This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk02: The conference will begin shortly. To raise your hand during Q&A, you can dial star 1 1. Ladies and gentlemen, thank you for standing by and welcome to Canaan Inc's third quarter 2022 earnings conference call. At this time, all participants are in listen-only mode. After the management's prepared remarks, we will have a question and answer session. Please note that this event is being recorded. Now, I'd like to hand the conference over to your speaker host today, Mr. Clark Soucy, Investor Relations Director of the company. Please go ahead, Clark.
spk01: Thank you, Mel. Hello, everyone, and welcome to our earnings conference call. The company's financial and operating results were released by our Newswire services earlier today and are currently available online. Joining us today are our chairman and CEO, Mr. Nan-Gung Zhang, and our CFO, Mr. Jin-Chung James. In addition, Mr. Xiaoming Liu, our senior VP, 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 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 thereof, 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 the 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'll discuss both gap financial measures and certain non-gap 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 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.
spk05: Hello, everyone. This is NG, CEO of the company. Our staff, James, and I are delighted to share our quarterly results directly in English from New York. Since the beginning of third quarter of this year, um the cryptocurrency and blockchain industry has been experiencing a great deal of turbulence especially during the past week there is a lot going on in the industry and now that we are together on this conference call we want to take this opportunity to speak openly with our investors and stakeholders Market conditions have become more severe since the beginning of the third quarter of 2022. The Bitcoin price continued to decrease, impacted by federal reverse interest rate increases and market expectations of further hikes. Meanwhile, Bitcoin's total network hash rate remained at a high level and miners' incomes decreased. We are fully aware of the great difficulties in the mining industry. The current situation resembles similar Bitcoin cycles we have previously navigated through. However, the situation is different today as we are facing more challenges, such as globally surging energy prices miners private risks and high financing costs caused by excessive leverage and high operating expenses for new miners these factors have led us to serious issues in miners operations furthermore what has been happening in the industry has industry participants' confidence. Turbulence in the industry is inevitable in the short term. On top of these headwinds, mining machine inventors in some regions remain, sorry, mining machine inventories in some regions remain high. all of these factors will negatively impact customer demand for and the pricing of our mining machines in the near term what i want to emphasize is that although currently participants in the industry are enduring a particularly difficult time we remain confident of navigating through the bitcoin cycle What we are going through now will turn into a valuable experience for us to develop our business as the industry enrolls. During these difficult times, we continue our investment in R&D to increase our product's half-rate and energy efficiency. In late October, we released two models of our new generation of mining machines. making a breakthrough in computing power and energy efficiency. Regardless of whether we are in a full or bare market environment, we will launch new products and develop our business steadily. This commitment demonstrates our confidence in the market's long-term prospects. Regarding the sale of money machines, in late October, Having received the full testing results, we immediately launched our new generation mining machines, Avalon-made A13 series. Specifically, two models are introduced, the A1346 and the A1366. Model A1346 features a hash rate of about 110 terabytes per second and the power efficiency of approximately 30 joules per terahatch. Model A1366 is equipped with a hash rate of about 130 terahatch per second and the power efficiency of approximately 25 joules per terahatch. Both models computing power and power efficiency demonstrate a significant improvement over the previous generation of mining machines. After our new products hit the market, we quickly corroded our supply chain to move forward on mass production. We expect to commence mass production and start shipments at the end of this year or early next year. Through prepayments, we have secure production capacity for the next year. This allows us to continuously provide high-performance products with reliable quality and superior services for our clients. As for our existing mining machine products, we deliver a total of 3.45 million terahash per second of computing power, generating revenues of RMB 140 million. Our global headquarters in Singapore continues to attract local tech talents to join us and further enhance its operations. The headquarters has already established R&D, operations, finance, supply chain, and other functions. Our Singapore-based chip design team has contributed significantly to the development of our new products, as well as the mass production process. The Southeast Asia supply chain headquartered in Singapore is performing well and has been stably fulfilling shipments since its entire operation during the previous quarter. It provides diversified parts of our production process and the logistics chain, and it demonstrates our commitment and ability to continue our internationalization Although the overall market is relatively sluggish this year, we have built a strong foundation of trust and cooperation with our industry-leading business partners. Meanwhile, we also insist on serving our small and mid-sized customers in a variety of flexible ways. Our online store for retail customers filter augmented