will then take your questions. Our progress during and after the third quarter is highlighted on slide four. Notably, Core we've exercised its final two options for an additional 232 megawatts contractually committing to all 500 megawatts of critical IT load we offered and achieving the first of our three 2024 catalysts we described last quarter. Additionally, we made meaningful progress to expand our capacity through new site acquisition and existing site expansions. With the Core we've committed secured, I'm happy to announce that we have allocated an additional 100 megawatts of our infrastructure that was previously designated for Bitcoin to HPC, increasing our total capacity for HPC hosting to approximately 570 megawatts of critical IT load. With respect to new site acquisitions, we leased with an option to buy an existing data center in Alabama with 11 megawatts of critical IT load. This site has the potential to support an additional 55 megawatts of critical IT load. To consolidate and strengthen our Bitcoin mining business, we completed a 100 megawatt expansion at our Pekis, Texas Bitcoin mining data center to house our miners. We also completed significant miner migrations and began partial demolition at two of our data centers tapped for HPC hosting during the quarter. From a capital structure perspective, we completed a successful $460 million convertible node operating that enabled us to refinance our debt, increase cash on the balance sheet, and effectively put our Chapter 11 debt structure behind us. Slide 5 summarizes our revised allocation of infrastructure with the addition of the new Alabama data center. Slide 6 highlights our strategic, operational, and financial results in the third quarter. Starting with strategic updates, our $460 million convertible node operating in August enabled us to improve our capital structure significantly by paying off debt, eliminating restrictions and covenants, and reducing our interest rate. The offering also gave us the ability to add cash to our balance sheet to finance operations and support the acquisition of new sites to expand our HPC hosting capacity. On the operational front, we earned $1,115 Bitcoin in the third quarter and generated total revenue of $95 million. Our diversification to HPC hosting showed positive momentum as third quarter revenue included $10.3 million from that segment. Gross loss of $0.2 million in the quarter and operating loss was $41 million, reflecting lower post-having hash price and higher operating expenses. And on financials, our $455 million net loss was driven mainly by the significant -over-quarter appreciation and share and warrant prices that required us to make -to-market adjustments to the value of our equity and adjust the diva that was $10 million in the third quarter. Denise will explain these in more detail shortly. To summarize our third quarter, we made great progress on our HPC hosting business and strengthened our balance sheet, even as we faced challenging Bitcoin mining economics in the first full quarter since the April 11. We are excited to build on this momentum. We are expanding our portfolio of powered digital infrastructure as illustrated on slide seven, which reflects our updated data centers, including our Austin and Alabama sites. We also include the contracted gross capacity of each site, which adds up to more than 1,200 megawatts. Now, I would like to turn the call over to Denise Sterling, RCFO, for more details on our financial performance and positioning. Denise?

