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spk10: Ladies and gentlemen, thank you for standing by and welcome to Canaan Inc's second quarter 2022 earnings conference call. At this time, all participants are in listen-only mode. After the management's prepared remarks, we'll 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, Mr. Clark Soucy, Investor Relations Director of the company. Please go ahead, Clark.
spk11: Thank you. 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. Nangong Zhang, and our CFO, Mr. Jincheng James. In addition, Mr. Edward Liu, our SVP, Mr. Leo Wang, IR Senior Director, and Ms. Shi Zhang, IR Manager. will also be available during the question and answer session. Mr. Chong will start the call by providing an overview of the company and performance highlights for the quarter. Mr. Chong will then provide details on the company's operating and financial results for the period before we open up the call for your questions. Before we continue, I would like to refer you to our safe harbor statement in our earnings press release. Today's call will include forward-looking statements. These statements include, but are not limited to, our outlook for the company and statements that estimate or project future results of operations or the performance of the company. These statements speak only as of the date hereof, and the company assumes no obligation to revise any forward-looking statements that may be made in today's press release, call, or webcast, except as required by law. These statements do not guarantee future performance and are subject to risks uncertainties, and assumptions. Please refer to the press release and the risk factors and documents we file with Securities and Exchange Commission, including our most recent annual report on Form 20F, for information on risks, uncertainties, and assumptions that may cause actual results to differ materially from those set forth in such statements. In addition, during today's call and webcast, we will discuss both GAAP financial measures and certain non-GAAP financial measures. which we believe are useful as supplemental measures of the company's performance. These non-GAAP measures should be considered in addition to and not as a substitute for or in isolation from GAAP results. You can find additional disclosures regarding these non-GAAP measures, including reconciliations with comparable GAAP results in our earnings press release, which is posted on the company's website. With that, I will now turn the call over to our chairman and CEO, Mr. Nangong Zhang. Please go ahead.
spk07: the mining income of Bitcoin miners and the demand for mining machines have been further impacted. The power-saving power has also dropped. The company's main office is in the domestic city. The recurrence of the epidemic and the large-scale lockdown and the better coordination of measures have brought a certain negative impact on the operation and management activities of our record. In the context of the negative impact of the above, our team is facing difficulties. In the effort to ensure that employees' material supply and During the second quarter of 2022, under the combined influence of two rounds of interest hikes by the Federal Reserve,
spk11: the Bitcoin price continued its downward trajectory, declining to about $20,000 from $45,000. A surge in energy prices caused by geopolitical conflicts further impacted both mining income and demand for mining machines. The situation thus led the Bitcoin network's total computing power to decline slightly. At the same time, the cities where our main offices are located experienced a resurgence of the COVID-19 pandemic with accompanying large-scale lockdowns and pandemic control measures. This combination of factors negatively impacted our operations during the quarter. Despite this unfavorable backdrop, our team successfully navigated through the difficulties posed by the challenging environment. As well as ensuring that our employees remained healthy and were supplied with daily necessities, we continued to fulfill our clients' orders, achieving 5.5 million terahash per second and total computing power sold. Coupled with the contribution from our steadily developing mining business, we generated total revenues of 1.65 billion RMB for the quarter, meeting our previous expectations. Notably, we achieved a net profit of 609 million RMB in the second quarter.
spk07: The total turnover is about 1.5 million t, and the sales business has contributed a revenue of RMB 16.0 billion. We will continue to promote the growth of the total revenue, which has increased by 48.6% and increased by 21.1%. We will do our best to meet the needs of each customer. In the face of the online shopping of overseas retail customers, since the beginning of May, we have started to receive orders from international retail customers. As the customer base is moving overseas, we are also working hard to build similar support measures. The company has already established a local research, development, and sales team for the overseas region headquarters in Singapore. And in this quarter, it has achieved the initial opening of production, assembly, warehouse, and logistics operations. It has become the second comprehensive office of the company. I believe this will bring strong support to the company's overseas business.
spk11: In regard to the sale of mining machines, we continued to work closely with our customers during the quarter. We delivered a total of 5.5 million terahash per second computing power, generating revenues of RMB 1.6 billion. Sales of mining machines continued to drive the growth of total revenues, which grew 48.6% year over year and up 21% quarter over quarter. We strove diligently to fill the demands of all of our customers. Following the launch of our online store for overseas retail customers in late May, we have received orders from all over the world. As our customer base shifts to overseas markets, we work tirelessly to build and expand supporting systems. Our overseas headquarters in Singapore has already established R&D, finance, and other operational teams and launched a supply chain system that encompasses assembly, warehousing, and logistics in this quarter. With comprehensive operational functions, our Singapore headquarters has become a second general office and will provide valuable support for our overseas operations.
spk07: By the end of the second quarter of 2022, the company's return on sales will be 4.75 million T, and the revenue will be RMB 10.2 billion. Although the revenue order will lay a certain foundation for our next short-term revenue, As of the end of the second quarter of 2022,
spk11: we had a total of 4.75 million terahash per second of computing power to be delivered and customer advances of 1.02 RMB billion on hand. Although contract sales orders set a considerable foundation for our upcoming short-term revenue, we are also fully aware that the Bitcoin price remains under pressure while energy prices are increasing. As such, mining companies' revenues and financials are expected to come under significant pressure. Considering these factors, we expect that demand for computing power will weaken over the next one to two quarters, which will negatively affect our sales revenue in the second half of 2022.
spk07: Although the industry is experiencing a downturn, we are still working on the long-term development of Bitcoin and its blockchain technology and super-computer technology. We are also continuing to develop and optimize the public chain, Although our industry is experiencing a challenging period
spk11: We still retain our confidence in the long-term prospect of Bitcoin and its underlying blockchain and supercomputing technology. We continue to invest in research and development, improve our supply chain capability, and work diligently to deliver superior products with high quality and advanced performance to the market and our customers. Our research and development for the next generation of mining machines is progressing smoothly. Currently, we have reached the critical stage of progressing towards mass production. Due to various uncertainties throughout the research and development and mass production process, it is necessary for us to wait until we have the testing results before we disclose the specific performance parameters of our new generation of mining machines.
spk07: In history, no matter how much Bitcoin has grown, In retrospect, no matter the upside or the downside cycle of the Bitcoin price, we have always insisted on investing in research and development
spk11: Although the Bitcoin price is currently experiencing turbulence, we still believe that Bitcoin will present more value in the future. At the current stage, launching the next generation of mining machines and delivering through mass production are paramount for our innovation and R&D efforts. Our new products will help clients further enhance mining efficiency, better prepare future challenges, and obtain more returns.
spk07: In the mining business, under the backdrop of the fluctuation of the price-to-market trend, it is very important to continue to operate the mining business in overseas. Due to the improvement in the situation of charging, the company's mining business has produced 245.11 BTC during this period. Until the end of the year, it held 346.84 BTC. Although the price has dropped in this quarter, the mining revenue has still passed Given the current environment characterized by downward fluctuations in the Bitcoin price, it's particularly important to insist on flexibility
spk11: and nimbly developing our mining business overseas. During the quarter, thanks to our improved electricity supply, we mined 245.11 Bitcoins, and we have a total of 346.84 Bitcoins on hold by the end of the quarter. Although the Bitcoin price continues to decline during the quarter, we still generated mining revenue of 52.1 million RMB. representing quarter-over-quarter growth of 60.9%. Faced with such an unfavorable market environment, we are currently exploring more opportunities for regional diversification of our mining business. We are forging partnerships in North America, Southeast Asia, and other regions so as to expand our business scale and lower costs.