ourselves this time to address demand from all types of customers since it's not in the second quarter it has fulfilled the customers orders from 21 countries and regions worldwide by the end of the third quarter having shipped out prepared others our total computing power to be delivered had decreased to 1.01 million terahash per second under current market conditions the industry is facing stronger headwinds and more uncertainty most customers are taking a weight and the approach just demand of money machines has dropped to a low point coupled with current market challenges our business is likely to face higher pressures over the next two quarters at this point facing a severe winter in the industry profitability is no longer our first priority we will get through this difficult time and prepare for the future by shifting our focus to the stability of cash flows reducing unnecessary expenses and continue to invest in the research and development of new products. During the current downturn, we are strengthening the operations of our mining business for long term. With our operational flexibility, we are propelling forward our mining business in overseas markets. Mining frauds mutual support and maximize between our mining machine cells and our mining business. Notably, our mining collaborations of the United States brought 260,000 terahatch per second of computing power online during this quarter. At the same time, the electricity from supply for our mining operations in Central Asia has further improved. enabling more stable operations for our deployed mining machines. Consequently, our mining business total online computing power is approximately 3.2 exahash per second, generating mining revenue of RMB 62 million in the third quarter, up 19% quarter over quarter. After using a proportion of our bitcoins to cover mining costs we had 535.5 bitcoins in the total at the end of this quarter the balance demonstrates an increase of 188.7 bitcoins from the end of the last quarter we are also actively exploring the geographical diversification of our mining business to mitigate concentration risk while steadily expanding our global layout at the scale of our mining business under a bearish market. Let's now turn to our AI chip business. During the third quarter, sales of our AI chips improved compared to the previous quarter, as downstream manufacturers resumed building up their inventories. As a result, our AI chip business sales grow by 52 percent quarter-over-quarter. However, weak end-user demand for the consumer goods remained a headwind to our AI chip sales performance. On the other hand, we have achieved good progress in terms of processing the developed ecosystem. For example, our proprietary AI development board has been used for learning and practice development by college students from over a hundred universities across China. At the same time, we have joined many informational development platforms, actively participating in constructing the RISC-V ecosystem. We will continue to closely collaborate with our downstream and the technology partners in the industry. uphold our open source philosophy and prepare for exportational growth in the demand of AI building. During this quarter, we continue to make good progress on our current share repurchase program approved in March, under which we may repurchase up to 100 million US dollars worth of our outstanding ADS or Class A ordinary shares over 24 months. We have repurchased 3.4 million ADS for a total of 11.2 million US dollars from August 12th to November 4th this year. As of November 4th, 2022, we have repurchased over 6.2 million ADS for a total of 21.5 million U.S. dollars with an average price of $3.46 over for ADS. Our ongoing execution of this buyback program delivers increased value to our shareholders and shows our confidence uh in the company's current and the long-term prospects overall during the third quarter we are with this a difficult environment under this micro macro economic and the industry headwinds many miners encountered operating difficulties leading to the declining demand of money machines lower money machine prices and more To overcome these challenges, we worked diligently to deliver products and further connect to the market, achieving our primary staff guidance. In addition, we successfully completed the chip-in progress for the new generation of computing-powered chips and launched our new series of mining machines. Looking ahead, we see that rising interest rates and other macroeconomic dynamics continue to exert downward pressure on Bitcoin prices and erode industry confidence. There is also the possibility of further energy price increases during the coming winter. Considering these combined headwinds, weaker demand in the mining industry is expected. As a result, we expect our performance to come under further pressure at least during the next two quarters. Based on our current projections, we expect our total revenues of the fourth quarter of 2022 to be approximately RMB 310 million. Please note that this forecast reflects our current and preliminary views on the market and the operational conditions, which are subject to change. It has been almost 10 years since Canaan's inception, and we are navigating through multiple Bitcoin cycles, regardless of macro environment. we remain firmly committed to always doing our ultimate most to develop new products and pursue a superior computing power and power efficiency we have continued to push forward on our internationalization adhering to our flexible and prudent operating strategy we endeavor to enhance synergies between our machine cells and mining business at the same time we will keep a conservative approach to our capital management and streamline our and streamline our cash outflows while continuing our investment in r d and the resistance operations It's paramount for us to sustain operations across the bull and the bear market cycles, upholding our responsibility and the commitment to our shareholders. This concludes my prepared remarks. I will now turn the call over to our CFO, James.
