Canaan Inc (CAN) 2023 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to Canaan 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 would like to hand the conference over to your speaker host today, Mr. Clark Soucy, 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. Nangeng Zhang; and our CFO, Mr. Jin Cheng, James. In addition, Mr. Leo Wang, IR Senior Director; and Ms. Xi 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 20-F 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. Nangeng Zhang. 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 quarterly report conference call with you.

Compared to Q4 of the previous year, Q1 of 2023 has brought more hope to the 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. Regrettably, 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 businesses 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 these areas. First, we insist on long-term R&D and production capacity investment. Second, we continue to develop and improve our multifaceted 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 earnings (corrected by company after the call) report, our latest generation A13 series mining machine chip (added by company after the call) 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 of 2023, 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 [of 2023] (added by company after the call), we have achieved stable supply. In actual use by customers, the excellent computing power, power consumption, and quality of the A13 series have also been recognized, and its shipment volume has grown rapidly.

Whether in a bear market or a bull market, we always insist on iteration and strive to make the best mining machines. Even when the 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 USD 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 bull-bear cycle, the industry undergoes reshuffling, with some miners leaving and new ones joining. As miners continually seek and develop stranded cheap energy worldwide, transforming wasted energy into reusable power, both the identity and location of miners are constantly changing. Starting from the first quarter of this year, we accelerated the construction, development and improvement of our comprehensive international sales system. Our sales system is now divided into three parts: large clients, channels and retail, and is assisted by online stores and regional business development, 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 market saw a slight recovery compared to Q4 of 2022, we still remained 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 [4.25 million terahashes per second] (corrected by company after the call), a sequential growth of 126.8%, but the total quarterly revenue of USD 55 million was below our expectations. However, we also see positive aspects. Although demand from large clients in the U.S. 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 stabilizes, the initiatives and efforts we implemented in Q1 are starting to show more results. For instance, we recently signed a contract order for 11,000 units of our A13 product with Cipher, a publicly listed institutional mining client in North America. Before the contract, we assisted the client in conducting extensive on-site tests of our products at their mining site in Texas. The client ultimately recognized the excellent performance of our A13 series products under relatively 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 confirm 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 firmly established mining as a strategic priority and secured a place for ourselves in the global, rapidly developing industry of Bitcoin mining. In the first quarter of 2023, the profitability of mining improved due to the 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 to a mining revenue of USD 11 million, a slight 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 operating costs. Even though the total network computing power is still rising, the increase in Bitcoin prices and recent industry events like BRC-20 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 31, 2023, we have deployed computing power of over 5 exahash per second to our mining sites. However, due to severe cold weather and contract execution issues, the total power 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 deployed computational power data, within our cash flow and operational capabilities.

Lastly, we are dedicated to maintaining a healthy cash flow and accumulating assets with strong growth potential. Canaan 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 experiences 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 improvement in sales and the return of contract sales orders in the second quarter, which continue to contribute to our revenue and cash flow. It's also worth noting that the healthy and stable supply chain resources we've 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 emphasize our strategy of holding Bitcoins. Bitcoins generated from mining are only used to pay for direct operating costs such as electricity. Our self-developed and self-produced mining machine products and the mining power deployed to the mining sites, as important assets for producing Bitcoin, contain huge growth potential as Bitcoin price continue 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 reality has made our performance less than ideal. However, our direction has not deviated 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 Canaan 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 purchasing power of miners in large mining farms have not yet recovered. Coupled with current situation where the industry's inventory digestion has not yet been completed or the decision has not yet been completed, both sales prices and gross profit will continue to be constrained.

Based on the above comprehensive situation, we are extremely cautious about the expectations for the second quarter of 2023. The revenue for the second quarter of 2023 is expected to be about USD 72 million. This forecast is based on the current market and operating conditions of the company, and the actual situation may vary.

In this 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 to 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 Web 3.0 have been largely completed, namely blockchain-based digital currencies and smart contract technology. In our last earnings call, 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 hedging tool against systemic risks and seigniorage in the current global financial 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 Web 3.0, blockchain-based digital currencies are likely to become mainstream applications and have broader prospects.

