Q1 2024 Core Scientific Inc Earnings Call

Participants

Steven Gitlin; Senior Vice President, Investor Relations and Marketing; Core Scientific Inc

Adam Sullivan; President, Chief Executive Officer, Director; Core Scientific Inc

Denise Sterling; Chief Financial Officer; Core Scientific Inc

Joe Flynn; Analyst; Compass Point Research & Trading, LLC

Lucas Pipes; Analyst; B. Riley Securities, Inc

Kevin Dede; Analyst; H.C. Wainwright

Greg Lewis; Analyst; BTIG

Tyler DiMatteo; Analyst; BTIG

Jack Chan; Analyst; Imperial Capital, LLC

Presentation

Operator

Good afternoon, ladies and gentlemen. Thank you for joining today's call scientifics first quarter fiscal year 2024 earnings conference call. My name is Tia, and I will be your moderator for today's call. (Operator Instructions) I would now like to pass the call over to your host. Steve, please proceed.

Steven Gitlin

Good afternoon, ladies and gentlemen, and welcome to CoreSite's first quarter fiscal year 2024 earnings 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. And before we begin, please note that on this call, certain information presented contains forward-looking statements within the meaning of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements include, without limitation, any statements other than historical or current facts that predict or indicate future events or trends, forecast, performance or achievements and may contain words such as believe, anticipate, expect, estimate, intend, project plan or words or phrases of 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 to date there.
Today's presentation is available on our website at core scientific.com in the Events and Presentations section. The content of this conference call contains information that is accurate only as of today, May 8, 2024. The Company undertakes no obligation to update statements made today to reflect events or circumstances occurring after today.
Joining me today from core scientific, our Chief Executive Officer, Mr. Adam Sullivan; and Chief Financial Officer, Ms. Denise sterling.
We will now begin with remarks from Allan Solomon. Adam?