spk07: Thank you, Mr. Zhang. And good day, everyone. This is James. I'm with our CEO in New York City. As we discussed in August on our second quarter earnings call, in the third quarter of 2022, as we expected, the overarching industry environment started to negatively impact our demand and average selling price. We reported the total revenue of RMB $978 million in the quarter, meeting our guidance range despite the year-over-year and sequential decrease. Specifically, as the Bitcoin price further decreased to $16,000 recently, we expect the overall demand for mining machines remains constrained. In the third quarter, we delivered a total computing power sold of 3.5 million terahash per second. In response to the softening market, we lowered our selling price, leading to a certain decline in the average selling price As a result of the combined effect, sales of our Bitcoin mining machines decreased to RMB 914 million for the quarter. In a challenging market downside cycle, we take the mining business as a hedge against the weakening mining machine sales. It helps us better utilize our machine inventories and bring in additional revenues. Specifically, our mining business generated mining revenue of RMB 62 million, representing a quarter-over-quarter increase of 19%. In the third quarter, we started mining in the United States by deploying a trial batch of mining machines. Our increased Bitcoin production is also due to further improved electricity supply in our mining operation in Kazakhstan. Collectively, we have 3.2 extra hash per second of total computing power deployed for our mining business as of the end of the third quarter. After paying certain direct costs, especially electricity bills with Bitcoin's mind, we held 535.5 Bitcoins as of the quarter's end. representing 188.7 additional Bitcoin compared with 346.8 Bitcoin balance as of June 30, 2022. We remain prudent in machine deployment and are thoroughly exploring multiple geographical regions with favorable mining conditions to diversify our mining operations. Please also note that with the increase of our deployed machines for mining, we expect to have more machine depreciation in our total cost. Our AI revenue, realizing a sequential increase of 52%, reached RMB 2.4 million in the third quarter. The total AI chip sales performance reflected the soft demand for its end-user used consumer IoT products. Our gross profit for the third quarter was RMB $234 million, probably reflecting the impact to the top line level. Additionally, as we lowered the selling price of some older generation machines to even below their cost, we incurred an inventory write-down of RMB 221 million in the third quarter. Resulting from the complex effect of declining ASP inventory write-down and relatively flat product costs, our gross margin was further squeezed to 23.9% for the third quarter. Please note that if we had not implemented this inventory write-down, our sales margin for the third quarter would have been 46.5%. In the third quarter, we continued to enhance our research and development. We launched our new generation mining machines in October as we propelled the commercialization of our R&D efforts. We also made upfront payments to secure the production capacity for advanced load wafers to ensure stable supply in the future. As the vast majority of our sales contracts were denominated in U.S. dollars, we recorded a foreign exchange gain of RMB 101 million in the third quarter. Due to the depreciation of RMB against U.S. dollars, Conversely, if RMB appreciates against the US dollars in future, we will incur foreign exchange losses correspondingly. For our bottom line, our net income reduced to RMB 61 million in the third quarter. Turning to our balance sheet, as of September 30th, 2022, the company had cash and cash equivalents of RMB 2,003 million. The decrease in cash balance was primarily due to upfront prepayments for securing waivers and payments of operating and tax expenses, which was partially offset by cash inflow from the sports sales of mining machines during the