Once, I had a long discussion with GPT4 about the future of AGI becoming mainstream in the world. I'm almost certain that AGI will be the last piece of the puzzle for Web 3.0. The final creation of Web 3.0 will be a decentralized individually distributed AI system. At that time, digital currency and smart contracts based on blockchain will reshape the financial system of this new world on the basis of consensus. More trustworthy, efficient, transparent, greatly improving the level of productivity and promoting the progress 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, bring value to customers with computing power products and services, and 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.

Thank you, NG, and good day everyone. This is James speaking in our Singapore headquarters.

Firstly, I would like everyone to notice that we have changed our reporting currency. Starting from January 1, 2023, we've decided to change our reporting currency from Renminbi or so-called Chinese Yuan to U.S. dollars. The change of the reporting currency will better illustrate the results of our global sales and is another important step in our internationalization strategy. We have applied the change of reporting currency retroactively to our historical results of operations and financial statements. It will also be easier for our investors to read and analyze our financial reports in one currency.

As NG started the call with, the first quarter of 2023 was challenging due to the revived but still weak market demand, and declining selling price. From company perspective, we are committed to maintaining our strategic continuity. We kept investing in R&D and production capacity. We developed and upgraded our sales system to reach global customers. We continued to expand our mining deployment. And we strived to maintain a healthy cash flow and accumulate assets with strong growth potential for our shareholders.

Overall speaking, in Q1 of 2023 (added by company after the call), total revenue generated was USD 55.2 million, which did not meet our guidance of USD 65 million. The gap consisted of approximately USD 6 million in machine sales and USD 4 million in mining business.

Let's begin by discussing our machine sales. Our revenue of mining machine sales was USD 43.7 million in this quarter, 7.6% lower than USD 47.3 million for the last quarter. In the first quarter of 2023, the industry was affected by inventory, competition, financing environment, and cash flow, and the average selling price of computing power continued to decline. We actually increased our sales volume in computing power, reaching 4.2 million terahashes per second with a substantial increase of 126.8% compared to Q4 last year. However, the average selling price dropped to USD 10 per terahashes per second as we needed to adjust our prices in line with the overall market for Bitcoin mining machines. Additionally, affected by a series of U.S. bank failure events in mid-March, payment and shipment of some orders have been delayed. After that period, we received more orders and recorded customer advances of USD 8.3 million at the end of March. This laid a good foundation for the machine sales revenue in the second quarter.

Our gross profit for mining machine sales was USD 5.2 million and our gross margin rate for mining machine sales was 11.9% in this quarter.

Turning to our mining business. Our mining revenue was USD 11 million in this quarter, a 3.3% sequential increase compared to USD 10.7 million in Q4 last year. It's a new record high. However, this revenue did not meet our expectation. We temporarily shut down the machines at several mining sites during January due to low Bitcoin prices. We believe this was a necessary measure to minimize operating losses. This had an impact on the quarterly mining revenue result. In this quarter, our total deployed hash rate reached more than 5 exahash per second, and our installed hash rate reached more than 4 exahash per second. We mined 476 Bitcoins in this quarter and achieved 19.8 Bitcoins for mining profit. Gross profit was USD 0.2 million for our mining business in this quarter. Please notice here that mining profit or loss is defined as the proportion of mining revenues, deducting costs for energy and hosting in terms of mining revenues, without consideration of depreciation.

Now talking about our AI business. We recorded USD 0.41 million for AI revenue in this quarter. This is a 68.6% increase compared to USD 0.24 million for Q4. The sequential revenue growth was mainly driven by the increased sales volume for AIoT customers.

Switching to the expense. Our R&D expenses stood at USD 19.1 million in this quarter, compared to USD 33.4 million in the last quarter and USD 15.2 million in the prior-year period. The quarter-over-quarter decrease was due to one-off expenditure for our new generation chips incurred in the last quarter. Excluding this one-off expenditure impact, our R&D expenses remained stable sequentially. The steady year-over-year growth reflected our continuing commitment to building our talented R&D team.