Thank you, Adam. Our third quarter operational execution was strong, while our financial performance reflected a challenging post-having hash price. Total third quarter revenue of $95.4 million consisted of $68.1 million in digital asset self-mining revenue, $16.9 million from digital asset hosted mining, and $10.3 million from HPC hosting that Adam highlighted earlier. Digital asset self-mining revenue decreased by $14.9 million, or 18% year over year, primarily from a 62% decrease in the number of Bitcoin earned during the quarter as a result of the April halving and a 61% increase in the network hash rate. This was partially offset by a 117% increase in the price of Bitcoin, as well as an increase of 36% in our self-mining hash rate, which resulted from the deployment of approximately 31,000 additional new generation self-mining units that was completed in the first half of 2024. Digital asset self-mining cost of revenue increased by $2 million for the fiscal third quarter of 2024. This was primarily driven by an increase in depreciation expense resulting from the deployment of our new self-mining units, an increase in payroll and benefits costs associated with the new self-mining units, and a decrease in the value of the new self-mining units. This was partly offset by a decrease in power cost. The segment gross margin was negative 9% in the quarter. HPC hosting revenue of $10.3 million, which includes a base license fee, as well as direct pass-through of power costs to our client with no margin added, exceeded HPC hosting cost of revenue of $9 million for the fiscal third quarter of 2024 by $1.3 million for a gap gross margin of 13%. For the fiscal third quarter of 2024, HPC hosting revenue and cost of revenue include a one-time adjustment related to delivering the data center capacity more than 30 days ahead of schedule. At our Austin data center, HPC hosting cost consists primarily of lease expense, the direct pass-through of power cost, direct and indirect facilities operations expenses, including personnel and benefit costs, and stock-based compensation. The non-gap gross margin for the fiscal third quarter of 2024, excluding the direct pass-through of power cost, is 17%. Non-gap gross margin excluding direct pass-through of power cost and non-cash expenses such as stock-based compensation is 27%. During the third quarter of 2024, we continued to refine the methodology used to allocate our cost of revenue to our segments, including direct and indirect facilities operations costs. This resulted in a portion of these costs being allocated to our HPC hosting segment. We expect our margins to improve over time as we increase our critical IT load without incurring additional operating costs. It is important to remind you that the terms of our hosting contract for our Austin data center, which is leased from a third party, vary significantly from those of our larger HPC hosting contracts where we are modifying our owned infrastructure and therefore do not incur lease expenses. A summary of our segment economics can be found on slide 8. Gross margins for the quarter were negative 9%, 29%, and 13%, respectively, for digital asset self-mining, digital asset hosting, and HPC hosting. Power costs were favorable in the quarter, declining to 3.8 cents from 4.5 cents per kilowatt hour for the same period in the prior year. Operating expenses for the fiscal third quarter of 2024 totaled $40.3 million as compared to $26.8 million for the same period in the prior year. The $13.5 million increase was primarily attributable to a $4.2 million increase in personnel and related expenses and $3.7 million of HPC hosting segment site startup cost incurred during the period, which represents the cost of modifying our sites over the next two years to deliver HPC hosting services and generate the associated revenue. Other contributors to the increase include stock-based compensation of $2.5 million and $1.9 million in bankruptcy advisory cost. Net loss for the fiscal third quarter of 2024 was $455.3 million as compared to a net loss of $41.1 million for the same period in the prior year. The increase in net loss of $414.1 million was primarily due to a net $408.5 million non-cash -to-market adjustment to our warrants and contingent value right liabilities required as a result of significant -over-quarter increases in the value of our equity and also a $4.9 million increase in interest expense, partially offset by a $28.3 million decrease in reorganization items net with no comparable activity in the same period in fiscal 2024. Non-GAAP adjusted EBITDA for the fiscal third quarter of 2024 was $10.1 million or 11% of revenue, a -over-year decrease of $18 million that included several offsetting adjustments. Our power contracts vary in price and terms. As I mentioned previously, our fleet-wide power cost averaged $0.03 per kilowatt hour in the fiscal third quarter. We continue to expect average power cost in 2024 to be between $0.04 and $0.04 per kilowatt hour. As of September 30, 2024, we operated approximately 175,000 miners in our self-mining fleet and did not procure any new miners during the quarter. Our self-mining to hosted mining mix was 89% to 11%, respectively. As our hosted mining contracts continue to sunset this year, we expect our hosted mining percentage to decline to a single-digit percentage of our fleet, creating capacity for self-mining and for our HPC hosting business. Now I would like to discuss our balance sheet starting on slide 9. At the beginning of the quarter, stock price appreciation triggered the mandatory conversion of our secured convertible notes, resulting in the equitization of the remaining $233.6 million. As Adam mentioned, we completed a successful $460 million convertible note offering in early August that strengthened our balance sheet. Funds raised in this offering enabled us to pay off all of the $150 million of secured notes, $49 million in miner equipment loans, and the entire $61 million exit facility plus accrued interest, all of which eliminated restrictions and covenants such as the 10-day hold on self-mining, self-mined bitcoin, and also reduced our interest rate from as much as .5% to 3% for the new notes. The new convertible note terms, of which can be found on slide 18, have a conversion price of $11, representing an additional share count of approximately 41.8 million shares at full conversion. At the end of the third quarter, our total debt was $512 million. In October, we paid off an additional $6.4 million in miner equipment financing. With the additional cash generated from our convertible notes offering, we enhanced our liquidity in the quarter, ending with $253 million in cash and cash equivalents, up from $250 million at the end of 2023. Slide 10 summarizes our total pro forma diluted share count. As of October 31, 2024, share count was approximately $279 million. A total of $98 million Tronch 1 warrants, $27 million Tronch 2 warrants, $23 million restricted stock units, and approximately $5 million other reserve shares remained unexercised. Full exercise of these items I just mentioned, plus the conversion of the approximately 42 million shares related to the new convertible note, would result in a total pro forma diluted share count of approximately 474 million shares. And now I'll turn to our CapEx plans. As a reminder, the CapEx associated with converting our infrastructure to 500 megawatts of critical IT load for HPC hosting is paid by CoreWeave. Therefore, we do not expect any -of-pocket CapEx for these contracts. Any additional capacity that is not currently contracted, whether from incremental power allocations at our existing sites or entirely new sites, may require our funding of CapEx, at least in part. Once we announce a customer contract, we will be in a position to comment on any CapEx investments associated with incremental capacity. Given our focus on growing our HPC hosting business, we do not expect to increase or refresh our Bitcoin mining fleet until we procure the new block ASIC chips in the second half of 2025. Now that we have completed the 100 megawatt expansion of our Pekas, Texas Bitcoin mining data center, we anticipate no further CapEx this year associated with our Bitcoin mining business. And now I'll turn to a review of our mining economics summarized on slide 11. Our direct cash cost to mine a Bitcoin in the third quarter was $42,351. This consists of power cost of $33,946 and direct cash-based facilities operations cost of $8,405, allocated based on the 84% of our fleet dedicated to self-mining and divided by total Bitcoin mined in the third quarter of $1,115. Another way to evaluate our mining cost is by calculating the cash-based hash cost of these same items, which represent the same cost expressed as a cost per tera hash per day. Our total cash-based hash cost in the third quarter was approximately three cents per tera hash. Cash cost to mine a Bitcoin increased year over year by $24,314, driven primarily by a 62% decrease in the number of Bitcoin earned during the quarter as a result of the April 2024 halving, a 61% increase in the network hash rate, and a higher allocation of cost to self-mining from hosting as we sunset several of our digital asset hosting contracts. The increase was partially offset by a decrease in power and facilities operations cost year over year. Now that we have contracted the full 500 megawatts of critical IT load to CoreWeave, I will provide an updated overview of the contract found on slide 12. Based on the full contract, we project aggregate total potential revenue over the 12-year contracts of approximately $8.7 billion, average annual revenue of $725 million, and non-gap profit margin of 75 to 80%. Power and utilities costs are passed through to our client and will be included in both revenue and cost of revenue. Given that most of our costs associated with the growth of our HPC hosting business are included in cost of revenue, we expect operating expenses to increase only slightly as we grow this business. And now I'd like to share some modeling details. We continue to model a statutory effective tax rate of approximately 23% for 2024. We also retain more than $300 million in net operating loss carry forwards, which will reduce future cash taxes. And now I'll turn the call back to Adam.