spk07: The company's AI chip sales, due to the COVID-19 lockdown in some major cities in this quarter, which has slowed down the supply and demand of consumer products from the downstream, have affected AI chip sales in the second quarter. With the improvement of the lockdown in the third quarter, the downstream market has also begun to recover, and we have been able to improve the sales of AI chip sales by strengthening the strength of our AI chip sales. Recently, our K510 CRB developer has passed Amazon's AWS IoT cloud certification. Through our technical consultation support, customers can more conveniently integrate AWS IoT service software into the K510 chip platform, and develop products based on AWS IoT services quickly. At the same time, after certification, K510 developer products have already been displayed on the AWS website, which has further improved the brand's awareness.
spk11: Let's now turn to our AI chip business. As a result of the COVID-19 control measures implemented in major cities during the quarter, downstream manufacturers had slower inventory turnover for consumer products, which negatively impacted our AI chip's business revenue in the second quarter. As the pandemic control measures are gradually eased in the third quarter, downstream clients have enjoyed better sales and started to build up their inventories again. Simultaneously, we have further strengthened the sales efforts for our AI chips, and our sales have now begun to recover. Recently, our K510CRB Customer Reference Board Development Kit obtained Amazon's AWS IoT Core certification. Through our technology reference support, it became easier for our clients to integrate AWS IoT service software on the K510 chip platform. and develop products based on the AWS IoT service. At the same time, obtaining the certification allowed our product to be displayed on the AWS website, further increasing our brand recognition.
spk07: This quarter, the company has implemented a $1 billion per share return plan for 24 months. As of August 12, 2022, more than 2.8 million shares of ADS This quarter, we also made decisive progress on our share buyback program approved in March, under which we may repurchase up to $100 million worth of our outstanding $80 million
spk11: over the next 24 months. As of August 12, 2022, we have repurchased over 2.1 million ADS for a total of 10.3 million U.S. dollars with an average price of 3.63 U.S. dollars per share, which is lower than the current stock price. Our execution of this repurchase program demonstrates our strong determination to continually increase shareholder value and our confidence in the company's long-term outlook. On June 23rd, 2022, we announced the repurchase agreement with certain warrant holders to repurchase all outstanding warrants for an aggregate price of approximately 6.61 million US dollars. We have made the payments in full. Upon the completion of warrant certificate cancellation, our outstanding ADS will be reduced by 4.72 million. We will discuss in due time when the cancellation process completes. We didn't execute any financing activity during the quarter. Considering the current market environment and our stock price that is under pressure, we will be focusing on the repurchase program as the core of our capital market operations.
spk07: In addition, we have noticed that the investors are concerned about the loss of risk caused by the Chinese stock market. The company is actively seeking possible solutions to protect the interests of shareholders, and try to maintain the status and credibility of the listed companies to promote the long-term development of the company. As a listed company that mainly exports overseas,
spk11: I would also like to acknowledge that investors have raised concerns over the delisting risk of our company under the Holding Foreign Companies Accountable Act. We have been actively exploring possible solutions to protect the interest of our shareholders and other stakeholders. We are taking every step to maintain our listing status and the advantage in compliance as a listed company to promote the long-term development of our firm. As a public company with the majority of revenues generated overseas, we will further strengthen our governance and operations capabilities to comply with applicable laws and regulations in different locations and maintain active communications with capital markets.
spk07: In the second quarter, both the COVID-19 pandemic in China and the global economic and economic environment, as well as the decline in the price of bitcoins, have brought us a lot of resistance. In such a challenging situation, we are working hard to maintain cooperation with our top and bottom companies, and have achieved an unprecedented stable performance. However, we have also noticed that the environment of price drop and energy price rise is still very severe.
spk11: During the second quarter, our business faced several concurrent headwinds, including further outbreaks of COVID-19, a volatile geopolitical and economic environment, and a downward trend in the Bitcoin price. Against this uncertain backdrop, we relentlessly maintained our communication and collaboration with upstream and downstream partners and performed steadily despite these challenges. However, we are aware that macro adversities, particularly the decline of the Bitcoin price and rising energy costs, have pressured the entire Bitcoin mining industry, seriously impacting miners' demand for computing power for some time in the future.
spk07: Therefore,
spk11: We expect our performance to come under further pressure during the upcoming one to two quarters. Based on our current view, we expect our total revenues in the third quarter of 2022 to be in the range of 900 million RMB to 1.1 billion RMB, representing a decrease of 17% to 32% compared with the third quarter of 2021. Please note that this forecast reflects our current and preliminary views on the market and operational conditions, which are subject to change.
spk07: Since the establishment of Canaan, it has been nine years. We have gone through several B2B price cycles. Our management team has some experience in dealing with price drops. As a responsible enterprise, when the market is on fire, we will also keep an eye on the market. but sacrifice their wealth for the sake of short-term expansion. Therefore, the company has no temporary debt, and the mining and encryption assets are not set up. In addition, the current cash flow allows us to steadily advance the company's various strategies in the currently unfavorable market environment, and protect employees and partners, so that the company's products and services can continue to improve.
spk11: It has been nine years since our inception, and during that time, we have been through multiple Bitcoin price cycles. Our management team has a good amount of experience operating in market environments where the Bitcoin price is declining. As a responsible company, we always keep respect for the market. Even in bullish times, we didn't expand at the expense of balance sheet health. As such, now we do not have interest-bearing debt. and our mining machines and cryptocurrencies are not collateralized. These financial advantages, along with our current cash position, allow us to steadily push forward our business strategies despite unfavorable market environments and protect our employees and partners while continuously improving our products and services.
spk07: Every time the market goes down, it is a good time for us to fully expand the market, open up and optimize the logistics and supply chain. In the current period, we will further enhance the expansion of our business, strengthen the construction of our service system, and prepare to serve our customers better. At the same time, we will actively develop mining and mining businesses and promote the communication between mining and sales and mining businesses.
spk11: When the market enters a downswing, it also provides a good time for us to sharpen our new products, steadily develop our markets, and grow and optimize our supply chain and logistics. At the same time, we continue to expand our business internationally and strengthen our after-sales service system to better serve our customers. Furthermore, we will retain the agile and flexible operating strategy when prudently developing our mining business. while enhancing synergies between our machine sales and mining business. This concludes my prepared remarks. I will now turn the call over to our CFO, James.
spk16: Thank you, Mr. Zhang. And good day, everyone. This is James.
