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spk05: Ladies and gentlemen, thank you for standing by and welcome to Canon Inc's second quarter 2021 earnings conference call. At this time, all participants are in a listen-only mode. After the management's prepared remarks, we will have a question and answer session. Please note this event is being recorded. Now, I would like to hand the conference over to your speaker today, Ms. Ji Zhang, Investor Relations Manager of the company. Please go ahead, Ms. Zhang.
spk04: Thank you. Hello, everyone, and welcome to our earnings conference call. The company's financial and operating results were released by our newsletter services earlier today and are currently available online. Joining us today are our chairman and CEO, Mr. Nan Geng Zhang, and our CFO, Mr. Jin Cheng, Jin. In addition, Mr. Xiao Minglu, our SVP, and Mr. Shaoke Li, our secretary of the board, will also be available during the question and answer session. Mr. Zhang will start the call by providing an overview of the company and performance highlights for the quarter. Mr. Cheng will then provide the detail 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 thoroughly explained at our reconciled to the most comparable measures reported under the generally accepted accounting principles in our earnings press release and filings with the FDC. With that, I will now turn the call over to our Chairman and CEO, Mr. Nangeng Zhang. Please go ahead.
spk03: Hello everyone, this is Mr. Nangeng Zhang, Chairman and CEO of Canon.
spk04: I will now provide a brief overview of our progress in the second quarter of 2021.
spk03: Since May of this year, there have been some control policies for mining industries. For more than a quarter of a year, there has been a certain impact on the net profit and price of Bitcoin. But due to the company's early expansion of overseas business, and the completion of the mining contract with many large mining enterprises, it successfully completed RMB1.8 billion in the second quarter, The May of this year,
spk04: The promulgation of a few regulatory policies on Bitcoin mining has had a certain impact on the total computing power of the Bitcoin network and Bitcoin prices. Nevertheless, we have developed our overseas business in advance and secured purchase contracts with multiple large-scale mining companies. As such, we were able to reach record high revenues of RMB 1,081.8 million, that is 167.5 million US dollars during the second quarter. Meanwhile, our gross profit reached RMB 427.1 million, which is 66.2 million US dollars. And our non-GAAP net income reached RMB 320.1 million, which is US$49.6 million, marking a historical high since our IPO.
spk03: In the second quarter, we continue to strengthen our collaborations with Fungry partners,
spk04: to stabilize our production capabilities, further upgrade our technology, and improve our product yield. These improvements have been well-recognized by our customers who have placed the more new and renewal orders as a result.
spk03: The company has completed about $1.7 billion of targeted launches in the second quarter, and has received a $1.61 billion reserve from customers by the end of the second quarter. We closed a registered direct offering of $170 million in the second quarter as of June 30, 2021.
spk04: we had $161.2 million in advances from customers, which has allowed us to secure wafer supply from our founding partners and better support our chip production. At the same time, our strong cash position has enabled us to accelerate our R&D team expansion and the development of new products. During the second quarter of 2021, we attracted 45 new technology talents to join our team, representing 28% of our total R&D team as of the quarter end.
spk03: In terms of mining, in the second quarter, we achieved a sales of 5,940,000 T total, and set a new record for each quarter, including large mining companies such as MIAG and GDA, which sold tens of thousands of high-performance mining machines.
spk04: In terms of our mining machine sales, we delivered a robust 5.9 million terahash of computing power to our clients in the second quarter of 2021, marking a historical new high for sales performance. Large orders included tens of thousands of high-performance mining machines from Molson Infrastructure Group and the Genesis Digital Asset.