Thank you, Denise. We are applying our expertise from the data center and Bitcoin mining industries and our large asset portfolio to accelerate time to power for clients such as CoreWeb. We believe this expansion of our business will deliver more than $500 million in annual gap gross profit for the initial 500 megawatts of contracted critical IT load at full run rate, creating significant value for our shareholders. We are building a data center business with CoreWeb as our anchor tenant, and our ambitions beyond the initial 500 megawatts of critical IT load. In fact, with our recent reallocation of infrastructure to HPC and our new Alabama site with its growth plan, we now have another approximately 130 megawatts of critical IT load to offer to clients. Beyond our existing infrastructure, we plan to grow our portfolio for HPC hosting in two ways. First, we are actively pursuing the expansion of certain of our data centers by securing more power from local grid partners. We believe that we can capture as much as an additional 300 megawatts of critical IT load at existing sites from our power suppliers. We believe that we will secure some of this additional power allocation before the end of 2024, representing the quickest path to capacity growth. Second, we are working to secure additional sites to expand our HPC hosting capacity. These sites fall into one of the following categories. A, distressed conventional data centers that have either lost their tenants or have been pruned from larger data center company portfolios. These sites typically have backup generators and may have chillers already installed and also have options for additional power allocations from their power providers, including completed load studies. B, brownfield sites that we believe we can convert to HPC data centers. And C, greenfield sites with access to significant power allocations. Our new lease site in Alabama offers 11 megawatts of critical IT load to contract now to clients who would like to grow with this site to as much as approximately 66 megawatts of critical IT load. We are currently in discussion with potential new clients about contracting this site for HPC hosting. This is one example of how we intend to diversify our customer base by securing new customers for these new sites. As depicted on slide 13, we believe that by expanding our portfolio based on growing existing sites and securing new sites, we have line of sight to total HPC hosting capacity of more than one gigawatt of critical IT load by the end of 2027. Key to the success of our data center business is the conversion of existing sites to HPC hosting. This is a massive and complex project that requires considerable coordination. The area with the most potential to affect our timing remains the supply chain. We are actively working to identify creative solutions as bottlenecks appear. These solutions include developing alternative configurations for components, working with secured parties to secure supply and securing temporary items until others are available to us. Right now, we are closely tracking switchboards, static transfer switches, and generators. At this time, we expect to begin delivery of powered infrastructure for HPC hosting by the end of the first half of 2025 as we previously communicated. Fortunately, there is no better team in the industry than ours, and we are expanding it with industry experts while also having secured some of the most experienced data center contractors to help us execute this program. When the conversion of our existing sites to support HPC hosting is complete, we will be one of the largest data center operators in the United States. With a tremendous value creation opportunity in HPC hosting, we are also focused on optimizing the operation of our Bitcoin mining business within the 400 megawatts of infrastructure now available to it. By consolidating Bitcoin mining at PECUS Texas and one other data center, we believe that we can lever the lowest power prices and implement power strategies to enhance financial performance. Further, our planned refresh next year using the new block ASIC chips represents a significant opportunity to continue improving our fleet efficiency and increase our half rate. We believe that these actions will position our Bitcoin mining business favorably, preparing us to benefit from an increase in Bitcoin price. To summarize our revised guidance for 2024 highlighted on slide 14, we expect 16 megawatts critical IT load of revenue generating HPC hosting infrastructure and average fleet power price for active Bitcoin mining data centers of 4.2 to 4.4 cents per kilowatt hour. Now I'd like to update you on our 2024 catalysts, which we introduced last quarter and are summarized on slide 15. We set out to contract all 500 megawatts of critical IT load and have now done so. We sought out to secure a new site to begin expanding our capacity and we secured a new site in Alabama while we continue to focus on pursuing additional new site opportunities. And we seek to diversify our client base by gaining new clients for new sites. We remain actively engaged in discussions with multiple potential clients regarding our newly available capacity and our growth plans. These potential clients include hyperscalers and AI cloud providers. Core Scientific's transformation into a leader in digital infrastructure for next generation compute continues to build momentum. We now have HPC hosting contracts with Core Weave valued at up to $8.7 billion in revenue over their 12 year terms. We have an additional approximately 130 megawatts of critical IT load to contract to new clients from our existing portfolio and have the opportunity to expand our infrastructure at existing sites as well as through new site acquisitions. And our Bitcoin mining franchise is very well positioned to benefit when hash price rises. As I mentioned at the beginning of this call, our momentum and progress continue and our positioning for growth and value creation is only improving. Thank you for your continued interest and thank you to our clients, industry partners and all our teammates for your ongoing efforts and support. We will now take your questions.

Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove yourself from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. So that we may address questions from as many participants as possible, we ask that you limit yourself to one question and one follow up. If you have additional questions, you may re-queue and time permitting those questions will be addressed. One moment please while we poll for questions. Thank you. Our first question comes from the line of John Turadoro with Needham and Company. Please proceed.

Hey guys, thanks for taking my question. Congrats on the results here. I have one and then I'll use one of my follow ups if I can. First one being the 100 megawatts that you're going to allocate away from Bitcoin mining to HPC. Are we already in conversation with potential customers there? And then I know you can't give kind of specific capex as you mentioned, but should we just still be kind of thinking that five to eight million to retrofit that site? And then I have my follow

up. Yeah, thanks John. Yeah, those conversations actually began earlier in the year looking at this site in particular. We go back to what we mentioned on the previous earnings call. It really comes down to whether a site could be Bitcoin mining or HPC. It comes down to really power, environmentalism, latency. Based on conversations we were having with some potential clients, we went back and solved the power issue that we need to solve in order to convert that site. And so these conversations have been ongoing for quite some time and it's looking like a competitive process for those 70 megawatts. And then I'll comment quickly too on your megawatt question. Yeah, we're looking at really that five to eight million per megawatt for the retrofit.

Got it. Okay. And then just a follow up. So to the HPC revenue, it looks like it came in a little bit higher than we at least expected. I think if it's just the 16 megawatts I'm seeing, that implies almost 2.5 million per megawatt annualized on a revenue basis. Not sure if we're missing something. But I guess, you know, in other words, I think we're thinking more like five to six million and it came in at 10 million for the quarter.

Yeah. So thanks for the question. I think as we suggested in our prepared remarks, that was really driven by a one-time adjustment associated with the fact that we had actually pulled forward the delivery by 30 days. And so you are seeing an additional month of revenue, which is why there is a delta. In Q3.

Thank you. Our next question comes to the line of John Peterson with Jeffries. Please proceed.

I think I could follow up on the 100 megawatt transition. So in terms of the cost, are you guys, is your plan to go ahead with construction and then try to sign a lease along the way or are you going to sign a lease before you start spending capital on that transition?

Yeah, thanks, John. Right now, the way we're viewing it is, you know, we're hopeful to get to a client and a final contract in a short enough time period where we know exactly what they want to build. We know exactly the sizing and the requirements that they're looking for. From our perspective, we're not looking to spend capital prior to having that contract in hand.

Got it. And then maybe I'm slightly getting ahead of myself, but I guess my follow-up is, you know, what kind of financing structures are you, you know, would you be looking at for future deals? Is the core weave model repeatable or would we see more of a traditional data center, you know, financing type structure with the construction loan and you guys spending all capital upfront?

Yeah, the way we see it right now and where the market's moving to is, you know, clients are coming around to spending some portion of the capex to help buy down their rate. We are seeing higher rental rates right now. So really the way we're looking at it is, you know, that 20 to 30 percent that's generally spent by data center companies as the equity check, you know, the rest is funded on a debt basis, on a project financing level. We're looking at, you know, many of these clients looking to really cover that portion of the equity check and we would look to project finance the rest of the build out.

Thank you. Our next question comes to the line of Joseph Baffi with Kinect Core Genuity. Please proceed.