Our sales and marketing expenses [in this quarter] (added by company after the call) were USD 1.5 million, compared to USD 1.1 million in the last quarter and USD 3.0 million in the prior-year period. Sales commissions reduced year-over-year because of revenue downsizing.

Our general and administrative expenses in this quarter were USD 17.6 million compared to USD 24.6 million in the last quarter and USD 19.8 million in the prior-year period. The decrease was mainly due to USD 2.6 million of realized gain on Bitcoin sold in this quarter for electricity costs, which offset our G&A expenses. Please note when we do disposal of Bitcoin, the gain or loss upon booking value will be recorded into G&A.

The net result of the foregoing was an operating loss of USD 85.7 million for this quarter, which is 31.4% narrower than the last quarter. The net loss was recorded as USD 84.4 million, which is 8% narrower than the last quarter.

It is important for us to keep our eyes on the cash flow. We held cash and cash equivalents of USD 72 million on March 31, [2023] (added by company after the call). As our CEO shared, we committed to securing future production capacity during this quarter. We spent USD 53.9 million to secure wafer supply and machines production. Other cash payments included USD 28.6 million for operations and USD 4.7 million in tax expenses. Please note that, as we paid the year-end bonus in January, the outflow on operation was higher than usual run-rate. The cash-out, totaling USD 87.1 million, was net off by inflows of USD 54.8 million from sales and the proceeds of USD 3.1 million by the ATM facility.

Turning our attention to our Bitcoin assets. We held 623 Bitcoin as of March 31, decreased from 757 Bitcoins by the end of 2022. First, we mined 476 Bitcoins in this quarter. In order to reduce the effect of Bitcoin price fluctuation on the profitability of our mining business, we implemented a pre-exchange plan in this quarter. That is at the beginning of each month, we would exchange Bitcoins to U.S. dollars based on the current price in advance for the monthly electricity cost. This new process eliminated possible risks triggered from significant Bitcoin price fluctuations. In total, we exchanged 699 Bitcoins for the electricity cost in this quarter. These aforementioned resulted in a decline of 134 Bitcoins quarter-over-quarter. It is a one-time change.

From March 7, 2023, the date we reported our financial results for the fourth quarter of 2022 to May 25, 2023, we utilized the ATM for a small amount of fundraising to test the financing facility. During the above period, we sold 1,532,219 ADSs with net proceeds of approximately USD 4.2 million at an average price of USD 2.73 per ADS. We executed the above sales within 10 trading days in March and did not utilize the ATM after March 31.

From March 7, 2023, the date we reported our financial results for the fourth quarter of 2022 to May 25, 2023, we did not repurchase (corrected by company after the call) any ADS back. In future, we will prioritize our shareholders, carefully monitor cash flows and stock prices, and flexibly execute ATM or stock repurchase.

In Q2 [of 2023] (added by company after the call), we anticipate the revenue of USD 72 million, a 30% increase from Q1 [of 2023] (added by company after the call). Despite the market's gradual recovery, we have secured some contract sales orders from major clients and distributors. This has bolstered our cash flow and allowed us to invest in strategic areas of focus. However, it is important to note that we operate in a dynamic market with uncertainties, so our estimation reflects our current perspective and understanding of the operation.

Now I would like to briefly walk you through our financial results for the quarter.

Revenues in the first quarter of 2023 were USD 55.2 million as compared to USD 58.3 million in the fourth quarter of 2022 and USD 201.8 million in the same period of 2022.

Gross loss in the first quarter of 2023 was USD 47.5 million compared to a gross loss of USD 64.1 million in the fourth quarter of 2022 and a gross profit of USD 123.5 million in the same period of 2022.

Total operating expenses in the fourth quarter of 2023 were USD 38.1 million, compared to USD 60.8 million in the fourth quarter of 2022 and USD 38.0 million in the same period of 2022.

Loss from operations in the first quarter of 2023 was USD 85.7 million compared to a loss from operations of USD 125.0 million in the fourth quarter of 2022 and an income from operations of USD 85.4 million in the same period of 2022.

