Canaan Inc (CAN) 2021 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Canaan Inc.'s Third Quarter 2021 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, Ms. Xi Zhang, Investor Relations Manager of the company. Please go ahead, Ms. Zhang.

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. Nangeng Zhang; and our CFO, Mr. Jin Cheng, James. In addition, Mr. Xiaoming Lu, our SVP; Mr. Shaoke Li, our Secretary of the Board; Mr. Leo Wang, IR Senior Director, 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. 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, which also applies to this call as we will be making forward-looking statements. Please also note that we will discuss non-GAAP measures today, which are more thoroughly explained and reconciled to the most comparable measures reported under generally accepted accounting principles in our earnings press release and filings with the SEC.

With that, I will now turn the call over to our Chairman and CEO, Mr. Nangeng Zhang. Please go ahead, sir.

(foreign language) Let me translate. In the third quarter, powered by our team's efforts, we have achieved satisfactory results on multiple fronts. We generated RMB 1,317.6 million in total net revenues, up of 708.2% year-over-year and up 21.8% quarter-over-quarter, reaching a new historical high. At the same time, our profitability further improved with our gross margin expanding to 56.3% during the quarter.

Net [income] (corrected by the company after the call) totaled RMB 467.2 million, setting a new record since our IPO. To achieve this performance, both our business and operations have overcome significant challenges as the recent related regulatory and policy changes negatively impacted the mining machine sales market. Besides the market factors, we attribute our accomplishment against the challenges to the visionary and preemptive strategies that our management team have been implementing.

Following our IPO in 2019, we have been continuously expanding our business globally and diversifying the geographic presence of our business, while upholding our business philosophy of operating in compliance. Moreover, we have deepened our collaboration with some of our key clients from purely mining machine sales to joint mining, further expanding the breadth and form of our cooperation.

On the supply front, we maintained a healthy relationship with our suppliers, enhancing our discussion and communication, securing capacity from wafer production to packaging and testing, so as to ensure the supply to our own production. As such, we were able to overcome the semiconductor supply instability as well as the constraints on electricity and international logistics towards the end of the quarter. Importantly, we remain steadfast in bolstering our R&D efforts and attracting elite talents to build our product development team, thereby strengthening our technological capability and consequently our growth.

(foreign language) In terms of our mining machine sales, we delivered 6.7 million terahash per second of computing power to our clients during the third quarter of 2021. This was an increase of 128.4% year-over-year and 12.9% quarter-over-quarter, marking a new historical high for quarterly sales performance. In the first nine months of 2021, we delivered our -- of our mining machines directly to 26 countries and regions.

While we are building a geographically diversified business, we also strengthened our foothold in several overseas markets, where market demand is more concentrated, such as the U.S. and Kazakhstan. We have received repeat orders from several large-scale mining companies in these overseas markets and established a long-term cooperation with them.

In the third quarter, 2.24 million terahash per second of computing power sold was ordered by repeat customers, demonstrating their continued recognition of our product performance, delivery capabilities and service quality. At the same time, we are in discussion with these clients regarding potential partnerships to expand deeper into the industry value chain through joint mining operations and advocating for renewable energy mining in overseas markets.

(foreign language) The average selling price or ASP of our computing power sold in the third quarter also increased from previous quarters, we currently set up -- expect our ASP to continue to serve as a growth driver for our top line performance in the fourth quarter, just as received in the third quarter.

(foreign language) In terms of our supply chain, we continued to strengthen our cooperation with foundry partners and secured their capacities through upfront payments. Our adequate cash position, which was a result of the spot and future sales of our mining machines has enabled us to secure a sufficient supply of wafers and production capacity for chips.

(foreign language) For our Bitcoin mining business, we upheld our business philosophy of operating in compliance with relevant laws and regulations and choose to work with large scale compliant and solid partners in overseas markets. We are able to leverage our advantages in the supply chain to allocate machines to the facilities of strategic partners with lower electricity costs. Given the industry dynamics, we will adjust our business operations from time to time to implement the most suitable development strategy and seize market opportunities. To do so, we will constantly adjust the allocation of mining machines between sales and the mining business.

