Canaan Inc (CAN) 2020 Q2 法說會逐字稿

Ladies and gentlemen. Thank you for standing by, and welcome to Canaan Incorporated Second Quarter 2020 Earnings Call. (Operator Instructions)

Please note that this event is being recorded. Now I'd like to hand the conference over to your speaker host today, Mr. Shaoke Li, Board Secretary of the company. Please go ahead, sir.

Thank you very much, and hello, everyone. Welcome to Canaan Inc. Second Quarter 2020 Earnings Conference Call. The company's financial and operating results were released by our newswire services earlier today and are available currently online.

Joining us today are our Chairman and CEO, Mr. Nangeng Zhang; and our CFO, Mr. [Quanfu Hong]. In addition, Mr. [Xiao Ming Liu], our VP; and Mr. [Dong Chen Chang], our Executive Assistant, 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 second quarter of 2020. Mr. Hong will then provide the 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 well 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 general accepted accounting principles in our earnings release and 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 the corresponding English translations. 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 second quarter of 2020..

(foreign language)

[Interpreted]

During the quarter, Bitcoin's price volatility declined in comparison to the first quarter as a result of the big halving event in May 2020. As Bitcoin's price began to recover in the post halving period during the second quarter, we recorded a meaningful improvement on a sequential basis in our financial and operating performances.

(foreign language)

[Interpreted]

Most notably, our total net revenues increased by 160.8% (sic) [160.9%] quarter-over-quarter to RMB 178.1 million, driven by 198.5% sequentially increase in our total computing power sold and a 153.5% sequential increase in the number of Bitcoin mining machines sold during the quarter.

In addition, we also improved our profitability as we grow our gross profit to RMB 43.3 million in the second quarter from RMB 2.4 million in the prior quarter while significantly narrowing our net loss to RMB 16.8 million in the second quarter from RMB 39.9 million in the prior quarter.

(foreign language)

[Interpreted]

This strong performance was a testimony to our ability to rejuvenate our business and financial growth as Bitcoin prices stabilized in the post halving period. Additionally, China's rainy season brought an excess of hydropower in the second quarter, making electricity cheaper and mining more profitable. As a result, the welcoming environment for Bitcoin and the blockchain has accelerated the rebound of market demand for mining machines. In fact, during the second quarter, we came close to clearing out our entire inventory and our Bitcoin mining machines that are now currently under production in the third quarter, have all been preordered.

To date, we have already started accepting preorders for mining machine deliveries in the fourth quarter of 2020 and early 2021. These preorders will result in significant increase in customer advances and prepaid expenses in the third quarter. We are encouraged by the strong market demand.

(foreign language)

[Interpreted]

Meanwhile, we further strengthened our research and development capabilities to ensure that our products maintain the position at the cutting-edge of technological innovation. After mass production -- after mass producing the first generation of the Samsung 8-nanometer chip in the first quarter, we completed the R&D process for the second-generation of the same chip in the second quarter.

During our test, the second-generation chip has displayed a 20% overall improvement in comparison to its predecessor. We are planning to utilize the new generation of the Samsung 8-nanometer chip to begin our mass production of new Bitcoin mining machines early September.

(foreign language)

[Interpreted]

In addition, during the second quarter, we completed the three-part process for the SMIC first generation N+1 chip, which was one of the first N+1 chips to have a successful tape-out at SMIC.

In late August, we have already received the N+1 chip from SMIC. And its performance during the test has exceeded our expectations. Currently, we are expecting to start delivering mining machines with the N+1 chip in the middle of the fourth quarter.

(foreign language)

[Interpreted]

While refining our product offerings, we also remained committed to the expansion of our overseas customer base. In Kazakhstan, for example, we have secured multiple large-scale purchase orders from local mining companies such as AQ Group Limited and AMAK. Furthermore, we are currently in the process of tendering several international Bitcoin mining farms, each of which involves more than 10,000 machines. As of now, we are optimistic about our ability to secure these projects, and we will continue to keep the market updated on our progress.

(foreign language)

[Interpreted]

As the price of the Bitcoin stabilized in the post halving period, the market demand for high-quality mining machines is nobly. However, the global capacity for wafer fabrication and the distribution has been impacted by a series of factors such as COVID-19 pandemic and the geopolitical issues.

