Canaan Inc.

Q1 2021 Earnings Conference Call


spk04: Ladies and gentlemen, thank you for standing by and welcome to the Canaan Inc. First Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, after the management's prepared remarks, we will have a question and answer session. Please note that this event is being recorded. Now, I'd like to hand the conference over to your speaker host today, Mrs. Shao Kae Lee, both 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 newswire services earlier today and are currently available online. Joining us today are our chairman and CEO, Mr. Nan Geng Zhang, and our CFO, Mr. Tong He. Mr. Matthew Lee from ITR, our IR consulting firm, will conduct the English translation throughout the call. 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 the 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 earnings 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 as reconciled to the most comparable measures reported under general accepted accounting principles in our earnings release and the filings with the SEC. With that, I will now turn the call over to our chairman and the CEO, Mr. Nangeng Zhang. Please go ahead, sir. Hello, everyone. This is Nangeng Zhang, chairman and CEO of Canon Inc. to now provide a brief overview of our program in the first quarter of 2021. In the first quarter of 2021, the price of Bitcoin continues to rise. Customer demand continues to increase. At the same time, the company's production delivery is gradually smooth. Under the co-operation of the above factors, the company's performance is greatly improved. The company completed a revenue of $61.48 million in one quarter. The profit of Nungap reached $21.85 million. During the quarter, we significantly improved our financial performance as a result of the Bitcoin price rally, increasing customer demand, and a substantial ramp-up of our mining production and deliveries. As such, we reported a total net revenues of $61.5 million and a non-cap adjusted net income of $21.9 million in the first quarter of 2021, a significant improvement from a non-GAAP-adjusted net loss of $31.4 million in the full year of 2020. As the new generation of machines continues to increase in mass production, the yield of the products does not decrease. With the further integration and improvement of chip manufacturing technology, our chip performance and yield have stabilized at a very high level so far. With the mass production of the new generation of mining machines, our product yield continues to improve. Through the close collaboration with our foundry partners, we have further enhanced our chip manufacturing process. As of today, such advances have led to industry-leading performances in our chip speed and yield. In the second quarter to date, in addition to our delivery of mining machines, we have also secured a number of large purchase orders of future contracts. Furthermore, we have locked in the capacities of our foundry partners for the next 12 months to fulfill these future contracts. Although the price of Bitcoin has increased in this quarter, it has brought some challenges to the current quarter's cash sales. But overall, we expect that the total supply of the second quarter will increase significantly in the first quarter. Due to the recent influence of various policies and industry factors, the price of Bitcoin has increased significantly. The second quarter's revenue is currently unable to be accurately estimated. We expect that the total revenue of the second quarter will be between $1.5 billion and $2.5 billion. Although the Bitcoin price volatility in Q1 created some challenges in sales of mining machines, we expect our Q2 total shipments to either maintain or surpass our current growth rate. Due to the Bitcoin price volatility caused by recent policy and market uncertainties, we're not able to project the total net revenues for the second quarter in a precise manner. Hence, we expect our total net revenue for the second quarter to be in the range of $150 million to $200 million. In terms of mining sales, the company has continued its long-term customer sales strategy since the fourth quarter of 2020. As of May 31, 2021, the company has completed more than 14.9 million mines in total orders. The total revenue is more than $1.9 billion. In the company's期货 orders, the US stock market listed companies Mouset and the international mining giant Genesis have signed more than 10,000 mining purchase orders. There are 29 customers with more than 1,000 orders. This part of the customer order accounts for 94% of the total期货 orders. In terms of mining machine sales strategy, we have re-prioritized our sales focus to our long-term and large-scale customers. As of May 31st, 2021, we have had total order volume of over 149,000 mining machines with over $190 million of total customer transactions. In regards to our future contracts, we have signed purchase orders of more than 10,000 mining machines with both Mawson, a U.S. listed company, and Genesis, an international Bitcoin mining giant. In aggregate, we have had 29 different customers, each with purchase orders of more than 1,000 mining machines, accounting for 94% of our total orders this quarter. Our partnerships with such large-scale customers generally involve multi-batch mining machine purchases over a long period of time. These characteristics have helped us to reduce the impact of short-term fluctuation in cryptocurrency prices and to ensure the stability of our production and delivery schedules. Since the second half of 2020, we have had our focus on overseas customers. As of May 31st, 2021, our overseas revenues accounted for more than 70% of our total net revenues. with the purchase orders from overseas markets accounting for more than 70% of our