third quarter. With a rollout of mass production, for the new generation of mining machines. We expect our cash balance by the end of this year may further decrease as we make additional prepayments to secure production capacity. We don't have any interest-bearing debt. In a downward market, it's critical for us to preserve cash and sustain cash flows. we will continue to closely monitor our cash balance and manage it prudently. From August 13, 2022 to November 4, 2022, we used approximately US$11.2 million to repurchase 3.4 million ADSs under our current stock repurchase program approved in March 2022. with an average repurchase price of US dollar 3.29 per ADS. In light of an increasingly volatile macro environment, we may reevaluate our repurchase program in accordance to our cash balance. Looking into the near term, we see unfavorable factors may become even worse in the market. including constrained Bitcoin prices under U.S. rate hike and high energy costs. Recently, the Bitcoin price has continued to decline after a series of industry incidents. As such, we expect lingering very soft demand in the near term for worldwide total hash rate expansion and mining machines purchased. To conclude, the third quarter was a difficult one. We strived to maintain a sufficient cash balance and seek opportunities in the market downturn. As a company, while the macroeconomic factors and the industry trends are out of our control, we endeavor to control the decisions and efforts we make to streamline our business operations, maintain cash flow, and effectively manage our liquidity levels. To sustain our operation is our minimal and optimal strategy during the hard times. Now I would like to briefly walk you through our financial results for the quarter. Revenues in the third quarter of 2022 were RMB $978.2 million, $137.5 million. representing a decrease of 40.8% from RMB 1,652.7 million in the second quarter of 2022, and a decrease of 25.8 from RMB 1,317.6 million in the same period of 2021. Gross profit in the third quarter of 2022 was RMB 234.2 million, 32.9 million U.S. dollars, representing a decrease of 74.8% from RMB 929.7 million in the second quarter of 2022, and a decrease of 68.4% from RMB 741.7 million in the same period of 2021. Total operating expenses in the third quarter of 2022 were RMB 275.0 million, 38.7 million U.S. dollars, representing an increase of 1.7% from RMB 270.5 million in the second quarter of 2022, and a decrease 1.2% from RMB 278.4 million in the same period of 2021. Net income attributable to ordinary shareholders in the third quarter of 2022 was RMB 61.1 million, 8.6 million US dollars, representing a decrease of 90.0% from RMB 608.9 million in the second quarter of 2022, and a decrease of 88.1% from RMB 512.5 million in the same period of 2021. Non-GAAP adjusted net income in the third quarter of 2022 was RMB 166.3 million, 23.4 million US dollars, representing a decrease of 75.8% from RMB 688.2 million in the second quarter of 2022. and a decrease of 71.7% from RMB 587.5 million in the same period of 2021. Basic and diluted net earnings per ADS for the quarter, both were 36 cents in RMB and 5 cents in U.S. dollars. Contract liabilities as of September 30, 2022, were RMB 300 million. 42 million us dollars decreasing from rmb 1340.7 million as of december 31st 2021 this concludes our prepared remarks we are now open for questions thank you we will now begin the question and answer session
spk02: As a reminder, to ask a question, you will need to press star 11 on your telephone and wait for your name to be announced. As a courtesy to other investors and analysts who may wish to ask a question, please limit yourself to two questions at a time. If you have any follow-up questions after the Q&A session, the investor relations team will be available after the call. 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.
spk08: Please standby.
spk02: Your first question comes from the line of Shuang Sun from Guosheng Securities. Please go ahead. Your line is open. Can you hear me?
spk05: Yes. Hello, Linda.
