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spk03: ladies and gentlemen thank you for standing by and welcome to the canon inc's third quarter 2021 earnings conference call at this time all participants on listen only mode after the management's prepared remarks we will have question and answer session please note that this event has been recorded now i would like to have the conference over to your speaker host today machine Ms. Zhang, Investor Relations Manager of the company. Please go ahead, Ms. Zhang.
spk02: Thank you. Hello, everyone. 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. Nandong Zhang, and our CFO, Mr. Jin Chong, James. In addition, Mr. Xiaoming Lu, our SVP, Mr. Shaoke Li, our Secretary of the Board, Mr. Leo Wang, IR Senior Director, will 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 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 thoroughly explained as reconciled to most comparable measures reported under general accepted accounting principles in our earnings release and findings with the FDC. With that, I will now turn the call over to our Chairman and CEO, Mr. Nandong Zhang. Please go ahead.
spk05: Thank you. In the past three seasons of 2021, after many efforts, the company has achieved many results in this season. This season, the company's sales have been strong. The total revenue of RMB 13.2 billion has increased by 708.2%. with an increase of 21.8% compared to the previous year, achieving the best in history. The profit-saving level has been further expanded, with a profit-saving ratio of 56.3%. The net profit total is RMB 4.7 billion, which has also created the best record performance since its launch. But in fact, due to the change in the policy of this quarter's supervision, and the continued impact on the mining market, our business and operations have overcome a very big challenge. The results in the mirror, in addition to market factors, It is also related to the pre-war layout of the company. Since our listing in 2019, we have started to expand our overseas business strategy. We focus on harmonizing and achieve regional diversification development. We deepen the cooperation relationship with customers, from simply selling mining machines to cooperation digging, expanding the scope and method of cooperation. At the supply end, we continue to maintain a healthy cooperation relationship with suppliers, and strengthen the business negotiation strength. In the process of production of raw materials, we match the standard production capacity and ensure supply. Let me translate. In the third quarter powered by our team's efforts, we have achieved satisfactory results on multiple fronts. We generated
spk02: 1,317.6 million RMB in total net revenues, up 708.2% year-over-year, and up 21.8% quarter-over-quarter, reaching a new historical high. At the same time, our profitability further improved with our gross margin expanding to 56.3% during the quarter. Net revenue totaled RMB 467.2 million, setting a new record since our IPO. To achieve this performance, both our business and operations have overcome significant challenges as the reason-related regulatory and policy changes negatively impacted the mining machine sales market. Besides, the market factors we attribute our accomplishment against the challenges to the visionary and preemptive strategies that our management team has been implementing. Following our IPO in 2019, we have been continuously expanding our business globally and diversifying the geographic presence of our business while upholding our business philosophy of operating in compliance. Moreover, we have deepened our collaboration with some of our key clients, from purely mining machine sales to joint mining, further expanding the breadth and form of our corporation. On the supply front, we maintain healthy relationship with our suppliers, enhancing our discussion and communication, securing capacity from wafer production to packaging and testing, so as to ensure the supply to our own production. As such, we were able to overcome the semiconductor supply instability, as well as the constraints on electricity and international logistics towards the end of the quarter. Importantly, we remain steadfast in bolstering our R&D efforts and attracting elite talent to build our product development team. thereby strengthening our technological capability and consequently our growth.
spk05: 在矿机销售方面,我们在三季度实现 总算力销售670万TH. 创造公司历史最高单季度销售记录,同比增长128.4%,环比增长12.9%。 In the past nine months, our mining machines have directly been distributed to 26 countries and regions. The market area is gradually diversifying, and it has formed the overseas market, which is more concentrated in demand, such as the United States and Kazakhstan. We have seen a number of powerful large-scale mining companies in these markets establish long-term trust cooperation with us many times. In the third quarter, we made 224,000 THB from resale customers. In terms of our mining machine sales, we delivered 6.7 million terahash per second of computing power to our clients during the third quarter of 2021.