total outstanding purchase orders. From the beginning of this year, the shortage of production capacity in the global semiconductor supply chain has become a common challenge for global enterprises. In order to ensure the supply and production of products, the company has actively negotiated with suppliers Since the second half of last year, capacity shortages in the global semiconductors supply chain have become a common challenge for chip makers around the world. In order to secure the production and supply of our products, we have initiated negotiations with our suppliers, opting to provide them with a higher unit price and longer upfront payments. As of now, we have paid our suppliers a total of approximately $200 million in upfront payments. In April, the company issued a $1,349,065 U.S. deposit fund to several major banks at a price of $12.6 million per share. Additionally, in April of this year We completed a direct offering of $13,492,065 of our ADS at $12.6 US dollars per ADS for a total announced raise of $170 million US dollars. The financial impact through our latest raise and through our recent large purchase orders will considerably enhance our cash position, aid us in supply chain improvements, and enable us to secure sufficient production capacity for future deliveries. Going forward, we will continue to invest in our R&D capabilities to improve the quality and performance of our mining machines. We will also utilize our cash reserves to enhance our customer service capacity and expand our business segments and models. Regarding the self-propelled mining business, the company has set up the main body in Singapore to operate specific mining business. Our personnel are now preparing to launch the self-propelled mining business in Harcourt. In the summer of May, the first batch of mines has been used for our self-propelled mining. Self-propelled mining business is useful to increase the company's financial income, expand the business scope and customer group, and integrate industry resources. In anticipation of self-operated Bitcoin mining, we have already set up a fully-owned subsidiary in Singapore and deployed an operational team in Kazakhstan in latter part of May of this year. We have also deployed the first batch of mining machines to Kazakhstan for our Bitcoin mining-related operations. We believe that our self-operated Bitcoin mining business will help us improve our financial performance as well as expand our business scope and customer base. As we integrate more industry resources into our operations, we believe this business segment will enable us to revitalize our mining machine inventory shield us from Bitcoin volatility, and ensure our end-to-rate sufficiency during a market upturn. In the first quarter, the company invested $888 million in R&D, mainly in R&D of new products, to continue to improve the mass production capacity and yield, expand the product line and supply chain. At the same time, the company is also recruiting R&D personnel. Jialan Technology is always a technology company that uses R&D as the core competitiveness. As a technology company, we have always prioritized our investments in R&D as the driver of our core competitiveness. As such, our total R&D investments reached $8.9 million in the first quarter of 2021, with the majority of our R&D investments allocated to develop new products, improve capacity and yield, expand the product lines and supply chains, as well as invest in our R&D teams. AI industry, the AI industry is still in the early stages of market growth. As the company's first generation of AI chips, K210 has created a huge increase since 2018. In the market of education robots, smart home and other areas, a total of 47.9 million units have been exported. In March 2021, the second AI chip K510 successfully came back. The current function test is normal and is expected to enter the market in the second half of the year. Beyond our core mining machine business, we also achieved steady progress in advancing our other business initiatives during the period. The AI industry is still in the early stage of market cultivation. Since launching our first generation of AI chip K210 series in 2018, We have made outstanding progress and continue to gain traction in the market for robotics education and smart homes. We have cumulatively delivered 439,000 of the K2100 AI chips for our customers to date. In March 2021, we finished the chip-back process for our second generation of AI chip, the K510 series. We have also completed the main function testing for all functional modules of this series and expect to launch in the second half of this year. As such, we plan to expand our K510 series to multiple application scenarios with a promising outlook that includes high-end cameras, edge computing, video conferencing, and more. In addition, the company pays attention to the education process and developer community In the 2021 National Student OS Design Contest held by the Ministry of Education, the company successfully became the only record supporter. More than 120 high school students from all over the country participated in this contest through the development version of the K210 chip. In addition, K210 has also been loved by developers. It has experimented with a lot of interesting scene applications, such as smart water watch, water watch watch, VR app for tracking eyes, and multi-tool toy walking in the river. Furthermore, we maintain and emphasize our education sponsorship with the establishment of the developer ecosystem. We recently became the sole technical support provider for the 2021 National Student OS Design Competition, an event organized by China's Ministry of Education. Using development support equipped with our K210 chip, Students from over 120 