Canaan Inc.

Ladies and gentlemen, thank you for standing by and welcome to Kenan Inc.' 's fourth quarter and full year 2022 earnings conference call. At this time, all participants are in a listen-only mode. After 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 Susie. investor relations director of the company. Please go ahead, Clark.

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. N.G. Zhang, and our CFO, Mr. Jin Chung-Jing. In addition, Mr. Xiaoming 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. Zhang will start the call by providing an overview of the company and performance highlights for the quarter. Mr. Cheng will then provide details on the company's operating and financial results. for the period before we open the call up for your questions. Before we continue, I would like to refer you to our safe harbor statement in our earnings press release. 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 the Securities and Exchange Commission, including our most recent annual report on Form 20M, 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. NG Zhang. Please go ahead.

Hello everyone. This is NG, CEO and the founder of Canaan. Our CFO James and I are delighted to share our quarterly results from the company's Singapore headquarters. The market environment in the fourth quarter of 2022 became even tougher and probably reached its darkest moment. The Fed raised interest rates by 75 bps in November and 50 bps in December to fight inflection. As such, the recent macro environment has been quite difficult for the Bitcoin mining industry. In November 2022, the crypto exchange FTX and the crypto lender BlockFi both filed for bankruptcy. These unfortunate events further hurt creditors' and investors' confidence in the whole cryptocurrency industry. Due to this series of adverse events, the Bitcoin price decreased to a 52-week low of $16,500 at the end of the year. At the same time, energy prices stayed high because of the regional conflicts. While Bitcoin total network hash rate has increased by more than 20% from the last quarter. As new mining farms began operations and new machines went online around the world, This has made mining more difficult with decreased mining rewards and has even resulted in select mining farms to stop operating. In North America, where mining has been relatively concentrated since 2021, many miners and hosts have high debt ratios and financing costs. These borders have further impacted their cash flows, and some miners and hosts have gone bankrupt or had to reorganize their business. These problems have badly affected miners' operations, income, and demand from purchasing mining machines. We have mixed feelings about this industry downturn. During the fourth quarter of 2022, together with our management team, I visited investors, clients, and partners in North America, the Middle East, and the Southeast Asia. I wanted to understand their business and financial positions and start to weather this hard time with them. Faced with the current industry challenges and thanks to the execution of our flexible sales strategy as well as our mining business, which we have been expanding for some time now, we generated a total revenues of 392 million RMB this quarter, exceeding our guidance of 310 million RMB. Today, I want to take this opportunity to discuss three key topics. First, our continuous investment in R&D and the production capacity. Second, the ongoing development and the progress of our mining business. Finally, our understanding of and thoughts on the downturn in the Bitcoin price and the general public currency industry. First, we made substantial investments in R&D and continued to secure future production capacity in the fourth quarter. Our CFO will share more details on this later. I would like to address that during an industry downturn, it is a tough decision to maintain these investments. This decision showcased our long-term confidence in global Bitcoin adoption. In late October of last year, we launched the new generation A13 mining machines after the takeout on the advanced process node. The A13 achieves new highlights in computing power and energy efficiency. After the release of our new generation mining machine, we have been strengthening our cooperation with foundry partners. This will help us to secure the limited surplus production capacity of wafers on the most advanced nodes. Accordingly, we are moving on to mass production and upgrading our products to the new generation with better computing power and energy efficiency. Second, our mining business is bearing fruits. Our mining operations installed computing power in Central Asia and North America increased slightly to 3.3 xhs in the fourth quarter from 3.2 xhs. in Q3 of 2022. The power supply in Kazakhstan has been improving, but it is still unstable. Under these conditions, we generated mining revenue of 72.2 million RMB in the fourth quarter, up 16.3% sequentially. Despite the Bitcoin price decreasing during Q4, At the 2022 year end, we have 757 Bitcoins in total. Going into the first quarter of 2023, the Bitcoin price is showing an upward trend, and we are making further strides in our mining business. As of the end of February, our total installed mining computing power reached 3.8 XH per second. With additional hash rate continued being installed, we expect our installed hash rate to reach 5x hash per second to 5.5x hash per second by the end of Q1 of 2023. Our nearly 10-year industry experience enables us to explore