Canaan Inc (CAN) 2020 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to Canaan Inc.'s First Quarter 2020 Earnings Call.

At this time, all participants are in a listen-only mode. After the management's prepared remarks, you will have a question-and-answer session. Please note 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 and welcome to Canaan Inc.'s First Quarter 2020 Earnings Conference Call. The company's financial and operational 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. Quanfu Hong. In addition, Mr. Jianping Kong, our Co-CEO, and Mr. Jingjie Wu and Ms. Li Zhang, our Senior Vice President will also be available during the question-and-answer session. Mr. Zhang will start with the call by providing the overview of the company and the performance highlights for the first quarter of 2020. Mr. Hong will then provide the details on the company's operating and the 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 mostly roughly explained at reconciled to the most comparable measures reported on the general 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 the CEO, Mr. Nangeng Zhang. Mr. Zhang will deliver his remarks in Chinese, and I will provide the corresponding English translations. Please go ahead, Sir.

(interpreted) Hello, I'm Nangeng Zhang, Chairman and the CEO of Canaan Inc. Please allow me to provide a brief overview of the Company in the first quarter of this year. This call is just a month away from the last, but the Bitcoin halving just happened on May 12. From the general market perspective, after halving, the Bitcoin prices steady and rising. We haven't seen computing power volatility. The Bitcoin network is running stable. In general, the 3rd halving in Bitcoin history had successfully completed. Upon completion, the coming rainy season further rebalanced as a market demand of mining machines.

In Q1 this year, affected by the COVID-19, our total net revenue was RMB68.3 million, reflects a 44.6% year-over-year increase. The company's total net revenue growth aligns with the computing power sales. The company's total sales grew from 700,000 Thash per second to 900,000 Thash per second in Q1 2020, represents 18.4% year-over-year increase and with an increase ASP. The Company's first quarter gross profit was RMB2.38 million, while operating loss was RMB71.1, which mainly includes RMB41.8 million R&D expense, representing a 33% year-over-year increase. The drop of our gross profit margin is due to Q1 market conditions, including the influence of low Bitcoin price and the halving was about to come.

We have performed a series of refinements in management procedures and the product upgrades. We expect a sound increase in gross profit margin during the next coming windows of market recovery. On behalf of the team, I would like to sincerely thank all of the medical and the community workers who continuously fight on the front line against the COVID-19 to protect the safety of general public and the operation of the society. We are grateful to our safe working environment.

(interpreted) In terms of mining business, we started a mass production and the shipments based on the Samsung 8-nanometer chip in Q1 this year. We had manufactured several tens of thousands of such units. The 14-nanometer process based Miner developed with SMIC will begin mass production in Q2. Meanwhile, next-generation process development with Samsung and the SMIC is ongoing. Also, 5-nanometer process ASICs with TSMC are in progress and accelerating.

We continuously optimize the universality of hardware and the software design in our mining business. We believe the platform design of mining machines can reduce costs, shorten design cycles and they simplify customer deployment and maintenance. Avalon 1066Pro is our first serialized product under such concept, which currently available to our clients. The Avalon 1146Pro will be made available soon after. To improve competitiveness in real-world operation, we are about to launch the [practical application of liquid] (corrected by company after the call) cooling mining, to further improved thermal performance and reduced noise level. [We expect] (corrected by company after the call) improved energy efficiency, prolonged miner lifecycle and increased application scenarios.

We further provide our customers SaaS platform to lower energy barrier and to free our clients for our maintenance work. It is always our relentless pursuit to provide the product of extreme performance, reliability, practicality and the accessibility. As COVID-19 impact are easing, individuals and the institutional investors, especially Wall Street investors, are entering Bitcoin trading market.It is seen in media reports that legendary trader, Paul Tudor Jones entering Bitcoin's futures markets, Galaxy Digital's positive attitude and the active participation and et cetera.