colleges and universities across China participated in the competition. Concurrently, our Kendrick K210 chip also became the chip of choice for developers in many interesting application scenarios, such as smart meter, eye tracking VR applications, programmable robot dock, et cetera. In summary, we have established the in-depth partnerships with various segments of the semiconductors industry value chain. These relationships will play an essential role in supporting our steady business expansion in the future. As we continue to accelerate our growth, we will generate increasing returns for our customers and investors going forward. Now I will turn the call over to Mr. Tonghe, our chief financial officer, to go through financial details. Hello, everyone. This is Matthew Li with ICR. I will not speak in English on behalf of Mr. Tonghe. Thank you, Nanfeng. Now I will provide an overview of our first quarter financial results. Before I start, please note that all numbers are in RMB terms unless otherwise noted. Total net revenues increased to $402.8 million from $68.3 million in the same period of 2020 and $38.2 million in the previous quarter. The increases were due to the increase in our total computing cover sold as we delivered more Bitcoin mining machines in the period. Cost of revenues increased to $208.6 million from $65.9 million in the same period of 2020 and $29.2 million in the previous quarter. The increase in our cost of revenues were in line with the changes in our sales volumes of THash and cost of our THash. As a result, We reported a gross profit of 194.2 million in the first quarter of 2021 compared to 2.4 million in the same period of 2020 and a 9.1 million in the previous quarter. Gross margin further expanded to 48.2 percent from 3.5 percent in the same period of 2020 and 23.8 percent in the previous quarter. Research and development expenses were $58.2 million, compared to $41.8 million in the same period of 2020 and $40.1 million in the previous quarter. The increases were mainly due to higher share-based compensation expenses, which increased to $24.1 million in the first quarter of 2021, as part of our amended 2018 shares incentive plan. The increases were partially offset by the decrease contractor expenses and other expenses related to our R&D activities during the first quarter of 2021. Let's now take a look at other operating expenses in the first quarter. Setting and marketing expenses were 6.3 million compared to 4.1 million in the same period of 2020 and 6.1 million in the previous quarter. The increases were mainly driven by higher share-based compensation expenses in the first quarter of 2021, partially offset by lowering advertising expenses. Our selling and marketing expenses in the quarter included 3.0 million share-based compensation expenses. General and administrative expenses increased to 143.4 million from 27.6 million in the same period of 2020 and 33.9 million in the previous quarter. General and administrative expenses in the quarter included 114.8 million share-based compensation expenses. Consequently, our loss from operations in the first quarter of 2021 narrowed to 13.7 million from 71.1 million in the same period of 2020. and 71.0 million in the previous quarter. Net income attributable to ordinary shareholders was 1.2 million compared to a loss of 39.9 million in the same period of 2020 and 72.0 million in the previous quarter. Non-GAAP-adopted net income, which excluded share-based compensation expenses, was 143.2 million in comparison Net gap adjusted net loss was 38.2 million in the same period of 2020 and 73.1 million in the previous quarter. Valued net earnings for ADS was RMB 0.01 compared to a loss of RMB 0.25 in the same period of 2020 and a loss of RMB 0.46 in the previous quarter. Turning to our balance sheet, contract liability as of March 31st, 2021 increased to $1,210.6 million from $430.4 million as of December 31st, 2020. The increase was driven by the increased down payment for the sales orders of our Bitcoin mining machines, which are scheduled for delivery in the following quarter of 2021. As of March 31st, 2021, we have cash and cash equivalents of $1,337.8 million compared to $391.3 million as of December 31st, 2020. Short-term investments as of March 31st, 2021, increased to $8.5 million from $62.4 million as of December 31st, 2020. as we redeemed a portion of our short-term financial products during the period. We purchased the short-term financial products to receive higher returns, but at the same time can withdraw at any time. Looking ahead into the second quarter of 2021, as we have begun mass-producing our new generation of Bitcoin mining machines, we believe that our product yields and deliveries will substantially increase on a year-over-year basis. However, the volatility in Bitcoin pricing in late May of this year has made it difficult to predict the future trends in Bitcoin prices. As a result, we will not provide financial guidance for the coming quarter. This concludes our prepared remarks for today. Operators, we are now ready to take questions. Certainly, sir. Ladies and gentlemen, we will now begin the question and answer session. If you wish to ask a question, please press star followed by the number 1 on your telephone keypad and wait for your name to be announced. If you wish to cancel your request, you can press the pound or hash key. Once again, hit a star 1 to ask a question. When asking a question, please state your question in Chinese first, then immediately repeat your question in English for the convenience of everyone on this call. Once again, It is start followed by the number one to ask the question. We have the first question. This is coming from the line of Akita Elkin from China Securities. Please go ahead.
