Canaan Inc.

Ladies and gentlemen, thank you for standing by, and welcome to Canaan, Inc.' 's second quarter 2024 earnings conference call. At this time, all participants are in a 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, Ms. Gwen Lauber, Investor Relations Director of the company. Please go ahead, Gwen.

Thank you, Operator. Hello, everyone, and welcome to our earnings conference call. Joining us today are our Chairman and CEO, Mr. Nanjun Zhang, and our CFO, Mr. Jin Cheng, or James. In addition, Mr. Leo Wang, Head of Capital Markets, and Ms. Qi Zhang, IR Manager, will be available during the question and answer session. Mr. Zhang will start the call by providing an overview of the company, and performance highlights for the quarter. Mr. Chang 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 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 regarding 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 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 reconciliation with comparable GAAP results in our earnings release which is posted on the company's website. With that, I will now turn the call over to our chairman and CEO, Mr. Zhang. Please go ahead, sir.

Okay. Hello, everyone. This is NG, the CEO of Canon. Thank you for joining our conference call. Our CFO James and I are at the company's headquarters in Singapore to share our quarterly results with you. The major event in Q2 2024 was the fourth Bitcoin halving. The Bitcoin network ran smoothly without any issue during this halving. Aimed at intense marketing fluctuations, the Bitcoin price varied between about $71,000 at the beginning of the quarter and a low of $56,000, eventually closing at 61,000 US dollars by the end of the quarter. The total network cash rate remained relatively stable, with growth slowing but not declining significantly. As I mentioned during the last earnings call, the quarter before the halving tends to be quiet, but the market quickly recovers afterwards. Our operations continued steadily inventory reduction proceeded half-time, and the A14 series products began large-scale deliveries on schedule. Our new product, the A1566, was launched with outstanding performance, and our global sales network continued to expand. Our mining operations were optimized and adjusted. successfully weathering the challenges of the hobby. This quarter, our revenues saw significant sequential growth, exceeding our expectations. Let me now walk you through a few key areas. In R&D, we have continued to drive product innovation. The mass production wrap-up for our A14 series products has been successfully completed. Through close collaboration with our foundry partners, we have seen smooth improvements in the yield rates and production capacity for the A14 series. These improvements have enabled us to deliver more computing power than initially expected from the levers we had ordered. In May, at the Bitcoin Asia 2024 in Hong Kong, we launched our AirQuote A15 series miners, pushing energy efficiency to approximately 18 drops per terahash and around 200 terahash in single-unit computing power. Later, at the end of June, during the Mining Disrupt Conference in Miami, we introduced the LiquidQuote model of A1566i, which achieved a computing power of 249 Terahash per unit. The A15 series, which is on a different process node from A14, is currently undergoing a similar mass production run-up, yield improvement, and the capacity increase. Based on the current progress, the A15 series is advancing more smoothly than the A14 did at the same stage. We are confident to complete the above process within the next few weeks, propelling the A16s into mass production for large-scale delivery. In addition, we have been working closely with our customers to provide customized integrated mining solutions tailored to their specific needs. Starting this quarter, the Middle East has entered an extremely hot season. with temperatures reached around 50 degrees Celsius. The liquid-cooled and air-cooled system we deployed earlier have successfully withstood the harsh conditions. Regarding the next step after the ACP series, as per our EURO practice, we do not announce new products before obtaining actual test results from complete machines. What we can share at this stage is that the development of our A16 series is progressing smoothly. We are utilizing more advanced process nodes and through process advancements and close collaboration with our wafer fabrication partners, we aim to push the critical power efficiency matrix of the entire machine into the 10-plus-yard-per-terahatch range. When the milestone is achieved, the output machines will be poised to reach the 300-terahatch threshold in computing power for a single unit. Although someone says more slow is dead, In this industry, innovation is still far from reaching its limits. In terms of sales, we achieved a total computing power sales of 6.2 million terahash per second this quarter, making a significant 84% sequential growth. This was driven by the large-scale delivery of our A14 series, which has become our main product and led to a 33% sequential increase in the average selling price of our computing power. At the same time, we further cleared our inventory of our traditional models, primarily A16, leading to an optimized inventory mix by the end of Q2. Our one-stop mining solutions have gradually gained market traction, contributing $4.6 million in revenue. We also launched the profitable mining heater Avalon Nano 3 for individual instances. Since its launch in Q1, the product has seen strong demand, with over 11,000 units pre-ordered by the end of Q2. As of today, we have shipped over 10,000 units to 75 countries and regions worldwide, receiving highly positive market feedback. This quarter, we made big progress in several key regional markets in North America, we secured a large resale order of 6,600 units of our new A1566 model for Cypher, a listed mining company. Additionally, we successfully completed deliveries on previous orders from several other listed mining companies and continue to collaborate with more. This led to a tenfold sequential increase in recognized revenue from the region. Our products' performance, durability, and the professionalism of our delivery progress were highly recognized by our customers, establishing a strong reputation that will support further business expansion in North America. In the Middle East, our mining machines and one-stop mining solutions are gradually gaining traction. Our machines with superior heat resistance and comprehensive solutions that enable quick deployment have been very well received by customers, resulting in fivefold sequential increase in revenue from the region in Q2. In South Asia, our channel partners continue to contribute stable orders. Our traditional models known for their cost effectiveness and resistance to heat and humidity remain very popular in this region. Our online store cutting to individual customers overseas, so 314% quarter-over-quarter increase