Canaan Inc.

Ladies and gentlemen, thank you for standing by and welcome to Canons Inc's first quarter 2023 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 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 Newswire Services earlier today and are currently available online. Joining us today are our Chairman and CEO, Mr. Nan-Gung Jung, and our CFO, Mr. Jin-Chung James. In addition, 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. Chung 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 webcasts, 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 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 Jung. Please go ahead.

Hello, everyone. I'm NG, the CEO of Canaan. Thank you for joining our conference call. James and I are at the company's headquarters in Singapore, sharing the corporate report of the conference call with you. Compared to Q4 of previous year, Q1 of 2023 has brought more hope to Bitcoin mining industry. Although the Bitcoin price still fluctuates, it has generally stepped out of the bear market and shown an upward trend. The confidence of miners has gradually recovered, and coupled with the traditional peak season in the first quarter, there are signs of a revival in purchasing demand. Although the purchasing power of large miners is still limited by cash flow, pace of facility construction and the financing environment. This has not affected the positive trend of the market. Regardless, the selling price in the mining machine market is still declining, and the first quarter is still in a bear market state. In this ever-changing market environment, we believe that maintaining strategic continuity and timely adjusting tactical decisions according to market dynamics are equally important. In other words, we need to keep investing in business and assets that bring long-term value while also carefully handling our company's balance sheet. I would like to introduce to investors the four strategic focuses that we have been concentrating on. and our actions in this area. First, we insist on long-term R&D and production capacity investment. Second, we continue to develop and improve our multi-faceted sales system to connect and assist global customers. Third, we adhere to our own mining strategy, overcome difficulties, and continue to expand mining deployment. Finally, we maintain a solid balance sheet and accumulate valuable assets with great potential. I will elaborate on these four points one by one. Firstly, we are committed to R&D and production capacity. Product development and capacity assurance remain our major input and investment in the first quarter of 2023. The specific data will be shared by James later. As a technology and product-oriented company, the importance of product power in our industry is self-evident. We always put product development first. As mentioned in the last financial report, our latest generation A13 series mining machine was introduced in the industry's winter in late October last year, we insisted on maintaining close cooperation with upstream foundries, mass-produced in the first quarter, and further improved the yield and computing power efficiency through technical adjustments and process improvements. Our A13 series has reached and exceeded our previous design and expectations in terms of yield rate and actual performance. In the first quarter, we have achieved stable supply. In actual use by customers, the excellent computing power consumption and the quality of A13 series has also been recognized, and the shipment volume has grown rapidly. Whether in a bear market or a wool market, we always insist on intuition and strive to make the best mining machines. Even when A13 series was not yet mass-produced and the market was at its most bearish, our new product development was always in full swing. We are well aware that the market requires the performance of mainstream products to take a big step forward about every half a year. And we must keep up. And the continuous launch of new products often means continuous supply chain investment. In the first quarter, our mass production and investment in the supply chain exceeded $50 million. I believe that our efforts and resource input will pay off in the subsequent product performance improvement and supply chain stability. Secondly, we are dedicated to developing and enhancing our sales system to reach global customers. The industry we are in is fast growing and unpredictable. In each bear bull cycle, the industry undergoes reshuffling, with some miners leaving and new ones joining. As miners continually seek and develop standard chip energy worldwide, transforming wasted energy into reusable power, both the density and the location of miners are constantly changing. Starting from the first quarter of this year, we accelerated the construction, development, and the improvement of our comprehensive international sales system. Our sales system is now divided into three parts, large clients, channels, and retail. And it is assisted by online stores and original business developments, allowing us to better reach and convert customers worldwide. In the first quarter of 2023, the overall industry was affected by inventory, competition, financing conditions, and cash flow. Although sales volume in the mining machine markets saw a slightly recovery compared to Q4 of 2022, we still remain in a bear market with a continuous decline in average selling price of computing power. A series of small and medium-sized Bank failures in the U.S. late in the quarter also had some impact, causing delays in payment and shipment for some orders. These factors resulted in less than ideal sales revenue for this quarter. We achieved total sales of 4.22 million terabytes per second, a sequential growth of 126.8%, but the total quarterly revenue of $55 million was below our expectations. However, we also see positive aspects. Although demand from large clients in the US fluctuated, our expanding sales system quickly seized many sales opportunities in other regions. With the total number of purchase orders rising to over 500 in Q1, in the first quarter, We actively developed sales channels in Southeast Asia and established cooperation with local distributors in Thailand and Malaysia for the first time. Our online store targeting overseas retail customers attracted orders from about 20 countries, including first-time contacts in several countries such as Greece, the Netherlands, Argentina, Brazil, Mexico, and the Philippines. As we enter Q2 and the market storyline, the initiatives and efforts we implemented in Q1 are starting to show more results. For instance, we recently signed a contract order of 11,000 units of our A13 product with Cypher, a public we listed institutional mining clients in North America. Before that contract, we assisted the clients to conducting extensive on-site tests for our products at their mining set in Texas. The client