Canaan Inc.

Ladies and gentlemen, thank you for standing by, and welcome to Canon Inc.' 's fourth quarter and full year 2020 earnings call. At this time, all participants are in listen-only mode. After the management's prepared remarks, we will have a question-and-answer session. Please note, this event has been recorded. I would like to hand the conference over to your speaker host today, Mr. Shahokhi Lee, board secretary of the company. Please go ahead, Mr. Lee. Thank you very much. Hello, everyone, and welcome to our earnings conference call. The company's financial and operating results were released by our news services earlier today and are currently available online. Joining us today are our chairman and the CEO, Mr. and our CFO, Mr. . In addition, Mr. , our SVP, will also be available during the question and answer session. Mr. Chang 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. Before we continue, I would like to refer you to our safe harbor statement in our early press release, which also applies to this call as we will be making forward-looking statements. Please also note that we will discuss non-GAAP measures today, which are more roughly explained and reconciled to the most comparable measures reported on the generally accepted accounting principles in our earnings release and the filings with SEC. With that, I will now turn the call over to our Chairman and the CEO, Mr. Nankeng Zhang. Mr. Zhang will deliver his remarks in Chinese, and I will provide the corresponding English translations. Please go ahead, sir. Hello, everyone. This is Dangan Zhang, Chairman and the CEO of K9E. I will now provide a brief overview of our progress in the fourth quarter and the fourth year of 2020. In the fourth quarter of 2020, the price of Bitcoin continued to rise, directly promoting the growth of the global mining market demand. The company successfully realized the forward-looking layout of the market, and the client structure continued to optimize. A large number of long-term cooperation pre-sale orders ensured that the company had a comprehensive cash flow. By the end of 2020, During the fourth quarter, Bitcoin prices continued to rise, which helped to grow the market demand for mining machines. Our visionary approach had 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 and delivered the next generation of A12 series mining machines in that period. And we have already begun delivering this new product series at a large scale in the fourth quarter of 2021. In this quarter, we aim to expand the market, improve our own research and development capabilities, and improve the competitiveness of our company's core mining industry. In addition, we are also investing more in the AI industry, 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 investments 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 terms of mining sales, the company's total order volume in 2020 reached 17.2 million mines. In the second half of 2020, the company's order volume increased significantly. The first quarter's order volume exceeded 9.2 million mines, including 15,000 mines of well-known investment institutions, Blue Energy Investor, and 1,350 mines of Aptos Credit LLC. 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 firm Blue Energy Invest, which has ordered 15,000 machines, and OctoCredit, which has ordered 1,350 machines. In addition, we have also started collaborations with several well-regarded mining machine customers in northern Europe. As of the end of the first quarter of 2021, we have already recorded orders for more than 156,000 mining machines with over $238 million in advances from our customers. These orders included 6,400 from Hive Blockchain Technologies, a Canada-listed crypto miner, and 6,000 from Core Scientific, a leading U.S.-based crypto miner. Meanwhile, in order to provide our global customer base with the best services possible, we have been building up our global customer service network and established our first international customer service center in Kazakhstan in the fourth quarter. Going forward, we plan to build additional customer service centers in North America and other regions, which will enable us to provide a timely and effective open-end after-sales service to our local customers around the world. 公司一直以来都非常重视对研发的投入, We have always prioritized Prioritize our investment in product R&D and our total R&D investment reached 21 million US dollars in 2020. We have a team of seasoned engineers as well as complete design flow. We continuously recruit talented people with competitive compensation scheme and the working conditions. 公司與新的定員廠經過了一年多的磨合期。 We also continued to refine our supply chain during the quarter. Since starting to work closely with our new IC manufacturing partner, which we began more than one year ago, we have been continuously improving the yield of the chips. the power consumption and the computing performance of which have basically reached the expected level in the product test. In 2021, we will continue to develop several new generations of our chips. In the AI industry, companies have seen significant growth in the domestic and foreign markets. In 2020, the amount of AI chips exported was three times that of 2019. In addition to advancing our coal mining, in our AI business segment, for example, the usage of AI chips grows significantly across both domestic and international markets in 2020. In fact, our numbers of AI chips tripled on a year-over-year basis. in 2020, and we currently expect that our AI segment revenue will maintain its relatively high year-over-year growth rate in 2021. Through market research, we found that the market space for current AI chip exchanges and products is large, especially in the AI world, which is currently in a general