Adam Sullivan

Thanks, Dave. I'll start today's call with a high-level summary of our positioning. As we enter 2024 and some highlights of our exceptional first quarter performance. I will then hand the call over to Denise Stirling to review our first quarter financials after Jenny's remarks, I'll take some time to talk about the current industry environment and our strategy to drive continued growth and value creation for 2024 and beyond. We will then take your questions. Core scientific is a market leader position for growth.
Slide 3 summarizes position of strength from which we operate today, highlighted by the following key points. First, we operate the largest owned bitcoin mining infrastructure in the industry in terms of operating megawatts, comprising approximately of 745 megawatts of operational power and contracts for a total of up to 1.2 gigawatts of power.
Next, we own and control every structure, every transformer and every concrete pad in our seven mining data centers. Finally, we have the experience track record in team to monetize our infrastructure for the highest value uses and to secure additional infrastructure opportunistically. We started our business by identifying high-power sites with attractive power that could support emerging high-value compute applications.
We focus on designing building efficient, low-cost proprietary infrastructure for Bitcoin mining operations that offered attractive posting opportunities for third parties. When the price of bitcoin increase, we use our expertise to mine for our own account. We invested in mining equipment and expand the geographic footprint of our infrastructure, increasing our revenue and the ROI of our original infrastructure investments, you can see our current infrastructure footprint on slide 4, our industry leading infrastructure has allowed us to produce more bitcoin than any other public company for the last three years. Through our self mining business shown on slide 5. We now believe our infrastructure is well positioned to take advantage of the enormous demand for power and infrastructure required for high-performance compute and we see that as the next major growth opportunity for our business. With the demand for ready high-power sites increasing rapidly, our infrastructure can be repurposed to provide access to HPC. without the development planning regulation, construction permitting in supply chain time lines associated with greenfield HPT. sites according to Bank of America research power demand from data centers is expected to double in the next three to five years.
With this in mind, we'd like to frame today's conversation around a simple central theme, owning and controlling all our valuable high power data center infrastructure gives us a significant advantage at a time when the demand for such infrastructure exceeds the available supply. Our high power independent infrastructure places us in a uniquely valuable position where we can balance our portfolio between bitcoin mining and alternative compute, hosting to maximize cash flow, minimize risk and maintain significant exposure to Bitcoin upside potential. We can offer clients a shorter time to power as compared to them waiting potentially three to five years for new greenfield data center capacities come online. We see this as a powerful mix that provides the potential for multiyear, high visibility, cash flows to buffer against the inherent volatility of bitcoin pricing. And because we own and control our infrastructure, we can optimize for the allocation of our infrastructure portfolio, investing in bitcoin mining position us well, and we now have the opportunity to maximize the value of these assets moving forward, we will continue to seek out low cost, abundant power, particularly mining as our entry point. And we'll constantly evaluate the market for a way to pair that power for another higher value use case with Bitcoin mining is our base business. Our infrastructure becomes the platform upon which we will continue to grow and optimize. We have created a unique business opportunity for us. And for you, our shareholders to monetize our own infrastructure for both bitcoin mining and HPC hosted how we discuss this further After these comments.
So now let's review our strong first quarter results, summarized on slide 6, we entered 2024 with strong momentum from 2023, continuing to set the pace for our industry by earning 2,825 bitcoin in the first quarter more than any other listed miner. Our leading bitcoin production generated $150 million in revenue, plus $29 million from our hosting business for total revenue of $179 million, up 49% year over year. Nearly all our key financial metrics reflect strong performance in the quarter. Our gross margin was 43%. Operating margin was 31%. Net income was $211 million and adjusted EBITDA was $88 million, up 118% year-over-year we ended the quarter with healthy liquidity consisting of $98 million in cash and cash equivalents and $16 million in restricted cash. Shortly after the end of the quarter, we deployed capital to pay down $19 million in debt associated with outstanding mechanically and funded $1 million project at our Denton data center to add 72 megawatts of infrastructure throughout the first quarter, we continued to deliver strong cash rate utilization, which remain higher than the average for our peer group and for scaled miners illustrated on Slide 7.
We also continue to refresh our self mining fleet with new S21, completing the deployment of 2.5 Exa Hashes to ash in April and improving our average minor efficiency to 25.7 Exa Hashes. We are waiting to make countercyclical minor purchases to take advantage of improved pricing. After the recent happen. We are already seeing that dynamic fit with post having pricing lower than pre having.
In March, we entered into a contract for high-performance compute hosting at our new Austin data center, which we have leased. Importantly, we delivered a 16 megawatt data center to our clients' core with more than 30 days ahead of schedule, helping them accelerate their time to power, which refers to how long it takes to establish operations and service their clients upgrading the data center was no small task and required a team effort to completely reconfigure 118,000 square feet of compute space, including point 18 mile fiber, 500 miles of copper cable, removing 1,500 racks, installing 4,500 new PDU strips. Parking performance was nothing short of spectacular as we look to the remainder of 2024. We are confident our outstanding first quarter has positioned us well to continue building on our momentum and capitalizing on the significant growth opportunities we see ahead now I'll turn the call over to our CFO, Sidney sterling.

