Canaan Inc (CAN) 2021 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 2021 Earnings Conference Call. (Operator Instructions)

Now I'd like to turn the conference over to your host today, Ms. Xi Zhang, Investor Relations Manager of the company. Please go ahead, Ms. Zhang.

Thank you, operator and hello everyone. 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. Leo Wang, IR Senior Director 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 -- and we open the call up for your questions.

Before we continue, I would like to refer you to our Safe Harbor statements 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 and estimates for the 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 for GAAP results. You can find additional disclosures regarding these non-GAAP measures, including reconciliations to the comparable GAAP results in our earnings release which is found 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, sir.

(foreign language) In the fourth quarter of 2021, we faced a wide range of challenges, including high volatility in Bitcoin prices, pandemic evolvement, complex impact due to geopolitical factors and continued semiconductor supply shortages across different fabrication production lines. With a pragmatic attitude and flexible steady operations, we seized opportunities amidst numerous challenges. This enabled us to achieve progress on multiple fronts as demonstrated by our strong financial performance in the fourth quarter to close out the year 2021.

During the fourth quarter, as we continued to expand in overseas markets, we maintained growth momentum in our computing power sales, reaching a record high of 7.74 million terahash per second. For the quarter, we achieved a 65.8% quarter-over-quarter increase in revenue to RMB2.18 billion, smashing through the upper range of our guidance. We earned a net profit of RMB1.2 billion, another record high for our company. For the full year, we completed 22.34 million terahash per second in total computing power sold, up 238.5% year-over-year. Total net revenues reached RMB4.99 billion, up more than 10-folds than 2020, generating a net profit of RMB2 billion for the year.

(foreign language) Next, let's look at our detailed operations during the quarter. In terms of our mining machines sales, we realized a 15.5% quarter-over-quarter increase to deliver 7.74 million terahash per second of computing powers for our clients, setting a new historical high for our quarterly sales performance. Market demand remains robust. Despite considerable volatility in Bitcoin prices during the fourth quarter, we were able to increase the overall average selling price and drive revenue growth through various measures. These measures include enhancing production capacity and yield rate, acquiring new customers, leveraging flexible pricing strategies, maintaining stable supply, dynamically adjusting the proportion of spot sales. We continue to diversify our computing power sales through more overseas markets, especially in Southeast Asia and South America.

For the first time, we have customers from Malaysia, UAE, Argentina, Peru and other emerging markets. Orders by new customers contributed a significant portion of our computing power sold, reaching 41%. Meanwhile demand remained strong in traditional overseas markets like Central Asia, North America and Europe as orders by our existing clients represented 59% of total computing power sold. Our ability to expand our geographic coverage, both foster repeat repurchases from large mining companies and maintain a consistent and stable supply chain, allows us to more effectively convert market demand into our sales.

(foreign language) We are very confident in our revenues for the quarters to come, as we have recorded a solid full year performance and secured production capacities with our foundry partners for the year. In addition to our production capacity allocation for spot sales and mining business, we received contract advances of RMB1.34 billion from contract sales customer as of December 31, 2021, setting a new record. This demonstrates over 6 million terahash per second to be delivered. The strong contract sales brought substantial cash inflows for our company and reflect strong demand from Bitcoin miners and their recognition of our product and -- product quality and delivery capabilities.

(foreign language) Regarding our Bitcoin mining business, we setup overseas operations in house to carry out the mining operations in other Bitcoin related business. During this quarter, our mining operations in Kazakhstan encountered multiple challenges including pandemic factors, logistic congestion and power supply shortage in the winter which all negatively impacted our mining machine online rate. We are closely monitoring the local energy supply situation. Our staff on site are making best efforts and proactively communicating with our partners to solve the problem as soon as possible. We will also be prudent in carrying out additional deployments.

(foreign language) It's necessary to emphasize that although our mining business encountered headwinds in the near term, developing the mining business is still one of our long term strategy. With lessons from past experience, we will decisively execute this strategy. We will continue to leverage the advantages of our mining machine supply through expanded presence and deepened collaborations, as well as dynamic allocation of production capabilities between -- production capacities between machine sales and mining. We endeavor to further enhance the overall economic benefits of our operation.

(foreign language) We remained steadfast in developing our AI business in the fourth quarter. Feedback has been positive thus far, and we are seeing continued interest from customers in intelligent educational hardware, smart homes and various other application scenarios. Recently, we reached a strategic cooperation agreement with OpenAnolis, a leading open source operating system community and innovation platform. We will jointly explore the development and applications based on the OpenAnolis operating system and the Kendryte AI chip platform, promoting localized open source projects in the field of edge computing AI chip applications.

(foreign language) Regarding our R&D, in terms of our research and development, we continue to expand our R&D teams and enhance our design capabilities. We have achieved the ability to independently implement chip front-end logic and back-end physical design for multiple advanced nodes covering the entire packaging, heat dissipation and mass production processes. In the fourth quarter, our total number of R&D staff increased by 99% year-over-year.

(foreign language) We possess a deep self-developed IP matrix and have established an even more comprehensive self-developed IP system. We carefully protect the achievements of our R&D efforts with a range of active patents. As of December 31, 2021, we have accumulated 156 authorized patents, 70 IC layout design rights and 105 software copyrights. (foreign language) We also continue to make steady progress on a number of R&D projects for the new generations of Bitcoin mining machines. We are dedicated to cultivating the industry and providing better products for miners. Going forward, we will close -- we will disclose specific performance parameters of new generation mining machines only after we chip in and successfully tape-out and complete the full testing for the machines.