We also see more and more big players' interest in our product and the services. Market confidence is recovering. Furthermore, the May to October is raining season and that brings cheap hydroelectricity. That would pressure the price of thermal power, resulting in overall cost of reduction of mining. Both increased trading and the cost of reduction should create a demand for miners and are favorable to payment.

(interpreted) We are also pleased to report that our A.I. chip K210 has received the hardware specialist certificate by Forrester's I.C. Chip Industry Report in Q2 2020, acknowledging its solid performance, low power consumption, suitable for various application scenarios and easy accessibility. In April, K210 support was added to Linux 5.7 kernel so that more developers can use a mainstream operating system to design with our A.I. chip for more applications, even beyond our design scope.

Furthermore, Linux provides a much friendlier development environment to reduce time-to-market and the user's learning curve. For example, only two days after our announcement, our world's largest technology community, GitHub, a team of three RISC-V developers has shared the support to K210 in Rust language. We improved the synergy between algorithm, hardware setup and the software design. We developed this with a smart gate control further incorporated mask detection, mask of the face recognition, and the liveness detection mode.

Our product satisfied many application scenarios at the banks, schools, communities, and the commercial, and the industrial parts, and have received many customer inquiries. The positive feedback is a good starting point for our A.I. business. We are committed to open source of K210 refining the product menu and the open-source tool chain, and attracting domestic and foreign developers to build an active and a skillful developer community.

(interpreted) In corporate management, we have optimized the management procedures, refined the governance system and the organization structure, linked to corporate culture with performance review in order to ensure product quality, control risks and the optimized capital allocation to benefit our shareholders on every front. With an average age of 32 and the work experience of eight years, our R&D team is passionate and experienced. Our management team has extensive experience in R&D, corporate governance and a strategic planning in the IC industry as well in international business execution. These are our core assets for future growth.

Supercomputing is what we do. Social enrichment is why we do it. Despite the growing macro-economic uncertainty, we have maintained the strong growth momentum. Through technological and the product innovation, we are to deliver better futures to everyone. Thank you.

Thank you, Nangeng. I will now go through our first quarter financial results on behalf of our CFO, Mr. Quanfu Hong. Before I start, please note that all numbers are in RMB terms unless otherwise noted.

Total net revenue in the first quarter of 2020 increased by 44.6% to RMB68.3 million from RMB47.2 million in the same period of 2019. The growth was mainly driven by increases in total computing power sold and the average selling price per Thash. Cost of revenues in the first quarter of 2020 increased to RMB65.9 million from RMB46.8 million in the same period of 2019, which was in line with the increased sales volume of Thash.

Gross profit in the first quarter of 2020 increased to RMB2.4 million compared to RMB0.5 million in the same period of 2019. Gross margin in the first quarter of 2020 expanded to 3.5% from 1% in the same period of 2019.

As a leading provider of super computing solutions, we remained committed to continuously enhancing our technology and refining our product offerings in the quarter. Consequently, our research and the development expenses in the first quarter of 2020 increased to RMB41.8 million from RMB31.3 million in the same period of 2019. As a percentage of total net revenues, R&D expenses in the first quarter of 2020 was 61.2%.

Let's now take a look at our operating expenses in the first quarter. Sales and marketing expenses in the first quarter of 2020 increased to RMB4.1 million from RMB2.3 million in the same period of 2019. This increase was due to the increased headcount of company's sales and marketing department. As a percentage of total net revenues, S&M expenses in the first quarter of 2020 was 6.1%.

General and administrative expenses in the first quarter of 2020 increased to RMB27.6 million or 40.4% of total net revenues from RMB24.8 million or 52.6% of total revenues in the same period of 2019. G&A expenses in the first quarter of 2020, the increase was mainly due to higher issuance fee in the first quarter of 2020. Total operating expenses in the first quarter of 2020 was RMB73.5 million compared to RMB58.5 million in the same period of 2019.