(foreign language) We currently -- we are currently operating mining machines with a total computing power of approximately 32,000 terahash per second. We have also delivered mining machines with 850,000 terahash per second computing power to our partners' mining farms and gradually put them into operation. In addition, we have signed contracts with partners for approximately 1 million terahash per second of additional computing power and we are preparing to ship out these machines to the mining farms by January's end in 2022. Furthermore, we are negotiating with a number of business partners for joint mining projects with a total capacity of about 200 megawatts.

(foreign language) For our AI business, we have seen a rapid growth momentum in terms of total sales of AI chips, which increased by 451% in the first nine months of 2021 from the same period of last year. We have also made solid progress in the research and development of our K230 AI chip.

(foreign language) Our R&D expenses reached RMB 92.76 million in the third quarter, increasing by 188.8% year-over-year. We have continued to expand our R&D team by recruiting more elite talents through our initiatives to enhance our employer branding efforts directed at experienced talents and campus hires.

During the third quarter, we recruited 33 technical staff, accounting for 19% of the total headcount in our R&D team as of September 30, 2021. Our total number of R&D staff as of the end of the third quarter increased by 70% from a year ago. At the same time, we have made steady progress in the research and development of the new generation of Bitcoin mining machines.

(foreign language) After the completion of our previously announced share repurchase program in September 2021, our Board of Directors approved a new share repurchase program of up to US$20 million. As of today, we have repurchased about 0.6 million ADSs in a total amount of over US$4.6 million. We have strong faith in Canaan's growth potential and will remain committed to creating value for our shareholders.

(foreign language) During the quarter, we experienced the regulatory changes, continued supply constraints in the global semiconductor industry and other challenges posed by the market environment. However, despite these challenges, we leveraged our team's collective efforts as well as our effective network of customers and supply partners to navigate the difficult market dynamics. As such, we delivered a historically best quarterly performance in the third quarter based on the foundation of our success in the previous quarter.

So I would like to take this opportunity to express my gratitude for what everyone at Canaan for their hard work and dedication, as well as our partners, clients and investors for their continued support and vote of confidence.

(foreign language) Going forward, through our best endeavors, we aim to sustain our growth trajectory to create increasing value for all of our shareholders. We now expect that our revenues in the fourth quarter of 2021 will increase by 35% to 50% on a sequential basis. Please note that this forecast reflects our current and preliminary views on the market and operational conditions, which are subject to change.

(foreign language) This concludes my prepared remarks. I will now turn the call over to our CFO, James.

Thank you, Mr. Zhang, and hello, everyone. This is James speaking. Q3 was not an easy quarter. However, we still delivered a solid performance in this quarter with record highs in multiple operating and financial metrics. I'm glad to share the results to all of you. In the third quarter, we achieved another record high top line results and further expanded our profit level. Specifically, we delivered total net revenues of RMB 1,317.6 million and yielded a gross profit of RMB 741.7 million, with a gross margin of 56.3%.

We also reached a new high in our bottom line, with non-GAAP adjusted net income of RMB 587.5 million. From top line perspective, we delivered a record high computing power sold 6.7 million terahash, while at the same time, our average selling price per terahash improved by 7% sequentially. Both volume and price increased, which drove revenue to a new level.

Looking at our sales pipeline, our pre-orders have retained our contract liability at a high level of RMB 1,026.7 million as of the quarter end compared with RMB 430.4 million as of December 31, 2020. Gross profit was RMB 741.7 million compared to a gross loss in the same period of 2020, representing a sequential growth of 73.3%. Here, I do want to note that the demand for an ASP of our computing power are meaningfully influenced by the Bitcoin price and its trend outlook, which are difficult to project.

On the other hand, we also sensed the pressure from wafer cost increase from our suppliers, which could affect our margin to a certain extent. As such, our gross margin rate is always subject to a combined effect of the volatile sector. As we previously disclosed, we have kicked off our mining business and now we have 32,000 terahash in the mining operation.

As of the third quarter's end, we were holding 23.86 Bitcoin. Please be advised that our mining income and cryptocurrencies are initially recorded at the price when we generate them through our mining operation. Our digital assets are recorded on the balance sheet, net of any impairment losses incurred since initial recognition. Gains are not recorded until realized upon disposal of such digital assets. Therefore, the digital assets value on our balance sheet does not reflect its value appreciation in case of an increase of Bitcoin price.

Regarding the plan of our mining business, as Mr. Zhang just shared, we now have -- also have 850,000 terahash computing power under deployment in Kazakhstan. We are under discussion with a few partners to secure additional power and operating capacity. Looking forward, we will continue to allocate Bitcoin mining machines to our mining business sector and we will continuously disclose the progress.