spk17: In the second quarter of 2022, we reported the total revenues of RMB 1,652.7 million, representing 21.9% quarter-over-quarter increase, and 52.8% year-over-year growth, meeting our guidance range. During the quarter, the Bitcoin price further sank to below $20,000 from about $45,000 in late March. Despite this soft market, sentiment, we strive to achieve this top-line performance, primarily due to the delivery of 5.5 million terahash per second of computing power for our clients. The relatively high average selling price we secured with contract sales in previous quarters also contributed to the top-line results. Our AI chips business recorded a revenue of RMB 1.6 million for the quarter due to soft demand from integrated product providers, e.g. our customers. This is because they stocked up electronic product inventories that embed our chipset during the quarter when the pandemic-related lockdown negatively impacted their supply chain and the consumption of these retail electronic products. As the pandemic quarantine control measures gradually eased, and retail started to recover. We are having more progress in our AI chip sales in July and early August. Our mining business, with an improved power supply, generated 245.11 Bitcoins in the second quarter, which contributed 52.1 million RMB in revenue, representing a sequential revenue increase of 60.9%. we had 346.84 bitcoins on hold as of the quarter's end, compared with 166.96 bitcoins as of March 31, 2022. Due to the ongoing energy instability, a portion of our deployed mining machines have not been consistently online, and we are facing increasing energy costs for our operations. Under the evolving market environment, we are prudently exploring other geographical regions with favorable mining conditions to diversify our operations. Above all, our gross profit for the quarter increased by 12% sequentially and 117.3% year-over-year to RMB 929.7 million. As a result of the complex effect of slightly decreased average selling price and increased product cost due to waiver price rise, our gross margin for the quarter narrowed to 56.3% from 61.2% in the first quarter of 2022. In the second quarter, we continued our efficient expense management with consistent investment in research and development. Notably, we have built an R&D team at our Singapore overseas headquarters by leveraging the advantage of local talent. From profit and loss perspective, we have several material non-operating items related to accounting treatments for the quarter. First, we incurred a $30 million R&D impairment for our cryptocurrency assets in the quarter due to the Bitcoin price decrease compared with the first quarter's end. I would like to reiterate that Bitcoins are initially recorded at the price when we generate them. Our digital assets are recorded on the balance sheet, net of any impairment losses incurred since initial recognition. Scans are not recorded until realized upon disposal of such digital assets. Secondly, during this quarter, due to the depreciation of RMB against the US dollars, we also recorded a foreign exchange gain of RMB 114.3 million. As almost all of our revenues were generated from overseas markets in US dollars, Should the RMB appreciate against the U.S. dollars in the future, we expect to incur corresponding foreign exchange losses. Last but not least, the change in fair value of RMB appreciates against the U.S. dollars in the future, we expect to incur corresponding foreign exchange losses. Last but not least, The change in fair value of warrant liability brought us a gain of 25 million RMB in the second quarter. As we completed the repurchase of all outstanding warrants in late June, we don't expect any gains or losses from such fair value change in the foreseeable future. As a result of foregoing, we realized a solid net income of 608.9 million RMB for the second quarter, achieving 37.9% increase quarter over quarter and 148.6% growth year over year. Turning to our balance sheet, as of the end of the second quarter, we have customer advances of 1,017.5 million RMB Together with our cash generated from product sales, we have an aggregate of 2,640.7 million RMB in cash and cash equivalent as of June 30, 2022, maintaining relatively flat compared with the end of the first quarter. Our cash level provides us with a solid position to navigate challenging market environments, enables us to carry out prudent exploration in expanding our global presence and continues our share repurchase program. As of August 12, 2022, we have repurchased a total of 2.8 million ADSs with an aggregate value of 10.3 million US dollars and an average repurchase price of 3.63 US dollars per ABS under our current stock reach purchase program approved in March 2022. This stock buyback demonstrates our firm confidence in the company's long-term growth prospects. Moreover, as mentioned earlier, we reached an agreement with our warrant holders to repurchase all 4.72 million outstanding warrants in late June for an aggregate of $6.61 million. The repurchase of outstanding warrants enables us to capitalize on the current valuation and grants us more financing flexibility in the capital markets in the future. Under the current market environment, we will continue our conservative approach in the capital market and prioritize the share repurchase program to drive value for our shareholders. Looking forward, we see that the continued lower Bitcoin price level coupled with increasing energy costs and logistics expenses has significantly jeopardized our clients' demand and their cash flow. But we expect a considerable decrease in both product orders and average selling price. Taking into account the relatively high level of production costs, we expect an inevitable gross margin decrease in the second half of this year. Subsequently, we expect our bottom line performance to experience a substantial decrease or even loss making in certain scenarios if the Bitcoin price continues to fluctuate at a low price level. Maintaining respect for the market We will continue our prudent and agile operating strategy to navigate the current market dynamics and strengthen our supply chains and develop advanced new products for future opportunities. Now I would like to briefly walk you through our financial results for the quarter. Revenues in the second quarter of 2022 were RMB $1,652.7 million, $246 representing an increase of 21.9% compared to the first quarter and an increase of 52.8% from RMB 1,081.8 million in the same period of 2021. Gross profit in the second quarter of 2022 was RMB 929.7 million which means US dollar 138.8 million, representing an increase of 12% from 829.8 million in the first quarter of 2022, and an increase of 117.3% from RMB 427.9 million in the same period of 2021. Total operating expenses in the second quarter of 2022 or 270.5 million RMB, which means 40.4 million US dollars, representing an increase of 7.7% from 251.2 million RMB in the first quarter of 2022, and an increase of 3.1% from 262.4 million RMB in the same period of 2021. Income from operations. in the second quarter of 2022 was 659.3 million RMB, which means 98.4 million US dollars, representing an increase of 13.9% from 578.6 million RMB in the first quarter of 2022, and an increase of 298.4% from 165.5 million RMB in the same period of 2021. Net income attributable to ordinary shareholders in the second quarter of 2022 was 608.9 million RMB, which means the 90.9 million US dollars representing an increase of 37.9% from 441.6 million RMB in the first quarter of 2022, and an increase of 148.6% from 245 million RMB in the same period of 2021. Now GAAP adjusted net income in the second quarter of 2022 was 688.2 million RMB, US dollar 102.7 million, representing an increase of 26.6% from 543.4 million RMB in the first quarter and an increase of 115% from 320.1 million RMB in the same period of 2021. Basic and diluted net earnings per ADS for the quarter were RMB 3.53, which means 0.53 US dollars. Country liabilities as of June 30, 2022 were 1,017.5 million RMB, 151.9 million US dollars, decreasing from 1,340.7 million RMB as of December 31, 2021. This concludes our prepared remarks. We are now open for questions.
spk10: We will now begin the question and answer session. As a courtesy to other investors and analysts who may wish to ask a question, please limit yourself to one question at a time. For the benefit of all participants on today's call, if you wish to ask your question to management in Chinese, please immediately repeat your question in English. To ask a question, you'll need to press star 1 1 on your telephone and wait for your name to be announced. Please stand by while we compile the Q&A queue. Thank you. We'll now take our first question. Please stand by. First question is from the line of... Yes, Jia Xu from China Related Securities. Please go ahead.
spk09: Yes, Jia Xu from China Related Securities. Please go ahead. We see a significant decline in the Bitcoin price during the first quarter this year. I want to know, are there any large customers who will cut orders? And what is the impact on the outlook of the demand, gross profit margin, and ASP for the second half of this year? And how do we react to this down cycle and further expand our OSCE market? Thank you.
spk07: Let me answer this question. The company's flagship sales are all in the form of receiving and receiving funds. Customers usually need at least 50% of the supply to lock-in our mining products. So by the end of the second quarter, our revenue will be 17 billion RMB. At present, we do not have the situation where the customer is asked to pay. We have always been an important sales model. So after we negotiate with our customers about the price, we set a price to lock-in the order of the future delivery. Our future contract sales require our clients to prepay at least 50% of the total payment to secure mining machines. By the end of the second quarter, our customer advances reached one point
spk11: So far, we have seen very limited cases of payment defaults. Future contract sales have always been a part of our business model. We negotiate contract sales with clients to lock in prices for orders to be delivered in the future. The business model has been acknowledged by both our clients and us. Even when the Bitcoin price soars, we will still deliver mining machines at predetermined prices.