spk03: At the same time, our pre-sale profit is also increasing significantly. As of September 10, 2021, our pre-sale computing power reached 9.11 million per hash. Our pre-orders are now scheduled till June 2022. The increase in the pre-sale percentage has also accelerated the growth of the company's pre-sale funds. By the end of the second quarter, the company's pre-sale funds reached 10.4 billion RMB, which is 1.61 billion US dollars. Compared with the 4.3 billion RMB at the end of 2020, the increase reached 141.8 percent. The company is in the process of working with customers to make dynamic adjustments to the ratio of pre-sale and pre-sale funds according to the market objective and future expectations. The significant increase in our pre-sale computing power has led to a substantial increase in our advances from customers.
spk04: As of June 30, 2021, our advances from customers have reached $161.2 million, representing an increase of 141.8%. at the end of 2020. Throughout our client's collaboration, we will adjust the volume of pre-sale orders and the proportion of advances from customers according to the market conditions and our expectations. This helps us partially offset the impact of market volatility and better secure our supply chain.
spk03: In terms of the self-sufficiency mining business, the company has always followed the concept of legal compliance. The first batch of machines registered in Singapore's main company was completed in June and started operation in the mining plant in Kazakhstan. The current exchange rate is stable. The second batch of machines with 580,000T computing power is expected to be launched from the factory in the near future. Autonomous mining will become one of the company's strategic business. The future company will continue to expand the scale of autonomous mining under the premise of legal and legal.
spk04: Regarding our self-operated mining, we have been adhering to the business philosophy of operating in compliance with the law and regulations. The first batch of mining machines deployed to Pakistan by our fully-owned subsidy in Singapore has been in operation since early June, and the Bitcoin production is stable. We expect to ship out the second batch of mining machines with a computing power of .85 million terahash per second soon as our self-operated mining business continues to be one of our strategic focuses in the future. We will continue to expand the scale of our self-operated mining business while also adhering to the law and regulations.
spk03: Our R&D expenses reached about
spk04: 64 million RMD, which is 9.9 million US dollars in the second quarter, increasing by 145.4% year-over-year. With the increased investment in the RMD, we have also steadily expanded our RMD team by attracting more talents to join us. As previously mentioned, we have newly hired 45 new technology talents who are mainly responsible for technology management. I see front-to-end design, I see back-end design, and algorithm development.
spk03: We also expect to tape up the next generation chip in the fourth quarter and anticipate to have an overall performance improvement
spk04: of 15% to 20%. In terms of AI disease, We released the Kendrick K510 in July to address the demand of high-end application scenarios, specifically in terms of visual and vocal processing. The Kendrick K510's computing power is approximately three times higher than that of its previous chip generation. We also started our R&D efforts for the K230. This is the next generation AI chip that will outperform our current K210 product.
spk03: We have achieved exponential growth in our overall AI chip sales, which increased by 335% in the first half of 2021 from the same period of last year. Between September 22, 2020 and September 12, 2021, the company has cumulatively deployed approximately
spk04: 9.3 million U.S. dollars to repurchase approximately 2.51 million ADS under the company's share repurchase program, further demonstrating our confidence in China's growth potential. Despite the impact to our business operations from industry-wide cheap supply instability in the second quarter, we still achieved the best of quarterly revenue since our IPO. On behalf of Canon, I would like to take this opportunity to express our sincere gratitude to our partners customers and investors for their support and trust.
spk03: In the meantime, we have further strengthened our senior management team by inviting professionals with global vision
spk04: profound experience, and extensive resources to join Canon. Such efforts have enabled us to optimize our management and operations while also achieving more efficient process management and collaborations among different departments. 接下来公司希望延续上半年的业绩增长势头,为广大投资人带来更多更好的表现。
spk03: Going forward, we will continue to build on our successes in the first half of this year to create increasing value for all of our shareholders.
spk04: We expect that our revenues in the third quarter of 2021 will increase by 10% to 30% on a sequential basis. Please note that this forecast reflects our current and preliminary review on the market and operational conditions, which are subject to change.
spk03: This concludes my prepared remarks.
spk04: I will now turn the call over to our CFO, James.