Denise Sterling

Thank you, Adam. As Adam stated, our first quarter performance was strong across all financial metrics, driven by favorable fundamentals and outstanding execution. Total revenue for the fiscal first quarter of 2024 was $179.3 million and consisted of $150 million in digital asset mining revenue and $29.3 million in hosting revenue segment economics are highlighted on Slide 10. Digital Asset mining revenue of $150 million for the fiscal first quarter of 2024 exceeded mining cost of revenue of $81.6 million by $68.4 million, representing a gross margin of 46%.
Digital Asset mining revenue of $98 million for the same period in the prior year exceeded mining cost of revenue of $72.7 million by $25.4 million, resulting in a gross margin of 26%. Gross profit increased by $43 million, demonstrating a significant improvement quarter over quarter to quarter over quarter increase in digital asset mining revenue of $51.9 million was driven primarily by a 134% increase in the price of bitcoin and a 20% increase in our self mining cash rate, driven by the deployment of an additional 18,000 new generation mining units. The increase in digital asset mining cost of revenue of $8.9 million for the fiscal first quarter of 2024 was primarily driven by an increase in depreciation expense resulting from the deployment of our new self mining units and an increase in payroll and benefits costs associated with merit and market adjustments made during the quarter.
Power costs were relatively flat quarter over quarter as the increase in power consumption associated with the deployment of the additional self mining units was offset by a 3.8% decrease in our power cost per kilowatt hour, which declined to $0.043 from $0.044 per kilowatt hours for the same period in the prior year.
As a reminder, digital asset mining cost and revenue consists primarily of direct production cost of mining operations. These direct production costs consist of electricity and data center operating costs, which includes salaries, stock-based compensation and depreciation of property, plant and equipment hosting revenue of $29.3 million exceeded posting cost of revenue of $20.1 million for the fiscal first quarter of 2024 by $9.3 million, resulting in a 32% gross margin. Hosting revenue of $22.6 million for the same period in the prior year exceeded hosting cost of revenue of $16.2 million by $6.4 million, representing a 28% gross margin.
Hosting gross profit increased by $2.8 million or 44% quarter over quarter driven by the onboarding of proceeds sharing clients beginning in the fiscal second quarter of 2023. Hosting costs consist primarily of direct electricity cost and data center operating costs, operating expenses for the fiscal first quarter of 2024 totaled $16.9 million compared to $24.2 million for the same period in the prior year. The decrease of $7.3 million was primarily attributable to lower stock-based compensation of $13.3 million due to forfeitures during the quarter, partially offset by a $3.4 million increase in personnel and related expenses and a $1.7 million increase in advisory fees related to the reorganization incurred during the fiscal first quarter.
Net income for the fiscal first quarter of 2024 was $210.7 million as compared to a net loss of $388,000 for the same period in the prior year.
Net income increased by $211.1 million, driven primarily by a decrease of $143 million in reorganization items, which included $143.8 million associated with the extinguishment of pre-emergence obligations in excess of the amount settled post-emergence, lower Chapter 11 financing costs of $11.1 million, partially offset by a $12.8 million increase in payment related bankruptcy professional fees and a $60.1 million mark-to-market adjustment on our warrants and contingent value rights.
Non-gaap adjusted EBITDA for the fiscal first quarter of 2024 was $88 million as compared to non-GAAP adjusted EBITDA of $40.3 million for the same period in the prior year. This $47.7 million increase was driven by a $58.6 million increase in total revenue and then $1.1 million decrease in impairment of digital assets, partially offset by a $4.4 million increase in total cash-based operating expenses, a $4.1 million increase in cash cost of revenue, a $3 million increase in realized losses on energy derivatives and a $0.5 million decrease in gain from sales of digital assets.
Our power contracts vary in price and terms. As mentioned previously, our fleet-wide power cost averaged $0.043 per kilowatt hour in the first quarter. We continue to expect average power costs in 2024 to be between $0.045 and $0.047 per kilowatt hour. At the end of the first quarter, our self mining to hosted mining mix was 77% to 23%, respectively. We plan to increase the efficiency of our self mining fleet through ongoing liner refresh and additional hash rate to achieve our 2024 goal.
As we expand ourselves mining fleet, we expect our hosting mining mix to decline over time. Our fleet-wide average energy efficiency was 26.85 joules per cash as of March 31, 2024 and 25.78 joules per carrier has as of April 30, 2024, for the improvement was due to the completion of our S21 deployment in April.
As of March 31, 2024, we operated approximately 173,000 miners in ourself mining fleet. The model mix shown on slide 11 was 10% S19; 64% S19 Pro; and S19j Pro; 24% S19j XP and 2% S21.
Now I'd like to discuss the strength of our balance sheet. Cash and equivalents at the end of the first quarter was $98 million, up from $50 million at the end of 2023 and does not include an additional $16 million in restricted cash.
Slide 12 compares our first quarter capital structure to year end 2023. At the end of 2023, total debt was just under $1 billion as of March 31, 2024. For total debt was $608 million, a decrease of $390 million. The reduction in debt for the quarter was driven mainly by the equitization of legacy debt and the settlement of prior claims as a reminder, a share price of $6.81 puts our tranche one warrants in the money and their full exercise would provide us with $670 million in cash, allowing us to pay down debt and to build our cash balance a share price of $7.79 triggers the mandatory conversion of the convertible notes, which would clear $260 million off our balance sheet.
Now I'll turn to our CapEx plans. In the first quarter, we made all payments due this year on miners we ordered and have deployed in 2024. We anticipate purchasing additional lenders in 2024 to complete our planned refresh and to achieve our 21.8 Exa Hashes self mining cash rate goal. The precise amount and timing of this purchase will ultimately depend on us finalizing the details of our HPP. strategy in April we announced the start of the expansion project at our Denton, Texas data center, where we are increasing our operational powered by 72 megawatts to 197 megawatts an expansion of more than 50% by the end of our fiscal second quarter. Capital expenditures associated with this expansion were included in our 2024 CapEx plan and were paid in April of 2024, we will incur an incremental $4.5 million in CapEx associated with our new Austin HPC data center, which was not previously included in our 2024 CapEx plan.
Now I'll turn to a review of the mining economics summarized on Slide 13. Our direct cash cost to mine at bitcoin in the first quarter was $18,915. This consists of power cost of $15,977 and a cash based facilities operations costs of $2,938 allocated based on 77% of our fleet dedicated to self mining and divided by total bitcoin self mined in the first quarter of 2,825.
Another way to look at this is by calculating the cash, the cash cost of these same items, which represents the same cost expressed as a cost per Terra hash per day. Our total cash-based cash costs in the first quarter was [$0.0326] per Terahertz. In summary, we expect operating cash flow to be sufficient to support operating expenses, debt service and CapEx associated with our organic growth plans in 2024.
And now a few housekeeping items. As we continue to model a statutory effective tax rate of approximately 23% for 2024. We also have more than $300 million in net operating loss carryforwards, which will reduce our future cash taxes our share count as of March 31, 2024 is approximately 182 million shares.
And now I'll turn the call back to Adam to discuss our expectations for 2024 at our base business.