spk01: Thank you for taking my question. I have three questions about policy. The first question is to ask how do you see the impact of domestic financial regulation on the mining industry and corporate industry? I'm going to talk to myself quickly. My first question is about how do you consider the impact of financial regulation on the Bitcoin mining industry in companies like Canon? Thank you.
spk04: Let me answer this question. From a policy point of view, I think any new industry growth needs to undergo market and regulatory tests. Since 2020, In terms of policy environment, I believe every new and emerging industry is subjected to the testing for market evolution and regulatory compliance. Since 2020, cryptocurrency represented by the Bitcoin is increasingly accepted by the market. The Bitcoin has gone through a long process for being validated to be recognized by the market. Similarly, in terms of regulatory supervision, I believe the Bitcoin and the mining industry also need to go through a process of regulatory compliance. The peculiarity of the cryptocurrency mining industry is that it is not only a technology-driven industry, but it also has a strong financial attribute. The Vice President of the Central Bank, Li Bo, recently expressed in the Asian Forum in Portugal that if Bitcoin is used as an investment tool, We need to study the monitoring policy to ensure that such activities will not cause financial risk. What more points out here is that financial fraud is a behavior that disrupts the normal market order and prevents personal investment risks from being transmitted to society. So financial monitoring for the Bitcoin mining industry should be constructive, not destructive. From a long-term point of view, financial monitoring policy is conducive to the development of the cryptocurrency industry. The particularity of the cryptocurrency mining industry is the combination of technology-driven and strong financial future. As the Vice President of the PBOC, Mr. Lee Bo, expressed at the BoA Forum for Asia recently, if we consider Bitcoin as an investment instrument we need to develop regulatory policies to efficiently manage potential financial risks, which mainly refer to, one, activities to cause market disorder, such as financial fraud, and two, preventing individual investment risks from extending into the overall financial system. As such, we believe regulatory supervision is constructive to the development of the Bitcoin mining industry, not destructive. In the long run, regulatory supervision is positive for the healthy and orderly development of the industry. From the market point of view, currently, the clients of J&K are mainly overseas institutions, such as mining companies, old companies, mining companies, and professional fund institutions, etc. Domestic monitoring policies may lead to some domestic miners or agents selling mining machines to small and medium-sized miners overseas. From the market perspective, currently majority of our customers are overseas companies, including public companies well-established mining companies and professional financial institutions. Policy changes in China might cause some domestic mining companies or vendors to undersell Bitcoin mining machines to medium and small miners abroad, which will cause price volatility of mining machines in international markets. Majority of our customers are large-scale institutions and professional mining companies. The large amount of upfront payments received from these customers will enable us to smoothen the price volatility caused by the undersetting of mining machines.
spk01: My second question is, what is the attitude of overseas governments towards cryptocurrency currently? though Bitcoin and Bitcoin mining face high-end regulation globally.
spk04: Let me answer. The world's main economy has always been in control of Bitcoin. But most of the economy has a development perspective towards Bitcoin. The supervision on Bitcoin from world's major economies has long been eclipsed. Most economies hold a developmental perspective. According to the statistics of CoinDance, among 257 economies in the world, over 52% or 132 economies currently recognize Bitcoin as legal currency and do not impose restrictions on it. Only 14 economies consider Bitcoin illegal and restricted. In terms of the nature of Bitcoin More than 60% of the economies believe that it has monetary properties, which means it could be used as a means of payment. Nearly 30% of the economies regard it as a commodity. More than 10% of the economies treat it as property. Recently, many countries, such as Turkey and India, have been saying that they may join the economic system that restricts or prohibits Bitcoin. Recently, many countries such as Turkey and India contended that they may join the list of economies who restrict or prohibit Bitcoin. Since the epidemic has worsened the growth of their economies, their domestic inflation has clearly risen. The attitude towards Bitcoin regulation of these economies varies over time.
