Canaan Inc (CAN) 2020 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to Canaan Inc.'s Fourth Quarter and Full Year 2020 Earnings Call. (Operator Instructions) Please note, this event has been recorded.

I would like to hand the conference over to your speaker host today, Mr. Shaoke Li, Board Secretary of the company. Please go ahead, Mr. Li.

Thank you very much. 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 the CEO, Mr. Nangeng Zhang; and our CFO, Mr. Tong He. In addition, Mr. [Xiao Ming Lu] our SVP, will also be available during the question-and-answer session.

Mr. Zhang will start the call by providing an overview of the company and the performance highlights for the quarter. Mr. He 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 as reconciled to the most comparable measures reported under Generally Accepted Accounting Principles in our earnings release and the filings with the SEC.

With that, I will now turn the call over to our Chairman and CEO, Mr. Nangeng Zhang. Mr. Zhang will deliver his remarks in Chinese, and I will provide corresponding English translation. Please go ahead, sir.

(foreign language)

[Interpreted]

Hello, everyone. This is Nangeng Zhang, Chairman and the CEO of Canaan Inc. I will now provide a brief overview of our progress in the fourth quarter and the full year of 2020.

(foreign language)

[Interpreted]

During the fourth quarter, bitcoin prices continued to rise, which helped to grow the market demand for mining machines. Our visionary approach had already enabled us to establish a presence in the market in previous quarters. In the fourth quarter, we further optimized the composition of our customer base and secured a large number of orders from our long term partners, which helped to safeguard our abundant cash flows.

As of December 31, 2020, our total contracted orders amounted to USD 174 million, with USD 66 million in advances from our customers, representing a sequential increase of USD 54 million from the third quarter of 2020. We also successfully started our mass production and delivered the next-generation of A12 series mining machines in the period and we have already begun delivering this new product service at a large-scale in the fourth quarter of 2021.

(foreign language)

[Interpreted]

During the fourth quarter, we further strengthened the core competencies of our mining machine business by expanding our operations in the market, investing in our R&D capabilities and refining our supply chain management. In addition, our increased investment in our AI chips business segment have enabled us to achieve meaningful progress in developing best-in-class AI chips and are facilitating their commercial applications.

(foreign language)

[Interpreted]

In particular, the total number of orders we received for our mining machines in 2020 reached 172,000 machines in the second half we were able to significantly grow the number of orders for our mining machines, reaching 92,000 machines in the fourth quarter alone. Among these orders, we continue to secure orders from prominent institutions, including the investment firms [Blue Energy Invest], which has ordered 15,000 machines and [Okto Credit], which has ordered 1,350 machines. In addition, we have also started the collaborations with several well-regarded mining machine customers in Northern Europe.

(foreign language)

[Interpreted]

As of the end of the first quarter of 2021, we have already recorded orders for more than 156,000 mining machines with over USD 238 million in advances from our customers. These orders included 6,400 from highest blockchain technology, Canaan listed a crypto miner and the 6,000 from [Core Scientific], a leading U.S -based crypto miner.

(foreign language)

[Interpreted]

Meanwhile, in order to provide our global customer base with the best service possible, we have been building up our global customer service network and established our first international customer service center in Kazakhstan in the fourth quarter. Going forward, we plan to build additional customer service centers in North America and other regions, which will enable us to provide a timely and effective (inaudible) after-sales service to our loan for our local customers around the world.

(foreign language)

[Interpreted]

We have always prior optimized -- prioritized our investments in product R&D and our total R&D investments reached USD 21 million in 2020. We have a team of seasoned engineers as well as complete designing flow. We continuously recruit talented people with competitive compensation scheme and the working conditions.

(foreign language)

[Interpreted]

We also continued to refine our supply chain during the quarter since starting to work closely with our new IC manufacturing partner which we began more than 1 year ago. We have been continuously improving the yield of the Chips. The power consumption and the computing performance of which have basically reached the expected level in the product test. In 2021, we will continue to develop several new generation of our chips.

(foreign language)

[Interpreted]

In addition to advancing our core mining -- in our AI business segment, for example, the usage of AI chips grew significantly across both domestic and international markets in 2020. In fact, our numbers of AI chips delivered tripled on a year-over-year base in 2020. And we currently expect that our AI segment revenue will maintain its relatively high year-over-year growth rate in 2021.

