Canaan Inc.
Q4 2020 Earnings Call Transcript

Published:

  • Operator:
    Ladies and gentlemen, thank you for standing by, and welcome to Canaan Inc.’s Fourth Quarter and Full Year 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. I would like to hand the conference over to your speaker 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 our earnings conference call. The Company’s financial and operating results were released by our newswire services earlier today and are currently available online. Joining us today are our Chairman and CEO, Mr. Nangeng Zhang; and our CFO, Mr. Tong He. In addition, Mr. Xiaoming Lu, our SVP, will also be available during the question-and-answer session. Mr. Zhang will start the call by providing an overview of the Company and the performance highlights for the quarter. Mr. He will then provide details on the Company’s operating and financial results for the period, before we open the call up for your questions.
  • Nangeng Zhang:
  • Shaoke Li:
    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 fourth quarter and the full year of 2020. During the fourth quarter, Bitcoin prices continued to rise, which helped to grow the market demand for mining machines. Our visionary approach has already enabled us to establish a presence in the market in previous quarters. In the fourth quarter, we further optimized the composition of our customer base and secured a large number of orders from our long-term partners, which helped to safeguard our abundant cash flows. As of December 31, 2020, our total contracted orders amounted to $174 million, with $66 million in advances from our customers, representing a sequential increase of $54 million from the third quarter of 2020. We also successfully started our mass production and delivered the next-generation of A12 series mining machines in the period, and we have already begun delivering this new product service at a large scale in the fourth quarter of 2021. During the fourth quarter, we further strengthened the core competencies of our mining machine business by expanding our operations in the market, investing in our R&D capabilities and refining our supply chain management. In addition, our increased investment in our AI chips business segment have enabled us to achieve meaningful progress in developing best-in-class AI chips and facilitating their commercial applications. In particular, the total number of orders we received for our mining machines in 2020 reached 172,000 machines. In the second half of 2020, we were able to significantly grow the number of orders for our mining machines, reaching 92,000 machines in the fourth quarter alone. Among these orders, we continued to secure orders from prominent institutions, including the investment for Blue Energy Invest, which has ordered 13,000 machines and Octo Credit which has ordered 1,350 machines. In addition, we have also started collaborations with several well-regarded mining machine customers in Northern Europe.
  • Tong He:
    This concludes the remarks for our CEO, Mr. Zhang. I will provide an overview of our fourth quarter and full year financial results. Before I start, please note that all numbers are in RMB terms unless otherwise noted. Total net revenue decreased to RMB 38.2 million from RMB 463.2 million in the same period of 2019 and RMB 163 million in the previous quarter. The decrease was due to a few factors. First, we started mass production of our new product series during the first quarter, which only began to ramp up in sales in the period. Meanwhile, we have almost sold out our inventory of our older production in the third quarter of 2020. Cost of revenue decreased to RMB 29.2 million from RMB 1.14 billion in the same period of 2019, and RMB 180 million in the third quarter of 2020. The fluctuation in our cost of revenues was in line with the changes in our sales volume of Thash and cost per Thash. As a result, we reported a gross revenue of RMB 9.1 million in fourth quarter of 2020 compared to the to a gross loss of RMB 673.4 million in the same period of 2019 and a gross loss of RMB 17 million in the previous quarter. Research and development expenses were RMB 40.1 million compared to RMB 63.6 million in the same period of 2019 and RMB 32.1 million in previous quarter. The year-over-year reduction was mainly due to the changes in materials that we used for R&D purposes. The sequential increase was driven by the higher salary and welfare benefits for R&D personnel. Let’s now take a look first at other operating expense in the fourth quarter. First, selling and marketing expenses were RMB 6.1 million compared to RMB 7.7 million in the same period of 2019 and RMB 3.2 million in the previous quarter. The changes in our selling and marketing expense were primarily due to travel expenses and salary changes in our sales and marketing department.
  • Operator:
    We have the first question from the line of . Please go ahead.
  • Unidentified Analyst:
    My first question is about our new generation Bitcoin mining machine that CEO, Zhang mentioned. And I would like to know which foundry partner are we cooperating with and which technology node are we using? And any launch schedule for this new machine?