spk10: I'm Shuang Sun from Guosheng Securities. The first question I want to ask is, we set up Singapore. Have you ever thought of becoming a foreign company? So you have established headquarters in Singapore. Have you ever thought about being a completely foreign company?
spk05: Okay. First and foremost, we are a US business company. The globalization of our business and operations has progressed along with the global diversification of our client base. The goal of our company's globalization is to better serve our clients. We established our headquarters in Singapore. We like its business environment, local R&D and the technical habits. as well as the status of Southeast Asia's business hub. It also has an open attitude towards digital currencies. We have set up local R&D and operations teams and established Southeast Asia's supply chain by leveraging our operations in Singapore. For a long-term perspective, we aim to grow into an international company with operations not only in Singapore but also in the U.S. and Southeast Asia. By leveraging the geographical advantages of each market we are present in, we will better serve our customers globally and create values for shareholders.
spk10: Thank you. Okay, thank you. So considering the recent decline of Bitcoin price, will you have when will it occur?
spk07: I will take this one. Thank you, Song, for this, you know, difficult question. I think that you might have already noticed in this quarter we recorded RMB 221.1 million for inventory write-down. as we determined that the estimated realizable value of our inventory will be lower than the holding cost. That was due to the lower sales price for subsequent orders. Of course, it links to the bigger picture, like Bitcoin price drop and the softening market demand from the miners. The inventory write-down was recorded in the cost of revenues, and had a material negative impact on our gross margin of the current quarter. If the severe impact of Bitcoin price continue to decline in the coming quarters, we may have to consider further decreasing our selling price, which will probably lead to additional inventory write-down and also lead to P&L losses in the bottom line. I think we should prepare the worst in balance sheet and do our best in operation. On the other hand, going forward, if we could be able to sell such inventories above their costs, the cost of sales for those machines will be a net of such write-down, which in turn will have the effect of increasing our gross profits for the period. Thank you.
spk10: Okay. Thank you, James. How is your small sales and future contract sales ratio? I think currently a vast majority of the sales are future contract sales. The small sales are
spk07: at a relatively pretty small quantity. As CEO previously mentioned, our new generation of mining machine is progressing towards mass production. We are still not 100% sure whether shipment will begin at the end of this year or at the start of next year. Therefore, we expect the sales of our new mining machines to be primarily contract sales. And we have already secured a production capacity for our new generation machines for next year to maintain a stable supply. Thank you.
spk10: Okay, thank you. My last question is, how much has the cooperation between the company and the main energy plant changed? What's the progress of cooperation with foundries?
spk05: We have been altering our multi-foundry strategy and utilizing our comprehensive R&D capabilities so as to prepare to capture surface capacity in advanced process nodes. Therefore, we continue to actively maintain productive collaborations with our foundry partners. supporting their operations through, like, repayments and orders. In return, our founding partners are really invested working with us to optimize the product's fabrication and R&D and production. I think mining machine supercomputing chips can serve as the vanguard for advanced process having foundries was they stabilized their production our collaboration with foundries is definitely a win-win partnership um i think the current challenges across industry uh Yeah, and which I personally believe will be a short-term issue. We will continue to invest in the advanced process as a way for procurement as we strive to capture more commercial opportunities and higher market share. Thank you.
spk08: Thank you.
spk02: Thank you. We'll now move on to our next question. Please stand by. Our next question comes from the line of Kevin Dede from HC Wainwright. Please go ahead. Your line is open.
spk04: Good morning to all of you in New York. Thank you very much for taking my question. I'm curious now on how much of the cash decline was attributed to foundry prepayments and how much of the September quarter shipments were to customers versus Canaan self-mining?