spk07: Our current reserve funds have laid the foundation for the third quarter of sales. However, we also see that due to the impact of the low price drop and the increase in energy prices, there is indeed a sharp decline in the demand for computing power deployment. We have also made the appropriate adjustments. Based on the sales price of our online retail stores, we have reached about 30%. Therefore, the sales volume and price of computing power in the second half of the year will also continue to decline. Our current prepaid orders on hand set a considerable foundation for our third quarter revenue. However, we have noticed a significant decrease in demand for miners' deployment of computing power
spk11: due to factors such as the declining Bitcoin price and surge in energy prices. We have adjusted our prices in response. As you may have seen on our online shop, the average selling price for retail has been adjusted down to 30 US dollars per terahash. Therefore, we expect a downward trend in sales and price of computing power in the second half of this year. As disclosed in the earnings release, we estimate the third quarter's revenues to be between 900 million RMB and 1.1 billion RMB.
spk07: At the same time, we also see that some experienced customers have not been particularly affected by the operation and cash flow. Therefore, there is a low price point for the mining machine to make more calculations. We are actively negotiating and we will also pay attention to the form of the industry to carefully explore opportunities. At the right time, we will discuss the deployment of nuclear mining and continue to deal with the price and market changes in a flexible and real-time way. We plan to make dynamic adjustments between the supply and demand of raw materials and the mining business. In the past few years, the company has gone through several peak price fluctuations and bearish periods.
spk11: So meanwhile, we've observed that for some of our experienced clients, their businesses haven't been particularly impacted in terms of operations and cash. They have the intention to deploy more computing power at the low point of the Bitcoin and mining machine prices. We are currently in active communication with these clients. We will also continue to closely monitor market conditions and prudently explore opportunities for mining collaborations at the appropriate time. We will also flexibly adjust our operations in response to Bitcoin price and market changes. Computing power will be dynamically adjusted in its allocation to spot sales, future contract sales, and our mining business. During the past few years, we've experienced multiple dramatic fluctuations in the Bitcoin price, as well as bear market cycles. Although the market's not in an ideal condition right now, we have faith in our long-term growth.
spk15: If we have a further plan to expand our OSC markets on the self-mining business.
spk07: It's like this, we are actually continuing to work closely with overseas companies to maintain contact and close cooperation. Now the global energy prices are rising significantly. So we see that in areas with relatively high energy prices and high price advantages, the customer purchase desire is very strong. In addition to this sales, we are also actively sending a team to participate in various exhibitions in the US and American regions, such as Bitcoin and mining conferences.
spk11: So to answer your question, we continue to closely communicate and collaborate with overseas clients. As energy prices soar globally, we have seen stronger demand in places where energy resources are abundant and have price advantages. Our team are also actively participating in Bitcoin and mining industry conferences held in North America and other regions to enhance communication and product promotion with business partners and clients in the industry.
spk07: And Beijing has also realized a gradual opening of life-saving assembly warehouses and logistics operations. It is expected to provide development and more and more support and convenience for overseas businesses. Our retail stores are also facing overseas complaints. For the past month, we have received orders from North America, Europe, Australia, Southeast Asia, and other regions. So during the quarter, our overseas headquarters in Singapore has already established R&D, finance, and other operational teams and launched a
spk11: supply chain system that encompasses assembly, warehousing, logistics. It is expected to provide more support and convenience for the development of our business overseas. Our online store that targets overseas retail markets has already received many orders and prepayments from North America, Europe, Australia, Southeast Asia, and other regions since its launch more than a month ago. Even though total sales volume is still very small, we've seen interest in Bitcoin mining from clients globally. The online store also opens up a channel for us to extend our reach to customers and expand our brand promotion.
spk08: Thank you. That's very cute.
spk10: Thank you. We'll now take our next question. Please stand by. This is from the line of Michael Legg from the Benchmark Company. Please go ahead.
spk18: Thanks, and congratulations on weathering this tough environment. Can you talk a little bit about your build-out in the U.S. and how that's going, please?
spk06: Okay.
spk07: We really value the development of this company. We have noticed that due to the rapid development of rich energy, especially clean energy, as well as the wider acceptance of encrypted currency, the North American region is actually attracting more and more Bitcoin miners to invest in construction mines. Over the past year, we have actively participated in several Bitcoin industry meetings in the United States, and established contacts with many miners and partners in the industry. Now we have also arranged for colleagues to work hard in North America to design business. Uh, uh, uh, uh, uh, uh, uh, uh,
spk11: Thank you for your question. So we highly value the North American market and notice the increasing demand for investing in and building mining farms by Bitcoin miners in North America. This is due to the wide acceptance of cryptocurrency and the abundant energy resources there, especially the rapid development of clean energy. So this year we actively participated in many Bitcoin industry conferences in the United States. We had valuable dialogues and built connections with mining companies and business partners in North America. We now have colleagues based in North America to expand our business, including sales and exploring mining business opportunities. We are also building local warehousing and logistics there to support our business development. We also set up repair centers and provided continuous and improved local and after-sales services for clients.
spk07: At present, we have a lot of mining partners in the North America region and we are working together. We are still taking a realistic strategy. In the early stage, with the current market conditions and our partners, we have set about a five-day position to develop mining business in the future. In the new region of the United States, mining business as an advantageous addition to our mining sales business So currently in North America, we're in dialogue with multiple mining farm partners. Maintaining a prudent strategy, we have initially booked mining site resources
spk11: that can host 5,000 units of mining machines through typical deposit prepayment to explore mining operations in this new region in the future. The mining business serving as the critical supplement for our mining machine sales enables us to dynamically allocate our mining machine inventories among sales and mining operations so as to maximize our returns through our agile operations.
spk02: Great. Thank you very much. Appreciate it.
spk10: Thank you. We'll now take our next question. Please stand by. This is from the line of Kevin Deedy from HC Wainwright. Please go ahead.
spk13: I understand a strong interest in continuing to develop New machines and new technology would be continued spending on R&D. What I would like to understand is how you see semiconductor development and machine technology improving such that efficiency improves and your opinion on the inclusion of immersion capability. Thank you.
spk07: OK. OK. OK. OK. So for us in the mining machine business,
spk11: An important task in the future is to integrate products and solutions vertically, penetrating the whole product system from chip to site and mining computing power throughout the industry value chain. Currently, in this process, the product front only includes mining machine hardware. There is limited penetration into providing solutions for mining site deployment operations and maintenance of mining machines. Based on our recent observations, the entire industry still lacks standardized products, simplified deployment for improved operations and lower costs, and better use of waste and clean energy. For us, products and services will continue to be integrated and developed vertically.
spk07: 而半能体技术呢,现在其实是从这个ThinFly走向 GAA或者是NanoShift一类的 4D工艺的一个十字路靠法。 So semiconductor technology is at the crossroads of transitioning from FinFET to GAA or nanosheet types of 4D technology. This application
spk11: mining machines is still the vanguard of helping stabilize advanced fabrication technology. Actually, our industry is currently doing this.
spk01: Thank you. Thank you very much.
spk10: Thank you. That's all the time we have for questions. I will now turn the call back over to management for closing remarks.
spk11: So thank you, everyone, very much for attending our earnings conference call today. This thus concludes our questions. Please feel free to reach out to our questions. Please feel free to reach out to our IR team. Thank you.
spk10: Thank you. That concludes the call today. Thank you, everyone, for attending. You may now disconnect. Thank you. Thank you. Thank you.
spk00: Thank you. you Thank you. you
spk10: Ladies and gentlemen, thank you for standing by and welcome to Canaan Inc's second quarter 2022 earnings conference call. At this time, all participants are in listen-only mode. After the management's prepared remarks, we'll 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, Mr. Clark Soucy, Investor Relations Director of the company. Please go ahead, Clark.