Hey guys, good afternoon. Nice to see all the incremental progress here. You know, any updates on, I know, you know, our previous discussions you were looking to expand your power capacity at some of your existing HPC sites, you know, any more color to provide there on, you know, progress and going above the 500 for Core, we even now have a quick follow up.

Yeah, absolutely. And thanks for the question, Joe. What we're looking at right now is about 300 additional, potentially above 300 additional megawatts across our existing HPC sites. You know, those conversations are still ongoing and we really view this as our fastest path getting additional megawatts at each of those sites. So we're, you know, we're especially excited about that process. You know, it could result in a very significant uplift in the number of megawatts at each of our existing sites.

Yeah, that would be really good progress for sure, Adam. And then, you know, I mean, obviously we had a presidential election here and, you know, Bitcoin's up, you know, obviously that's good kind of for all miners. But any other further thoughts here on the results of the election and implications, you know, broadly for the Bitcoin mining industry and maybe anything more specific for core. Thanks a lot, guys.

Yeah, of course. I mean, I think that Trump, that Trump in the past has expressed strong support for both Bitcoin and energy production, as well as US leadership and artificial intelligence. Those are strong tailwinds and I think his three priorities there really align well with our business and our future goals.

Thank you. Our next question comes from the line of Joe Flynn with Compass Point Research. Please proceed.

Hi, I was hoping you could give some more color into, you know, the potential deal structures of these new sites and just new customers in general. Should we expect like, you know, kind of in the similar co-location range of, you know, the core weave deal or, you know, do you see this like changing on a site by site basis, like some being built to suit, some being co-location, any color you could provide there would be great.

Yeah, really for what we're looking at for the new sites is really focused on, you know, single tenant buildings. So really we're doing a lot of looking at a lot of build to suit here for potential clients. The size and scale of what clients are looking for, you know, they're really looking for as many megawatts as they can possibly get at any individual site. And so as we evaluate each of our sites, these are based on deep conversations between the engineering teams of both companies, both our company and the potential clients, and really going through each of their requirements to ensure that we can meet exactly what they're looking for in the timelines that they're looking for. So just to give a little bit more color on that too, to get to a finalized contract, really requires us not only to have a finalized design, but also for us to evaluate where we're at in the supply chain to ensure that we can meet the timelines that both sides agree upon.

Great, thanks. And, you know, we've seen a number of news stories about CoreWave recently. Hopefully maybe you could provide color on your recent conversations, say even speaking about diversifying, but ultimately as, you know, companies continue to add megawatts and build out data center, you see an opportunity to return kind of to that neocloud market. Thanks.

Yeah, yeah, I mean, obviously we have a lot of respect for the CoreWave team and what they've been able to accomplish. I mean, really what we're seeing across the news is very impressive in terms of what they're working on. We're having, you know, continued conversations with both CoreWave as well as other cloud providers here, because we view this as a big growth factor in the market. The GPU cloud development that we're seeing going on is going to capture a significant amount of compute and the overall compute market over the next few years. And, you know, we look to continue to ride the tailwinds that that provides.

Thank you. Our next question comes from the line of Brett Noblow with Canter Fitzgerald. Please proceed.

Okay, thanks for taking my question and congrats on filling out the remaining capacity with the CoreWave. Adam, maybe just, you know, it's now been called five, six months since you first announced the initial CoreWave deal. What do you think has happened to the market in terms of, you know, rental rates or lease rates or however you want to kind of quantify it? Have they gone up since that deal? Just, you know, how should we think about where the market is at now for maybe new capacity coming online?

Yeah, thanks, Brett. I mean, really, the difference in the CoreWave deal is, you know, the 100% funding of the capex. They were able to significantly buy down their rates. I think as we look forward, you know, what we're seeing for 2025 is frankly rather unique. If you're able to deliver capacity in 2025 and 2026 right now, we're definitely seeing those lease rates be much higher than we expected, especially given that, you know, many of these folks are willing to cover some portion of the capex of the buildup. So, you know, we're excited about where lease rates are going, and we believe, you know, we'll be able to extract a significant amount of value from the demand that we're currently seeing over the next few years. Perfect.

Helpful. And then maybe just on the new site acquisitions, I guess you kind of outlined three different options. On the distress side, what, if it's five to eight million, kind of, retrofit an existing facility, what are you seeing in the market there on a megawatt basis on the distress data center side?

Yeah, and Brad, I just want to make sure I clarify the question. Are you asking about the, to retrofit those facilities for newest generation compute?

Yeah, retrofit or what you would have to pay to acquire the sites and then the additional capex needed to get them up and running.