spk05: Okay. You know, we typically secure our boundary partners' production capacity through prepayments. We have recently paid for production of a batch of the new generation of mining machine chips. That because the wafer fabrication process will take about five to six months. uh typically we will uh prepare some inventories for new models uh machines uh in in advance uh yeah so uh i think it's really hard to catch the accurate numbers uh but we are also uh actively uh enhancing our production the selling to uh better support our boundary partners uh which actively managing wafer cost uh through flexible uh negotiation yeah and uh during the third quarter we uh start our uh mining operation uh in the us uh and we uh cooperate with local mining farm to bring the first batch of over uh two thousand machines online operating in compliance with laws and regulations. I think due to non-disclosure agreements, we are not able to disclose the contract's name. And at the end of third quarter 2022, we have 3.2 extra hashes for computing power online for mining. Through this deployed mining computing power, Mining has already run in the top 10 among the state companies in the U.S. Compared to our computing power source, our mining hatred is still relatively small. We have many operations in Central Asia and North America. We are also exploring and pushing forward our business in other regions. with favorable energy prices and market dynamics. Given the current great uncertainties in the industry environment, we adhere to the prudent strategy for exploring partnership opportunities in regions with favorable power supply and market policy conditions. that has North America and South East Asia.
spk04: Yeah, thank you. Do you have a target for Canaan's internal mining hash rate for the end of the year?
spk05: Yeah, I think there's still some opportunities for us to expand our self-mining business. And you know the demand of the market is very low, so I think we will move more machines from selling to money, yeah. But I think there's no exact number for our target at the end of this year. Thank you.
spk04: Thank you very much, too. One last question for me, please, if I may. Can you characterize Canan's position on immersion and how the company might be working in R&D to develop machines particularly suited for that type of application?
spk05: Yes. We have been providing immersion modules for customers for evaluation. And they are ready to be mass-produced if we have orders from our customers. Our inverted design demonstrates more stable performance under difficult conditions and the kind of improvements producing power by maybe 30% to 50% per chip unit compared to air-cooled products. some clients will overclock for even higher power. Of course, I think overall, a purchase cost is also a very important factor for customers when choosing between emerging and dire food products. Yeah, thank you. Xiexie, have a great day. Thank you. Have a good day. Bye-bye.
spk02: Thank you. We'll now move on to our next question. Please stand by. Our next question comes from the line of Venice Xu from China Renaissance Securities. Please go ahead. Your line is open.
spk09: Thank you. My first question is, how do you see the Bitcoin trend especially in your down cycle?
spk05: Okay. I think in the near term, we see the Bitcoin price remains under pressure. The federal reverse is still rising interest rates. The recent downward trend in the Bitcoin price is clearly event-driven. Entering and going through the low point is the necessary part. of navigating through every cycle. However, I think, I don't think that anyone accurately predicted the short-term Bitcoin price trend. In regard to the price of Bitcoin, I have always believed that there's no need to forecast the Bitcoin price in the long term. As Bitcoin becomes the most important cryptocurrency, it has increasingly large user base. Meanwhile, based on Bitcoin's halving mechanism, it's foreseeable that the supply of Bitcoin will be lower than market demand. As a result, I remain confident in Bitcoin's long-term prospects. From the mid-term perspective, perspective, much of the work that we are doing now is in preparation of potential business opportunities in the coming maybe one or two years. Seizing each opportunity that arises virtually in our industry. Yeah, thank you.
spk09: Okay, thank you. My next question is We know that recently the FX acquisition issue has greatly impacted industry. Just wondering what's our view on this event and maybe how we react to this situation?
spk05: I think this is a very sensitive question. so i will say something maybe uh from the industry side of the uh factory exchange uh i believe uh private currencies uh such as bitcoin uh actually provide people with uh decentralized and trafficless ways to hold high liquidity assets uh 100 on their own um For the operational way of this system, transactions trade should be completed on blockchains. However, due to technical bars for ordinary people to hold on the trade or currencies, many of them tend to use centralized cryptocurrency exchanges when they're investing and trading. This performance makes many transactions switch from blockchain-based trading to off-chain trading during the last two or three years. As such, users' assets and trading transaction fees, which has been a way to enhance the security of blockchains, have been uh redirected to cryptocurrency exchanges uh centralized cryptocurrency exchanges more uh due to lack of really effective revelations in this area uh this kind of exchanges exchange-based transaction poses strict requirements on changes management abilities and attitudes or more frankly a test of human nature i think during proven strong of their markets incidents on crystal changes similar to the issue also occur therefore we are not surprised So, we hope that through this round of turbulence, the market can return to the process and sense of decentralization of cryptocurrencies represented by the Bitcoin Demonstrate's advantage that are far beyond a modern way of speculation. I believe that the industry will better develop with increasing .