spk11: Thank you. 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. Nangong Zhang, and our CFO, Mr. Jincheng James. In addition, Mr. Edward Liu, our SVP, Mr. Leo Wang, IR Senior Director, and Ms. Shi Zhang, IR Manager. will also be available during the question and answer session. Mr. Chong will start the call by providing an overview of the company and performance highlights for the quarter. Mr. Chong will then provide details on the company's operating and financial results for the period before we open up the call for your questions. Before we continue, I would like to refer you to our safe harbor statement in our earnings press release. Today's call will include forward-looking statements. These statements include, but are not limited to, our outlook for the company and statements that estimate or project future results of operations or the performance of the company. These statements speak only as of the date hereof, and the company assumes no obligation to revise any forward-looking statements that may be made in today's press release, call, or webcast, except as required by law. These statements do not guarantee future performance and are subject to risks uncertainties, and assumptions. Please refer to the press release and the risk factors and documents we file with Securities and Exchange Commission, including our most recent annual report on Form 20F, for information on risks, uncertainties, and assumptions that may cause actual results to differ materially from those set forth in such statements. In addition, during today's call and webcast, we will discuss both GAAP financial measures and certain non-GAAP financial measures. which we believe are useful as supplemental measures of the company's performance. These non-GAAP measures should be considered in addition to and not as a substitute for or in isolation from GAAP results. You can find additional disclosures regarding these non-GAAP measures, including reconciliations with comparable GAAP results in our earnings press release, which is posted on the company's website. With that, I will now turn the call over to our chairman and CEO, Mr. Nangong Zhang. Please go ahead.
spk07: the mining income of Bitcoin miners and the demand for mining machines have been further impacted. The power-of-thread has also not dropped. The company's main office is in the domestic city. The recurrence of the epidemic and the large-scale blockade and the better coordination of measures have brought a certain negative impact on the operation and management activities of our record. In the context of the negative impact of the above, our team is facing difficulties. In the effort to ensure that employees' material supply and During the second quarter of 2022, under the combined influence of two rounds of interest hikes by the Federal Reserve,
spk11: the Bitcoin price continued its downward trajectory, declining to about $20,000 from $45,000. A surge in energy prices caused by geopolitical conflicts further impacted both mining income and demand for mining machines. The situation thus led the Bitcoin network's total computing power to decline slightly. At the same time, the cities where our main offices are located experienced a resurgence of the COVID-19 pandemic with accompanying large-scale lockdowns and pandemic control measures. This combination of factors negatively impacted our operations during the quarter. Despite this unfavorable backdrop, our team successfully navigated through the difficulties posed by the challenging environment. As well as ensuring that our employees remained healthy and were supplied with daily necessities, we continued to fulfill our clients' orders, achieving 5.5 million terahash per second and total computing power sold. Coupled with the contribution from our steadily developing mining business, we generated total revenues of 1.65 billion RMB for the quarter, meeting our previous expectations. Notably, we achieved a net profit of 609 million RMB in the second quarter.
spk07: In terms of the mining and sales business, this quarter we continued to maintain and cooperate with our customers. The total sales volume is about 1.5 million t. The sales business has contributed a revenue of RMB 16.0 billion. We will continue to promote the growth of the total revenue. The actual revenue has increased by 48.6%, and the return has increased by 21.1%. We will do our best to meet the needs of each customer. In the face of the online shopping of overseas retail customers, since the beginning of May, we have started to receive orders from international retail customers. As the customer base is moving overseas, we are also working hard to build similar support measures. The company has formed a local research, development, and sales team for the overseas region headquarters in Singapore. And in this quarter, it has achieved the initial opening of production, assembly, warehouse, and logistics operations. It has become the second comprehensive office of the company. I believe this will bring strong support to the company's overseas business.
spk11: In regard to the sale of mining machines, we continued to work closely with our customers during the quarter. We delivered a total of 5.5 million terahash per second computing power, generating revenues of RMB 1.6 billion. Sales of mining machines continued to drive the growth of total revenues, which grew 48.6% year over year and up 21% quarter over quarter. We strove diligently to fill the demands of all of our customers. Following the launch of our online store for overseas retail customers in late May, we have received orders from all over the world. As our customer base shifts to overseas markets, we work tirelessly to build and expand supporting systems. Our overseas headquarters in Singapore has already established R&D, finance, and other operational teams and launched a supply chain system that encompasses assembly, warehousing, and logistics in this quarter. With comprehensive operational functions, our Singapore headquarters has become a second general office and will provide valuable support for our overseas operations.
spk07: By the end of the second quarter of 2022, the company's return on sales will be 4.75 million T, and the revenue will be RMB 10.2 billion. Although the revenue order will lay a certain foundation for our next short-term revenue, As of the end of the second quarter of 2022,
spk11: we had a total of 4.75 million terahash per second of computing power to be delivered and customer advances of 1.02 RMB billion on hand. Although contract sales orders set a considerable foundation for our upcoming short-term revenue, we are also fully aware that the Bitcoin price remains under pressure while energy prices are increasing. As such, mining companies' revenues and financials are expected to come under significant pressure. Considering these factors, we expect that demand for computing power will weaken over the next one to two quarters, which will negatively affect our sales revenue in the second half of 2022.
spk07: Although the industry is experiencing a downturn, we are still working on the long-term prospects of Bitcoin and its blockchain technology and super-computer technology. We are also continuing to further develop and optimize the industry, Although our industry is experiencing a challenging period
spk11: We still retain our confidence in the long-term prospect of Bitcoin and its underlying blockchain and supercomputing technology. We continue to invest in research and development, improve our supply chain capability, and work diligently to deliver superior products with high quality and advanced performance to the market and our customers. Our research and development for the next generation of mining machines is progressing smoothly. Currently, we have reached the critical stage of progressing towards mass production. Due to various uncertainties throughout the research and development and mass production process, it is necessary for us to wait until we have the testing results before we disclose the specific performance parameters of our new generation of mining machines.
spk07: In history, no matter how much Bitcoin has grown, we have continued to insist on In retrospect, no matter the upside or the downside cycle of the Bitcoin price, we have always insisted on investing in research and development.
spk11: Although the Bitcoin price is currently experiencing turbulence, we still believe that Bitcoin will present more value in the future. At the current stage, launching the next generation of mining machines and delivering through mass production are paramount for our innovation and R&D efforts. Our new products will help clients further enhance mining efficiency, better prepare future challenges, and obtain more returns.
spk07: In the mining business, in the context of the fluctuation of the price and price, it is very important to continue to operate the mining business in overseas. This quarter, due to the improvement of the charging situation, the company's mining business produced 245.11 BTC during this period. Until the end of the quarter, it held 346.84 BTC. Although the price has dropped further in this quarter, mining revenue has still passed Given the current environment characterized by downward fluctuations in the Bitcoin price, it's particularly important to insist on flexibility
spk11: and nimbly developing our mining business overseas. During the quarter, thanks to our improved electricity supply, we mined 245.11 Bitcoins, and we have a total of 346.84 Bitcoins on hold by the end of the quarter. Although the Bitcoin price continues to decline during the quarter, we still generated mining revenue of 52.1 million RMB. representing quarter-over-quarter growth of 60.9%. Faced with such an unfavorable market environment, we are currently exploring more opportunities for regional diversification of our mining business. We are forging partnerships in North America, Southeast Asia, and other regions so as to expand our business scale and lower costs.