spk01: My third question is, so recently a few opinion leaders, both so massively and also internationally, have raised their concerns about the high energy consumption of supermining. So what do you think of this kind of deal? And also, will the closing down of supermining firms in Inner Mongolia cause a chain reaction in other countries in China? Please go on, Yifan.
spk04: Okay. Inner Mongolia has been working on this issue I don't think it's a new move. In fact, this has been the case for a long time. In the past, Xinjiang has also issued similar policies. Currently, the development of the Bitcoin mining industry is mainly dependent on low-price power resources. This resource is categorized in two categories, which are electricity and water. In the northwest region, electricity is mainly used. The establishment of a whistleblower platform for digital currency mining companies in Inner Mongolia is not a new move. Xinjiang has issued similar policies before. At present, The development of the Bitcoin mining industry relies on low cost of power resources. There are two main types of resources, thermal power and hydropower. The northern western region is dominated by thermal power, which is against the inherent environmental protection principle of carbon neutrality. This is one of the fundamental reasons for the withdrawal of local mines in senior Mongolia. Secondly, many mining companies engage in mining activities pretending to be data centers. in joining policy subsidies granted by the country, but failing to fulfill their corresponding social responsibility. Withdrawal of these companies will help standardize the operations of domestic mining companies. Although mining industry consumes electricity, it uses a large percentage of the electricity. For profit, miners will prioritize low-cost areas for mining activities. The low price means that the local electricity energy supply is greater than the actual demand. There is a situation of energy waste. So, before there is an effective way to handle this waste energy, the Bitcoin mining industry is a solution to convert gas into value. Although the mining industry consumes electricity, it uses wasted electricity to a large extent. Miners prefer to choose areas with low electricity prices to engage in mining activities out of profit-making purposes. The low electricity price indicates that the local power supply is greater than the actual demand, and there is a waste of energy. Before the emergence of effective means to destate wasted electricity, Bitcoin mining is a solution to transform waste electricity into a source of value. At present, A certain degree of poverty abandonment exists in many areas in China, such as the northwest and southwest regions. Bitcoin mining has contributed a lot to the finances, employment, and income of residents in poverty areas. It also helped new energy facilities to generate income and further expand their scale. Thank you. I hope that answers your question.
spk01: Thank you.
spk03: Thank you. We have the next question. This is coming from Martin Chen from . Go ahead. .
spk04: We still have good revenue growth in the second quarter. Maybe you can give us some color of the second quarter mining machine output and the price compared to the first quarter of 2021. According to what we explained in the last quarter, in the second quarter, more than 70% to 80% of orders are delivered by delivery orders. However, due to the improvement of our supply chain, production capacity, and grain rate, the number of products produced has increased significantly. As we discussed last quarter, we still expect 70% to 80% of our Q2 orders to be future contracts. Driven by our optimizing supply chain, continuous run-up of our capacity, and improvement of product yield, our product throughput has been considerably elevated. As a result, we expect the shipment of mining machines in Q2 to be more than triple from that in Q1. That's about it. Thank you. What about the price? We know that the price has been fluctuating a lot recently. Does this affect our price in the second quarter or the second half of the year? Do we see any impact on the Bitcoin price fluctuation in the second quarter or second half of 2021? OK. Regarding the price, we have seen that the price of Bitcoin has been fluctuating and retreating. There are many points of view in the market. However, I think from the point of view of the general profit of miners, the profit is still relatively high. In most cases, the operating cost and overall income ratio of the miner are not more than 1%. In addition, because of the recent policy changes, and the transition of the dry season and the wind season in China, Bitcoin's net profit has also dropped recently. So the current miner's mining comprehensive revenue is actually very small. It is lower than the return of Bitcoin. Recently, we have observed considerable fluctuation and replacement of the Bitcoin price and also heard different voices on the market. The overall return for Bitcoin miners remains at a relatively high level. Under most circumstances, the cost of mining machines does not exceed one-third of a miner's income. In addition, total computing power of the Bitcoin network declined recently due to policy change in China and the transition between dry and wet season. There is a minor decline of overall return for miners, but the change is significantly less than the retracement of Bitcoin prices. 