spk02: This was an increase of 128.4% year-over-year and 12.9% quarter-over-quarter, marking a new historical high for quarterly sales performance. In the first nine months of 2021, we delivered our mining machines directly to 26 countries and regions. While we are building a geographically diversified business, We also strengthened our foothold in several overseas markets where market demand is more concentrated, such as the U.S. and Kazakhstan. We have received repeat orders from several large-scale mining companies in these overseas markets and established a long-term cooperation with them. 24 million terahash per second of computing power sold was ordered by repeat customers, demonstrating their continued recognition of our product performance, delivery capabilities, and service quality. At the same time, we are in discussion with these clients regarding potential partnerships to expand deeper into the industry value chain through joint mining operations and advocating for renewable energy mining in overseas market.
spk05: The average selling price for ASP of our computing power sold in the third quarter also increased from previous quarter
spk02: We currently expect our ASP to continue to serve as a growth driver for our top-line performance in the fourth quarter, just as it did in the third quarter.
spk05: In the energy supply side, we continue to strengthen our cooperation with Jinyuan Factory and make an agreement on energy supply through the payment method. Through the abundant cash flow brought by the sale of mining machinery and pre-sale mining machinery,
spk02: In terms of our supply chain, we continue to strengthen our cooperation with foundry partners and secure their capacities through upfront payments. Our adequate cash position, which was a result of the thought and future sales of our mining machines, has enabled us to secure a sufficient supply of vapors and production capacity for chips.
spk05: For our Bitcoin mining business,
spk02: We uphold our business philosophy of operating in compliance with relevant laws and regulations, and choose to work with large-scale compliance and solid partners in overseas markets. We are able to leverage our advantages in the supply chain to allocate machines to the facilities of strategic partners with lower electricity costs. Given the industry dynamics, We will adjust our business operations from time to time to implement the most suitable development strategy and seize market opportunities. To do so, we will constantly adjust the allocation of mining machines between sales and the mining business.
spk05: 公司目前已在运营的挖矿算力为3.2万T, 还有85万T已经到达合作伙伴矿场,正在陆续上架上线挖矿。 We are currently operating mining machines with a total computing power of approximately 32,000 terahash per second. We have also delivered mining machines with 850,000 terahash per second.
spk02: computing power to our partners' mining farms and gradually put them into operation. In addition, we have signed contracts with partners for approximately 1 million terahash per second of additional computing power, and we are preparing to ship out these machines to the mining farms by January's end in 2022. Furthermore, we are negotiating with a number of business partners for joint mining projects with a total capacity of about 200 megawatts.
spk05: For our AI business, we have seen a rapid growth momentum in terms of total sales of AI chips.
spk02: which increased by 451% in the first nine months of 2021 from the same period of last year. We have also made solid progress in the research and development of our K230 AI chip. We invested RMB9,276.3 million in the third quarter, which is 188.8% of the total growth.
spk05: In terms of the construction of the R&D team, the company has planned to expand its excellent talent team by strengthening the brand promotion of the company in the field of social skills. The 33 new recruiters account for 19% of the total R&D in the last three seasons. In 2021, the total number of R&D in the third season of the company was 70% as of last year. At the same time, the R&D of the next generation of Bitcoin miners is also in steady progress.
spk02: Our R&D expenses reached an R&D 92.76 million in the third quarter, increasing by 188.8% year-over-year. We have continued to expand our R&D team by recruiting more elite talent through our initiatives to enhance our employer branding efforts directed at experienced talent and campus hire. During the third quarter, we recruited 33 technical staff, accounting for 19% of the total headcounts in our R&D team as of September 30, 2021. Our total number of R&D staff as of the end of the third quarter increased by 70% from a year ago. At the same time, we have made steady progress in the research and development of the new generation of Bitcoin mining machines. After the completion of our previous announced share repurchase program in September 2021, our board of directors approved a new share repurchase program of up to $20 million. As of today, we have repurchased about 0.6 million ADS, in a total amount of over 4.6 million U.S. dollars. We have strong faith in Cadence's growth potential and will remain committed to creating value for our shareholders.
