Canaan Inc.

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.

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.

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.