这个矿机的价格走势受多种因素的影响,在这个没有政策因素影响的前提下, The price of basic mining machines is strongly related to its revenue. But because of the uncertainty of some policies and the fluctuation of the price of coins in recent years, the domestic market is relatively optimistic. Domestic miners are now considering going out to sea. This has also caused a sudden increase in the supply and demand of overseas second-hand mobile phones. This has caused some short-term fluctuations in supply and demand relations. From the perspective of experience and market conditions, the current policy is not clear, and the major impact of the price fluctuation is not only the price, but also the decision of when the customer will order. In general, domestic customers now need to wait for the landing of the monitoring boots, while overseas customers are actually waiting for the price to rise steadily. So from today's point of view, overseas customers have basically returned to normal期货现货价单. From the price point of view, the impact is there, but it is not very big. The期货价格因为本来就不是特别高,我觉得基本上没有受太大的影响。现货价格其实主要受的是地价变动的影响, The price of mining machines depends on multiple factors. Without considering the impact of policy change, we see a strong correlation between the price of mining machines and the return of mining. However, the recent policy uncertainties and the volatility of Bitcoin prices have cultivated an overwhelming watching atmosphere in our domestic market. As domestic miners consider going abroad, overseas demand for secondhand mining machines boomed, which caused a short-term turbulence in market supply and demand. From our experience and current market situation, we believe the major impact from policy uncertainty and fluctuating Bitcoin price is not the price of the mining machine itself, but the timing of placing purchase orders. While domestic customers wait for a clearer policy environment, overseas customers incline to a more stable Bitcoin price. Currently, most of our overseas customers have resumed ordering for spot sales or futures contracts. and the impact on overall price is not material, especially minor on the price of futures contracts. Depending largely on the Bitcoin price, current price of mining machines for spot sales is 20% to 30% lower compared with that when Bitcoin price was $60,000. Thank you. Thank you. About our shipment, we already tripled our shipment in the second quarter compared to first quarter. Can we continue to increase shipment in the second half? Actually, I think we will have about 300,000 machines this year. Because we still have half a year to go. So this is an estimated number of 300,000 machines. But if you are concerned about the index of income or profit, it is indeed related to the price of Bitcoin. So I think it's hard to say a whole year number now. But we can control the output. In terms of our total shipments in this year, we currently expect it to be around 300,000 Bitcoin mining machines delivered to our customers in this year. However, in terms of revenue and profit, we are not able to give you a clear guidance at this point. I think they are closely related to the price of Bitcoin. I also want to know do we have any strategy to get rid of the Bitcoin cycle and then maintain the volatility for a long time? This is a good question. First of all, I think our industry is a new industry that is developing at a high speed. Earning stability should not be our top priority. At present, we are trying to maximize our revenue and at the same time control the risk of loss. I think in the past, our company's business model was relatively simple. This is a very good question. Firstly, as we are in a fast-developing emerging new industry, we believe stable profitability is not the top priority of our business operations. We are working on maximizing our profits and managing the risks of losses at the same time. Our operating performance used to be significantly affected by the change of Bitcoin price. The impact was sometimes even magnified on our operating performance. This is natural due to the simplicity of our business model and product line. As a result, we have carried out the following initiatives to increase and stabilize our profitability. The first initiative is the selection of customers and sales models. We enter into long-term supply agreements with selected customers and suppliers to stabilize our supply chain, sales, and profits. And we also reserve a small portion of the mining machines for spot sales in market upturn to increase our profitability. The second is to develop a new business model. The simplest way to do this is to increase the business of CNA mining. This business is actually an important step from the simple hardware manufacturing to the development of blockchain industry. In addition to the advantages that I just mentioned, to extend the business model of this industry. For example, profit-saving lease, cloud profit-saving sales, and even the basis of profit-saving contracts. In fact, the industry has developed to today, the threshold of mining is very, very high. Probably for most of the investors in the zero-sum phone conference, they have enough funds, but they do not have the resources and ability to build and operate a large-scale investment scale of tens of millions of dollars. Our second initiative is to expand into new business segments such as self-operated mining business to diversify our business model. This is a critical segment for a hardware manufacturer to share the development dividend of the blockchain industry. In addition, as a derivative business model of the blockchain industry, it is the fundamentals for computing hardware leasing, cloud computing sales, and even computing hardware contracts. As the industry evolves, they enter The entry barriers for cryptocurrency mining has become too high for most of the participants on our call today to build and operate a tens of millions of dollars large scale mining facility. This entry barrier has essentially discouraged investments in this field. The business model of pure hardware manufacturing