To ensure that we can continue delivering our products to customers in the coming months. We have made sure to place a sufficient number of orders with our production partners.

Nonetheless, as a result of our efforts to diversify our supply sources since 2019, we are well prepared to fulfill our customers' orders and drive our business expansion going forward.

(foreign language)

[Interpreted]

In terms of our AI products, we remained focused on expanding our AI partnership and accelerating the monetization of our AI products during the second quarter as COVID-19 outbreak is gradually brought out, under control in China. We believe that the social distancing practice people have developed during the epidemic will help to accelerate the digitization process for government agencies, businesses and individuals.

(foreign language)

[Interpreted]

In line with this strategic focus, we've partnered with VergeSense, a U.S.-based workplace management service provider, specializing in sensor hardware and SaaS solutions. Through this partnership, our K210 chips will be implemented in VergeSense's new generation of motion sensors developed to analyze safe, social distances amid the pandemic. Mass production for this new generation of motion sensors began in July.

(foreign language)

[Interpreted]

On the previous earnings call, we mentioned that we had developed an intelligent door lock system capable of running facial recognition on people wearing masks. This system is now available in the market and the system orders are ramping up.

(foreign language)

[Interpreted]

In addition, during the second quarter, DJI technology selected our K210 chips for one of its STEM education project. This project was launched in July, and we expected to start implementing our chips into DJI technologies product in late 2020 or early 2021.

Moreover, our AI products jointly developed both leading STEM learning solution provider, UBTECH, and the leading developer of (inaudible) information have begun production testing.

(foreign language)

[Interpreted]

We are also working around the clock to develop our next-generation AI chip, the K510. The new chip has already received a large number of customer requests for testing. And we expect to start mass production before the first quarter of 2021. At the same time, we have maintained our commitment to integrating our AI products into our open-source community. Our strategic goal is to build an open source AI application platform.

(foreign language)

[Interpreted]

Recently, we also announced the change to our organizational structure and the Board of Directors. The new additions to our executive team will help to ensure that we have an in-depth understanding of the future trends in the high-tech industry. Additionally, this executive changes have also helped to ensure that our management team has extensive experience not only in the IC industry, but also in global market strategic planning at the corporate governance.

We firmly believe that effective corporate governance will enable us to generate the most value for both our company and our shareholders going forward.

(foreign language)

[Interpreted]

Although the global economy is still facing uncertainties, we are confident that the technology transcend borders and will become a vital tool for us to enhance society's operational efficiency and improve everyone's way of life.

This concludes the remarks of our CEO, Mr. Zhang. Now on behalf of our CFO, Mr. Quanfu Hong, I will provide an overview of our second quarter financial results.

Before I start, please note that all numbers are in RMB terms unless otherwise noted. Total net revenue in the second quarter of 2020 decreased by 26.3% and to RMB 178.1 million from RMB 241.5 million in the same period of 2019. The year-over-year decline was primarily attributable to the outbreak of COVID-19 and the Bitcoin halving event in the second quarter of 2020. Both of which led the decrease in our total computing power sold and our average selling price per terahash in the same period. On a sequential basis, total net revenue grew by 160.9% from RMB 68. 3 million in the first quarter of 2020. Cost of revenue in the second quarter of 2020 was RMB 133.8 million compared to RMB 230.8 million in the same period of 2019 and RMB 65.9 million in the first quarter of 2020.

The year-over-year decrease and a quarter-over-quarter increase in the cost of revenues were in line with the change in both our terahash sales, sales volume and the cost per terahash.

Gross profit in the second quarter of 2020 increased to RMB 43.3 million, representing an increase of 302.5% from RMB 10.8 million in the same period of 2019 and an increase of 1,711.5% from RMB 2.4 million in the first quarter of 2020. Gross margin in the second quarter of 2020 expanded to 24.3% from 4.5% in the same period of 2019 and 3.5% in the first quarter of 2020.

Research and development expenses in the second quarter of 2020 decreased to RMB 26.1 million from RMB 35.9 million in the same period of 2019, and RMB 41.8 million in the first quarter of 2020. The reduction of R&D expenses was mainly due to the decrease in materials used for research and development purpose during the second quarter.

