My primary reasons for viewing Core Scientific’s Q2 2024 results are rooted in its significant market presence and recent developments. As one of the earliest public Bitcoin miners, Core Scientific held a leadership position in the market for an extended period. However, after facing bankruptcy during the last market cycle, the company was relisted in late January 2024, offering valuable lessons on resilience and recovery in a volatile industry. Additionally, in February 2024, Core Scientific strategically expanded into the AI sector by partnering with CoreWeave to provide HPC hosting, a move projected to generate $6.7 billion in revenue over 12 years. This expansion has been well-received by the market, as evidenced by the company’s increased market capitalization in recent months.
As of this writing, Core Scientific ranks as the third-largest Bitcoin miner among all U.S.-listed Bitcoin mining companies.
What a wild ride!
Based on my interpretation, here are major takeaways from their latest financial statement:
- Bankruptcy and Reorganization Impact: The company’s emergence from Chapter 11 bankruptcy has altered the company’s capital structure (including the issuance of new debt and equity instruments, e.g. Tranche 1 Warrants). However, the significant warrant liabilities ($1.155b) pose a considerable risk, leading to net loss of $804.896m for the quarter despite improved revenue.
- AI Business Arm: The expansion into HPC hosting shows strategic foresight, aiming to stabilize revenue streams amid the volatile Bitcoin mining market. However, the costs associated with this new service ($4.891m) are already contributing to increased expenses. It generated gross profit of $628k during three months ended June 30, making a gross margin of 11% (lower than 28% overall gross margin), which only contributed 4% to the total revenue.
- Cash Flow and Liquidity: The company’s cash position improved significantly to $96.122m, a 90.68% increase compared to December 31, 2023. However, cash flow from operations declined from $37.977m to $23.378m. Additionally, capital expenditures rose sharply to $35.029 million during the first half of 2024, primarily for expanding HPC hosting facilities and other operational capacities. Given these factors, careful cash flow management will be essential to fund growth initiatives without compromising financial stability, especially considering the company’s substantial liabilities and the volatile market environment.
The following is a breakdown of Core Scientific's Fiscal Second Quarter 2024 results.
Income Statement Highlights:
- Total Revenue: $141.102m in Q2 2024 (+11% YoY) . In specific, self-mining generated $110.743m, an increase from $97.082m in Q2 2023. This increase was primarily due to higher bitcoin prices and increased self-mining capacity. $24.840m was from hosting, down from $26.316m in Q2 2023, due to contract terminations with customers. HPC Hosting generated $5.519m. This is a new revenue stream, which marks a strategic shift towards more consistent revenue sources.
- Net Loss: $804.896m in Q2 2024, compared to a net loss of $9.260m in Q2 2023. This significant loss was driven by the $796.035m expense related to the change in the fair value of warrant liabilities and contingent value rights.
- Total Cost of Revenue: $102.285m (+14% YoY). This increase was primarily due to higher depreciation costs associated with mining equipment and the new HPC hosting services.
- Significant Changes: The introduction of HPC hosting added $4.891m in new costs. Additionally, depreciation expense, a major component of cost of revenue, saw a notable increase due to capital investments and infrastructure expansion. For example, depreciation related to self-mining increased to $58.0m in the first half of 2024 from $40.5m in the same period of 2023.
- Warrant Liabilities: The non-cash expense of $796.035m due to the change in fair value of warrant liabilities and contingent value rights is highly unusual and significantly impacts the financial results. This non-cash expense was driven by an increase in Core Scientific's stock price, which reflects risk associated with financial instruments issued during reorganization.
- Sales and Marketing: expenses increased to $2.966m (+174%YoY). This sharp increase indicates a stronger push in market outreach, most likely to be the new service segment– HPC hosting.
Balance Sheet Highlights:
- Cash and Cash Equivalents: $96.122m as of June 30, 2024, up from $50.409m as of December 31, 2023. This increase was primarily due to funds raised through equity issuance and the restructuring of debt.
- Total Assets: $761.456m by the end of Q2 2024, compared to $712.156m as of December 31, 2023. This growth is mainly attributed to an increase in cash, accounts receivable, and property, plant, and equipment (PPE).
- Total Liabilities: Rose to $1.845b from $1.309b at the end of 2023. The substantial increase is primarily due to the recognition of $1.155b in warrant liabilities (valued $345.856m at the beginning of the year), reflecting the rise in Core Scientific's stock price.
- Convertible Notes Payable: Decreased to $526.756m from $684.082m at the end of 2023, reflecting the company’s efforts to reduce debt through reorganization and settlements.
Cash Flow Highlights:
- Operating Cash Flow: $23.378m generated from operating activities in the first half of 2024, down from $37.977m in the same period of 2023. This decline is largely due to higher working capital needs and non-cash adjustments related to reorganization.
- Capital Expenditures: The company spent $35.029m on property, plant, and equipment in the first half of 2024, compared to $1.774 million in the same period of 2023. This significant increase reflects the company’s investment in expanding its infrastructure, particularly for HPC hosting.
- Equity Issuance: The company raised $55 million from issuing new common stock, which was crucial in improving its cash position post-reorganization.
- Debt Repayments: Core Scientific made $28.348 million in debt repayments, a significant decrease from the $8.709 million in the same period last year, highlighting the restructuring efforts to reduce leverage.
Notes on HPC Hosting
In February 2024, Core Scientific entered into a long-term contract with CoreWeave to deliver 16 MW of infrastructure at its Austin, Texas facility. This marks the beginning of Core Scientific's operations in the HPC hosting space. By June 2024, the company had expanded its agreements with CoreWeave, signing contracts to provide an additional 200 MW of infrastructure for HPC operations across multiple sites, with an option executed later for another 70 MW.
During Q2 2024, the HPC Hosting segment generated $5.519m in revenue, with associated costs of $4.891m. This resulted in a gross profit of $628,000 and a gross margin of 11%, which is notably lower than the company’s overall gross margin of 28%.
While Core Scientific anticipates generating a total of $6.7 billion in revenue over the life of the contract with CoreWeave, there is a significant risk due to the high customer concentration. Being 100% dependent on a single customer, CoreWeave, poses a risk if CoreWeave fails to meet its contractual obligations or if the relationship deteriorates. In response, it is no surprise that Core Scientific has doubled its sales and marketing efforts, as reflected in its cash flow.
Overall, Core Scientific has made significant adjustments in restructuring and expanding its operations. The company's cash position and working capital have improved, the substantial net loss reflects ongoing financial risks and the impact of non-cash adjustments related to reorganization and equity-linked instruments. Moving forward, Core Scientific’s ability to manage the financial risk associated with its liability/warrants and capitalize on its HPC revenue streams will be critical to its financial health and future growth.
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The views expressed in this article are my own and are based on publicly available information. This content is intended for informational purposes only and should not be construed as investment advice. Readers are encouraged to conduct their own research before making any investment decisions. Past performance is not indicative of future results. No recommendation or advice is being provided as to the suitability of any investment for any particular investor.