spk05: Despite the changes in policy management in the last three seasons, global semiconductor production is still insufficient, as well as the ongoing challenges of other market environments. During the quarter, we experienced the regulatory changes continue to supply constraints in the global semiconductor industry.
spk02: and other challenges posed by the market environment. However, despite these challenges, we leveraged our team's collective efforts, as well as our effective network of customers and supply partners, to navigate the difficult market dynamics. As such, we delivered a historically best of quarterly performance in the third quarter, based on the foundation of our success in the previous quarter. So I would like to take this opportunity to express my gratitude towards everyone at Canaan for their hard work and dedication, as well as our partners, clients, and investors for their continued support and vote of confidence.
spk05: Going forward through our best endeavors, we aim to sustain our growth trajectory to create increasing value for all of our shareholders.
spk02: We now expect that our revenues in the fourth quarter of 2021 will increase by 35% to 50% on a sequential basis. Please note that this forecast reflects our current and preliminary views on the market and operational conditions, which are subject to change.
spk05: That's all for my introduction. Thank you, everyone. Next, please welcome CFO James.
spk02: This concludes my prepared remarks. I will now turn the call over to our CFO, James.
spk01: Thank you, Mr. Zhang. And hello, everyone. This is James speaking. Q3 was not an easy quarter. However, we still delivered solid performance in this quarter with record highs in multiple operating and financial metrics. I'm glad to share the results to all of you. In the third quarter, we achieved another record high top line result and further expanded our profit level. Specifically, we delivered a total net revenues of RMB 1,317.6 million and yielded a gross profit of RMB 741.7 million with a gross margin of 56.3%. We also reached a new high in our bottom line. with non-gap adjusted net income of RMB 587.5 million. From top line perspective, we delivered a record high computing power sold 6.7 million terahashes. While at the same time, our average selling price per terahash improved by 7% sequentially. Both volume and price increased, which drove revenue to a new level. Looking at our sales pipeline, our pre-orders have retained our contract liability at a high level of RMB $1,026.7 million as of the quarter end, compared with the RMB $430.4 million as of December 31, 2020. Gross profit was RMB $741.7 million compared to a gross loss in the same period of 2020. representing a sequential growth of 73.3%. Here, I do want to note that the demand for and ASPO, our computing power, are meaningfully influenced by the Bitcoin price and its trend outlook, which are difficult to project. On the other hand, we also sensed the pressure from wafer cost increase from our suppliers, which could affect our margin to a certain extent. As such, our gross margin rate is always subject to a combined effect of the volatile factor. As we previously disclosed, we have kicked off our mining business and now we have 32,000 terahashes in the mining operation. As of the third quarter's end, we were holding 23.86 bitcoins. Please be advised that our mining income and the crypto currencies are initially recorded at the price when we generate them through our mining operation. Our digital assets are recorded on the balance sheet, net of any impairment losses incurred since initial recognition. Gains are not recorded until realized upon disposal of such digital assets. Therefore, The digital assets value on our balance sheet does not reflect its value appreciation in case of an increase of Bitcoin price. Regarding the plan of our mining business, as Mr. Zhang just shared, we now also have 850,000 terahashis computing power under deployment in Kazakhstan. We are under discussion with a few partners to secure additional power and operating capacity. Looking forward, we will continue to allocate Bitcoin mining machines to our mining business sector, and we will continuously disclose the progress. Research and development expenses were RMB 92.8 million, increasing by 188.8% year over year. The increase was primarily attributable to the increased staff costs in technology-related departments, as well as the incremental development costs for new products. We will continue to invest in R&D. With respect to our expense management, we will closely monitor the ROI on different projects. We have incurred a minimal income tax expense in the third quarter. I'd like to note, since we are going to use up the deferred tax assets generated by accumulated operating losses from previous quarters, we expect to incur substantial income tax expenses for our profitable quarters going forward. Overall, While we delivered solid results for the quarter, we are not resting on our laurels. We do note the risks and the volatilities of our normal life in this rapidly developing industry. We endeavor to proactively manage the risks with our agile operating strategies. Now, I would like to briefly walk you through our financial results for the quarter. Total net revenues increased by 708.2% year-over-year and increased by 21.8% quarter-over-quarter to RMB 1,317.6 million. Gross profit was RMB 741.7 million, up 73.3% sequentially. Total operating expenses in the third quarter were RMB 278.4 million compared to RMB 75.9 million in the same period of 2020 and RMB 262.4 million in the second quarter of 2021. Income from operations was RMB 463.3 million, up 179.9% sequentially. Net income attributable to ordinary shareholders was RMB 467.2 million, up 179.3% sequentially. Non-GAAP adjusted net income was RMB 587.5 million, up 83.6% sequentially. Non-GAAP adjusted net income or loss excludes share-based compensation expenses. Basic and diluted net earnings per ADS for the quarter were RMB 2.68 and RMB 2.64, respectively. As of September 30, 2021, the company had cash and cash equivalents of RMB 1,698.5 million, up 334%, compared to RMB 391.3 million as of December 31, 2020. This concludes our prepared remarks. We are now open for questions.