Research and development expenses were RMB 92.8 million, increasing by 188.8% year-over-year. The increase was primarily attributable to the increased staff costs in technology-related departments, as well as the incremental development costs for new products. We will continue to invest in R&D. With respect to our expense management, we will closely monitor the ROI on different projects.

We have incurred minimal income tax expense in the third quarter. I'd like to note, since we are going to use up the deferred tax assets generated by accumulated operating losses from previous quarters, we expect to incur substantial income tax expenses for our profitable quarters going forward. Overall, while we delivered solid results for the quarter, we are not resting on our laurels. We do note the risks and the volatilities are our normal life in this rapidly developing industry. We endeavor to proactively manage the risks with our agile operating strategies.

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

Total net revenues increased by 708.2% year-over-year and increased by 21.8% quarter-over-quarter to RMB 1,317.6 million. Gross profit was RMB 741.7 million, up 73.3% sequentially. Total operating expenses in the third quarter were RMB 278.4 million compared to RMB 75.9 million in the same period of 2020 and RMB 262.4 million in the second quarter of 2021.

Income from operations was RMB 463.3 million, up 179.9% sequentially. Net income attributable to ordinary shareholders was RMB 467.2 million, up 179.3% sequentially. Non-GAAP adjusted net income was RMB 587.5 million, up 83.6% sequentially. Non-GAAP adjusted net income or loss excludes share-based compensation expenses.

Basic and diluted net earnings per ADS for the quarter were RMB 2.68 and RMB 2.64 respectively. As of September 30, 2021, the company had cash and cash equivalents of RMB 1,698.5 million, up 334% compared to RMB 391.3 million as of December 31, 2020. This concludes our prepared remarks. We are now open for questions.

(Operator Instructions) Your first question comes from the line of Martin Chien from Ten Asset. Please go ahead.

(foreign language) First, congratulations for the very strong Q3 earnings and Q4 guidance. And CEO already mentioned that Chinese government tightened the regulation in the act for shutdown of mining operation in Mainland China. In your view, how is the impact on the cryptocurrency mining industry and how it impacts Canaan sales in Q3? And can these orders -- can be transferred to the overseas customers?

(foreign language) If we look at the computing power statistics of the Bitcoin network, by the end of the third quarter, basically, all the computing power from mining farms in Mainland China have been removed. Afterward, most of the discontinued mining farm, along with the computing power, has relocated to overseas markets. However, as of now, the Bitcoin network total computing power still has not recovered to its highest level in the industry.

(foreign language) So these market developments resulted in short-term volatilities in the price of Bitcoin. However, we can see that Bitcoin price has fully recovered from the -- from the temporary losses as of now.

(foreign language) So specifically, although recent regulatory changes created a prudent level of negative impact to the sale of mining machines in the short term, the market has already reacted and adjusted in a timely manner during the quarter.

As industry players reallocated their discontinued computing power to the overseas market, the overall global demand for mining machines resumed its upward trajectory. So, we have also observed that the financing environment for miners in overseas market is improving as a lot of large-scale overseas funds are actively investing in mining farms. So, overall, the demand for the computing power is relatively stable.

(foreign language) Additionally, our financial performance maintained robust growth momentum in the quarter, as you can see, and we anticipate even higher sequential growth in the fourth quarter. As such, we believe our preemptive measures to expand our business footprint in overseas market has enabled us to offset the impact of domestic regulatory changes. So hope I answered your question.

(foreign language) CEO already mentioned that Canaan already locked some wafer and could you elaborate more on your collaboration with your foundry partner in 2022? And in terms of the cost collaboration and yield? And do you expect the increase of the price of wafers in the next year due to sustained supply constraint?

(foreign language) So we have implemented a multi-foundry strategy and established a long-term partnership with multiple major foundries. Our smooth cooperation with these foundry partners, in turn, has secured a stable wafer supply for our production. As our yield will continue to improve in 2021, we are able to ensure the performance of our mining machines, while improving our production capacity. We have also been proactively seeking additional production capacity to meet the increasing demand from our clients. So with one of our foundry partners, for example, we have secured wafer supply through prepayments through June 2022.