spk01: Thank you, Mr. Zhang. Hello, everyone. This is James. I joined Canon in early August as a CFO, and I'm happy to communicate with you on our earnings call. We delivered a remarkable second quarter. I wish I were here to witness the progress of reaching the achievement. We realized a record high in multiple financial metrics in the quarter. Specifically, we generated a robust revenue of RMB 1,081.8 million, which means $167.5 million, the highest sales record in our history to date. The impressive top line performance for the quarter sets the solid foundation for our profitability. As such, we achieved a non-GAAP net profit of RMB 245.0 million, 49.6 million US dollars. Once again, demonstrates a historical new height since our IPO. Additionally, our large amount of pre-orders have brought abundant advances from customers. which further generated strong and continuous cash inflow. This enabled us to secure future wafer supply, grow our research and development team, and carry out strategic investments. On top of our encouraging performance, we are also fully aware of some industry-wide challenges. These include Bitcoin price fluctuation, wafer supply instability, regulatory uncertainties in different countries, et cetera. Despite this dynamic, we remain confident in the long-term prospects of the industry. With our technologically advanced precise management of cash flows, solid business operating capabilities, and the efficient execution of strategies, We are ready to zoom along our growth trajectory. Total net revenues increased by 507.3% year-over-year and increased by 168.6% quarter-over-quarter to RMB 1,081.8 million mainly due to the substantial increase in total computing power sold. Cost of revenues increased to RMB 654.6 million. The year-over-year and sequential increases were in line with the increases in the company's terahash sales volume and the cost per terahash. Gross profit was RMB 427.1 million after year over year and up 119.9% quarter over quarter. Total operating expenses were RMB 261.6 million compared to RMB 62.2 million in the same period of 2020 and RMB 207.9 million in the first quarter of 2021. as the company enhanced its investment in R&D efforts and a sales bonus spending during the quarter. Research and development expenses were RMB 64.0 million, increasing by 145.4% year over year and increasing by 10% quarter over quarter. The increase was primarily attributable to the increased headcount in technology-related departments. Income from operations was RMB 165.5 million compared to operating loss in the same period of 2020 and in the first quarter of 2021. Net income attributable to ordinary shareholders reached a new high since the company's IPO to RMB 245.0 million compared to a net loss of RMB 16.8 million in the same period of 2020 and a net income of RMB 1.2 million in the first quarter of 2021. Non-GAAP adjusted net income was RMB 320.1 million compared to a non-GAAP-adjusted net loss of RMB 16.0 million in the same period of 2020 and a non-GAAP-adjusted net income of RMB 143.2 million in the first quarter of 2021. Non-GAAP-adjusted net income excludes share-based compensation expenses and a change in fair value of warrant liabilities. Basic and diluted net earnings per ADS for the quarter were RMB 1.46 and RMB 1.40, respectively. As of June 30, 2021, the company had a cash and cash equivalent of RMB 1,220.2 million, up 211.8%. compared to RMB 391.3 million as of December 31, 2020. This concludes our prepared remarks. We are now open for questions.
spk05: Thank you. We will now begin the question and answer session. For the benefit of all participants on today's call, if you wish to ask a question to management in Chinese, Please immediately repeat your question in English. To ask a question, you will need to press star 1 on your telephone. To withdraw a question, please press the pound or hash key. Please stand by while we compare the Q&A results. Once again, to ask a question, please press star 1 on your telephone. The first question comes from the line of Martin Chan from 10FS. Please go ahead.
spk02: Hello, Mr. Guan. Congratulations on your success. My first question is, we saw that our company has signed a relatively long order, which is a large order of 20,000 plus 18,000 units. I would like to ask if the company has seen any changes in the market with the customers, which made us willing to sign such a long contract. Regarding the price of this long contract, is this machine a fixed price? And is this price lower than the price of a one-time purchase because the order is larger? Let me translate it. We have seen that Canon has signed a long-term sales order with customers. It is because of any change of the market condition. Do you apply a fixed price of mining machine for long-term order? Is the average price of this order lower than the mining machine for one-time purchase?