Yeah, absolutely. So what we're seeing today in the market, you know, it depends on what type of load studies those facilities come along with. For instance, the site in Alabama, you know, coming alongside of a total of 100 gross megawatts available at the site. Really what we're seeing is somewhere in the range between three to six million per megawatt on the existing megawatts. And really on a retrofit basis, that could range from really one to three million, depending on, you know, the type of infrastructure that's currently in place and how much infrastructure needs to be acquired to accommodate the newest generation GPUs.

Thank you. Our next question comes from the line of Lucas pipes would be Riley securities. Please proceed.

Thank you very much, operator. Good afternoon, everyone. Following on a similar theme to the prior question on the potential additional sites, any desire to enter exclusivity or has that maybe already occurred on some of these sites? And could you speak a little bit to the competitive dynamics? How many other companies might be in the room? I would appreciate your thoughts on that. Thank you.

Yeah, I would say, you know, where we're at right now is there's extraordinarily strong demand. There's frequent meetings on a number of clients. And I'll kind of outline that. I mean, really, we're trying to focus on about 10 clients right now where we have consistent design engineering meetings between the teams, hosting site tours for many of these clients, and really trying to get to a deal here that makes sense for both parties. So, you know, there's definitely a competitive process on both the 70 megawatt site, as well as the new site in Alabama. And so we have high confidence in our ability to execute on both of those sites. That's

helpful. Thank you. And then, Adam, taking a step back, you have a HPCAI business that is growing very quickly where you have a very robust pipeline, and then a BTC business. And I imagine some sites overlap and do both. But does it make sense? Could it make sense to maybe separate these businesses either now or sometime down the road? Thank you very much for your

perspective. Yeah, it's really hard to speculate on the future. But really, what we see right now is significant crossover between our Bitcoin mining teams and our HPC teams and our ability to operate high-power digital infrastructure. And as we continue to evaluate each of our sites, we definitely feel strongly that we have a very strong Bitcoin mining business. And as we look towards 2025, our ability to execute on that block transaction represented a significant, not only it's going to represent a significant increase, not only in our efficiency, but also given us the ability to continue to grow our hash rate. So we have two very strong businesses. And so for us to speculate on what may happen in the future is difficult today.

Thank you. Our next question comes from the mind of Tyler DiMatteo with BTIG. Please proceed.

Great. And thank you for the time. And I appreciate you taking the question. Adam, in terms of, I guess, the sourcing process of new customers on HPC front, what do you think has changed now that you have the full core weave contractor? Is there anything notable on that front as you go to secure new customers now that the full 500 of capacity is contracted with core weave and you kind of have that anchor customer?

Yeah, things are definitely different. I appreciate the question, Tyler. Things look much different. We're building out one of the largest infrastructure bases for high performance computing over the next two years. That definitely brings with it a significant amount of credibility. What we're seeing in conversations that we're having is we're the thought leaders on the design and the requirements that are necessary to operate these GPUs. That puts us in a very unique position walking into the room with hyperscalers and with NeoCloud providers. So we feel like we're really in the driver's seat here in these conversations.

We're following up here. I know you laid out some of the power cost forecast, but more broadly speaking, as you kind of look to next year and bringing on more HPC capacity and we have some of the new sites, I guess, how do you kind of think about the power strategy as you're building some of these custom built facilities for HPC customers and kind of what does that look like across the footprint as you kind of look out into bringing some more capacity online?

Yeah, so the power expectations that we laid forward, that's really just on the Bitcoin mining part of the business. But one of the unique parts about our business and our data center business is that we have a power team in-house. So power team that is a very close relationship with the utilities in which we operate many other utilities as well. That helps us significantly in our negotiations with potential clients where we can walk them into the room with utilities who are excited about the new capacity coming online. So as we think about power pricing, that's something that us at Core Scientific do handle on behalf of our clients. And so we're excited about the additional potential megawatts that we have at many of our sites. And I think not only Core, but other potential clients are very interested in that power as well.

Thank you. Our next question comes from the line of Paul Golding with Macquarie Capital. Please proceed.

Thanks so much. My first question is around the block chip delivery. Given the timing and how that lines up with your progress around the HPC infrastructure rollout and your conversion of 100 megawatts from BTC to HPC, I was just wondering if those block chips, if you envision that they'll be predominantly net new capacity that you're going to find and build out, or if it's going to be in part fleet upgrade. Thanks.

Yeah, thanks for your question, Paul. Those new block chips are really going to be focused on a refresh of existing fleet. It's going to give us the opportunity to not only increase X-ash, but also increase our efficiency. And so we're very excited about once those landing, getting them up online in our facilities.

Thanks, Adam. And then a quick follow-up around power with this conversion and maybe other conversations you're having to expand site capacity from a power perspective. How are your conversations going with utilities that you may have demand response enrollment with and not sure if you are unenrolling or if, you know, as you approach these conversations, it's not interruptible capacity. How does the tone of those conversations is evolving and any impact might be having on spot rate that you're talking through with these utilities? Thank you.