Adam Sullivan

Before return to Q&A, I'll spend some time walking through our strategic priorities for the rest of the year and the macro environment factors driving these priorities now that we are three weeks removed from the latest having we had seen a normalization of the record high transaction fees immediately after the Haddon House price has declined to around $0.05. And we are seeing a small decline in global network hash rate, barring any dramatic and sustained increase in house price over the next three to six months, we expect to see inefficient cash rate drop off the network as some machines are turned off as operators seek new homes for their miners. We expect some difficulty decreases throughout this process, and we expect year-end cash rate to be higher than current levels.
Speaking more broadly in 2024 and over the next few years, we anticipate increased competition for blocks as skilled miners continue to invest CapEx to increase their efforts. We also expect to see increases in US power prices over the coming years.
The question for core scientific now is how can best grow our business and continue to create economic value for our shareholders at a time when the value of our owned infrastructure is increasing for core scientific The answer comes in three parts first by continuing to build out our owned infrastructure, particularly through the completion of our Texas projects. Second, by expanding our hash rate through fleet refresh and emerging minor options.
And finally, as I discussed, we are focused on leveraging our own infrastructure to capture the significant opportunity in HPC hosting. I'll describe each of these in more detail, starting with our partially built infrastructure at our two Texas sites. At these sites, we have 372 megawatts that require an investment of about $200,000 per megawatt on average to complete the 372 megawatt can support more than 20 extra half of mining capacity over the next three years when complete and as mining technology yields, higher efficiencies and hash rate per megawatt, that total hash rate will increase. We can also dedicate a portion of this new infrastructure to HPC hosting depending on customer needs and opportunities. We are currently on track to energize the 70 megawatts intention by the end of our second quarter. We expect to purchase the remaining miners to achieve our refresh and hash rate expansion goals later this year.
Second, we are taking advantage of mining market economics and new miner suppliers to expand our hash rate cost effectively both are refreshing our fleet and expanding our rack space for perspective, based on our current 745 megawatts of infrastructure. If we were to refresh all of our prior generation S19, S19 Pro and S19j Pro miners would S21, we will be able to increase our existing hash rate by more than 10 Exa Hashesto hash without adding any new infrastructure.
We are already seeing improved mining equipment economics in this post-COVID environment. We are also working with multiple technology companies to develop and deploy new lower cost technology with higher energy efficiency that will offer greater procurement options. And third is our emerging alternative compute business launch with our successful deployment of 16 megawatts of data center capacity for core Kuwait. As discussed earlier, buyers of advanced GPUs for workloads such as AI, cloud and high-performance computing, have a limited supply of infrastructure options and often faced significant and costly delays in the availability of new data center capacity. Core scientific has more than 500 megawatts of our total 1.2 gigawatts of contracted power that can be utilized for alternative compute workloads based on geographic proximity to major cities and fiber lines.
Further, we have a successful track record of efficiently managing large-scale data centers, and we have a team from the data center industry leading our operations. We are in regular discussions with customers in this space and expect to build up this part of our business further over the course of the year we think it's important to help frame the economics of this potentially significant business opportunity as follows based on industry data, the cost to building new Tier one HPC data center ranges between $7 million and $12 million per megawatt. Based on our current assumptions, we project the cost to convert one of our high-power bitcoin mining data centers into a Tier one HPC data center at between $5 million and $8 million per megawatt. Even saving $1 million per megawatt represents $800 million in construction savings for a 100 megawatt data center we are pursuing clients that are able to prepay for construction CapEx as an offset against a portion of their monthly hosting payments. We aim to become a market leader in providing digital infrastructure for high-performance computing.
The cash-generating power of that business will enable us to keep some of our Bitcoin production on our balance sheet in anticipation of future increase to the extent that we have cleared certain debt that prevent us from holding bitcoin today based on industry data, we target Tier one HPC. hosting revenue on the order of $1.4 million to $1.6 million per megawatt per year with gross margin of 75% to 80%. Power costs and utilities are direct passed through to clients the complete conversion of 500 megawatts of bitcoin mining infrastructure to HPT. hosting would likely take three to four years, but we expect to begin generating revenue earlier as capacity comes online incrementally during that process, HPC hosting provides stable revenue and gross profit.
This is important for core scientific because it will provide stability and a greater degree of revenue predictability, which can also help moderate the variability in our Bitcoin mining results against the more dynamic mining backdrop, as we consider these three points, we see a transformational opportunity to balance our portfolio and business between highly-efficient, Bitcoin mining at scale and alternative compute, hosted our Bitcoin mining business generates profitable cash flow and preserves our exposure to the upside potential and Bitcoin price.
It also built a platform for an alternative compute business that provides significant multiyear, steady cash flows with strong financial returns, the potential to optimize our asset portfolio across these two attractive and high value compute areas is only available to us because we own and control all our infrastructure. We can not be better positioned to capture the opportunities in these two growing markets. We will provide more details about our emerging alternative compute hosting business when we reach any definitive agreements.
Our Board, our leadership team and I are more excited than ever about core scientific and our growth plans. We truly believe that by executing on our balanced strategy of bitcoin mining at scale and alternative compute hosting, we can enhance value for all our stakeholders, both in the near and long term and deliver compelling financial results that will unlock tremendous value in our company. Thank you all for your engagement and attention, and thank you to our customers, industry partners and all our teammates for your ongoing efforts and support. We'll now take your questions.