spk03: Certainly. Participants who wish to ask a question, please press star 1 on your telephone keypad and wait for your name to be announced. To cancel your request, Please press the pound or hash key with star followed by 1 to ask a question. Your first question comes from the line of Martin Chin from Tenacet. Please go ahead.
spk04: 可以。 首先非常恭喜有強勁的Q3業績及Q4的指引。 I'd like to ask Mr. Zhang first. Mr. Zhang has just mentioned that the mining industry in Q3 has still been hit by a relatively large policy impact. I'd like to know how big is your impact on the entire market and how big is the impact on the performance of Jialan in Q3? For example, can the order of domestic businesses be transferred to our foreign customers? Let me translate it. First, congratulations for the very strong Q3 earnings and Q4 guidance. And the CEO already mentioned that Chinese government tightened the regulation and the act for the shutdown of mining operation in mainland China. In your view, what's the impact on the cryptocurrency mining industry and how it impacts tenant sales in Q3? And can these orders can be transferred to the overseas customers.
spk05: In terms of the net profit and loss statistics, at the end of the third quarter, the net profit and loss in mainland China has basically dropped. In terms of the subsequent net profit and loss changes, most of the net profit and loss has been transferred overseas.
spk02: If we look at the computing power statistics of the Bitcoin network, by the end of the third quarter, basically all the computing power from mining farms in mainland China have been removed. Afterward, most of the discontinued mining farms, along with their computing power, had relocated to overseas markets. However, as of now, the Bitcoin network's total computing power still has not recovered to its highest level in the industry.
spk05: These things have had a certain impact on the short-term market of Bitcoin. But from the current price of Bitcoin, it has basically lost ground.
spk02: So this market development resulted in short-term volatility in the price of Bitcoin. However, we can see that Bitcoin price has fully recovered from the temporary losses as of now.
spk05: This is the third quarter, and it has made rapid reactions and adjustments. Calculations are moving overseas and the demand of the entire market has returned to the peak of growth. We have also observed that many overseas-based funds are setting up overseas mines. The financing environment of overseas mines is also improving, and the demand for calculation is also relatively stable.
spk02: Specifically, although recent regulatory changes created a certain level of negative impact to the sale of mining machines in the short term, the market had already reacted and adjusted in a timely manner during the quarter. As industry players reallocated their discontinued computing power to the overseas market, the overall global demand for mining machines resumed its upward trajectory. We have also observed that the financing environment for miners in overseas markets is improving. A lot of large-scale overseas funds are actively investing in mining farms. So overall, the demand for the computing power is relatively stable. 另外,本季度公司的财务数据保持着高度增长的势头。
spk05: Additionally, our financial performance maintained robust growth momentum in the quarter, as you can see, and we anticipate even higher sequential growth in the fourth quarter.
spk02: As such, we believe our preemptive measures to expand our business footprint in the overseas market have enabled us to offset the impact of dramatic regulatory changes. So, I hope I answered your question. Thank you.