stage. In 2020, China's total production value of smart homes has exceeded 10,000 yuan, and the current market size is up to 58,000 yuan. We have created a three-step product route plan. The first step is a low-cost exchange-type chip. The second step is a medium-sized computing visual chip. The third step is a high-end computing visual chip. The third step is a high-end computing visual chip. Following our research, we have identified significant market opportunities for customer-grade products with AI chips. In particular, the wide adoption of AI vision chips is currently creating a large addressable market. In fact, in 2020, the total production output of China's smartphone sector has exceeded 1 trillion RMB. and the potential market size is expected to be as high as 5.8 trillion RMB. In light of these market opportunities, we have formed a three-tier product plan. First, we will prioritize the development of low-cost customer product solutions with consumer chips. For the second tier, we have vision chips with medium computing power for smart homes smart education, and other applications. The third tier will be vision chips with high computing power for new retail, assisted driving, robotics, and other applications. For the roadmap of AI chips, we have analyzed the specific application use cases, and the corresponding market demand for computing power. As a result, we have designed multiple product lines. K510 is the fourth digital chip in 2020. In March of this year, D-Zhou successfully recreated the chip. This chip is equipped with various digital and simulation IPs that we have developed over the past two years. K510 is a semi-organized chip in the face of the high-end AIoT market. Clients have high expectations for the 510. We have already accumulated a small amount of pre-ordered orders. It is expected to be mass-produced in the second half of 2021. The K230 is an upgraded version of the K210, based on the feedback from customers. It is optimized on the flexibility and support of the power supply chain in today's power generation. It is even closer to the development needs of enterprises. We completed the tape-out process for the K510 series in the fourth quarter last year, and finished the series chip-back process in early March. The K510 series chips, which carry a variety of digital and analog IPs that we have developed over the past two years, are undergoing commissioning. As partially customized chips for the mid- to high-end AIoT market The K510 series chips have already generated significantly high interest in the market and received several small pre-orders. Currently, we expect to start the mass production of the K510 series in the second half of 2021. On the other hand, the K230 series under development is an upgrade version of our K210 series. Using customer feedback from the K210 series, we further optimized the K230 series computing power and the power consumption figures. In addition, we also made this next generation chip more flexible for developers and refined its tool chain support, laying the foundation for the K230 series to better support the needs of future enterprise development. For the first half of 2021, we continue to expect that the future contract sales for our mining machines will contribute around 70% to 80% of our total revenues. However, for the second half of the year, We will adjust such percentage based on the market situation and the production capacity. Our current mining machine production capacity for the first been fully pre-sold through future contracts. As a result, starting from the second quarter of 2021, we plan to dedicate several thousand mining machines to our own Bitcoin mining business. These machines will primarily consist of our A12 and A11 series miners for an additional combined computing power between 350 pH to 450 pH. Since the beginning of the next half of the year, the company plans to deploy 10% less than the monthly production capacity per month for self-sufficiency mining. The actual number of deployments will be adjusted according to the progress of the cooperation mine and the price and production situation. In the event of a huge change in the price and production capacity, it is expected that at least 200 million to 400 million H will be deployed by the end of the year. Starting from the second half of 2021, we plan to allocate no less than 10% of our total monthly production capacity of mining machines to our own Bitcoin mining business every month. The actual number of mining machines will be adjusted based on the development of our partner mining farms, the price of Bitcoin, and our production capacities. In the case that there are no significant changes to the price of Bitcoin and our production capacity, we felt that the total computing power dedicated to our Bitcoin mining business will reach between 2EH to 4EH by the end of the year. 2020 is a very important year for the company's development. We have overcome a number of challenges, including the external epidemic and chip supply. 