Question and Answer Session

Operator

We will now begin the Q&A session.
If you would like to ask a question, please press star followed by one on your touch-tone keypad. If for any reason you would like to remove that question, please press star followed by two again to ask a question, please press star one. Please limit your questions to one question and one follow-up. As a reminder, if you are using a speakerphone, please remember to pick up your handset before asking your question. We'll pause briefly to allow questions to generate in queue.
Our first question comes from the line of Joe Flynn with Compass Point.
Please proceed, guys.

Joe Flynn

Thanks for the question. On the HPC front, with the 500 megawatt potential infrastructure capacity, I'm curious like what kind of customers are you currently having conversations with? What are they hyperscalers, datacenter operators, startups are just that color you can provide?

Adam Sullivan

There would be your question. I would say our target base right now is mainly around our goal to have prepaid revenues part of this contract. So then having the client pay for the CapEx that definitely narrows the scope of potential clients for that definitely puts it in the range of large tech companies that are looking at the development of their AI segments. So that's really our focus right now is mainly around large tech companies with a focus on AI where the demands are for application-specific infrastructure.

Joe Flynn

And just drilling down to the economics you guys mentioned, I would like the existing Kharif contract with now roughly $100 dollars per megawatt hour never used get closer to $150 to $170. I'm just kind of curious, is that $150 per megawatt hour level with these existing agreements where the CapEx will be to pay? And really just any other color you could provide margin.

Adam Sullivan

Yes, of course. So our target for or what we laid out is really our target for conversions of sites. And so when we when we talk about things like the existing corporate deal for any conversion of existing space, where we leased and then subleased to potential clients, if our total revenue in our margin profile would be of a different and a bit lower.
Our focus going forward is really on the conversion of sites. And so what we've laid out are based on discussions with potential clients as well as industry data. That's helping guide us really to the answer. And so what we're looking at on the on the margin side is really that 75% to 80% is really what we're targeting today. And that's on the back of about $1.4million to $1.6 million in revenue per megawatt.