(foreign language)

[Interpreted]

Following our research, we have identified significant market opportunities for customer going to products with AI chips, in particular, the wide adoption of AI vision chips is currently creating a large addressable market, in fact, in 2020, the total production output of China's smartphone sector has exceeded RMB 1 trillion and as the potential market size is expected to be as high as RMB 5.8 trillion.

In light of these market opportunities, we have formed a 3-tier product plan. First, we will prioritize the development of low-cost customer product solutions with customers with consumer chips. For the second tier, we have vision chips with medium computing power for smart homes, smart education and other applications. The third year will be visited with high computing power for new retail, assisted driving, robotics and other applications.

(foreign language)

[Interpreted]

For the road map of AI chips, we have analyzed a specific application use cases and the corresponding market demand for computing power. As a result, we have designed multiple product lines.

(foreign language)

[Interpreted]

We completed the tape-out process for the K510 series in the fourth quarter last year and finished the series [chip back] process in early March. The K510 series chips, which carry a variety of digital and analog IPs that we have developed over the past 2 years. Our undergoing commissioning as partially customized chips for the mid- to high-end AIoT market, the K510 series chips have already generated significantly high interest in the market and received several small preorders.

Currently, we expect to start the mass production of the K510 series in the second half of 2021. On the other hand, the [K230] series under development is an upgraded version of our K210 series. Using customer feedback from the K210 series, we further optimized the K230 series computing power and the power consumption features.

In addition, we also made this next-generation chip more flexible for developers and the (inaudible) support, laying the foundation for the K230 series to better support the needs of future enterprise development.

(foreign language)

[Interpreted]

For the first half of 2021, we continue to expect that future contract sales for our mining machines will contribute around 70% to 80% of our total revenues. However, for the second half of the year, we will adjust such percentage based on the market situation and the production capacity.

(foreign language)

[Interpreted]

Our current mining machine production capacity for the first half been fully presold through future contracts. As a result, starting from the second quarter of 2021, we plan to dedicate several thousand mining machines to our own vehicle mining business. These machines were primarily consisted of our A12 and A11 service miners for an additional combined computing power between 350ph to 450ph.

(foreign language)

[Interpreted]

Starting from the second half of 2021, we plan to allocate no less than 10% of our total monthly production capacity of mining machines to our own bitcoin mining business every month. The actual number of mining machines will be adjusted based on the development of our partner mining farms, the price of bitcoin and our production capacities in the case -- in the case that there are no significant change to the price of a bitcoin and our production capacity. We expect that the total computing power dedicated to our bitcoin mining business will reach to between 2 EH to 4 EH by the end of the year.

(foreign language)

[Interpreted]

2020 was an extremely important year for Canaan. We overcame external challenges such as COVID-19 pandemic and there's obstacles that in place throughout our supply chain. We also continued to optimize our management structure while adding personnels and independent directors to our Board in order to further strengthen our corporate company.

(foreign language)

[Interpreted]

Finally, I would like to take this opportunity to thank all of our employees for your hard work as well as our business partners and investors for their ongoing trust and the support during the challenging year.

In 2021, we will remain as committed as ever towards our mission of improving the efficiency of our society and the way of our lives. Thank you.

This concludes the remarks for our CEO, Mr. Zhang. I will provide an overview of our fourth quarter and full year financial results. Before I start, please note that all numbers are in RMB terms, unless otherwise noted. Total net revenue decreased to CNY 38.2 million from CNY 463.2 million in the same period of 2019 and CNY 163 million in the previous quarter.

The decrease was due to a few factors. First, we started mass production of our new product series during the first quarter, which only began to ramp-up in sales in the period.

While we have almost sold out our inventory of our older production at start to the third quarter of 2020. Cost of revenue decreased to CNY 29.2 million from CNY 1.14 billion in the same period of 2019, and CNY 180 million in the third quarter of 2020. The fluctuations in our cost of revenues were in line with the changes in our sales volume of Thash and cost per Thash.