Net loss in the first quarter of 2023 was USD 84.4 million compared to a net loss of USD 91.6 million in the fourth quarter of 2022 and a net income of USD 65.1 million in the same period of 2022.

Basic and diluted net loss per ADS in the first quarter of 2023 were USD 0.51.

As of March 31, 2023, the company had cash and cash equivalents of USD 72.0 million.

This concludes our prepared remarks. We are now open for questions.

(Operator Instructions)

Your first question today comes from the line of Kevin Dede from H.C. Wainwright.

I was wondering if you might be able to offer a self-mining hash rate target for the year, maybe disclose a little bit on what you're seeing in terms of the availability of hosting sites? And then secondly, I was hoping you could share a little bit more geographic information on equipment sales. It's very comforting to see that sales are growing outside of North America. And I was wondering if you might be able to segment sales from Asia, North America and European framework.

As we mentioned, as of March 31, the deployed computing power at our mining farms exceeded 5 exahash per second. However, in the first quarter, the installment of computing power was slower than expected due to severe weather conditions and contract execution issues, resulting in total installed hash rate was over 4 exahash per second. In the second quarter, we entered into a mining partnership with Stronghold in early May, which involved 4,000 mining machines with a total capacity of 0.4 exahash per second.

At the same time, we are also exploring more mining partnership opportunities in regions with abundant energy resources around the world. Our mining business has expanded into many geographical regions where we had no previous presence. The local political, economic, and infrastructure conditions in these areas are complex and subject to change, which poses challenges to our exploration and development efforts. This further tests our team's operational capabilities and ability to adapt to changes. Therefore, we have a more cautious outlook on mining expansion. We currently estimate that the installed mining hash rate in Q2 of this year will be around 4.5 exahash. This forecast is based on the current operating conditions, and the actual situation may be different.

Mining is a long-term strategic focus for us, as it complements our mining machine sales business and allows for the effective utilization of more inventory. We will actively and prudently pursue collaboration opportunities, negotiate terms of cooperation, and strive to continuously increase the installed mining hash rate to generate Bitcoin mining income.

Yes. I will take the second question from Kevin. It's about the geographical situation of the mining industry. I think the leading market is still the United States, but it looks like the inventory, no matter new machines or secondhand machines, are still quite sufficient inside the whole North American market. So it looks like there are more opportunities coming from Southeast Asia, the Middle East, and even the South American market. And we noticed some retail customers are ordering machines, even from Africa and from Western Europe. I think it depends on the energy of the local-level usage.

I think the mining business will grow as we expected to global level, and more and more areas will join this mining business. And it will rapidly change because different locations may have different regulations coming out related to mining. But from our perspective, we would like to seize all kinds of opportunities, especially like, in this quarter, we had connections with Malaysia and Thailand distributors, which enabled us to reach customers locally in those two countries.

We will develop more, as CEO said, build up our sales channels to make sure we get in touch with our customers locally. And we also would like to continue the dialogue with big clients in North America. Cipher is just a beginning for us. So, we have confidence to discuss with more customers -- discuss with more customers and let them enjoy the A13 series machines for their mining purposes. So I hope that answers your question, Kevin.

Yes. So phenomenal. I really appreciate the detail. I hear great things about the A13, but I cannot leave the call without hearing from Nangeng what Bitcoin price is going to be this year.

Okay. In short term, I think that we have no need to do midterm or long-term prediction of Bitcoin. But for short term, I think the Bitcoin price is related to the economic environment, especially for the U.S. So, I think you know the answer. I think you know the numbers. Yes. I hope that it will rise in the second half of this year, I cross my fingers.

Next, we have the line from Shuang Sun from Guosheng Securities.

(foreign language) So I want to ask that you introduce the new progress and application scenarios of the company's AI edge computing chips?

Okay. (foreign language) Recently, the AI industry, represented by products like ChatGPT, has revealed an important point. The reason -- I think the reason why the AI industry has most evolved as developed as expected over the years is not due to AI itself, but rather, like many other industries, it is the result of a contradiction between the users' expectations for product capabilities and what the industry can provide at a certain cost. When AI products can truly bring significant benefits to users, then you see the response (corrected by company after the call) is very positive.