spk03: Overseas professional institutions have gradually recognized the potential of digital currency. Therefore, the number of institutions involved in the mining of digital currency has increased significantly. These institutions will usually build specialized funds according to the three-year or above operation plan, and then operate the project. At the same time, their mine construction is also based on the season or month plan to start production gradually. Since 2021, we have observed increased recognition of cryptocurrency's growth potential by overseas professional institutions.
spk04: and a substantial increase in the number of institutional players in the cryptocurrency mining business. In general, these institutional players usually set up special funds for their operational plans for a period of three years or longer. They arrange the construction and operation of their mining farms stage by stage on a quarterly or monthly basis. These mining companies are more inclined to cooperate with mining machine suppliers such as Canon, who can ensure a longer-term and steady supply. This is the primary reason for the increase in our long-term orders for mining machines.
spk03: Your next question is based on the current situation, the price gap between the期货订单和现货订单其实是一个随行就市的情况。总体的差距其实在10%到20%,我们会给一些折扣。对于公司来说的话,我觉得还是需要尽量避免市场行情的不确定性对公司经营的稳定性和供应链产生负面的影响。 According to the latest situation,
spk04: We set the prices for our spot sales and pre-orders, referring to market trends. Generally, the price gap is between 10% to 20%. We will also extend some discounts to our clients. From the company's perspective, we need to try our best to avoid the negative impact of market uncertainty on the company's operation and supply chain. At the same time, we would like to grasp the upside momentum when the market is prospering. As such, we have been dynamically adjusting our mining machine allocations among future contract sales, spot sales, and self-operated mining according to market situations, production capabilities, and our client demand. Thank you.
spk02: 我繼續延續上一個問題,因為我們現在手持比較大的訂單。 在這個情況下,我們是否更容易去跟這個晶圓廠拿capacity? 我反映一下。 Do we enhance our capability to secure waiver from our foundry partner because we have bigger orders on hand? 還是我來回答一下這個問題。
spk03: In fact, the company is negotiating with the power plant for the next 9 to 18 months. In other words, they are already talking about the next half of next year. This is the situation now. So I think now, in addition to the power of the power, many investors may ignore the power of the wind circuit. We have also taken a large-scale backup measure. So from the results, from this semiconductor, the production capacity of the entire industrial chain is extremely tight. Now, the production capacity of our company is very good for the industry. Our晶圓 and sealed production capacity are also relatively good. At present, from the production of晶圓 to the complete production of the whole machine, the cycle time can still be controlled at an average of 120 days. There is no obvious lengthening of this situation.
spk04: We are under negotiation with our founding partners regarding wafer production for the actually next nine to 18 months, namely till the second half of next year. Especially, we are also taking measures to secure factory capabilities for the packaging and testing phases of IC manufacturing. which investors typically pay less attention to. In light of the overall instability of production capability throughout the entire IC industrial chain, we believe our production capability and supply chain are well managed. Our production capability allocation for wafer packaging and testing is also reasonable. which enabled us to keep the time of production cycle from wafer to mining machines available for sale to be around 120 days in average. So this has not been prolonged. So far our wafer supply is also relatively stable.
spk02: Thank you. 由於張總是說我們已經在談明年下半年這個晶圓的狀況,所以 I also want to ask about the current situation with all the financial institutions. We also heard that Bitcoin Continent has issued orders to TSMC before. So I also want to know if we have a chance to get as many orders as possible from TSMC. And then, for example, can you tell us more about the current situation with TSMC, Samsung, and TSMC International, or some negotiations? Let me translate it. We have heard about order consolidation from Bitmain. We have chance to get Bitmain's order transfer from TSMC. And the CEO has discussed about the multi-foundry partnership before. And it is still our long-term goal for tenant business development. Could you elaborate on your plan and the current reservation of the foundry capacity from TSMC, Samsung, and SMIC?