  • Nangeng Zhang:
  • Shaoke Li:
    Okay. Let me add a translation. So, we are one of the few in our industry to have multiple foundry partners. And we are actually working with them to -- for our new generation chips. And so, every year, we have roughly two to three product introductions, and this year will be no exception. We will evaluate our selection of foundry partners around variety of factors such as technology, the market as well as the capacity. So, the work is currently in progress. But at this point, we cannot really disclose any additional information on the schedule of launches.
  • Unidentified Analyst:
    My second question is about our capacity. We know that current capacity is very tight. And how much wafer capacity can we procure each month? And do we have any improvement about our wafer capacity?
  • Nangeng Zhang:
  • Shaoke Li:
    Okay. So, let me translate. We believe a series of inherent issues in the Bitcoin mining industry resulted in the shortage of chip supply. So, mining machine manufacturers generally use Bitcoin prices as reference points to estimate future market demand for their mining machines, which in turn, will determine the production volume of their mining machines. Due to the low Bitcoin prices in the second half of 2020, most mining machine manufacturers reduced their investment in fabrication during the period. As a result, when the Bitcoin price bounced back in the second half of 2020, we saw a severe supply shortage in the industry. In addition to the limited supplies across the semiconductor manufacturing sector recently also has played a role in building the shortage of chips in 2021, further accelerating the problem of chip supply. We cannot really disclose the exact number of chips that we have under production right now. But one of the strategies we’ve adopted to address this problem is to maintain our partnerships with multiple foundry partners and keep expanding our collaborations, which has helped us achieve outstanding results in terms of keeping up. On the other hand, we are also actively incorporating with large mining companies worldwide, including both publicly traded companies and professional institutions with long-term purchase orders for mining machines in place. We can effectively secure the delivery of our chips from our foundry partners. This, in turn, would enable us to alleviate the technical shortages of chip supply caused by the fluctuations in Bitcoin prices.
  • Unidentified Analyst:
    My follow-up up is that we have good relationship with Mainland China advanced foundry partners, and we got a lot of wafer capacity from them? And do we see any competitor to compete with this capacity in 2021 and what’s our strategy to protect the capacity?
  • Nangeng Zhang:
  • Shaoke Li:
    Okay. So first, there will, of course, be competitors, especially given the high Bitcoin prices. But we have already established a strong competitive mode with our extensive experience, our collaborations with multiple foundry partners, our integrated supply chain, as well as our large global client base. This is why we actually let the industry market share of mining machine in new markets during the first half of 2021 so far. And we actually see supply chain in a similar fashion as design, where the good design requires continuous and higher investments in R&D. In terms of screening production capacity, which is -- which actually has similar requirements too, we need to increase our investments in supply chain, technology and engineering in the current market environment in 2021 today. We are working to see the marketing opportunities to enhance our cash positions and strengthen our product development capabilities. Our work on product designs on multiple nodes at the same time works for us with additional flexibility when we negotiate or coordinate with these partners to ensure capacity.
  • Unidentified Analyst:
    My next question is our current yield rate. CEO already mentioned that our yield rate already achieved some milestones, and how do we expect the improvement in Q2 or second half and the contribution of the improvement to our machine shipment?
  • Nangeng Zhang:
  • Shaoke Li:
    So, yield rate can easily be affected by a variety of factors and it is also an important and confidential trade secret. But generally, when introducing new product, especially when starting corporation with a new partner, it takes a bit of time for the production capacity and the yield rate to ramp up. And we are working around the clock to minimize this so-called break-in period as much as possible. Through the hard work of our employees, our colleagues and our partners, we can -- we have effectively completed this difficult break-in period -- break-in process in the second quarter of 2021.
  • Unidentified Analyst:
    And my last question is about our Ethernet mining machine. Do we have any plan to launch our ETH machine in 2021 or 2022?
  • Nangeng Zhang:
  • Shaoke Li:
    So, what I can say right now is that our R&D is currently in progress. But, at this point, we can’t really disclose any more information than that.
  • Operator:
    Next question is from the line of .
  • Unidentified Analyst:
    We know that selling price on mining machines and Bitcoin price are highly related, but Bitcoin price has increased significantly since fourth quarter last year. Why it didn’t reflect on our fourth quarter financial report and the fourth quarter guidance?
  • Nangeng Zhang:
  • Shaoke Li:
    Okay. So yes, to answer your question, the price of mining machines actually moves with the Bitcoin prices only for the mining machines that are ready for delivery. So, since the second half of last year and the first half of this year, most of the mining machines we sold were actually sold as futures contracts, which had a fixed price. And the prices were actually lower than our existing machines.