spk04: Thank you. Mr. Zhang just said that we have already locked some of the gold. I'd like to ask, what is the cooperation situation with the gold industry like next year? Can you tell us about it? For example, the production capacity, cost, or the yield, and then the nodes, is it still 7 nanometers next year? Or is there a chance of entering 5 nanometers? In addition, the supply chain seems to continue to be more tense, maybe by the end of 2022, according to the industry's information. So I don't know if we are facing a price drop here. Let me translate it. CEO already mentioned that Canon already locked some wafer and could you elaborate more on your collaboration with your foundry partner in 2022 and in terms of the cost collaboration and technology node and the yacht and do you expect the increase of the price of wafer in the next year due to the sustained supply constraints?
spk05: We have implemented a multi-fundraising strategy and established a long-term partnership with multiple major fundraisers. Our smooth cooperation with these fundraisers in turn
spk02: has secured a stable wafer supply for our production. As our yield will continue to improve in 2021, we are able to ensure the performance of our mining machines while improving our production capacity. We have also been proactively seeking additional production capacity to meet the increasing demand from our clients. So with one of our founding partners, for example, we have secured waiters' supply through prepayment till June 2022.
spk05: On the other hand, we are continuing to make improvements in the existing process. The yield has reached a satisfactory level, especially in the whole process, such as air-conditioning, machine board testing, and so on. There is a slight sense of yield.
spk02: So on top of that, we continue to refine the fabrication process and the improvements in our yield rate have been encouraging. So not only we have achieved slightly higher yield rates in all processes throughout the fabrication line, such as packaging, circuit board, and testing. As a result, we were able to improve the overall product yield, and that's our growth margin in the third quarter.
spk05: At the same time, we have to see that the production of semiconductor is still tense. As an industry-leading energy industry, it is in a sell-off market where it should not be. So, in fact, the price increase is a general phenomenon and it is inevitable. Under the conditions of poor environment, the company will use this flexible business negotiation as a strategy. The purpose is to continue to ensure the supply of our experience. Of course, these flexible strategies also include accepting the price increase under certain conditions to ensure the productivity of our country. With the price increase of the entire semiconductor industry, Meanwhile, we have to recognize that the continued industry-wide supply constraint is
spk02: Creating a seller's market consequently increases in vapor price a natural and inevitable from founding partners who are positioned in the upper stream of the industry value chain. So against the backdrop of unstable vapor supply, we are discussing a series of flexible strategies with our founding partners to secure our vapor supply. These strategies also include accepting price increases under certain conditions to ensure our supply. As the price of vapors increases throughout the semiconductor industry, we will continue to negotiate future vapor prices with foundry partners. We believe that a reasonable range of price increases will further solidify our operations. In 2022, we will continue to upgrade our fabrication process and improve the performance and cost efficiency of our products. So I hope I answered your question. Thank you.
spk04: Thank you. Next, I would like to ask about mining business. We have heard that there may be some new policies to limit mining. I don't know if the company has heard of any relevant information, and do you expect this to have a major impact on our future mining business? I saw the new policy of the Holocaust Foundation.
spk05: I think these new policies are conducive to the continued development of the legal mining industry in the country. According to this new policy, only mining companies authorized by the Kazakhstan government can enjoy the support of electricity and power. Recently, I have been talking to our customers in Kazakhstan for a while, and the result is that this policy is conducive to doing this business with a relatively large number of companies with technical and financial strength. At present, the top three companies in the country have already obtained a large amount of funds from the local energy ministry. This guarantees our business development in the country. On the other hand, this policy actually effectively prevents some unethical small and medium-sized mining companies from this kind of speculative behavior or disturbing the market. I think it is also conducive to our difficult health development in Afghanistan.
spk02: Yes, we did notice the recent policies in Kazakhstan and believe these policies will promote the sustainable development of the cryptocurrency mining in the country. Under the new guidelines, mining companies need to obtain an approval from the Kazakhstan government in order to secure electricity supply. We have learned from our recent communications with our customers in the country that large companies with technology capabilities and sufficient funding will benefit from this policy. Our current top three customers in Kazakhstan are also large-scale companies. who have obtained the necessary tools from the Kazakhstan Ministry of Energy to conduct mining business, therefore ensuring our business development in the country. From another perspective, the promulgation of this policy will effectively prevent unqualified and small mining companies from conducting speculative at the market disturbing activities, and in turn benefit our development in the Kazakhstan market.