Loss from operations in the first quarter of 2020 was RMB71.1 million compared to RMB58 million in the same period of 2019. Excluding share-based compensation expenses of RMB1.7 million, non-GAAP loss from operations in the first quarter of 2020 was RMB69.4 million. Net loss attributable to ordinary shareholders in the first quarter of 2020 was RMB39.9 million compared to RMB67.9 million in the same period of 2019. Non-GAAP adjusted net loss in the first quarter of 2020, which excluded a share-based compensation of RMB1.7 million, was RMB38.2 million. Diluted net loss per ADS in the first quarter of 2020 was RMB0.25 compared to RMB0.5 in the same period of 2019.

Turning to our balance sheet, as of March 31, 2020, we had cash and cash equivalents of RMB264.4 million compared to RMB516.6 million as of December 31, 2019. The decrease was mainly due to higher short-term investments as of March 31, 2020, where company invested RMB173.4 million in short-term investments compared with RMB11 million as of December 31, 2019.

As mentioned earlier, given the evolving nature of the COVID-19 pandemic and the uncertainties surrounding the Bitcoin halving event, the company currently has very limited visibility on the potential impacts only as a business and as a market in which it operates. As a result, the company will not issue a business outlook for the second quarter of 2020 since Canaan believes that it is not appropriate to provide the financial forecast that could be materially different due to the rapidly changing market and the operational conditions.

This concludes our prepared remarks for today. Operator, we are now ready to take questions. Thank you.

Yes, thank you. We will now begin the question-and-answer session. (Operator Instructions). At this time we will pause momentarily to assemble the roster.

(Operator Instructions).

And the first question comes from Zheng Jialiang with HashKey Capital. Please go ahead.

Thanks. Zheng Jialiang. Okay, [am I heard]?

Yes, we hear clearly.

(interpreted) So I will translate it myself. My first question is regarding the per Thash revenue. I think the per Thash revenue in the first quarter of 2020 has been dropped from the RMB160 from fourth quarter in last year to, I think, RMB76 Thash per renminbi. I know there's some reason for new products to be reaching in this quarter, so I would like to know details regarding how this happened? Thank you.

(interpreted) Okay. This is Nangeng Zhang. I'm trying to translate Nangeng Zhang's answers to your questions. In fact, we understand in the last December, the overall BTc price is seeing a little bit dropping and the overall market is not performing so well. And it has been observed in the extension also in January of this year. But still under such kind of circumstances and also market situation, Canaan was able to do sales. Of course, the sales you see have small impact on the unit price per thash.

Since February this year, we all understand that the outbreak of COVID-19 and which heavily impacted negatively in China during that period, especially the logistic and cash rotations almost stopped. Between February and March, we see some BTC price rising and increasing, but still the COVID-19 outbreak, which is heavily impacted during this period so we still see how our price dropping. But we have confidence that in the coming month, especially in the last two quarters, the quarter three and quarter four we will have new products. And we are sure that in the second semester we'll have sales increased and also a very good unit price per Thash. Thank you.

(interpreted) I'd like to ask about the second quarter as the company did not issue a business outlook for the next quarter, so along this global market and also the recent water season starting coming from early May, how can we outlook the second quarter revenue of Canaan? Thank you.

(interpreted) Okay. We know that the Chinese rain season will start from May 22nd, normally. It's almost the next week sometime. And the sales is coming even after the halving happened a few days ago. We see many inquiries and demand on our products, more and more demand and inquiries in those weeks.

Even after the halving, we see more and more inquiries and will be in large, in large potential order inquiries. And these information honestly cannot be precisely quoted today in our CFO's statement, but I'm sure I can disclose this good news, also, I'm sure that in the second quarter we will see much better performance from Canaan. Thank you.

(interpreted) My third question regarding the cost of revenue. Remember that in the last fourth quarter the company has write-down of inventory on the prepayment about RMB329 million, so wants to know that in this quarter or maybe in the next quarter, will the write-back to your balance sheet or is there any plan when will the impairment be write-back given that market has been go back to stable and the BTC price has risen to the same level from the last year? Thank you.

Please allow me to translate for Mr. Hong.