Joe Flynn

Great. Thanks, guys.

Operator

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

Lucas Pipes

Thank you very much, operator. Thank you for all the detail in the prepared remarks and presentations.
And Adam, I also wanted to ask about the HPC. opportunity. And you mentioned kind of three to five years for greenfield. And if I understood you right, and you mentioned three to four years for your conversions, is that correct? And maybe more importantly, kind of what is the process and for developing greenfield. I'd like to understand kind of the competition. And so if someone comes in, we're looking at a greenfield, how long does it take power? How long does it take to construction? And how do you how do you compete against them? Thank you very much.

Adam Sullivan

Of course, their focus. I'm going to start with the second part of the question here what we're seeing from traditional operators today, traditional data center operators, they have long dated contracts.
You have 10 years or greater. And so for on the existing infrastructure side, they have a very hard time competing with the part of the industry that we're focused on today. And then going forward, they've sold forward, I would say, at least three to five years of capacity at which they've locked up. And so converting any of that in the short term is very difficult for them.
Now if you look forward right now, you're seeing some of large tech companies securing power 2028, 2029, 2030. That's just to secure the power aspect you tack on on top of that, a lot of supply chain constraints for equipment, luckily that we already have. So in the traditional data center industry, it's a minimum three to five years for them to really start attacking this industry and from our perspective, what we're looking at, we said three to four years to fully develop the 500 megawatt you mentioned, we're going to have incremental capacity come online throughout that time period. And that's mainly driven by the fact that we have a lot of the long-lead items already owned inside of our inside of our business today. And you have a lot of those constraints around the electrical infrastructure that you could see.

Lucas Pipes

Thank you, Adam, to follow up on on this in your presentation, you show that valuation arbitrage between some of the leading bitcoin miners and and data center companies in light of everything discussed. Why don't why don't I haven't seen M&A yet? What's your take on that?

Adam Sullivan

Yes, Lucas, if I might just follow up your question. You're referring to M&A in our industry itself.

Lucas Pipes

Yes. Yes. Well, specifically, what I'm referring to on Slide 8 is a forward EV to EBITDA multiple for data center companies, 20 times on your site, 9 times to 14 times multiple for the highest multiple bitcoin miners are certainly consistent with some of the data I've looked at why why why haven't we seen M&A from the data center side to the bitcoin mining site to date? I would appreciate your thoughts on that.

Adam Sullivan

Yes. No, it's a great question. I think Morgan Stanley put out a very good report related to the opportunity there. Bitcoin miners actually have today, given the fact that just on electrical equipment alone, it's at least 36 months lead time for traditional data center. So just having access to the power is a significant advantage and is actually a much higher value to traditional data centers and really the valuations that we're seeing on Bitcoin mining infrastructure trade at today, I wouldn't rule that out. Traditional data centers are definitely trying to find ways to bring power online more quickly what we're seeing across a number of reports is that data center capacity is going to double over the course of the next six years. So I think that's something that we're still in the early stages. I would imagine that companies throughout the industry are having those types of conversations. From our perspective. We're focused on executing this because we believe we can drive a significant amount of short-term and long-term value for our shareholders.

Lucas Pipes

Adomite, I appreciate your perspectives on Best of luck, and thank you very much for all the color.

Adam Sullivan

Thanks.

Operator

Thank you again to ask the question, please press star one. We will pause briefly to allow questions to generate and kill.
Next question comes from the line of Kevin Dede with H.C. Wainwright. Please proceed.

Kevin Dede

Thank you, Wei Adam, Denise, thanks for having me on. So Adam, maybe you could offer a little operational insight. I know the hedge price has trended down right it may be a little bit lower than you expected or had modeled. I'm wondering and I know you said that you expect miners to come off and you look for the next difficult or difficult the adjustment this week and two weeks beyond. Is there anything that you're doing sort of in house term maximize the performance of the fleet?