spk07: The AI chip sales of the company, due to the COVID-19 pandemic, which is the main city of the domestic part of this quarter, which is the consumer products of the downstream mass-produced manufacturers, the storage consumption is relatively slow, which has affected the AI chip sales in the second quarter. With the improvement of the epidemic prevention in the third quarter, the downstream manufacturers have also begun to prepare again, and we have increased the strength of the AI chip sales, etc. The overall impact of the sales situation has improved. Recently, our K510 CRB development version has been certified by Amazon's AWS IoT portal. Through our technical consultation support, customers can more conveniently integrate AWS IoT service software into the K510 chip platform, and quickly develop products based on AWS IoT services. At the same time, after certification, the K510 development version of the product has been displayed on the AWS website, which has further improved the brand's awareness.
spk11: Let's now turn to our AI chip business. As a result of the COVID-19 control measures implemented in major cities during the quarter, downstream manufacturers had slower inventory turnover for consumer products, which negatively impacted our AI chip's business revenue in the second quarter. As the pandemic control measures are gradually eased in the third quarter, downstream clients have enjoyed better sales and started to build up their inventories again. Simultaneously, we have further strengthened the sales efforts for our AI chips, and our sales have now begun to recover. Recently, our K510CRB Customer Reference Board Development Kit obtained Amazon's AWS IoT Core certification. Through our technology reference support, it became easier for our clients to integrate AWS IoT service software on the K510 chip platform. and develop products based on the AWS IoT service. At the same time, obtaining the certification allowed our product to be displayed on the AWS website, further increasing our brand recognition.
spk07: This quarter, the company has implemented a $1 billion in stock purchase plan for 24 months. As of August 12, 2022, more than 2.8 million stocks of ADS have been purchased. This quarter, we also made decisive progress on our share buyback program approved in March under which we may repurchase up to $100 million worth of our outstanding
spk11: over the next 24 months. As of August 12, 2022, we have repurchased over 2.1 million ADS for a total of 10.3 million U.S. dollars with an average price of 3.63 U.S. dollars per share, which is lower than the current stock price. Our execution of this repurchase program demonstrates our strong determination to continually increase shareholder value and our confidence in the company's long-term outlook.
spk07: The company has signed a resale agreement with a specific authority on June 23, 2022. With $6.61 million, the resale has canceled all of the remaining liabilities. The company has fully paid the resale price. After completing all the resale procedures, the number of companies issued will be reduced to 4.72 million.
spk11: On June 23rd, 2022, we announced the repurchase agreement with certain warrant holders to repurchase all outstanding warrants for an aggregate price of approximately $6.61 million. We have made the payments in full. Upon the completion of warrant certificate cancellation, our outstanding ADS will be reduced by $4.72 million. We will discuss in due time when the cancellation process completes. We didn't execute any financing activity during the quarter. Considering the current market environment and our stock price that is under pressure, we will be focusing on the repurchase program as the core of our capital market operations.
spk07: In addition, we have noticed that the investors are concerned about the loss risk caused by the Chinese stock market and the financial crisis. The company is actively seeking possible solutions to protect the interests of shareholders, and try to maintain the status and core advantages of listed companies to promote the company's long-term development. As a listed company that mainly exports overseas,
spk11: I would also like to acknowledge that investors have raised concerns over the delisting risk of our company under the Holding Foreign Companies Accountable Act. We have been actively exploring possible solutions to protect the interests of our shareholders and other stakeholders. We are taking every step to maintain our listing status and the advantage in compliance as a listed company to promote the long-term development of our firm. As a public company with the majority of revenues generated overseas, we will further strengthen our governance and operations capabilities to comply with applicable laws and regulations in different locations and maintain active communications with capital markets.
spk07: In the second phase of the CCP, whether it is the reoccurrence of the COVID-19 pandemic in China or the global economic and economic environment and the decline in the price of bitcoins, it has brought us a lot of resistance. In such a challenging situation, we are working hard to keep up with our top and bottom partners to achieve the unparalleled stable performance. However, we also noticed that the environment of price drop and energy price rise is still very severe.
spk11: During the second quarter, our business faced several concurrent headwinds, including further outbreaks of COVID-19, a volatile geopolitical and economic environment, and a downward trend in the Bitcoin price. Against this uncertain backdrop, we relentlessly maintained our communication and collaboration with upstream and downstream partners and performed steadily despite these challenges. However, we are aware that macro adversities, particularly the decline of the Bitcoin price and rising energy costs, have pressured the entire Bitcoin mining industry, seriously impacting miners' demand for computing power for some time in the future.
spk07: Therefore,
spk11: We expect our performance to come under further pressure during the upcoming one to two quarters. Based on our current view, we expect our total revenues in the third quarter of 2022 to be in the range of 900 million RMB to 1.1 billion RMB, representing a decrease of 17% to 32% compared with the third quarter of 2021. Please note that this forecast reflects our current and preliminary views on the market and operational conditions, which are subject to change.
spk07: Since the establishment of Canaan, it has been nine years. We have gone through a number of B2B price cycles. Our management team has some experience in dealing with price decline. As a responsible enterprise, when the market is on fire, we will also keep an eye on the market. but sacrifice their wealth for the sake of short-term expansion. As a result, the company has no temporary debt, and the mining and encrypted assets have no facilities. In addition, the current cash flow allows us to steadily advance the company's various strategies in the currently unfavorable market environment, and protect employees and partners, so that the company's products and services can continue to improve.
spk11: It has been nine years since our inception, and during that time, we have been through multiple Bitcoin price cycles. Our management team has a good amount of experience operating in market environments where the Bitcoin price is declining. As a responsible company, we always keep respect for the market. Even in bullish times, we didn't expand at the expense of balance sheet health. As such, now we do not have interest-bearing debt. and our mining machines and cryptocurrencies are not collateralized. These financial advantages, along with our current cash position, allow us to steadily push forward our business strategies despite unfavorable market environments and protect our employees and partners while continuously improving our products and services.
spk07: Every time the market goes down, it is our duty to clean up new products, stabilize the market expansion, open and optimize the good times of logistics and supply chains. In the current period, we will further enhance the expansion of our business, strengthen the construction of our service system, and prepare better to serve our customers. At the same time, we will actively develop mining and mining business, and promote the communication between mining and sales and mining business.
spk11: When the market enters a downswing, it also provides a good time for us to sharpen our new products, steadily develop our markets, and grow and optimize our supply chain and logistics. At the same time, we continue to expand our business internationally and strengthen our after-sales service system to better serve our customers. Furthermore, we will retain the agile and flexible operating strategy when prudently developing our mining business while enhancing synergies between our machine sales and mining business. This concludes my prepared remarks. I will now turn the call over to our CFO, James.
spk16: Thank you, Mr. Zhang. And good day, everyone. This is James.