spk03: Okay. In fact, Taizhen has a large production pool, but there are a lot of customers. Occasionally, there will be a situation where the production area is empty. I think this is an opportunity for our industry, but this opportunity will only be left to those who are prepared. Speaking of this preparation problem, I think we need to go back to what I said before. What we need in this industry now, in a relatively long period of time, is that we need to use the remaining production power of the advanced manufacturing plants of major energy plants as our main source of production power. This means that our supply is very likely to be unstable, so we need to be prepared. At any time, a certain experience field in the industry can provide this sudden surplus of production capacity. However, this actually consumes a lot of the company's design resources. At the same time, it is necessary to do a lot of design in different industries. This research and development investment may also be a large number. So the company level also needs to be taken into account. In fact, over the past few years, we have been doing this kind of work. So TSMC is a founding partner with large manufacturing capability.
spk04: and also a large number of customers. So there will be excess capacity from time to time caused by occasionally unexpected changes to its capacity allocation. This will be an opportunity for us to leverage its excess capacity if we have prepared properly in our business planning. Here I would like to reiterate what I previously mentioned We need to be well prepared to grasp the output of supply capability from foundry partners. This holds true for the entire industry for a long period of time because we rely on the excess capacity of foundry partners cutting-edge fabrication production lines. In the meanwhile, this long-term market situation requires a substantial allocation of personnel resources to do a large amount of product design work. It consequently requires a substantial investment in the R&D. As a result, we have to evaluate the pros and cons and do tradeoffs to form our operational plan. We have sustained our efforts on this over the past several years. Although we haven't received any verbal or written guarantees from our upstream partners, we are trying our best to secure additional capacity from foundry partners in 2022.
spk02: is there still room for growth? This may also affect whether our company can continue to grow. My next question is about the gross margin. Model 1246 has been mass production for half a year. Have you seen the yield rate continue to climb? Do you see any room for further improvement of 10 and the 1246 gross margin?
spk03: Now our grain rate has increased to more than 90%. So as the grain rate rises, the machine cost will definitely drop. But the other problem is that the price of raw materials in the industry is rising. So part of it is due to the increase in grain rate. That's the situation now. Thank you.
spk04: So currently, our yield rate has increased to over 90%. With the improving yield rate, our product cost has been reduced. However, the overall material price increase across the industry partially offset the gross profit increase. So that's the current situation.
spk02: Thank you. Very clear.
spk05: Thank you. The next question comes from the line of from China Securities. Please go ahead.
spk06: Thank you very much for your introduction. I have a few questions. First of all, I would like to ask about the development of mining. What is the current situation of mining products? Can you update on new product development? When you expect to launch the next generation of machines, what is the expected manufacturing capacity? Who would you work with to produce it? Will you come up with the same boundaries as Model 1 to Model 6?
spk03: As I said before, we will update the chip every 9 months. According to this progress, we will have one to two new products released next year. In the fourth quarter of this year, there will be a new generation of chip chips. The overall performance will increase by 15% to 20% per generation. So we generally have a product iteration every nine months.
spk04: According to this pace, we anticipate to release one to two new products in the next year. And also we expect to tape out our new iteration of chip in the fourth quarter, which is estimated to have overall performance increasing by 15 to 20 percent. We now define a product model according to its computing performance. of the nodes and FAB factories. Additionally, we will speak to our foundry partnership strategy.
spk06: Can you update on the development of self-affiliated mining business? What is the COVID-19 efficiency? Have you entered any challenges for operations?
spk03: Thank you. For the first batch, we registered the main company's machine in Singapore. It started to run in Kazakhstan in June. The current situation is very stable. The second batch is a machine with a power of 850,000 t. It will be released from the factory in the near future. In the first half of the year, I think the sales volume of GT is relatively large. We need to prioritize the delivery of goods to customers, leaving a small amount to Zying. As mentioned earlier, Zying mining will become one of the company's strategic businesses. Therefore, in the future, we will continue to expand our Zying mining scale under the premise of legalization and regulation.