Adam Sullivan

Thanks, Kevin. I think it comes down to two really two items. First, it comes down operations prior to the Harvey. We actually moved our machines based on their efficiency amongst our sites based on their power contracts really to prepare for a time period that could be much worse than what we're seeing today in terms of the $0.05 ask price level.
The second part is our in-house software development team has developed a significant amount of firmware around the ability to adjust machines on a minute-by-minute basis amongst different types of firmware settings. And really what that does, it allows us to change our efficiency of our machine fleet, and it allows us to do that based on power prices at each of our sites as well as prevailing house price metrics. And so for us, that provides a significant advantage over our peers who have outsourced much of that capability set, whereas we've been able to integrate really all three parts of the software stack, the energy management on the fleet management and the firmware all into a single software stack that allows us to provide a significant amount of control greater than our peer set today.

Kevin Dede

You're at what point would you consider developing fresh megawatts for four HP. to address each PC market versus conversion? And how would you bought balance that infrastructure spend Visa 10 or so extra hash that you could Gayn in improving your fleet?

Adam Sullivan

Yes, we're in a very unique position today where we have infrastructure that can support both bitcoin mining and HPC hosting, obviously, Bitcoin mining platform for which we're able to expand into new markets and find new sites. And on the contract side for each PC business. Our focus today is really on customers who are able to prepay for that CapEx. And so as we evaluate new opportunities, that's going to come down to a month-by-month quarter-by-quarter basis in terms of how we allocate capital. But we'll continue to we'll be able to continue to grow our Bitcoin mining excess cash over the course of the next few years. As you mentioned, we have a 10 Exa Hashes cash opportunity just within our existing footprint today, if we were to upgrade our machines to the newest generation. And so what we're looking at it is an exciting opportunity to pick bitcoin mining side and a very exciting opportunity on the HPC side.

Kevin Dede

Thanks, Adam.

Operator

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

Greg Lewis

Yes, thank you and good afternoon and thanks for taking my questions on. And I was kind of curious on your thoughts on Kevin's question where you kind of addressed your firmware in your stack on you mentioned other miners using third party on solutions on, I guess as I think about your US firmware solution that you're using internally, is there an opportunity potentially to bring that out into the market and have and have others have other smaller miners, the potential customers, i.e., is this a potential other revenue stream for Gores?

Adam Sullivan

Yes, thanks for the question. This is something that we've evaluated in the past potentially rolling out to the broader market. We view this as a significant competitive advantage over that over our peers. And what we've seen over the past few years in terms of the development of software is that we've continued to lead the pack in terms of our development. And so from our perspective, we're going to continue to keep this as our proprietary in-house in-house software so that we can maintain that competitive advantage over our peers as we continue to grow.
I think one important note on that as well is that our peers, when they're running third-party software, they're paying a pretty significant development fee to the ultimate owners of that firmware. That's a fee that we're able to not pay and actually generate greater gross profit than our peers on the same machine type holding all the variables constant.

Greg Lewis

Okay. Super helpful. And then I also wanted to follow up on the on the HPC. opportunity. I mean, you mentioned the ability for prepaying on I guess is prepaying is one thing and that's obviously sounds like like the ideal solution, but but what about approaching it using your existing infrastructure with a joint venture? Is that something that could make sense or, you know, at this stage in the game, it's something that we're not really interested in I'm bringing on a partner.

Adam Sullivan

Yes, it was the way we look at it right now and really what excites us most is utilizing the prepaid revenue structure allows us to own that infrastructure for free and clear after that, prepaid revenue from owning this infrastructure, whether it's at the end of the fee, the contract or whether it's after that prepaid revenues paid off will give us significant advantage in terms of being able to refinance that or put or that infrastructure can potentially pull some capital out to fund future growth. And so we view this as we have the technical capabilities in-house. We have the infrastructure base. And so from our perspective, really the capital doing a part of that that's necessary to execute. And if we can get that from our client base, that will provide us a significant advantage going for.

Greg Lewis

Super helpful. Thank you.

Operator

Thank you. The next question comes from the line of Tyler De Maria with BTIG. Please proceed.

Tyler DiMatteo

Yes. Hey, guys. Thanks for taking the question. Adam, I just wanted to follow up really quickly on the on the prepayment from the HPC customers. I mean, do you have a threshold level in mind? And I guess, like what's the lead time you're thinking about for that payment and then maybe rolling it down?