spk17: In the second quarter of 2022, we reported the total revenues of RMB 1,652.7 million, representing 21.9% quarter-over-quarter increase, and 52.8% year-over-year growth, meeting our guidance range. During the quarter, the Bitcoin price further sank to below $20,000 from about $45,000 in late March. Despite this soft market, sentiment, we strive to achieve this top-line performance primarily due to the delivery of 5.5 million terahash per second of computing power for our clients. The relatively high average selling price we secured with contract sales in previous quarters also contributed to the top-line results. Our AI chips business recorded a revenue of RMB 1.6 million for the quarter due to soft demand from integrated product providers, e.g. our customers. This is because they stocked up electronic product inventories that embed our chipset during the quarter when the pandemic-related lockdown negatively impacted their supply chain and the consumption of these retail electronic products. As the pandemic quarantine control measures gradually eased, and retail started to recover. We are having more progress in our AI chip sales in July and early August. Our mining business, with an improved power supply, generated 245.11 Bitcoins in the second quarter, which contributed 52.1 million RMB in revenue, representing a sequential revenue increase of 60.9%. 346.84 bitcoins on hold as of the quarter's end, compared with 166.96 bitcoins as of March 31, 2022. Due to the ongoing energy instability, a portion of our deployed mining machines have not been consistently online, and we are facing increasing energy costs for our operations. Under the evolving marketing environment, we are prudently exploring other geographical regions with favorable mining conditions to diversify our operations. Above all, our gross profit for the quarter increased by 12% sequentially and 117.3% year-over-year to RMB 929.7 million. As a result of the complex effect of slightly decreased average selling price and increased product cost due to waiver price rise, our gross margin for the quarter narrowed to 56.3% from 61.2% in the first quarter of 2022. In the second quarter, we continued our efficient expense management with consistent investment in research and development. Notably, we have built an R&D team at our Singapore overseas headquarters by leveraging the advantage of local talent. From profit and loss perspective, we have several material non-operating items related to accounting treatments for the quarter. First, we incurred a $30 million R&D impairment for our cryptocurrency assets in the quarter due to the Bitcoin price decrease compared with the first quarter's end. I would like to reiterate that Bitcoins are initially recorded at the price when we generate them. Our digital assets are recorded on the balance sheet, net of any impairment losses incurred since initial recognition. Scans are not recorded until realized upon disposal of such digital assets. Secondly, during this quarter, due to the depreciation of RMB against the US dollars, we also recorded a foreign exchange gain of RMB 114.3 million. As almost all of our revenues were generated from overseas markets in US dollars, Should the RMB appreciate against the U.S. dollars in the future, we expect to incur corresponding foreign exchange losses. Last but not least, the change in fair value of RMB appreciates against the U.S. dollars in the future, we expect to incur corresponding foreign exchange losses. Last but not least, The change in fair value of warrant liability brought us a gain of 25 million RMB in the second quarter. As we completed the repurchase of all outstanding warrants in late June, we don't expect any gains or losses from such fair value change in the foreseeable future. As a result of foregoing, we realized a solid net income of 608.9 million RMB for the second quarter, achieving 37.9% increase quarter over quarter and 148.6% growth year over year. Turning to our balance sheet, as of the end of the second quarter, we have customer advances of 1,017.5 million RMB Together with our cash generated from product sales, we have an aggregate of 2,640.7 million RMB in cash and cash equivalent as of June 30, 2022, maintaining relatively flat compared with the end of the first quarter. Our cash level provides us with a solid position to navigate challenging market environments, enables us to carry out prudent exploration in expanding our global presence and continues our share repurchase program. As of August 12, 2022, we have repurchased a total of 2.8 million ADSs with an aggregate value of 10.3 million US dollars and an average repurchase price of 3.63 US dollars per ADS under our current stock reach purchase program approved in March 2022. This stock buyback demonstrates our firm confidence in the company's long-term growth prospects. Moreover, as mentioned earlier, we reached an agreement with our warrant holders to repurchase all 4.72 million outstanding warrants in late June for an aggregate of $6.61 million. The repurchase of outstanding warrants enables us to capitalize on the current valuation and grants us more financing flexibility in the capital markets in the future. Under the current market environment, we will continue our conservative approach in the capital market and prioritize the share repurchase program to drive value for our shareholders. Looking forward, we see that the continued lower Bitcoin price level coupled with increasing energy costs and logistics expenses has significantly jeopardized our clients' demand and their cash flow. But we expect a considerable decrease in both product orders and average selling price. Taking into account the relatively high level of production costs, we expect an inevitable gross margin decrease in the second half of this year. Subsequently, we expect our bottom line performance to experience a substantial decrease or even loss making in certain scenarios if the Bitcoin price continues to fluctuate at a low price level. Maintaining respect for the market We will continue our prudent and agile operating strategy to navigate the current market dynamics and strengthen our supply chains and develop advanced new products for future opportunities. Now I would like to briefly walk you through our financial results for the quarter. Revenues in the second quarter of 2022 were RMB $1,662.7 million, $246 representing an increase of 21.9% compared to the first quarter and an increase of 52.8% from RMB 1,081.8 million in the same period of 2021. Gross profit in the second quarter of 2022 was RMB 929.7 million which means US dollar 138.8 million, representing an increase of 12% from 829.8 million in the first quarter of 2022, and an increase of 117.3% from RMB 427.9 million in the same period of 2021. Total operating expenses in the second quarter of 2022 or 270.5 million RMB, which means 40.4 million US dollars, representing an increase of 7.7% from 251.2 million RMB in the first quarter of 2022, and an increase of 3.1% from 262.4 million RMB in the same period of 2021. Income from operations. in the second quarter of 2022 was 659.3 million RMB, which means 98.4 million US dollars, representing an increase of 13.9% from 578.6 million RMB in the first quarter of 2022, and an increase of 298.4% from 165.5 million RMB in the same period of 2021. Net income attributable to ordinary shareholders in the second quarter of 2022 was 608.9 million RMB, which means the 90.9 million US dollars representing an increase of 37.9% from 441.6 million RMB in the first quarter of 2022, and an increase of 148.6% from 245 million RMB in the same period of 2021. Non-GAAP adjusted net income in the second quarter of 2022 was 688.2 million RMB, US dollar 102.7 million, representing an increase of 26.6% from 543.4 million RMB in the first quarter and an increase of 115% from 320.1 million RMB in the same period of 2021. Basic and diluted net earnings per ADS for the quarter were RMB 3.53, which means 0.53 US dollars. Country liabilities as of June 30, 2022 were 1,017.5 million RMB, 151.9 million US dollars, decreasing from 1,340.7 million RMB as of December 31, 2021. This concludes our prepared remarks. We are now open for questions.
spk10: We will now begin the question and answer session. As a courtesy to other investors and analysts who may wish to ask a question, please limit yourself to one question at a time. For the benefit of all participants on today's call, if you wish to ask your question to management in Chinese, please immediately repeat your question in English. To ask a question, you'll need to press star 1 1 on your telephone and wait for your name to be announced. Please stand by while we compile the Q&A queue. Thank you. We'll now take our first question. Please stand by. First question is from the line of... Yes, Jia Xu from China Related Securities. Please go ahead.
spk09: Yes, Jia Xu from China Related Securities. Please go ahead. We see a significant decline in the Bitcoin price during the first quarter this year. I want to know, are there any large customers who will cut orders? And what is the impact on the outlook of the demand, gross profit margin, and ASP for the second half of this year? And how do we react to this down cycle and further expand our OSCE market? Thank you.
spk07: Let me answer this question. The company's flagship sales are all in the form of receiving and receiving funds. Customers usually need at least 50% of the supply to lock-in our mining products. So, by the end of the second quarter, our revenue will be 17 billion RMB. At present, we do not have the situation where the customer is forced to pay. We have always been an important sales model. So, after we have negotiated with the customer about the price of the goods, we have set a price to lock-in the order of future delivery. Our future contract sales require our clients to prepay at least 50% of the total payment to secure mining machines. By the end of the second quarter, our customer advances reached one point
spk11: So far, we have seen very limited cases of payment defaults. Future contract sales have always been a part of our business model. We negotiate contract sales with clients to lock in prices for orders to be delivered in the future. The business model has been acknowledged by both our clients and us. Even when the Bitcoin price soars, we will still deliver mining machines at predetermined prices.