As a percentage of total net revenue, R&D expenses in the second quarter of 2020 was 14.6% compared to 14. 9% in the same period of 2019 and 61.2% in the first quarter of 2020.

Let's now take a look at other operating expenses in the second quarter. One, selling and marketing expenses in the second quarter of 2020 were RMB 6.5 million compared to RMB 5.6 million in the same period of 2019 and RMB 4.1 million in the first quarter of 2020. The increase in selling and the marketing expenses was mainly driven by higher salaries for our sales and marketing department staff.

As a percentage of total net revenues, selling and the marketing expenses in the second quarter of 2020 was 3.7% compared to 2.3% in the same period of 2019, and 6.1% in the first quarter of 2020. Two, general and administrative expenses in the second quarter of 2020 were RMB 29.6 million compared to RMB 238.1 million in the same period of 2019, and RMB 27.6 million in the first quarter of 2020. In the second quarter of 2019, a total of RMB 213.1 million in share-based compensation allocated to general and administrative expenses was caused by the excess of price, the fair value of the transfer price of ordinary shares transferred from the existing shareholders to other existing shareholders who were also employees.

Consequently, our total operating expenses in the second quarter of 2020 decreased to RMB 60.4 million from RMB 279.7 million in the same period of 2019 and RMB 73.5 million in the first quarter of 2020.

Loss from operations in the second quarter of 2020 decreased to RMB 18.9 million from RMB 268.9 million in the same period of 2019 and RMB 71.1 million in the first quarter of 2020.

Excluding share-based compensation expenses of RMB 0.7 million, non-GAAP loss from operations in the second quarter of 2020 was RMB 18.2 million.

Net loss attributable to ordinary shareholders in the second quarter of 2020 decreased to RMB 16.8 million from RMB 263.1 million in the same period of 2019 and RMB 39.9 million in the first quarter of 2020.

Non-GAAP adjustable net loss in the second quarter of 2020 which excluded share-based compensation expenses was RMB 16.8 million.

Diluted net loss per ADS in the second quarter of 2020 was RMB 0.11 compared to RMB 1.88 in the same period of 2019, and RMB 0.25 in the first quarter of 2020.

Turning to our balance sheet. As of June 30, 2020, we had cash and cash equivalents of RMB 157 million compared to RMB 516.6 million as of December 31, 2019. The decrease was mainly due to the higher short-term investments. As of June 30, 2020, we had invested RMB 347.6 million in short-term investments compared to RMB 11 million in short-term investments as of December 31, 2019.

We purchased the short-term financial product to receive higher returns by no withdrawal restrictions. To -- this concludes our prepared remarks for today. Operators, we are now ready to take questions.

(Operator Instructions)

And our first question comes from the line of Dan Weiskopf from Toroso Investments.

I apologize I don't speak Chinese, so I have to ask the question in English. Is there -- can you make any comments on deposits made by customers for orders for your mining equipment?

(foreign language)

[Interpreted]

Our existing customer orders are mainly from the A10 series product. And this is part of because the A10 product was more mature. And in the second quarter, our sales are mostly -- our selling based on selling on our inventory. And starting from the third quarter, our inventory was completely sold. So the new orders are now future orders are booking our future new series of products.

This is a fairly common practice in our industry and especially for big orders, they normally, you have to wait for a certain period. Now that our expected delivery time is between the third quarter this year and first quarter next year, the delivery time a bit longer is because of the processing and manufacturing of the foundry takes a longer time. Recently, our number of orders are increasing because our new product series has better performance and better price -- cost efficiency.

(Operator Instructions)

And your next question comes from the line of Michael Parker From (inaudible).

My question is to the CFO. What international accounting standards does the company worked with and towards, please?

(foreign language)

(foreign language)

[Interpreted]

Our accounting principle is following the U.S. GAAP standard.

There are no further questions at this time. I hand back over to the management for closing remarks.

All right. Thank you for joining us today, and we look forward to talking with you next quarter. Thanks.

And that does conclude our conference for today. Thank you for participating. You may all now disconnect.

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