Yeah, and that's really a bifurcated question between regulated and non-regulated markets. In regulated markets, those were voluntary programs that we were participating in to reduce our power costs. Those are some power programs that we will be exiting as these sites begin to convert to high-performance computing. And then in the deregulated markets, those are new DPAs that we'll be looking to sign that will be on a different rate structure than the rate structure we are on for Bitcoin mining. So that's a well-trodden process and we feel very, very strongly that we have execution capability here with our utilities.

Thank you. As a reminder, if you have any follow-up questions, please press star one at this time. Our next question comes from the line of Kevin Deedee with HC Rainwright. Please proceed.

Thanks, Hi Adam. Thanks for having me on. You mentioned three components that you see locked in supply issue. I was wondering if you could just add a little more color to that. You said that you thought you could find workarounds. I don't see that happening with gensets and I was wondering how you could size that up against meeting your end of first half target for the core weave deal, which appears to be static. So congrats on that. Just maybe relieve a little of the unknowns regarding the supply chain.

Yeah, thanks, Kevin. I think as we look at 2025, we have high confidence in the supply chain locked up for those deliveries. For parts of 2026, those are things that we're still working on, but even on gensets, for example, that was used, these are things that the traditional gensets that are used in data center development, there are different size gensets that we're evaluating to help alleviate some of those traditional design choices that have been utilized over the past 10 to 20 years. So we are also coming up with methods and looking at potential rental of certain equipment to help really bridge the gap in areas where we might need to bridge some of those gaps. So we have high confidence in our ability to execute on the supply chain, even with the complexities that are presented due to the high demand for this equipment.

Okay, and with regard to the block machines, do you imagine those are water-cooled or immersion? And would you think that you'd have to retrofit existing Bitcoin mining facilities to manage those?

Yeah, if you look across our infrastructure base today, we are the leading experts in really air-cooled facilities. And so for this deal with the new block chips, we're designing a new factor that's really focused on an air-cooled design that we can maximize. We've mentioned PECUS in particular that can maximize the production coming out of these chips, even at high temperature ranges. So no significant refresh in terms of the infrastructure inside those Bitcoin mining facilities. So we believe it's going to be a very strong process or easier process for us to install all these machines.

Thank you. Our next question comes from line of Rosemary Cezon with Odeon. Please proceed.

Yes, good afternoon, everyone. Thank you for taking the call. The 100 megawatts that you've identified to convert from Bitcoin now to HPC that you hadn't identified prior to this, what was it that changed or did your view change about what you could do? What was the thought process there and is there the possibility of that same thought process being applied to other megawatts that you have currently employed in Bitcoin?

Yeah, thanks Rosemary. It really called back to the three points that I laid out. So power, environmental, and latency. This site in particular was something we were very focused on the power aspect, ensuring that we could create a contract with our utility that would be amenable to both sides. We've gotten to that point today. So that's what really led to the conversion of thinking this site was going to be specifically utilized for Bitcoin mining and undergoing a process to convert that to HPC. As we evaluate the rest of our sites, there are points that we would need to continue to evaluate on both the power, environmental, and latency side. And it's hard for us to speculate now about where we'll end up in each of those processes. But right now, we feel we have high confidence in our ability to continue to acquire sites and bring more critical IT load megawatts to market.

Okay, thank you. And then the new site in Alabama that's currently powered at 11 megawatts but can go to 66. What has to happen for that to actually get to 66 and what would the time frame be?

Yeah, this is one of the sites that really goes back to the distressed data centers that come with load studies and additional approved power. So on Alabama in particular, that's what really excited us about that site. 11 megawatts in traditional data center terms would be a significant amount of megawatts. But given that ability to expand while also bringing on capacity in 2025 is extremely attractive to potential clients, which is why it's one of our target areas for finding new capacity.

Thank you. Our next question comes in line is Darren Astia with Roth MKM. Please proceed.

Thanks. Just two, if I may. First, on the process for securing additional power with the 300 megawatts at the existing site you guys have on the deck, is that kind of like a, just talk about the processes that we've spent years and just how concentrated is that by site? And then when it comes to additional kind of expansion on HPC, like how do you balance customer concentration versus economics? And what I mean by that is, you know, the 100 or so megawatts you have available today, if CoreWeave was wanting to strike a similar deal, would you take those economics that are wanting to diversify to an additional customer? Thanks.