(foreign language) So on top of that, we continue to refine the fabrication process and the improvements in our yield rates have been encouraging. So, nobody, we have achieved slightly higher yield rates in all processes throughout the fabrication line, such as packaging, circuit board and testing. As a result, we were able to improve the overall product yield and thus our gross margin in the third quarter.

(foreign language) So, meanwhile, we have to recognize that the continued industry-wide supply constraint is creating a seller's market, consequently increases wafer price -- increases in wafer price are natural and inevitable from foundry partners who are positioned in upper stream of the industry value chain. So against the backdrop of unstable wafer supply, we are discussing a series of flexible strategy with our foundry partners to secure our wafer supply. These strategies also include accepting price increases under certain conditions to ensure our supply.

As the price of wafers increases throughout the semiconductor industry, we will continue to negotiate future wafer prices with foundry partners. We believe that a reasonable range of price increases will further solidify our cooperation. In 2022, we will continue to upgrade our fabrication process and improve the performance and cost efficiency of our products. So, hope I answered your question.

(foreign language) We have heard that Kazakhstan is planning to release regulation on cryptocurrency mining. Do you expect material impact on your mining business?

(foreign language) Yes, we did note with the policies in Kazakhstan, I believe these policies will promote the sustainable development of cryptocurrency mining in the country. Under the new guidelines, mining companies need to obtain an approval from the Kazakhstan government in order to secure electricity supply. We have learned from our recent communications with our customers in the country that large companies with technology capabilities and sufficient funding will benefit from this policy.

Our current top three customers in Kazakhstan are also large-scale companies who have obtained the necessary approvals from the Kazakhstan Ministry of Energy to conduct mining business, therefore, ensuring our business development in the country. From another perspective, implementation of this policy will effectively prevent unqualified and small mining companies from conducting speculative market disturbing activities and in turn, benefit our development in the Kazakhstan market.

(foreign language) So, I would like to point out that our global operations, which are far beyond Kazakhstan, as we have already established foothold in Central Asia, Southeast Asia, Europe and North America. Most notably, North America is accounting for approximately 30% of our overseas market with the majority of the long-term customers being publicly traded companies. This company includes Mawson, Iris Energy and Hive Blockchain. So, hope I answered your question.

(foreign language) And could you elaborate more on your income and the profit of your mining business? And how are your holding and trading of Bitcoin strategy to influence your financial statement in the future?

(foreign language) So it is worth reiterating that compliance with relevant laws and regulations is the foundation on which we export our mining business in overseas market with extreme caution at the early stage. We are currently operating mining machines with a total computing power of approximately 32,000 terahash per second. After the initial trial and testing process for six months, we can now effectively execute many aspects of the business, such as legal, tax and operations.

In addition, we have delivered mining machines with 850,000 terahash computing power to our partners mining farms, which are being set up for operations. We have also signed contracts with mining partners for approximately 1 million terahash per second of additional computing power and scheduled the shipments of these mining machines by the end of January of next year. So, furthermore, we are negotiating with a number of North American business partners for joint mining projects in North America with a total electricity consumption capacity of 200 megawatts.

(foreign language) As of September 30, we hold 23.86 Bitcoins. Our current strategy is to hold our Bitcoins and we will not trade them in the short term. However, we do not rule out the possibility of trading them in the future.

(foreign language) So according to the accounting standards, the value of Bitcoins we hold is recognized at the historical cost when we acquire the asset on the balance sheet. For subsequent valuation, we recognized impairment losses if we assess the value is lower than the initial cost. If the value goes up in the follow-on assessment, we do not record any gains on the balance sheet. Only when the Bitcoins are sold will we recognize the actual gains realized.

(foreign language) And my last question is about the Canaan's mining cost in the third quarter?

(foreign language) Well the cost of mining in the pilot run stage in the third quarter was about 39% of mining revenue and the gross margin was 61%, which is slightly higher than the gross margin of our sales of mining machines. However, going forward, for different collaborations, the gross margin will continue to be subject to change in the price of Bitcoin when it is harvested, electricity changes and different ways for collaborating with mining partners.

(Operator Instructions) As there are no further questions. I would now like to turn the call back to the management for any closing remarks.

Thank you once again for joining us today. If you have further questions, please feel free to reach us through the contact information provided on our website.

Thank you. That concludes the call today. Thank you, everyone, for attending. You may now disconnect. Thank you all.