ultimately recognized the excellent performance of our A13 series products under relative extreme weather conditions. Recently, We have also signed a series of large-scale contract orders for an additional 36,000 mining machines in other regions, which are expected to be delivered in succession before the end of the fourth quarter of 2023. The recent appearance of these large contract orders across multiple markets confirms that our business and product strategies are correct. Lastly, the return of contract sales orders will also help us improve our cash flow situation. Thirdly, we stick to our mining strategy and continue to expand our mining deployment. Since the company started mining operations in the second half of 2021, we have faced many challenges. Despite these, We have formally established mining as a strategy priority and secured a place for ourselves in the global, rapidly developing industry of Bitcoin mining. In the first quarter of 2023, the probability of mining improved due to recovery of Bitcoin prices, and some sites that were forced to shut down in the fourth quarter of 2022 were able to restart operations. This quarter, we produced 476 Bitcoins, contributing a mining revenue of 11 million US dollars, a slightly increase from the previous quarter and a new record high. We are continuously exploring more mining opportunities in different regions and reducing our comprehensive mining operation costs. Even though the total network computing power is still rising, The increase in Bitcoin price and the recent industry events like BRC20 have boosted mining income during certain periods. We anticipate that the company's mining income will reach a new high in the second quarter. As of March 31st, 2023, we have deployed computing power of over 5x hash per second to our mining sites. However, Due to severe cold weather and contract execution issues, the total power is installed is over 4 exahash per second. This figure is lower than our forecast in the previous quarter's financial report. We will continue to strive to improve our deployment, deployed computational power data with our cash flow and operational capabilities. Lastly, we are dedicated to maintaining a health cash flow and accumulating assets with strong growth potential. Canon has just completed a full decade from its inception in early 2013 to the first quarter of 2023. We've weathered many market ups and downs and have gained some unique experience in managing our balance sheet. In the first quarter of this year, our prediction about the price of Bitcoin was mostly accurate, but the sales of our mining machines proved to be more difficult. We achieved improvements in sales and the return of contract sales orders in the second quarter, which continued to contribute our revenue and cash flow. This also was noting that the healthiness The healthy and stable supply chain resources we accumulated over the years have helped us seize opportunities to mass produce and deliver mining machines as the price of Bitcoin rises. Meanwhile, our Bitcoin assets continue to grow. Once again, we exercise our strategy of holding Bitcoins. Bitcoins generated from mining are only used to pay for direct operation costs such as electricity. Our self-developed and self-produced mining machines products and the mining power deployed to the mining sites as important assets for producing Bitcoin contain huge growth potential as Bitcoin price continues to rise in the medium and long term. In some cases, already deployed mining machines can be resold with warranties. In this brand new industry, we are making history every day. Even for me, the first quarter of 2023 was a challenging start. The uncertainty in the reality has made our performance less than ideal. However, our direction has not divided significantly. Since the second quarter, Although the price of Bitcoin has not risen sharply, the company's operational results have been more positive, which is the result of the hard work of all KNN employees. However, we must also see that the current economic environment is not optimistic. The cloud of uncertainty still looms over us, and the price of Bitcoin may still continue to fluctuate. At least in the United States, the financing ability and the purchasing power of miners in large miners' farms have not yet recovered. Coupled with the current situation where the decision has not yet been completed, both sales prices and the gross profit will continue to be concentrated. The above comprehensive situation, we are extremely cautious about expectations for the second quarter of 2023. The revenue for the second quarter of 2023 is expected to be about 72 million US dollars. This forecast is based on the current market and operating conditions of the company. And the actual situation may vary. In the final section, I would like to share some new insights on my personal beliefs about decentralization and Bitcoin. We often hear doubts about the utility of Bitcoin. In fact, the use of Bitcoin is complementary in the development of new technologies, and its function as a medium of payment and value storage has never changed. Over the past 10 years, the two pieces of the puzzle leading to Web3 has been largely completed, namely blockchain-based digital currencies and the smart contract technology. In our last Earnings Core, someone asked me whether I think Bitcoin is a risk asset. I've thought more about this question since then. In the short term, Bitcoin, indeed, shows some characteristics similar to risk assets. But in the medium term, Bitcoin should be seen as a powerful hashing tool against system-based risk in the current global financing system. and even as a tool against global political and economic uncertainties. This isn't hard to understand. But in the long term, in the new information-driven world of Web3, blockchain-based digital currencies are likely to become mainstream applications and have broader prospects. Once, I had a long discussion with GPT-4 about the future of AGI becoming mainstream in the world. I'm almost certain that AGI will be the last piece of puzzle of Web3. The final creation of Web3 will be decentralized individually distributed AI system. At that time digital currency and smart contracts based on blockchain will reshape the financing system of the new world on the basis of consensus. Most trustworthy, efficient, transparent are greatly improving the level of productivity and promoting the process of the entire society. Today, we are a provider of computing power products and services in the blockchain industry. Going forward, I hope to further expand our technology and have the opportunity to participate in the broader changes in the future, bringing value to customers with computing power products and services, and to support the progress of society. This concludes my prepared remarks. Thank you, everyone. I will now turn the call over to our CFO, James. Thank you.