Thanks, Darren. So for the additional power at existing sites, you know, that process is different for each utility. Some of them require additional load studies. Some of them are negotiations about where and when we will have our ramp up in terms of megawatts. I think our ability to capture additional megawatts at existing sites really comes down to our proof of execution. You know, it comes down to what we show them on the Bitcoin mining side. And now in the movement to HPC, you know, these utilities are excited about working and growing their relationship with us. So, you know, it can in some instances be a lengthy process, but, you know, as it comes down to our negotiations with potential clients related to some of these additional megawatts, they understand time is of the essence and they're helping and working alongside of us to get to a final answer, which is why we said, you know, there's potential for some of these megawatts to be approved inside of 2024. Now looking at, now talking about your second question related to customer concentration and how we're thinking about that related to economics, you know, obviously that CoreWeave deal is extraordinarily attractive, you know, it has the potential to be the best data center deal ever signed in the history of data centers. So, you know, obviously we would like to continue to expand our relationship with CoreWeave, but we do think for the long term, it's necessary for us to diversify our client base, bring other large tech companies into the fold and really create a business that we believe is extraordinarily stable over the next, you know, 15 to 25 years. And that's really what gets us excited. And we think we have tremendous growth opportunities with new clients and also with CoreWeave.

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

Thank you so much for taking my follow-up question. I just wanted to go back to the Alabama opportunity. Adam, could you speak a little bit about the time frame from when you first recognized that site to today? How long did that take? And any indication on consideration for this asset? Is it cash? How much? And earn out, profit share, and anything you could share would be helpful. Thank you so

much. Yeah, thanks Lucas. And, you know, I would qualify this site as, you know, it takes probably low to mid single digit months in order to really get to a finalized deal here because we have a significant amount of time now to really perform all of our due diligence. And a lot of that due diligence is not only on the infrastructure side, but it's also spending a lot of time with those utilities. You know, we want to ensure that we're going to have a strong working relationship and also find a pathway to grow. You know, as we evaluated that site, the 100 megawatts is fantastic. And, you know, we also want to figure out ways to continue to grow with the utilities. You know, you're seeing it today across a number of our sites where we have the potential to potentially expand the number of megawatts. And that's very important to us. Strong working relationships with the utilities. Now, related to the consideration, you know, this is a lease site that we have the option to buy. So, you know, we're, we want to put ourselves in a position where we don't necessarily have to buy the site immediately, but having the option to buy provides us a lot of optionality. And it's at a fixed price. So, regardless of the upgrade that we do and perform and any additional power that accrues to the site, those accrue to our value.

And just to add, Lucas, this is Steve. There's a bit of a bit additional description of that deal in our 10Q that should be filed for later JRO tomorrow.

Super helpful, Adam, to you and the team. Continue best of luck. Thanks, Lucas.

Thank you. Our next question comes from line of Kevin Deedy with HCWangRight. Please proceed.

Adam, you clearly delivered on adding new sites and you did highlight three avenues to continue expand your portfolio. But maybe you could give us a little bit more insight on that pipeline specifically. And I know you're speaking to, you know, some pretty large numbers. I'm just wondering how you see that market and core's ability to compete given huge demand for power and access.

Yeah, absolutely. Thanks, Kevin. You know, the, there are a lot of sites outstanding there's a lot of power available in the United States, which is our focus area right now. And we're finding the most attractive sites to be ones that aren't being run through broker processes. And so that means we're, we have many booths on the ground, speaking with utilities, speaking with landowners and finding sites that are much more esoteric than the traditional ones being run through broker processes. So we're finding ourselves with a strong ability to compete. We've evaluated over 15 gigawatts worth of site over the course of the past, I'll call it, you know, six to eight months, putting us in a strong position to find unique deals in the market. And we're excited about our ability to continue to execute on deals coming forward. So Alabama's, you know, really the first one here that we've executed on. But, you know, we look forward to 2025 and 2026 to continue to grow our critical IT load megawatts.

Thanks, Adam. You know, while you're still there, maybe you could speak a little bit to the blocked chip deployment timeline. I know you mentioned second half next year. I'm kind of wondering whether or not that is what you initially expected, or was there some wiggle room in there? And do you suspect you'll be able to find all the components you need to make the full unit? Yeah, thanks,

Kevin. You know, this is something that our research and development team has been working closely with the block team on for a long period of time. This isn't something where we had only been working with them for months. This is something that we've been working on with their team for a much longer time period. So we have all of the manufacturing set up. We have our entire game plan in terms of our rollout, in terms of our execution already put into our schedule. So this timeline is exactly aligned with what we expected. And we're excited about being able to get these up and running and continue to reduce or, I would say, increase our efficiency and also increase our X-ash exposure.

Thank you. That concludes our question and answer session. I would like to pass the call back over to Steve for any closing remarks.

Thank you very much, Alicia. With no further questions at this time, we thank you for your attention and your interest in Core Scientific. An archived version of this call, all SEC filings and relevant company and industry news can be found on our website, corescientific.com. We wish you a good day and a joyful holiday season, and we look forward to speaking with you again following next quarter's results.

Thank you. This does conclude today's teleconference. We thank you for your participation. You may disconnect your lines at this time.