Adam Sullivan

Yes, of course, I think what we're looking at right now is really on the 100% payment term. So for the total CapEx bill, you're receiving 100% of that from our from our potential clients. And I think you have some high-level guidelines here to think about in terms of how we're thinking about it is we are really not utilizing more than 50% in any given year towards revenue that we could be generating. And I think that really brings us to a point where we're still able to stream significant free cash flow generation off of these megawatts, even with the prepaid structure rolling off over the course of contracts.

Tyler DiMatteo

Great. That's all I had. Thanks for closing the loop on our appreciate the time.

Adam Sullivan

Course. Thank you.

Operator

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

Lucas Pipes

Thank you very much for taking my follow-up question and hopefully really quick. The $1.4 million to $1.6 million that you mentioned, Adam, is that including the pass through on power? And I think you mentioned another pass through. If you could remind me of that on. And so for the for the EBITDA margin, I think you mentioned 75% to 80%, and that would be still kind of straight on top of that revenue line. I just wanted to make sure I didn't miss anything there.

Adam Sullivan

Yes. Thank you.
Is yes, so the $1.4 million to $1.6 million, that is not inclusive of the utility pass-through power and utilities. And so when you think about that number, that's really the lease rate on a per megawatt basis for the entirety of the year, all of the other expenses that are incurred are passed through to the clients. And so when you think about the 75% to 80%, we like to think about that as the gross margin on those. And on that per megawatt number that's given it's about $1.4 million to $1.6 million number.

Lucas Pipes

Got it. So that call it, Tom, 20%, 25%. And those would be more or less maintenance cost of the of the site on security, fixing fixing a plug, the leak here and there. So that's kind of the way to think about it.

Adam Sullivan

Absolutely right.

Lucas Pipes

Adam. I really appreciate it. Thanks so much and best of luck.

Adam Sullivan

Thanks very much.

Operator

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

Kevin Dede

Thanks again. Denise, you mentioned two stock price thresholds for warrant conversion and the flood of cash that would offer you and perhaps clearing the balance sheet at that point, can we take a step back and think about that process without the stock moving? I mean, at what point would you consider retiring debt given cash generation and favorable mining economics?

Adam Sullivan

Hey, Kevin, I'll take that question, David, really how we're thinking about it today.
Yes, first here, the $19 million that we paid off and early in the second quarter was related to mechanics liens to build out that 72 megawatts at our facility. We have some additional debt service over the course of this year that will pay down some additional principal as we evaluate the evolving market that we're in today. What we believe based on our analysis is that it's better to put capital towards growth, been paying down debt at this point. And so we're going to continue to fund growth and that may change over the course of the next month to next quarter. But today, our focus is on continuing to fund the growth of this business. We believe it's more accretive to our bottom line.

Kevin Dede

Perfect. Adam, I appreciate that nuance. Thanks for sharing, of course.

Adam Sullivan

Thank you.
Kevin.

Operator

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

Jack Chan

Hi, thanks for taking the question on dealer HPC., curious to know potential clients reached out to you directly? Where did you reach out to them? And how much of the 500 megawatts come would be potentially taken by these clients you're in.
Thanks for your question. I would have to say because it's a bit of a mix of both people recognize the platform that we've built. They know the locations of our sites and they know the capabilities that we have on our on our internal team, you look at our operations team up and down coming almost directly from the data center industry with decades of experience across each member. And so that has experienced that new the traditional data center industry as well as the tech industry know, and they know many of our team members really well. And so it was a bit of a combination of both inbound as well as some outbound calls to certain partners that we knew may be interested our goal right now is to repurpose about 500 megawatts to HPC. and are really what we're focused on is trying to accomplish this and potentially depending on how negotiations and discussions with potential clients over the course of the next three to three to four years. And so that's really what we're focused on today is executing on our growth plan, not only in the bitcoin mining side, but also on the HPC side.
Thank you. And I think you said the timing of a potential deal in this year. Where did I mishear that.

Adam Sullivan

Yes, that's something that we're going to be updating the market as has these negotiations conversations evolve. So as we get to more definitive decisions around this, we will be announcing that to the market.

Jack Chan

Thank you.

Operator

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

Steven Gitlin

Thank you With no further questions, we thank you for your attention and your interest in core scientific, an archived version of this call, all SEC filings and relevant Company and industry news can be found on our website, core scientific.com. We wish you a good day and we look forward to speaking with you again following next quarter's results.

Operator

That concludes today's conference call. Thank you. You may now disconnect your lines.