  • Unidentified Analyst:
    According to the news, a company called Integrated Ventures purchased 600 mining machines from our company with the total cost of around $2.70 million and the calculated price is around $4,500 for mining machine. May I ask how much was Bitcoin price when the deal made? And were those 600 mining machines all prepaid orders, how much is the price on mining machines under credit sales at this kind of price generally?
  • Nangeng Zhang:
  • Shaoke Li:
    To answer that question, the order -- the deal was made in February. And for the mining machines that we sold, we actually sold them at different prices and which may be compared to actually more complicated. And generally speaking, for mining machines that we sell at a given time, future’s could be much lower than the price of the existing, the existing machines could be similar or instances could have higher prices. And so, it kind of depends on the timing of when we sign those contracts and the timing of when we deliver them, as well as a bunch of other factors. Well, generally speaking, the future’s contracts should have around 60% to 80% of the price of the existing machine.
  • Unidentified Analyst:
    My question is, how do we expect the sales volume in 2021, how much prepaid orders we have currently? I mean, what is the average selling price of mining machine under current Bitcoin price?
  • Nangeng Zhang:
  • Shaoke Li:
    So, we actually mentioned this number earlier in my prepared remarks. So, as I said before, we have already recorded orders for more than 156,000 mining machines with over at RMB 238 million in advances from our customers for -- as of the end of the first quarter of 2021.
  • Nangeng Zhang:
  • Shaoke Li:
    And to add to my previous answer, the current timing of existing machines -- the current timing of delivery of existing machines is -- actually spans a pretty longer time, some of them were scheduled to mid of next year actually. And the prices of the existing machines actually remained pretty high as well. Some of them are in the range of $50 to $100. And most of them are going out as well.
  • Unidentified Analyst:
  • Nangeng Zhang:
  • Shaoke Li:
    Just to add translation. So, that $50 to $100 is priced for each Thash.
  • Unidentified Analyst:
    My question is, you have mentioned that our Company is planning to involve in Bitcoin mining activity. What is the current progress? How many mining exchanges do you plan to use for mining by the end of the year? And how much does our Company account for the network computing power? Compared with other mining companies, what is your expectation for computing power at the end of the year?
  • Nangeng Zhang:
  • Shaoke Li:
    We are advancing our mining business. We have actually already set up an operation center in Singapore to run the operation. And Kazakhstan is also going to be on the top of our considerations as well as North America. And we have always prioritized compliance for our mining business, which is why we are in constant communication with our lawyers, auditors as well as other independent agencies to ensure our compliance and reduce our operation risk.
  • Nangeng Zhang:
  • Shaoke Li:
    So, given that our production of mining machines have been pretty much fully booked for the first half of 2021, we actually expect that the deployment of mining machines for our own mining business for the second quarter of the year to be in the thousands with a total computing power between 350 Thash to 450 Thash. So, for the second half of the year of 2021, we will adjust that number, that figure based on the market environment as well as our production capacity. So, for the second half of the year, we plan to deploy more than 10% of our total production capacity every month for our own mining business. The actual number will be -- we will monitor the progress of mining -- other mining companies with -- that we’re partnering with as well as the Bitcoin to make real-time adjustments. Provided that we don’t see any huge changes in the Bitcoin prices and our production capacity, we expect to deploy around 2 extra -- 4 extra hash of total computing power for our mining business by the end of the year.
  • Unidentified Analyst:
    My last question is, what’s the plan for the mine Bitcoin, are you going to hold or exchange for U.S. dollars or any other kind of consideration?
  • Nangeng Zhang:
  • Shaoke Li:
    So, as I said earlier, we’re definitely going to make sure that all of our operations are compliant. And under guidance, we will aim to hold our Bitcoin as long as for the long term. At the same time, it is also possible for us to sell the Bitcoin. So, we’re doing this so that we can have the benefit or the dividend of the growing industry.
  • Operator:
    Thank you. There are no more questions at this moment. I will hand the call back to the management for closing remarks. Thank you.
  • Shaoke Li:
    Okay. Thank you all for joining us today. We look forward to talking to you next quarter. Thank you.
  • Operator:
    Thank you. Ladies and gentlemen, that does conclude your conference for today. Thank you for participating. You may all disconnect now. Thank you.

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