diverse ways to collaborate with our partners under varied business conditions. We are proud to have become an international and agile Bitcoin miner in our mining business. We expect to deploy more mining projects in multiple regions in the future. Finally, as Rotarin went through four major Bitcoin bear markets, I want to share my view on the low point of this Bitcoin cycle. The fourth quarter of 2022, in my view, was the darkest time for Bitcoin and the entire cryptocurrency industry during the past two years. When Bitcoin price dropped down to a cycle bottom, some unexpected events also happened in the industry. This fraud seriously hurt the confidence of industry players and caught regulators' attention. But I don't believe this should make us lose face. We should see this as an opportunity for the industry to separate good companies from cheaters. This process will drive the industry to become more sustainable in the future. There have been a lot of negative headlines recently, but I want to point out the positive. Looking back at the 14 years since the birth of Bitcoin, we can see that today is quite different from the past. Even if we only look over the last two years, there were great developments. Now the number of Bitcoin miners and the total computing power of the network are at a much higher level compared to the low point of the 2020 crypto cycle. In addition, Bitcoin mining now happens all over the world. This situation formed a highly decentralized trading network. We can see that many miners are seeking and adopting low-cost, sustainable energy across the globe. These miners have monetized many power plants' stranded capacity and have many undevelopment regions develop their green power infrastructure. Bitcoin has emerged as an outsider from traditional finance. It is now facing increasing regulatory focus in many places around the world. We should be aware that the trend will well show the growing user base of Bitcoin and other cryptocurrencies has formed a strong consensus and has a significant influence that cannot be ignored. Bitcoin has gone from a niche asset that few people understood to having tens of millions of users. We could even say that it has become mainstream. A new industry that has been around for only 14 years will observantly go through cycles of recession and despair to achieve progressive evolutions. During the industry's development, we want illegal and ethical behaviors to be exposed. Industry players are learning, improving, and matching. So companies who comply with regulations and act with responsibility will stand out. This takes us back to our original aspiration to found the company 10 years ago. At the time, our goal was to create a compliant company that supports the landmark invention of Bitcoin system with superior computing technology. To meet this goal and along with the global decentralization of Bitcoin, we are continuing to globalize our company. By the end of 2022, We have already established an overseas supply chain that can quickly fulfill orders from international markets and expand our services capabilities with 13 after-sales service stations worldwide. We also developed a headquarters with a multifunctional team in Singapore, insisting on producing best-of-class products. We have continuously integrated our technology and improved chip fabrication. By maximizing our product computing power and energy efficiency, we aim to provide a superior experience of Bitcoin miners and work with them to build a stronger Bitcoin network. Since the second half of 2021, we have started to explore the mining business and have further evolved our business model. With the growing experience of our team and the carry out of our mining operations, we installed mining hashrate has shown an emerging scale as of today. With that, we successfully expanded our business to the industry downstream, which helped us better understand our customers' need and understand Bitcoin itself. Overall, we remain bullish on the future of Bitcoin and the super computing technology behind it. Moving into the first quarter of 2023, with Bitcoin price showing some improvement, we believe the most difficult part of Bitcoin cycle is approaching the end. Now we are looking forward to the market recovery. We have recently received many orders and purchase inquiries. At the same time, we have also noticed that many miners are unable to place orders due to financial problems. Generally, computing power demand is gradually recovering, but recovery has just started. Therefore, we expect our total revenue in the first quarter of 2023 to be approximately 450 million RMB, or We expect our total installed hash rate for mining to be 5 to 4.5x hash per second by the end of the first quarter of 2023. With our new strategy of building our proprietary mining machine in conjunction with our mining operations, we already have two reinforce business segments focusing on Bitcoin. Going forward, we will continue to iterate our products and provide great services to our mining clients as we support the growth of Bitcoin ecosystem. Along with miners around the world, we will join in and contribute to Bitcoin's globalization. We will continue to adopt ourselves to researching and finding favorable mining sites. With agile operation and efficient execution, we endeavor to explore and design opportunities during the age of discovery of global Bitcoin mining. This concludes my prepared remarks. Thanks, everyone. I will now turn the call over to our CFO James.