spk07: Our current reserve funds have laid the foundation for the third quarter of sales. But we also see that due to the impact of the low price drop and the increase in energy prices, there has been a sharp decline in the demand for computing power deployment. We have also made the following adjustments. Based on the sales price of our current online retail stores, we have reached about 30%. Therefore, the sales volume and price of computing power in the second half of the year will also continue to decline. Our current prepaid orders on hand set a considerable foundation for our third quarter revenue. However, we have noticed a significant decrease in demand from miners' deployment of computing power
spk11: due to factors such as the declining Bitcoin price and surge in energy prices. We have adjusted our prices in response. As you may have seen on our online shop, the average selling price for retail has been adjusted down to 30 US dollars per terahash. Therefore, we expect a downward trend in sales and price of computing power in the second half of this year. As disclosed in the earnings release, we estimate the third quarter's revenues to be between 900 million RMB and 1.1 billion RMB.
spk07: At the same time, we also see that some experienced customers have not been particularly affected by the operation and cash flow. Therefore, there is also a low price point of the exchange rate to supply more computing power. We are actively negotiating, and we will also pay attention to the form of the industry to carefully explore opportunities. At the right time, we will discuss the deployment and acquisition of mining, and continue to deal with the price and market changes in a flexible and real-time way. We plan to make dynamic adjustments between the supply and demand of goods and the mining business. In the past few years, the company has experienced several big fluctuations in the price of Bitcoin and the bear market.
spk11: So meanwhile, we've observed that for some of our experienced clients, their businesses haven't been particularly impacted in terms of operations and cash. They have the intention to deploy more computing power at the low point of the Bitcoin and mining machine prices. We are currently in active communication with these clients. We will also continue to closely monitor market conditions and prudently explore opportunities for mining collaborations at the appropriate time. We will also flexibly adjust our operations in response to Bitcoin price and market changes. Computing power will be dynamically adjusted in its allocation to spot sales, future contract sales, and our mining business. During the past few years, we've experienced multiple dramatic fluctuations in the Bitcoin price, as well as bear market cycles. Although the market's not in an ideal condition right now, we have faith in our long-term growth.
spk14: Thank you.
spk09: If we have a further plan to expand our OSC markets on the self-mining business.
spk07: This is how it is. We are actually continuing to keep in touch with overseas companies and cooperate closely. Now, global energy prices are rising significantly. So we see that in areas with relatively high energy prices and high prices, customers are more likely to buy. In addition to this sales, we are also actively sending a team to participate in various exhibitions in the US and America, such as Bitcoin and mining conferences.
spk11: To answer your question, we continue to closely communicate and collaborate with overseas clients. As energy prices soar globally, we have seen stronger demand in places where energy resources are abundant and have price advantages. Our team are also actively participating in Bitcoin and mining industry conferences held in North America and other regions to enhance communication and product promotion with business partners and clients in the industry.
spk07: And this year, we also realized the initial opening of the life-saving assembly warehouse and logistics operation. It is expected to provide development and more and more support and convenience for the overseas business. Our retail store is also facing overseas complaints. For more than a month, it has received orders from North America, Europe, Australia, Southeast Asia, etc. So during the quarter, our overseas headquarters in Singapore has already established R&D, finance, and other operational teams and launched a
spk11: supply chain system that encompasses assembly, warehousing, logistics. It is expected to provide more support and convenience for the development of our business overseas. Our online store that targets overseas retail markets has already received many orders and prepayments from North America, Europe, Australia, Southeast Asia, and other regions since its launch more than a month ago. Even though total sales volume is still very small, we've seen interest in Bitcoin mining from clients globally. The online store also opens up a channel for us to extend our reach to customers and expand our brand promotion.
spk08: Thank you. That's very cute.
spk10: Thank you. We'll now take our next question. Please stand by. This is from the line of Michael Legg from the Benchmark Company. Please go ahead.
spk18: Thanks, and congratulations on weathering this tough environment. Can you talk a little bit about your build-out in the U.S. and how that's going, please?
spk06: Okay.
spk07: We really value the development of this company in the United States. We have noticed that due to the rapid development of rich energy, especially clean energy, and the wider access to encrypted currency, the North American region is actually attracting more and more crypto miners to invest in construction mines. Over the past year, we have actively participated in many Bitcoin industry meetings in the United States, as well as many mining teams and joint partners in the industry to communicate and establish relationships. Now, we have already arranged our colleagues to work hard in North America to design business. including the cooperation of sales and mining. At the same time, we are now building the local warehouse logistics in the United States to support the development of this business. And we will also do the construction of this kind of customer service in the north and the north of the United States. These are all closer to the customer, and we can provide continuous service to the customer.
spk11: Thank you for your question. So we highly value the North American market and notice the increasing demand for investing in and building mining farms by Bitcoin miners in North America. This is due to the wide acceptance of cryptocurrency and the abundant energy resources there, especially the rapid development of clean energy. So this year we actively participated in many Bitcoin industry conferences in the United States. We had valuable dialogues and built connections with mining companies and business partners in North America. We now have colleagues based in North America to expand our business, including sales and exploring mining business opportunities. We are also building local warehousing and logistics there to support our business development. We also set up repair centers and provided continuous and improved local and after-sales services for clients.
spk07: Currently, we have a lot of mining partners in the North America region and we are working together. We are still taking this real-life strategy. In the early stage, with the current market trend of the deposit form and our joint partners, we have set a position of about 5,000 units to carry out mining business in the future. In the new region of the United States, mining business as an advantageous supplement to our mining and sales business So currently in North America, we're in dialogue with multiple mining farm partners, maintaining a prudent strategy. We have initially booked mining site resources
spk11: that can host 5,000 units of mining machines through typical deposit prepayment to explore mining operations in this new region in the future. The mining business serving as the critical supplement for our mining machine sales enables us to dynamically allocate our mining machine inventories among sales and mining operations so as to maximize our returns through our agile operations.
spk02: Great. Thank you very much. Appreciate it.
spk10: Thank you. We'll now take our next question. Please stand by. This is from the line of Kevin Deedy from HC Wainwright. Please go ahead.
spk13: I understand a strong interest in continuing to develop New machines and new technology would be continued spending on R&D. What I would like to understand is how you see semiconductor development and machine technology improving such that efficiency improves and your opinion on the inclusion of immersion capability. Thank you.
spk07: OK. OK. OK. So for us in the mining machine business,
spk11: An important task in the future is to integrate products and solutions vertically, penetrating the whole product system from chip to site and mining computing power throughout the industry value chain. Currently, in this process, the product front only includes mining machine hardware. There is limited penetration into providing solutions for mining site deployment operations and maintenance of mining machines. Based on our recent observations, the entire industry still lacks standardized products, simplified deployment for improved operations and lower costs, and better use of waste and clean energy. For us, products and services will continue to be integrated and developed vertically.
spk07: 而半能体技术呢,现在其实是从这个ThinFly走向就GNA或者是NanoSheet一类的4D工艺的一个十字路靠法。 So semiconductor technology is at the crossroads of transitioning from FinFET to GAA or nanosheet types of 4D technology. This application
spk11: mining machines is still the vanguard of helping stabilize advanced fabrication technology. Actually, our industry is currently doing this.
spk01: Thank you. Thank you very much.
spk10: Thank you. That's all the time we have for questions. I will now turn the call back over to management for closing remarks.
spk11: So thank you, everyone, very much for attending our earnings conference call today. This thus concludes questions. Please feel free to reach out to our questions. Please feel free to reach out to our IR team. Thank you.
spk10: Thank you. That concludes the call today. Thank you, everyone, for attending. You may now disconnect.
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