As a result, we reported a gross revenue of CNY 9.1 million in fourth quarter of 2020 compared to the to a gross loss of CNY 673.4 million in the same period of 2019 and a gross loss of CNY 17 million in the previous quarter. Research and development expense were CNY 40.1 million compared to CNY 63.6 million in the same period of 2019 and CNY 32.1 million in previous quarter. The year-over-year reduction was mainly due to the changes in materials, that we use for R&D purpose. The sequential increase was driven by the higher salary and welfare benefits for R&D personnel.

Let's now take a look first at other operating expense in the fourth quarter. First, selling and marketing expenses were CNY 6.1 million compared to -- compared CNY 7.7 million in the same period of 2019 and CNY 3.2 million in the previous quarter. The changes in our selling and marketing expense were primarily due to travel expense and salary changes in our selling and marketing department segment.

G&A expense decreased to CNY 33.9 million from CNY 56.4 million in the same period of 2019, and the of course, and CNY 40.6 million in the quarter. The reduction was mainly driven by lower share-based compensation during the fourth quarter of 2020.

Consequently, our total operating expense in the fourth quarter of 2020 were CNY 80.1 million compared to CNY 127.7 million in the same period of 2019 and CNY 75.9 million in the previous quarter. Loss from operating narrowed to CNY 71 million from CNY 801.2 million in the same period of 2019 and CNY 92.9 million in the previous third quarter.

Net loss attributable to ordinary shareholders was CNY 72 million compared to CNY 798.2 million in the same period of 2019 and CNY 86.4 million in the previous quarter. Non-GAAP adjusted net loss, which excludes share-based compensation expense was CNY 73.1 million. In comparison, non-GAAP adjusted net loss was CNY 750.5 million in the same period of 2019 and CNY 84.8 million in the previous quarter. Diluted net loss per ADS was RMB 0.46 compared to RMB 5.34 the same period of 2019, and RMB 0.55 in the previous quarter.

Now turning to our results in full year of 2020. Total computing power sold in the full year of 2020 decreased by 37.1% to 6.6 million Thash per second, from 10.5 Million Thash per second in 2019 as a result of increased relative bitcoins and our broad it clear out our older product series inventory during the first 9 months of 2020.

Consequently, total net revenue in 2020 decreased to CNY 447.7 million from CNY 1.42 billion in 2019. Cost of revenue in 2020 decreased by 78.9% to CNY 409.9 million from CNY 1.94 billion in 2019. As a result, our gross profit in 2020 was CNY 37.8 million compared to a gross loss of CNY 516 million in 2019. Total operating expense in 2020 decreased by 45.8% to CNY 291.6 million from CNY 538.5 million in 2019.

Loss from operations in 2020, narrowed to CNY 253.9 million from CNY 1.05 billion in 2019. Net loss attributable to ordinary shareholders into 2020 was CNY 215.1 million compared to CNY 1.03 billion in 2019. On a non-GAAP basis, our adjusted net loss in 2019, which excluded share-based compensation of CNY 3 million was CNY 212.1 million. Net loss per ADS in 2020 was RMB 1.38 compared to RMB 7.21 in 2019.

Turning to our balance sheet. Contract liabilities as of December 31, 2020, increased to CNY 430.4 million from CNY 8.3 million as of December 31, 2019. The increase was driven by increased down payment for the sales order of our bitcoin mining machines, which are scheduled for delivering in 2021 and beyond.

As of December 31, 2020, we had cash and cash equivalent of CNY 391.1 (sic) [CNY 391.3 million] compared to CNY 516.6 million as of December 31, 2019. The decrease was mainly due to higher short-term investment as we had invested CNY 32.4 million in short-term investors as of December 31, 2020 compared with $11 million in short-term investment as of 31st 2019. Notably, we purchased short-term financial products to receive higher returns at the same time can withdraw at any time.

Looking forward, we are convinced our expense in 2020 will enable us to improve our financial performance significantly in 2021. As the price of bitcoin started to resume its upward trajectory since the first quarter of 2020. Consequently, we expect our total net revenue in first quarter of 2021 to exceed CNY 400 million.

Please note that the forecast only reflects our current expense expectation, and please (inaudible) in view on the market and operational conditions, which are subject to change, particularly in regarding to the potential fluctuation in the price of a bitcoin as well as the impact of COVID-19 on the global economy.

This concludes our proprietary remarks for today, operator. We are now ready to take questions.

(Operator Instructions) We have the first question from the line of [Martin Tim] from (inaudible).

