Canaan Inc.
Q3 2020 Earnings Call Transcript

Published: 30 Nov 2020

[Operator:]

Ladies and gentlemen, thank you for standing by, and welcome to Canaan’s Inc. Third Quarter 2020 Earnings Call. At this time, all participants are in a listen-only mode. After the management's prepared remarks, we will have a question-and-answer session. Please note this event is being recorded. Now, I'll now like to hand over the conference to your speaker host today, Mr. Shaoke Li, Board Secretary of the Company. Please go ahead, Mr. Li.

[Shaoke Li:]

Thank you very much. Hello, everyone. And welcome to Canaan Inc. third quarter 2020 earnings conference call. The company's financial and operating results were released by our newswire services earlier today and are currently available online.

[Nangeng Zhang:]

Hello, everyone. This is Nangeng Zhang, Chairman and the CEO of Canaan Inc. I will now provide a brief overview of our progress in the third quarter of 2020. Our total net revenue in the quarter decreased by 8.5% quarter-over-quarter to US$24.01 million. In the second quarter, we focused on reducing our inventory, and we had almost cleared out our inventory as of July. By the end of the second quarter, the demand for mining machines in the market has re-bounced. And as such, we continued to ramp up our production and tape-out the process in the third quarter. However, the waivers that were in the fabrication process during the third quarter will not be started to deliver until the fourth quarter of 2020. Consequently, these waivers did not make any significant revenue contribution to our third quarter results. At the beginning of the third quarter of 2020, the price of a Bitcoin maintained its upsides momentum, reaching US$12,400 in the period and, in fact, hitting US$19,000 during the fourth quarter of this year. As such, the blockchain market recovered - market recovery trend continue to boost the demand for our products. By the end of the third quarter, our advanced receipts totaled US$11.14 million, representing an increase of US$10.98 million from the end of the previous quarter. We also continued to increase our R&D investments during the third quarter, and our R&D expenses increased by 23.2% on a sequential basis to US$4.73 million, further demonstrating our confidence in the long-term development of the company.

[Shaoke Li:]

This concludes the remarks of our CEO, Mr. Zhang. Now on behalf of our CFO, Mr. Hong Quanfu, I will provide an overview of our third quarter financial results.

[Quanfu Hong:]

Before I start, please note that all numbers are in RMB terms unless otherwise noted. Total computing power sold in the third quarter was 2.9 million terahash, representing a year-over-year decrease of 20.7% from 3.7 million terahash in the same period of 2019 and a quarter-over-quarter increase of 13.4% from 2.6 million terahash in the second quarter of 2020.

[Operator:]

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. Thank you. Your first question comes from the line of Zheng Jialiang from HashKey Capital. Please ask your question.

[Zheng Jialiang:]

And I will translate it myself. So thank you, Zhang and Hong and also for management. And I like to raise a question regarding the new business that I don’t know just – I wish how to say. I would like to know that for the mining business, it's for the self-operating business or just a mining pool for the external client? Thank you.

[Nangeng Zhang:]

All right, so let me translate. Our new business still focused on operating our own mining business, Bitcoin mining business. So we will - we're planning to use our Bitcoin mining machines to hold Bitcoin currencies. And for the long-term, we – so this is how we are planning to develop our business. And for - in terms of the mining pool, we're still doing that through partnerships. And we're not currently planning to operate our own mining pool, given its compliance problems and – but we will still keep monitoring that.

[Zheng Jialiang:]

So, my second is, how long does the the tariff on this new business and where this new business will be going to expand? Thank you.

[Nangeng Zhang:]

So we have actually been preparing for the business for quite a while. And we're actually finishing off the preparation process. Currently, we're looking at either late first quarter 2021 or early second quarter of 2021. So – and the - in terms of location, we're looking at – of the overseas market. And currently, we are preparing in Asia and the Europe, as well as North American market.

[Zheng Jialiang:]

So my third question regarding how many resources that the company will be, I think, to invest into this new business, including how much the team and also how much capital will be allocated to this new act? And also like to know what's the size of the mining farm? Thank you.

[Nangeng Zhang:]

So in terms of our investments in new business, we're actually adopting a more prudent approach. The – so when we develop we're looking at investments in new locations and operations and human resources. So we're leaning towards partnering with local partners and investing in certain local resources. So we're not building facilities in local markets at the moment. So to elaborate on the investments or on the cash investments, we are actually - we're going to leverage our partnerships. And so the important terms of equity investments or just investments in local resources. And in fact, we actually think the cash investment is going to be a small portion compared to our investments in mining machine - mining machines. So actually, the mining machines will be a major part of our investment, not cash. So for the - for our mining business, the scale of our mining business is going to depend on the market dynamics. And so if the market is fluctuating, we are going to focus on running - we're expanding our mining business. So we will be in a better place to streamline our supply chain and the production of our mining machines. Okay. So for the actual scale of our mining business, we are expecting between 10% to 20% of our mining machines to be used in the mining business. When the market is looking good and when it's fluctuating, we are going to increase that presentation.

[Zheng Jialiang:]

Okay, thank you. So my by thinking is that, our product will be prioritized our clients first. And also when the market is in fluctuation period, our suppliers’ mining machines will be divided into our own mining farms, right?

[Nangeng Zhang:]

Yes. So when we're – our sales are performing well, we only expect 10% to 20% of our mining machines to go over to our mining business. But when the market isn't doing so great, that's going to be - we're going increase that.

[Zheng Jialiang:]

So my following question is regarding the supply chain that we all know that supply chain that the foundry may have cut a supply for the mining machine factory disappeared. But we know that our orders have been pushed into the next first quarter and those actually, we see that this is a common trend for the whole mining machine industry. So what season management quote projection for next year's supply chain situation, also how this evolution will be – impact our Canaan’s productive in the next year? Thank you.

[Nangeng Zhang:]

So to summarize our supply chain process, so for the first-half of 2020, our production has actually been under pressure, mostly because issues in global trade. And for the first-half of the year, Bitcoin - the Bitcoin isn't actually the market - home market isn't very healthy and the inventory is pretty low. So in the second-half of the year, the market demand for semiconductors actually rebounded and Bitcoin price increased as well. So for the second-half of the year, we still have problems in the production, which we actually thought coming in the first-half of the year, which is why we're going to be committed to upholding our strategy of partnering with more than one manufacturers. So currently for the first-half of 2021, our production is still going to ramp up. And as we mentioned earlier, our pre-order – pre-sale orders are already scheduled for delivery for the second quarter of next year, but that's more because of the increasing market demand. Okay. So one of the problems that we see - so currently, our - the production process for our machines is taking 90 to 120 days. So - but we are - we're running out to production and we expect to - our production capabilities to have to produce over, well, multiple of – several thousand - several tens of thousands of mining machines next year. And also, now we have the - we operate our own Bitcoin mining business, which would enable us to streamline our supply chain process, even when the market is under – is facing turbulence. And we should be able to just build our inventory regardless.

[Operator:]

All right. Thank you. I’ll now hand the conference back to the management team for their closing remarks.

[Shaoke Li:]

All right. Thank you all for joining us today and we look forward to talking to you guys next quarter.

[Operator:]

Thank you. Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may all disconnect.