is out of date. We should promote the hardware plus service model or even pure service model mining as a service for MAAS to become the mainstream model. And the third point is diversification. Essentially, we are a chip company. Our core competence is the capability of designing chips and the massive production of it. It will be too narrow if we limit our technological advantage and strong balance sheet only in the development of mining chips. As such, we are developing homologous technologies to be applied to completely different AI devices and edge AI chips. Although this new business segment is still in the early stage of market cultivation, it is generally acknowledged that AI chip is an important industry in the future with huge market potential. We hope to be prepared for potential business opportunities in the future. I need to answer your question. Thank you for this help. I'm asking about the situation of our next generation of mining machines. We would like to know how is our current next generation machine progress? Which foundry are we cooperating with? And which nodes are we using? Any roughly scheduled for partitioning? Okay, for the mining chip, because we are now a multi-battery and multi-tool factory and multi-tool at the same time, and then the reason for the mass production. Now, in order not to cause this confusion to the market, we are currently not going to release it separately according to each chip. In addition, it is said that there is uncertainty in research and development, so this In order to avoid causing confusion for the market, we normally don't separately launch a single new chip due to the simultaneous iteration of technologies and massive production by multiple function partners. As certainly is always associated with any R&D project, As such, there might be change to our following discussions and expectations. The next generation chip is the second iteration of our existing technology, we expected to gradually adopt the next generation chip in the second half of this year. Compared with current products, we expected the overall improvement to be 10% to 15% in terms of performance, cost, and power consumption. The next generation of this technology has already passed the test sheet. In terms of the R&D process of the next generation chip by our Foundry partners, the full function testing chips have been put into production and mass production is up to the Foundry partners schedule. Current expectation is next year. Compared with current products, we expect the overall improvement to be in the range of 20% to 30%. Now, in addition to Xeniao factory, for example, the development progress of Wunami, I think Wunami products should be in next year. Now, the development is not the biggest problem. Now, the period is too long and the production capacity is limited, which is actually a big problem. In addition, we're also in the process of developing the 5 nanometer chip. We expect to launch the N5 product in next year. Instead of the challenges of the R&D itself, the long process and capacity constraint are the major obstacles for its launching. uh uh uh uh uh is a very important potential partner. Last year, with the 8nm technology of Samsung, our product performance and cost performance were all good. But this year, Samsung's production capacity is limited. Our production has been interrupted for a few months. But later this year, we will have a new product design on Samsung's newer system. In terms of our cooperation with Samsung, the manufacturing of mining chips requires large volume of wafers. Under the current supply shortage of wafers, we are only able to utilize a foundry's surplus capacity from time to time. As such, our demand is not prioritized by the foundry partners. Foundries have multiple cutting-edge fabrication production lines, are important potential partners for us. The performance and cost of our eighth nanometer chip produced by Samsung was very good. Limited by Samsung's capacity constraint, we suspended our cooperation for several months in this year. We plan to resume our cooperation with Samsung for the production of our new chip in later this year or next year. Currently, only BTC, ETH, RTC, and DODGE are the major strategic plans for mining. The other markets are relatively small. Currently, in addition to traditional BTC, ETH mining is also under development. Because the performance we are pursuing now is one to two times better than the mainstream GPU projects. So the technical process is also very complicated, and the development cost is relatively large. It is expected that the product will be interviewed next year. From this year's chip production situation, I think it may be more difficult for the entire industry to produce a large number of ETH miners. Because ETH miners have huge needs for logic wafers, DRAM wafers, and pathaging. For a strategic plan of developing many machines, currently the mainstream POW coins included only the Bitcoin, Ethereum, and Litecoin. In addition to our existing Bitcoin mining machines, we are developing mining machines for Ethereum or ETH. We hope to improve the performance of the new machine by one to two orders of magnitude compared with the current mainstream GPU. As a result, the R&D of new ETH mining machines is complicated and difficult. So we expect to launch our ETH mining machine next year. In light of the current supply shortages on the market, We think it's difficult for anyone in the industry to put ETH mining machines into mass production in this year. And due to the severe shortage of supply for logic wafers, VRM wafers and package. Thank you. Thank you. Thank you. We have the next question. This is coming from the line of Dan Viskov from Torso Investments. Please go ahead.