2020 was an extremely important year for Cayman. We overcame external challenges such as the COVID-19 pandemic and the obstacles that it placed throughout our supply chain. We also continue to optimize our management structure while adding personals, independent directors to our board in order to further strengthen our corporate governance. At this time, I would like to thank the entire staff of Canaan, thank all our partners, and thank all the investors for their trust and support in Canaan. I hope that we can continue to make progress in 2021 to improve the efficiency of social operation, Finally, I would like to take this opportunity to thank all of our employees for your hard work, as well as our business partners and investors for your ongoing trust and support during the challenging year. In 2021, we will remain as committed as ever towards our mission of improving the efficiency of our society and the way of our lives. Thank you. This concludes the remarks of our CEO, Mr. Zhang. I will provide an overview of our fourth quarter and the four-year financial results. Before I start, please note that all numbers are in RMB terms. Total net revenue decreased to $38.2 million from $463.2 million in the same period of 2019 and $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 run out in sales in the previous period. Meanwhile, we have almost sold out our inventory of our older production since the third quarter of 2020. Cost of revenue decreased to $29.2 million from $1.14 billion in the same period of 2019. and $118 million in the first quarter of 2020. The flat fluctuations in our cost of revenues were in line with the changes in our sales volume of TH and cost of TH. As a result, we surpassed a gross revenue of $9.1 million in the first quarter of 2020, compared to the to a gross loss of $673.4 million in the same period of 2019 and a gross loss of $17 million in the previous quarter. Research and development expense was $14.1 million compared to $63.6 million in the same period of 2019 and $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 purpose. The sequential increase was driven by the higher salary and wealth benefits for R&D personnel. Let's now take a look at other operating expenses in the fourth quarter. First, selling and marketing expenses. were $6.1 million compared to $7.7 million in the same period of 2019 and $3.2 million in previous quarter. The changes in our selling and marketing expense were primarily due to travel expense and salary changes in our selling and marketing department. Secondly, G&A expense decreased to from $56.4 million in the same period of 2019 and $40.6 million in the previous quarter. The reductions were mainly driven by lower share based compensation during the fourth quarter of 2020. Our total operating expense in the fourth quarter of 2020 were $18.1 million compared to $127.7 million in the same period of 2019 and $75.9 million in the previous quarter. Loss from operating narrowed to $71 million from $800 million. and $1.2 million in the same period of 2019, and $92.9 million in the previous quarter. Net loss attributable to ordinary shareholders was $72 million, compared to $798.2 million in the same period of 2019. and $86.4 million in the previous quarter. Non-GAAP-adjusted net loss, which excluded share-based compensation funds, was $73.1 million. In comparison, non-GAAP-adjusted net loss was $715.5 million in the same period of 2019. and 84.8 million in the previous quarter. Diluted net loss per ADS was RMB 0.46 compared to RMB 5.34 in the same period of 2019 and RMB 0.55 in the previous quarter. Now, turning to our results in four years of 2020. Total computing household in the four year of 2020 decreased by 37.1 percentage to 6.6 million THz per second. From 10.5 million THz per second in 2019, as a result of increased of bitcoin price and our proud to clear out our old product series inventory during the first nine months of 2020. Consequently, total net value in 2020 decreased to $447.7 million from $1.42 billion in 2019. Cost of revenue in 2020 decreased by 78.9% to $409.9 million from $1.94 billion in 2019. As a result, our gross progress in 2020 was $37.8 million compared to our gross loss of $516 million in 2019. Total operation expense in 2020 decreased by 45.8% to $291.6 million from $538.5 million in 2019. Loss from operation in 2020 narrowed to $253.9 million from 1.05 billion in 2019. Net loss attributable to ordinary shareholders in 2020 was 215.1 million compared to 1.03 billion in 2019. On a non-GAAP basis, Our net loss in 2019, which excluded share-based compensation of $3 million, was $212.1 million. The net loss per ADS in 2020 was 1.38 compared to 7.21 in 2019. Turning to our balance sheet, contract liabilities as of December 31, 2020 increased to $413.4 million from $8.3 million as of December 13, 2019. The increase was driven by increased down payment for the sales order of our Bitcoin mining machine. which are scheduled for delivery in 2021 and beyond. As of December 31, 2020, we had cash and cash equivalent of $391.1 million, compared to $516.6 million as of December 31, 2019. The decrease was mainly due to higher short-term investment as we had invested $32.4 million in short-term investment as of December 31, 2020, compared with $11 million in short-term investment as of 31, 2019. can withdraw at any time. Looking forward, we are convinced our effect in 2020 will enable us to improve our financial performance significantly in 2021. As the price of Bitcoin started to resume its upward trajectory since the first quarter of 2020. Consequently, we expect our total net revenue in the first quarter of 2021 to exceed RMB 400 million. Please note that the forecast only reflects our current expense expectations and previous on the market and the operation conditions, which are subject to changes, particularly in regarding to the potential fluctuation in the price of Bitcoin as well as the impact of 2019 on the global economy. This concludes our prepared remarks for today. Operator, we have now ready to take questions. Certainly. Ladies and gentlemen, to ask a question, you will need to press star 1 on your telephone. To withdraw your question, press the pound or hash key. Please stand by while we compile the Q&A roster. When asking a question, please state your question in Chinese first, then immediately repeat your question in English.

the convenience of everyone on the call. Thank you.

We have the first question from the line of Mark and Tim from Tennessee. Please go ahead.