(foreign language)

My first question is about our new generation bitcoin mining machine, that CEO just mentioned. And I would like to know which foundry partner are we cooperating with and which technology [node] are we using? And any launch schedule for this new machine?

(foreign language)

[Interpreted]

Okay. Let me add a translation. So we are one of the senior in our industry to have multiple foundry partners. And we are actually working with them to -- for our new generation chips. And so every year, we have roughly 2 to 3 product iterations, and this year will be no exception. We will evaluate our nodes and our selection of foundry partners around the basis of various factors such as technology, the market as well as the capacity. So the work is currently in progress but at this point, we cannot really disclose any additional information on the schedule of launches.

Sure. Okay. (foreign language) My second question is about our capacity. We know that current capacity is very tight and how much wafer capacity can we procure each month? And do we have any improvement about our wafer capacity?

(foreign language)

[Interpreted]

So let me translate, we believe a series of inherent issues in the bitcoin mining industry resulted in the shortage of chip supply. So mining machine manufacturers generally use bitcoin prices as reference points to estimate future market demand for mining machines, which, in turn, will determine the production volume of their mining machines.

Due to the low bitcoin prices in the second half of 2020, most mining machine manufacturers reduced their investment in fabrication during the period. As a result when the point bitcoin price bounced back in the second half of 2020, we saw a severe supply shortage in the industry. In addition to the limited supplies across the semiconductor manufacturing sector recently also has played a role in building the shortage of chips in 2021, further exacerbating the problem of chip supply.

We cannot really disclose the exact number of chips that we have under production right now. But one of the strategies, we've adopted to address this problem is to maintain our partnerships with multiple foundry partners and keep expanding our collaborations, which has helped us achieve outstanding results in terms of [keeping up].

On the other hand, we are also actively cooperating with large mining companies worldwide, including both public traded companies and professional institutions with long-term purchase orders for mining machines in place, we can effectively secure the delivery of our chips from our foundry partners. This, in turn, would enable us to alleviate the technical shortages of chip supply caused by the (inaudible).

(foreign language)

My follow-up is that we have full relationship with Mainland China advanced foundry partners, and we got a lot of labor capacity from them? And do we see any competitor to compete with this capacity in 2021 and across our strategy to protect the capacity?

(foreign language)

[Interpreted]

Okay. So first, there will, of course, be competitors, especially given the high bitcoin prices. So we have already established a strong competitive mold with our extensive experience our collaborations with multiple foundry partners, our integrated supply chain as well as our large global client base. This is why we actually let the industry market share as well for mining machine is in new markets during the first half of 2021 so far.

And we actually see supply chain in a similar fashion as [IT] design, where the good design requires continuous and higher investments in R&D.

In terms of screening production capacity, which is -- which actually has similar requirements too. We need to increase our investments in supply chain, technology and engineering in the current market environment in 2021 today. We are working to see the marketing opportunities to enhance our cash positions and strengthen our product development capabilities. Our work on product designs on multiple nodes at the same time, will afford us with additional flexibility when we negotiate or coordinate with these partners to ensure capacity.

(foreign language) My next question is our current yield rate. CEO already mentioned that our yield rate already achieved some milestones? And how do we expect the improvement in Q2 or second half and the contribution of the improvement to our machine shipment.

(foreign language)

[Interpreted]

So yield rate can easily be affected by a variety of factors and it is also an important and confidential trade secret. But generally, when introducing new products, especially when starting cooperation with a new partner it takes a bit of time for the production capacity and the yield rate to ramp up.

And we are working around the clock to minimize this so-called break-in period as much as possible. Through the hard work of our employees, our colleagues and our partners, we can -- we have effectively completed this difficult break-in period -- break-in process in the second quarter of 2021.

(foreign language) And my last question is about our [ETH] mining machine, do we have any plan to launch our ETH machine in 2021 or 2022?

(foreign language)

[Interpreted]

So what I can say right now is that our R&D is currently in progress. But at this point, we can't really disclose any more information now.

Next question is from the line (inaudible).

(foreign language) We know that selling price on mining machines and bitcoin price are highly related, but bitcoin price has increased significantly since fourth quarter last year, why it don't reflect our fourth quarter financial report and the fourth quarter guidance.