spk05: In addition, it should be noted that our overseas market has never been only one market. Our current market covers Central Asia, Southeast Asia, Europe, America, and North America. Especially now, the North American market is close to 30% of the overseas market. The North American customers who have long-term cooperation with us are mostly from the private sector.
spk02: So I would like to point out that our global operations reach far beyond capacity as we have already established a foothold in Central Asia, Southeast Asia, Europe, and North America. Most notably North America is accounting for approximately 30% of our overseas market, with the majority of the long-term customers being publicly traded companies. This company includes Molson, Iris Energy, and Hive blockchain. Thank you. Hope I answered your question. Thank you.
spk04: Thank you. Could you elaborate more on your income and the profit of your mining business and the How will your holding and trading of Bitcoin strategy to influence your financial statement in the future?
spk05: In the early stages of the legal and regulatory framework, the company was more cautious in exploring and digging mines. At the beginning, our operations are 3.2 trillion T. After years of exploration and learning, we have now gone through the operations at the legal, tax, and business levels. At present, 850,000 T has already reached the cooperating mining plant. Now, we are continuously pricing and mining. In addition, about 1 million T of computing power has been signed. The preparation is to launch the production site before the end of next year.
spk02: It is worth reiterating that compliance with relevant laws and regulations is the foundation on which we export our mining business in overseas markets, with extreme caution at the early stage. We are currently operating mining machines with a total computing power of approximately 32,000 terahertz per second. After the initial trial and testing process for six months, we can now effectively execute many aspects of the business, such as legal, tax, and operations. In addition, we have delivered mining machines with 850,000 terahash computing power to our partners' mining farms, which are being set up for operation. We have also signed contracts with mining partners for approximately 1 million terahash per second of additional computing power and scheduled the shipment of these mining machines by the end of January of next year. Furthermore, we are negotiating with a number of North American business partners for joint mining projects in North America, with a total electricity consumption capacity of 200 megawatts. On September 30, the company's持有比特币是23.86枚。目前公司的策略是指持有比特币。 As of September 30, we hold 23.86 bitcoins. Our current strategy is to hold our bitcoins and we will not trade them in the short term. However, we do not rule out the possibility of trading them in the future.
spk05: According to the relevant accounting decision, the value of Bitcoin held in our asset portfolio is recorded according to the value of the coin when it was originally obtained. The following regular evaluations are carried out. If the value of the coin when it is evaluated falls when it is obtained, it will record the loss of Bitcoin value in the asset portfolio. If the value of the coin when it is evaluated rises when it is obtained,
spk02: So according to the accounting standard, the value of Bitcoin we hold is recognized at the historical cost when we acquire the asset on the balance sheet. For subsequent valuation, we recognize impairment losses If the assessed value is lower than the initial cost, if the value goes up in the follow-on assessment, we do not record any gains on the balance sheet. Only when the big points are sold will we recognize the actual gains realized. Thank you. Thank you.
spk04: Thank you. My last question is, can you tell us how much mining cost is in the third quarter? And my last question is about the tenant's mining cost in the third quarter.
spk02: So the cost of mining in the pilot run stage in the third quarter was about 39% of mining revenue, and the gross margin was 61%, which is slightly higher than the gross margin of our sales of mining machines. However, going forward, For different collaborations, the growth margin will continue to be subject to change in the price of Bitcoin when it is harvested. Electricity changes and these different ways of collaborating with mining partners.
spk05: Thank you.
spk03: Thank you. Thank you. Once again, if you wish to ask a question, please press star 1 on your telephone. Thank you. If there are no further questions, I would now like to turn the call back to the management for any closing remarks.
spk02: 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.
spk03: Thank you. That concludes the call today. Thank you, everyone, for attending. You may not disconnect. Thank you all.
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