spk09: Thanks for the comment. And my last question is, could you give us the guidance of the AFP average mining machine selling price, computing power sold, and gross margin for next quarter?
spk07: I will take this one, Venice. I think that you just noticed from our earnings release the gross margin decline in the third quarter. I think that this decline was partially because we adjusted down the selling price for some machine models with lower hash rates in response to market conditions. Some models or other certain sales packages were sold at a lower than cost cost to price. So in addition, our new generation of machines launched in October has just become available for pre-order. Some machines may be delivered in the fourth quarter, but as of today, we're not able to give specific guidance. The selling price for contrast cells of our new model demonstrates a certain level of gross margin. So, in a combination, we expect in the fourth quarter, gross margin probably decrease compared to the third quarter. You know, the ASP could be a little bit lower compared to third quarter. So, I think currently that's our prediction. Thank you.
spk09: Okay. Thank you.
spk02: Thank you. We'll now move on to our next question. Please stand by. Our next question comes from the line of Hans Chang from DA Davidson. Please go ahead.
spk06: Hi, good morning. Thank you for taking my question. So first, I was wondering how much inventory How much is the inventory level in the industry right now? And how long it could take for the market to digest the inventory? Okay, I think it's a good question.
spk05: Currently, the amount of inventory in the U.S. market is relatively high. Under current market conditions, it might take, I think it might take at least six months to digest the inventory. It mainly depends on how the electricity cost will decrease and the speed of mining facility construction. If the supply chain related issues were to be solved soon, then the overstocked machine, mining machine could be digested soon. So we have observed that the Bitcoin network's total computing power has shown an upward trend recently. But the Bitcoin price is around U.S. dollars, 20K for more than one quarter, and the recent trend of further decrease recently. I think this situation will accelerate the emulation of older models from mining machine inventories in the market, and the miners will be more uh inclined to deploy mining machines with higher computing power and energy and the lower energy efficiency um i think when we comprise returns to its upward trending filter uh inventory uh the stocking will be accurate yes thank you okay uh next question uh so
spk06: did you start to engage with the customer regarding your new A13 generation machine? And then what's the initial feedback, especially with the US-based customer? So I'll translate it into Chinese. So you guys have started to have contact with the customers, especially with the new A13 machine. And then... Oh.
spk05: I think following the new series launch in late October, 13 machines are still in the pre-stage for mass production, and we haven't started to ship the products in large quantities. Currently, we are still introducing our new products to the market and have started to obtain small batches of pre-orders. which, while having many other orders of intent to discuss this problem. I think in terms of our other fulfillment plans, we expected to wrap up the production of our 100-chain TerraHash model at the end of this year. By the middle of the next year, our production capacity will become concentrated to producing the 110 terahash to 120 terahash models. As fabrication technologies improvements at the cost reduce over time, machines with over 130 terahash expected to become our mainstream products. When enhanced cyber-efficient technology and performance, our new generation of mining machines feature similar performance parameters compared with our peers' mainstream products. We believe that our new machine series will be an excellent option for miners. North America is a very important market for us. Previously, we haven't shipped a large quantity of products to this region, and we had a relatively small market share there. Thus, we still need some time to build up our brand recognition in this region. We have set up local teams to work on sales after sales service warehouse operations. and other functions to provide more support for local business developments um but you know we are seeing that many miners in the north america area have under significant pressure for financing and operation costs uh this situation is likely to result in big changes to the uh competitive landscape in the region We will closely monitor market dynamics to reside opportunities for market share gains. At the same time, we have been actively exploring opportunities in other regions, such as both East Asia and the Middle East.