Therefore, I'm currently restructuring the company's AI department and business to ensure that our technology and investments can embrace the future of the AGI, artificial general intelligence, world.

But in the short-to-medium term, we believe that an important function of AIoT and EDGE AI is to convert real-world images, sounds, and sensory data into text and code, information that can be understood by large language models like ChatGPT, while complex decision-making is not the strength of EDGE AI today, where large language models excel. Our K230 chip has highly efficient EDGE AI capabilities and advantages in terms of low cost and low power consumption. Therefore, we are adjusting the direction of our product applications to adapt to this trend.

In the long run, as I mentioned in the CEO remarks, I will explore ways to horizontally expand our technology and participate in future and broader transformations. We aim to bring value to our customers through more general-purpose computing power, products, and services, and support societal progress.

(foreign language) Is there any upside to the company's mining business going forward due to the very high transaction fees on the network recently?

Yes, I think according to Satoshi Nakamoto's vision, transaction fees will become an important component of miners' income after multiple halvings. It appears that the industry is developing as expected. So recently, due to events like BRC-20, the increase in Bitcoin transaction fees has been beneficial for both miners and our own mining business. In a situation where the network's total computing power remains constant, miners can earn more mining fees. So we hope that miners and ourselves can improve our financial situation and that our customers can recover their purchasing power more quickly.

(foreign language) Overall, as your company has a growing supply of bitcoin on your balance sheet, what is your strategy for potentially selling them?

Currently, we do not have any plans to sell our Bitcoin, and there are several reasons for that. First, our mining operations are still in the early stages of scaling up, so we have been focused on the development. You may notice that we do sell the mined Bitcoin to cover our mining facility's electricity costs, which helps minimize our cash outflow.

Regarding whether we will sell the Bitcoin, we hold to profit from future price appreciation. We have recently heard this question from several investors. We have had many internal discussions on this topic, but due to our belief that Bitcoin is undervalued, combined with our long-term confidence in its global adoption, we are currently not considering selling our Bitcoin in the upcoming quarters. If the price of Bitcoin experiences a significant increase, we will revisit this topic and reevaluate.

Next up, we have the line from Mike Legg from The Benchmark Company.

Could you comment a little bit about the Cipher 11,000 unit sale plus you mentioned to have about 36,000 units being sold? Can you comment on what you're seeing from a pricing environment with that and how margins are holding up there?

Thank you, Michael. This is James. I think, yes, recently, we have secured more large-scale orders, including the agreement with Cipher for 11,000 machines. I personally joined the meeting with Cipher's team in New York and also in Singapore. Honestly, I really like their strategic ambition and their professional execution capability. So I'm happy they consider our A13 series very suitable for their new mining operation in west Texas. I think the deal benefits both Cipher and Canaan.

In terms of the price trend about the whole current price environment, it looks like customer demand is coming back step-by-step. It looks like the inventory of the market, no matter new machine or secondhand machines, are still quite sufficient, especially in North America. So the price did not come up. Instead, in Q1, we saw the price going down. So it looks like currently, the demand is coming back, but the price is still low.

It looks like the Bitcoin price continued to increase a little bit with some turbulence recently. But we still anticipate that in the coming months, the Bitcoin price could be coming up again. With that trend, the selling price has challenges to going up. But currently, nobody can assure that. So I just let you know that, frankly express myself and let you know my thinking.

Just a follow-up. Can you comment on the inventory, which -- how much of it is finished goods versus raw materials chips? And then also, how long do you depreciate your mining equipment for on the bitcoin mining site?

Currently, I think looking at the overall situation in the mining machine market, customer purchasing demands have [partially] recovered. This is also reflected in a significant growth of 126.8% in the company's first-quarter computing power sales compared to the previous quarter. However, the financial situation of miners is still not optimistic, so they lack purchasing power. On the other hand, the market's inventory supply is relatively abundant, thus the selling price of mining machines remains at a low level.