spk02: Thank you very much. Unfortunately, I don't speak Chinese. So I'm going to just thank you for trying to give the transparency on this call and answer all the great questions. Congratulations on a good quarter.
spk04: Thank you. Thank you. Thank you. Let me translate for the management.
spk02: That was my only question. Thank you.
spk03: Thank you.
spk04: Thank you.
spk03: We have the next question. This is coming from the line of Craig Ellis from . Please go ahead.
spk05: thanks for taking the question and i will ask for help in translating um the following uh first uh regarding the um the order intake that the company's seeing i i believe that's leading to the company believing it can ship 300 000 units this year but the question is really on 2022 are you taking orders currently for 2022 shipments and can you quantify the magnitude of orders that you might have taken year-to-date for next year?
spk04: Thank you for your question.
spk03: Okay, this is Ed with LURA, a so-called overseas sales. Yes, the question is, sure, we have taken orders in June 2022 this answer helps you or not?
spk05: It does, but I was hoping you could also quantify the degree of orders that you've taken for 2022 in addition to whether you're taking them or not.
spk03: Yes, we have taken orders for, in fact, In the pre-orders, as Nagin, John, the chairman and CEO mentioned in his previous sayings, 2021 we have pre-orders. Also, we have pre-orders for quarter one for 2021 every month with long-term overseas partners as well by monthly facing. So very well organized monthly facing orders. which of course helps us a lot in the allocation of production capacity and also stable our business pipelines. Thank you.
spk05: That's helpful. I have a second question if I could. In the press release, the company disclosed there was a 56 million order cancellation in the calendar second quarter. And the question is, related to that order cancellation, can those systems be redeployed to other customers or would those systems be redeployed to the company's internal mining operation? Can you just confirm what happened with the systems associated with that order cancellation?
spk03: Yes. a cancellation of one of our customers in the North America. Of course, customers have the right to decide to purchase or to cancel. Also, this cancellation doesn't impact our business as the miners' sales and demand, as you can see from the report, are stable and healthy. Thank you.
spk04: That's also helpful. Mr. Zhang, our chairman... If I could ask... That's a member's request.
spk00: Oh, go ahead.
spk04: Because now, it's a situation of public demand, especially in this year's three-fourth quarter. So, this incident itself, it has a negative impact In light of the current sort of supply situation on the market, especially for the second half of the year, we actually see the cancellation of a certain customer as a positive impact on our full year performance since we already signed a contract with a new customer at a higher price. Thank you.
spk05: That's very helpful and opportunistic. Finally, I just wanted to get some further color on some of the supply dynamics in the market. The company indicated that it's pre-booked capacity with boundary suppliers in the back half of the year. If demand continues to grow through the year, can you get upside to your current capacity for this year and exceed the unit shipment target of 300,000 rigs? Thank you.
spk04: Cool. Let me take a second to translate for the management. OK. Let me answer this question. I don't think the overall productivity of this year is likely to increase. But what we can do is to continue to improve the yield and improve the performance, so that we can deliver more Terahash to customers. As for the overall productivity improvement, I think there is still hope for next year. But this year, the hope is not too great. That's it. Yeah, actually we don't see further potential for increasing manufacturing capacity in this year given the supply and demand situation on the market. What we can do actually is to increase and improve the performance and yield of our products so that will enable us to deliver more terahash to our customers. In terms of the manufacturing capacity, We hope we will be able to lock in more capacity to address the increasing market demand in next year. Thank you.
spk05: Thank you for taking the questions.
spk04: Thank you. There are no further questions at this moment. I will hand the call back to the management for any closing remarks. Take over. Thank you everyone for joining us today. If you have any further questions, please do not hesitate to contact us. Thank you.

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