spk06: Yeah, thank you. Oh, okay, great. One last question, if I may. So I was wondering, in terms of the technology roadmap beyond the AS15 series, which is based on 5 nanometer process nodes, given that the U.S. bent on the EDA tool for 3 nanometer, I think it was announced in August, how do we make sure a new technology transition and product iteration going forward? So, I would like to ask about the blue area of our technology and products. After 5 nanometers, because the United States has issued a ban on the export of products below 3 nanometers a while ago. to ensure the progress of our technology and the delivery of new products?
spk05: I think this is a tough question. I think in regards to the U.S. ban, the impact is still unclear. For now, it has not impacted the R&D of our existing and new generation of mining machines. In terms of fabrication technology, our new generation of mining machines now stands at the same process node as our peers' mainstream products. So far, we already secured a certain amount of production capacity on the advanced node. I think that then we will also take time to process from imposition to exploitation, we will continue to monitor and evaluate its impact. As a listed company, we will continue to operate in compliance with related laws and regulations and endure to seek solutions aligned to our product design Thank you. Thank you.
spk02: Thank you. We'll now move on to our next question. Please stand by. Our next question comes from the line of Michael Legg from The Benchmark Company. Please go ahead. Your line is open.
spk03: Thank you. Two quick questions. One, could you kind of go over your capital allocation strategy during this period of industry weakness? And then secondly, can you just give us your viewpoint on 2024's expecting halving and its impact on the miners and rigged demand? Thanks. I will...
spk05: take the second one and James will take the first one. I think Bitcoin harming mechanism values that has Bitcoin rewards for each new block generated. This will impact miners' mining revenues to some extent. We expect that this will result in considerable short-term decrease in the Bitcoin's total computing power. However, I don't see the impact lasting for long. The halving mechanism has existed since the inception of the Bitcoin trading system. It was designed to create the supply of Bitcoin over time, especially in the context of the over-sourced theater currency. the halving mechanism brings support to Bitcoin's price decrease in the long run. For the long-term perspective, Bitcoin halving will force miners to upgrade their devices with higher computing power and better energy efficiency. Because of this, mining machine manufacturers uh we need to constantly upgrade our technology and let our products provide manners with pure money ability with higher computing power is better cost effective so this is what we have been doing
spk07: Yeah, I would take the capital strategy one. I think at the end of the third quarter, we have a cash balance RMB 2 billion. So we do not have any interest bearing debt on our balance sheet. That's not like our peers in the other listed companies. We do not need to pay interest. We do not make any principal repayment. So about the allocation in future, I think with the release and the sales of our new generation of mining machines, I think we will definitely deploy a certain amount of cash to secure a wafer capacity according to our plans. And also, this will enable us to fulfill clients' demand in time and maintain our close cooperation with foundries We make sure we can capture more market share when the market recovers in future. That's the first thing. And second thing is I think we will continue to invest in the R&D part to develop more advanced products. And also, in addition, we will prudently carry out collaborations in mining and, you know, explore business opportunities in different regions. We may need to pay some upfront fees, but it is an investment we are willing to make to develop a new business. Last but not least, I think we will still use some of our cash to continue share repurchase to show the confidence on our business for longer term. I think that's it. Thank you, Mike.
spk03: Thank you. Appreciate it.
spk02: Thank you. As there are no further questions now, I'd like to turn the call back over to the company for any closing remarks.
spk01: Thank you. Hello, everyone. This is Clark. Once again, thank you very much for joining us today for the call. If you have any further questions, please feel free to reach out to us through the contact information provided on our IR website. Thanks again.
spk02: Thank you. That concludes the call today. Thank you everyone for attending. You may now disconnect.
Disclaimer