I think compared to the end of [last] December, we have seen a rebound in the Bitcoin price in the past over one quarter. This has brought better mining profits to miners and helped improve their financial situation. In the industry cycle, some miners have undergone restructuring, and new miners continue to enter the market, driving the continuous increase in network computing power. As mining farm construction gradually completes and the weather in the northern hemisphere warms up, leading to abundant hydroelectric resources, it is expected to further stimulate the demand for computing power and provide support for the selling price. Let's see.

I think, Michael, you asked about the depreciation of our mining machines deployed in the mining farms. Actually, 18 months is our depreciation policy. Usually, after 18 months, the order depreciation will be completed. And about the inventory combination, I should say, the finished goods are not that huge a part of inventory, it's less than 50% of the total inventory we put and also some steel wafers and steel chips. And it takes time to assemble those materials into machines. So, so far, we also control the speed of assembling, make sure the inventory is just sufficient, not too much to increase the storage costs or too small to have shortages. So I think that's our inventory status. I don't know if I answered your question, Michael?

Yes, that was perfect.

Our last question comes from the line of Jiaer Zhu from China Renaissance.

Coming to A13 series. I just want to know where is the estimated revenue contribution for A13 series products this year? And also in terms of the pricing strategy, do we see any increased room for ASP per Thash in Q3 or Q4? That's my first question.

I think this is a very specific question about the A12 and A13 series. We have this transition period to try to clear the inventory of A12 models, and also the A13 series after the launch the customer's tests and also they start to place orders in Q1. It looks like the performance of the A13 series is better than what we expected. In Q1, the total revenue of A13 series is already occupying like 47% of total machine sales revenue. So we have confidence that in Q2, the A13 series will definitely become our biggest revenue source. And for the A12 series, I think our target is trying to clear the inventory before end of Q3, but of course, as soon as possible. We do have a very low price for the A12 currently.

About our price strategy in the coming quarters, I think as previously mentioned, demand currently is still at a weak level. And it looks like we need time to collect the demand back and also get the price to come back to normal. So I think Q3 will be the quarter we see the price going up most likely. We hope it will happen. And we also consider that there will be a possible increase of A13 series price. But currently, in Q2, we didn't do that because the market inventory digestion is still ongoing. So hopefully, in Q3 and Q4, we can see more positive changes. That's my answer.

I have a follow-up because I remember that on last quarter call's, we mentioned that we expect the A13 series will account for 70% to 80% of total revenue for the whole year. So just wondering if this number will improve a little bit given the better performance on A13 series products.

Yes. Currently, I still think A13 series could be higher than 70% of the total year sales because like in Q4, if our projection about the Bitcoin price is very correct, then in Q4, it will become a peak season. At that time, the A13 series will have good sales in Q4. So during the whole year, I still think the A13 series could be 70% to 80% of total sales. And yes, and I think let's hope it happens because the price can even have an upside that will be better. Thank you.

Okay. Got you. And my second question is in terms of the mining business revenue contribution. I know that in first quarter, the revenue contribution was around 20%, right? So just wondering, on a longer-term basis, what's a reasonable revenue mix? How should we think of a reasonable revenue contribution for the mining business, maybe in a longer-term consideration?

Yes, Venis, I think this is a very good question. As a company, we do both machine sales in the semiconductor design field and also do mining business. I think from our current view our mining revenue is about 20% of the total business. We expect it to remain within the range about 15% to 20% in the future. Of course, we should try our best to expand our deployed machines and increase our hash rate in future. But I think the thing is based on -- we can sell more machines than we did in (corrected by company after the call) Q1. It looks like in Q1 for machine sales, we are still in the bear market that makes 20% of mining business.

And actually, from a long-term perspective, my personal view is that it should be like 20% to 30% in our total business. We are still a company majored in manufacturing and designing machines. And the mining business will continue to grow, but we will leave more room to our customers in a modest way.

There are no further questions now, I'd like to turn the call back over to the company for any closing remarks.

Thank you again, everyone, for joining our call today. If you have any further questions, please feel free to reach out to us through the contact information provided on our website. And thank you again.

Thank you. That concludes today's call. Thank you, everyone, for attending. You may now disconnect.