spk04: So the first batch of mining machines deployed to Pakistan by our Singapore subsidy have been in operation since early June, and the Bitcoin production is very stable. The second batch of mining machines with computing power of 850,000 terahash is expected to be shipped out from the factory very soon. The challenge for the first half of this year mainly resulted from the large sales volume of our machines. We actually did prioritize and fulfilled our customers' orders first, and there is not much left over for our self-operated mining. So as we just mentioned in our prepared remarks, The self-operated mining business is becoming one of our strategic business units. We will continue to expand the scale of our self-operated computing power while also adhering to the relevant laws and regulations.
spk06: Thank you. Can you elaborate more on China's investment in Pixelverse? What are your expectations for product synergies for Asian collaboration and revenue contribution?
spk03: We believe that U.S.A. is a company that has been underestimated. In the field of visual imaging, they have a very profound technical foundation. The team experience is also very rich. So, combined with the years of accumulation in the advanced manufacturing of semiconductor, I believe that in the future, both sides will have a lot of potential cooperation opportunities on the products of HAI.
spk04: We believe Pixelwork is an outstanding company that is currently undervalued. They have very strong technology accumulation and extensive experience in the areas of visual processing. We believe with Canon's advanced knowledge and experience in the IC field, there's a great collaboration opportunities in the Edge AI product.
spk03: My current job, in addition to fighting for productivity, the second important thing is to attract more talent and strengthen internal coordination for the company. I think the correct route, high-level talent, and sufficient research and development are essential conditions for our product to succeed. Therefore, in terms of talent selection and reserve, the company has already set up the equity planning plan.
spk04: Yes, we have. Apart from our endeavor to secure production capability, the most important thing in my current job are to attract more talent to the company and to improve our internal synergy. I firmly believe that the current strategy, the correct strategy, high-level talent and sufficient R&D investment are the necessary conditions for the success of our product. So therefore, we have set up an equity incentive plan for the selection and retention of talent and will continue to implement it firmly in the future.
spk06: In the last question, I have a question for Johnson. When do you expect China to achieve its number one market position in terms of mining machine sales, performance, and value for money, and so forth? This question, I think...
spk03: In fact, in the mining industry, the market share rate is one of the company's important strategic goals. It may be one of our mid-term strategic goals. Therefore, I think in order to achieve this overall strategic goal, in our internal industry, the core of the industry is mining performance. including cost, these indicators are actually some of the goals that we have to achieve after doing this target analysis. Therefore, in the corresponding words, there is a huge investment on this research. This huge investment in the supply chain, everyone can actually see some progress. But in fact, I will say a few more words. In fact, I think you definitely hope that we can give a time or something. But I think it's also very important to strengthen our own construction and maintain our own rhythm. We shouldn't take this as our ultimate goal. But in fact, it should be the so-called iron or the self-reliant, or to do your own business and company well. I think it's the most important. Thank you.
spk04: Achieving and sustaining the number one market share position in the mining machine industry is absolutely one of our important strategic goals in the short and medium term. In order to achieve this strategic goal, we have set up sub-goals internally in terms of industry leading performance of mining machines. competitive manufacturing costs and more. So consequently, we have continued to invest significantly in our R&D and the supply chain. And we have made encouraging progress on this front. And ultimately, we believe it's really important for us to adhere to our own pace and strengthen ourselves And we believe we will achieve more over the time. Thank you. Thank you.
spk05: Thank you. As there are no further questions, now I would like to hand the conference back to the company for any closing remarks. Please go ahead.
spk04: Thank you once again for joining us today. If you have further questions, please feel free to reach us through the contact information provided on our website.
spk05: Thank you. That concludes our conference for today. Thank you for your participation. You may now disconnect.
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