(interpreted) Our annual report is very close to today's call, so the market hasn't changed much within this short-time window. We will see future market conditions and sales conditions and decide whether and when we are going to write back the impairment. We believe if sales goes better we will surely do that.

(interpreted) I'd like to know that the new product regarding Canaan's cooperation list at the SMIC of the new 5-nanometer ASIC 9-nanometer miner machine. I'd like to know that is there any concrete time frame for this new product? Thank you.

(interpreted) Okay. This is Nangeng Zhang and I will take your questions. Regarding the new product, yes, in fact, we haven't stopped ourselves in quarter one, quarter two on R&D even within the COVID-19 outbreak. We believe with 5-nanometers, which is a more advanced technology, which takes longer cycle to be mass-produced. So we believe in next year probably, this kind of product will be in the mass production.

And today if you're looking at our products, the power efficiency will be around 40 joules or below 40 joules, it will be a mainstream product. In the coming second semesters, our star product will be 1146pro, which is about 42 joules Thash. And this is the product that we will have in the second semester. And if we are looking at further more new product developments in the second semester, we will have mainstream products all those still below 30 joules in terms of power consumptions.

And we are working with today all the three foundries - the SMIC, Samsung and also TSMC as well. Thank you.

(interpreted) So my next question also I'd like to know how the management like to see the markets going to especially new generation of miners come to market, especially to a situation-based Bitcoin halving, also the flood season at this point. So how do you see the old generation miners fall out of market and new generation miners demand in this recent maybe just half years? Thank you.

(interpreted) Okay. This is Nangeng Zhang, and I will take the question. Regarding the old generation miners, which will be go out of the market, those miners are, in average, with the power consumption around 100 watts, so these miners are actually unable to perform. And looking at the current situation with many fields coming and also halving has happened already, we're starting to receive a huge demand. So in the market, there is a strong demand for miners. But of course, they're locked into this pool of second-hand miners, and they are competing on the price broadly. It worked in short-time effect the new miners price. There are average unit sales price in the short-term. But I will see in the long-term the demands from the market for new miners will come and the new miners will still take the lead in the mining industries. Thank you.

(interpreted) I'd like to know about if there's some policy changes and different problems regarding the mining industry? Does it has any effect on our miner sales? Thank you.

Thank you. I'll take the question.

(interpreted) This is Nangeng Zhang. Well, you mentioned the government policies regarding minings. In fact, we have noticed the news today or yesterday regarding the mining industries, but still it is a newly released news. We didn't see any impact so far in these industries. But of course, we know that the hydroelectricity supporting mining provinces mainly in China - in Yunnan province, Guizhou province and Sichuan province.

And we've been seeing these governments are developing or releasing new policies encouraging those hydroelectricity mining industries. By doing that, we see in those provinces or areas the mining are managed more and more in well-managed ways. So we are happy to see this happening and still we are evaluating these kind of policies if we will see new policies coming or releasing these days. Thank you.

(interpreted) I'd like to know the new SaaS platform that have been released this April called Canaan Cloud. I'd like to know - you mentioned sales and marketing strategy plan for the SaaS platform. Also, I'd like to know about the progress of marketing and also clients mentioned? Thank you.

(interpreted) We see the Miner cells are more and more we see key clients or big clients so the demanding or the requirements from the key clients are a little bit different. More and more we see one-stop service or total solution is becoming their requirement. So from this year we started to improve our software and added Canaan software into the sort of SaaS management system to support those kind of needs of demand.

And, in fact, it's like amazon cloud or ali cloud that the customers are asking for hash rate, not the the product or mining itself. And finally they want to have a hash rate, not a mining itself. So this product in terms product itself is trying to -- giving a lower entry level to our customers to avoid that they're involving daily mining operations. So they still can be benefited from those mining industries by using our hash platform. Thank you.

(interpreted) Thank you.

Thank you. And this concludes today's conference call. Thank you for attending today's presentation. You may now disconnect your line.