in registered users and an explosive increase in orders since the launch of AgroNano 3 on the platform in Q2. Demand has been especially strong in North America where nearly 50% of orders originated. Further boosting our brand recognition in the region Through our market-affected sales efforts and a more diverse product portfolio, customer advances increased significantly by 30% quarter-to-quarter to US$51 million by the end of Q2, laying a solid foundation for revenue growth in the second half of the year. This quarter, our mining operations performed steadily, successfully navigating the challenges brought by the Bitcoin Harvey, generating non-mini-US dollars in mining revenue. Despite the impact of the Harvey, the only represented an 11% decrease compared to the first quarter, we continued to optimize our mining project matrix Advancing hash rate deployment in new pilot projects while closing existing projects that were negatively impacted by policy changes. We are also near the completion of our exit from operations in Kazakhstan and Paraguay. As of August 10th, 2024, Our self-managed operational hash rate has reached 4.5x hash per second, exceeding our previous guidance of 4.3x hash per second mentioned in the last earnings call. Additionally, we successfully maintained an average electricity cost at a variable level of 4.2 cents per kilowatt hour. allowing our mining gross margin to remain steady at 33%, similar to the first quarter. In Q2, we mined 141 Bitcoins, bringing our total Bitcoin holdings, including pledged Bitcoins, to 1,114, an increase of 57 Bitcoins from the previous quarter. We will continue to strike a balance between policy's stability and energy cost advantages to strategically enhance our mining business. In our first quarter 2023 earnings call, we disclosed our plan to use more advanced mining machines models for our mining-based operations. We also mentioned that in addition to corporate mining models, we consider in fixed rate hosting and other approaches such as self-building or acquisitions to actively participate in mining operations and explore more collaborative opportunities. We would like to reaffirm these mining strategies. Additionally, when evaluating our mining operations and opportunities globally, we have concluded that North America holds strictly importance. This region offers strong legal protections, valuable infrastructure and power supply, and a rapid development. health Bitcoin mining ecosystem. According to our calculations, from the end of 2022 to the end of Q2 2024, the total hashrate growth of publicly listed mining companies in North America was 237%, outpacing the global network hashrate growth of 114%. Given that we view North America as a strategic opportunity, we are announcing our plan to focus on this region. We expect to increase our mining hash rate target in North America from current 0.65x hash per second to 10x hash per second by the first half of 2035. As a global provider of Bitcoin mining solutions, We are uniquely positioned to seize mining opportunities in North America. First, we have the flexibility to allocate mining machines inventory worldwide, maximizing investment returns and diversifying risk. Second, with comprehensive industry insights ranging from mining machine manufacturing supply chains to global mining markets we can more effectively evaluate investment opportunities and quickly match mining machines with optimal size for short-term gain and long-term success. Third, our standing and reputation in the industry further enhance our ability to establish strategic partnerships with the global mining community. Lastly, our advanced design capabilities allow us to customize mining solutions tailored to different environmental and economic conditions, whether in regions with extreme whether or in scenarios requiring flexible power load management and response strategies. At the same time, we hope these projects will serve as a showcase for potential customers around the world to learn about Canon. We are fully committed across multiple dimensions, including capital, construction, operations, and efficiency to make these projects outstanding. By accumulating valuable experience, we aim to better serve our clients. In Q2, we continue to improve our operations, significantly reducing total expense due to optimized G&A expenses, which have narrowed our operating loss by 61% year-over-year and 32% quarter-over-quarter. Although the decline in Bitcoin price at the end of Q2 led to an almost $10 million reduction in cross-currency fair value on the income statement, we still achieved a 62% year-over-year reduction in net loss. With revenue remaining stable, On the balance sheet, the successful bulk delivery of A14 products and strong cash inflows from sales contributed to a 22% quarter-to-quarter increase in our cash position, bringing it to $67 million by the end of Q2. While mainstreaming a safe cash level, we also made strategic moves to secure advanced process capacity in our supply chain through prepayments. As we enter the third quarter of 2024, our A14 series mining machines are being back delivered on schedule and contributing to our revenue. Following the launch of A15 series, expect to complete its mass production wrap-up within this quarter. The main R&D work for A16 series will also be completed by the end of this year. Beyond chip development, we are rapidly expanding our product line and solutions to meet the post-harving demand for equipment upgrades and mining site deployments from global miners. We believe the upcoming Bitcoin bull market will be driven by broader public adoption. In this regard, we are developing a consumer-focused products line to make mining a part of everyday life and bringing benefits to general public. At the same time, recognize that global political and economic instability is increasing, leading to more volatility in Bitcoin prices, which continues to present challenges for the industry. Based on the overall situation described above, we maintain a cautiously optimistic outlook for the third quarter of 2024. We anticipate revenue for the third quarter to be approximately $73 million. This forecast is based on the current market and operational conditions of the company and the actual results may vary. Bitcoin's fourth halving was now completed in Q2, but the global political and economic dynamics surrounding Bitcoin continue to unfold, bringing it to a wider audience. While the price of Bitcoin may experience significant fluctuations and centralization during the process, it also helps the public to better understand and accept Bitcoin. Our company navigated the halving quarter with a stable stance, continued to invest heavily in both product development and capacity expansion. We remain confident in the long-term prospects of Bitcoin and the wide set of this bull market. And we are already back on the path to growth. This concludes my prepared remarks. Thank you, everyone. I will now turn the call over to our CFO, James. Thank you.