(foreign language)

[Interpreted]

Okay. So yes. To answer your question, the price of mining machines actually moves with the bitcoin prices only for the mining machines that are ready for delivery. So since the second half of last year and the first half of this year, most of the mining machines we sold were actually sold as futures contracts, which had a fixed price. And the prices were actually lower than our existing machines.

(foreign language) According to the news, a company called (inaudible) purchased [600] mining machines from other companies with the total cost of around USD 2.53 million and the calculated price is around [USD 4,500] for mining machines. Now I ask how much was bitcoin price in the (inaudible)? And were those 600 mining machines, all pre orders how much is the price on mining machines on the credit sales discount of the of price generally?

(foreign language)

[Interpreted]

Okay. To answer that question -- what we -- the sale was made in February and for the mining machines that we sold, we actually sold them at different prices and -- which may be compared to actually more complicated. And generally speaking, for mining machines that we sell at a given time, features could be much lower than the price of the existing machines could be similar or in certain cases could have higher prices.

And so it kind of depends on the timing of when we sign those contracts and the timing of when we deliver them. As well as a bunch of other factors. Well, generally speaking, the future contracts should have around 60% to 80% of the price of -- [selling price for] machine.

(foreign language) My question is, how do we expect the sales volume in 2021, how much pre-sales orders we have currently? And what is the average selling price of mining machine on the current bitcoin price?

(foreign language)

[Interpreted]

So we actually mentioned this number earlier in my prepared remarks. So I said that before, we have already recorded orders for more than 156,000 mining machines with over at CNY 238 million advances from our customers for -- as of the end of the first quarter of 2021.

(foreign language)

[Interpreted]

And to add to my previous, the current timing of existing machines, what the current timing of delivery of increasing machines is actually spent a pretty longer time some of them were scheduled to mid of next year actually. And the prices of the existing machines has actually remained pretty high as well. Some of them are in the range of USD 50 to USD 100 and both of them are going up as well.

(foreign language)

(foreign language)

(foreign language)

(foreign language)

[Interpreted] Just to add translation. So that USD 50 to USD 100 is priced for each terahash.

(foreign language)

My question is, you have mentioned that our commitment was planning to evolve in bitcoin mining activity. What is the current progress? How many mining was shares do you plan to use for mining by the end of the year? And how much does our company account for the network computing power, compared with other mining line companies, what is your expectation for computing power at the end of the year?

(foreign language)

[Interpreted] So we already advancing our mining business. We have actually already set up an operation center in Singapore to run the operation. And Kazakhstan is also going to be on the top of our considerations as well as North America. And we have always prioritized compliance for our mining business, which is why we are in constant communication with our lawyers, auditors as well as other independent agencies to ensure our compliance and reduce our operation risk.

(foreign language)

[Interpreted] So given that our production of mining machines has been pretty much fully booked for the first half of 2021. We actually expect that the deployment of mining machines for our own mining business for the second quarter of the year to be in the [few thousands] with a total computing power between 350 petahash to 450 petahash.

So for the second half of the year of 2021, we will, we will adjust that number, that figure based upon the market environment as well as our production capacity. So for the second half of the year, we plan to deploy more than 10% of our total production capacity every month for our own mining business. The actual number will be -- we will monitor the progress of in other mining companies with -- but we're partnering with, as well as [we contracted] to make real-time adjustments. But provided that we don't see any huge changes in the bitcoin prices. And our production capacity, we expect to deploy around 2 exahash to 4 exahash of total computing power for our mining business by the end of the year.

(foreign language) My last question is, what's the plan for the mined bitcoins, are you going to hold or exchange for U.S. dollars or any other kind of consideration?

(foreign language)

[Interpreted] So -- so as I said earlier, we're definitely going to make sure that all of our operations are compliant. And under guidance, we will -- we will aim to hold our bitcoins as long as for the long term. At the same time, it is also possible for us to sell the bitcoins, or so we're doing this so that we can tap into the benefit or the dividend of the growing industry.

There are no more questions at this moment. And we'll hand the call back to the management for closing remarks. Thank you.

Okay. Thank you all for joining us today. We look forward to talking to you next quarter. Thank you.

Thank you. Ladies and gentlemen, that does conclude your conference today. Thank you for participating. You may all disconnect now. Thank you.

[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]