(foreign language) As we continue to propel forward our business, we remain committed to driving value for our shareholders. As of today, we have completed the repurchase program approved in September 2021, representing -- repurchasing approximately 3.6 million ADSs for the total of $20 million. The repurchase program progressed smoothly and we were able to complete the program earlier than the expiration date. Subsequently, the Board of Directors will continue to evaluate new repurchase plan for multiple aspects. We will keep you updated on any further progress.

(foreign language) In 2021, we achieved sustained growth and a strong performance despite various uncertainties and market challenges, a testament to the efficacy of our strategy and our solid execution capability. (foreign language) In 2022, we remain committed to amplifying our research and development capabilities, deep diving in chip design and improving product performance. In 2022, we will also comprehensively enhance our customer orientation as we shift our focus towards overseas market and expedite our presence across the globe. Maintaining close communications and providing best of class services, become increasingly important to better serve our customers, we are exploring more client-centric ways across our product R&D, manufacturing, transportation and after sales services.

Additionally, we will further leverage our pragmatic flexible and resilient operations to strive against the market uncertainties. We will continue to mitigate the impact from market evolvement on Bitcoin price fluctuations with steady supply and secure production capacities as we maximize our profit through strategic balancing our mining machines sales and mining business.

(foreign language) We expect our total net revenues in the first quarter of 2022 will be in the range of RMB1,500 million to RMB1,600 million, representing an increase of 275% to 300% compared with the first quarter of 2021. Please note that this forecast reflects our current and preliminary views of 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. Despite volatile marketing environments and various challenges, we achieved another robust quarter with solid financial results from topline to bottom line. In the fourth quarter, we delivered the computing power sold of 7.7 million Thash/s, representing a sequential growth of 15.5%. Our total net revenues reached RMB2,184.6 million, up 65.8% quarter-over-quarter which was 15.8% higher than the upper limit of our previous forecast in November. For the full year of 2021, our total net revenue reached RMB4,986.7 million, up more than 10 times year-over-year.

The good topline results came from our record high computing power sold and the responsive delivery as well as our effective pricing strategy that enables most spot sales driving higher average selling price. Additionally, our effective business development across the continents helped us record a strong contract advances of RMB1,340.7 million as of 2021 end, ensuring substantial cash inflow and a steady revenue recognition for quarters ahead.

Our gross profit for the quarter doubled sequentially to RMB1,486.9 million and the gross margin rate reached 68%, which is an outliner in the past four quarters. Gross margin rates for full year 2021 is 57.2%. Please note that for mining machines delivered during the fourth quarter, we secured the correspondent wafer cost several quarters earlier. From ongoing demand and supply imbalance across the semiconductor industry and the feedback from our foundry partners, we expect wafer cost price increases in 2022, which will have an impact on our future gross margin rates.

Regarding our Bitcoin mining business, as of December 31st, 2021, we held 1.13 million terahash/s computing power deployed at mining farms. As of the 2021 end, we held 70.5 Bitcoins with a carrying value of RMB20.3 million. Our AI business revenue achieved RMB5.5 million in the quarter, representing a year-on-year growth rate of 150.3% and a sequential growth rate of 20.9%. We kept getting positive feedback from customers in different industries and we newly cooperated with eco system platform partner, OpenAnolis.

Research and development expenses were RMB112.0 million, increasing by 179.6% year-over-year and a 20.8% quarter-over-quarter. The increase was primarily attributable to the increased research and development costs for new products and new hires in research and development team. We will continue to invest in R&D to advance our technology capabilities. As a result of our strong revenue efficient operation and expense management, we realized record high net profit of RMB1,196.5 million for quarter four, representing a sequential growth of 114.6%.

For the full year of 2021, net profit achieved RMB2,000.3 million. Non-GAAP adjusted net income was RMB1,250.7 million for quarter four, representing a sequential growth of 112.9%. For the full year of 2021, non-GAAP adjusted net income hit RMB2,301.6 million. While we are very pleased with our performance achieved in quarter four and the full year of 2021, we are fully aware that the existing challenges may persist and new challenges may emerge. It's time to think and plan the New Year in a prudent way.

I would like to talk more about the risk factors and how we tackle them. From marketing environment perspective, we are in the fed interest rate hike cycle for US dollar. The pace of interest rate increase has and will continue to have an impact on Bitcoin price fluctuations. On the other hand, geopolitical conflicts, even military operations, may also bring further uncertainties to Bitcoin price fluctuations. As Bitcoin price is closely linked to the demand and the price for our mining machines, its fluctuation always has an impact on miners' willingness to expand their mining scales. In past quarters, we continued building up the capability of flexibly allocating goods among contract sales, spot sales, and mining operations to seize the opportunity during the Bitcoin price fluctuation and to maximize the average selling price and the overall value.

On the supply front, given the ongoing wafer demand and supply imbalance across the semiconductor industry and ensuing price increase, we expect our production costs to scroll up and bring pressure on the gross margin rate. To sustain adequate wafer supply, we have been actively in communication with our foundry partners and secure the production capacities with considerable amount of cash prepayments. We will also continue to support our R&D team to further improve products and better utilize wafers to have higher product efficiency at a lower cost.

For our Bitcoin mining businesses, we managed to deploy our computing power as scheduled and we encountered unexpected winter electricity shortage in both quarter 4 2021 and quarter 1 2022. We closely monitor the local condition evolvement and will continue to be cautious in deploying additional computing power. We also actively evaluated target markets to diversify operational risks. We are aware of the obstacles and we remain resilient in the mining business as one of our strategies.

We are also aware that some investors have questions about the delisting risk as a US listed Chinese company. Canaan is different from some other China companies listed in the US. We are not under a VIE structure and we are running of B2B business with markets and corporate customers mostly located outside of China. And our principal business activities do not involve large numbers of registered user or deal with vast amount of user data. Additionally, there is still around two year window before SEC gives us the final decision, and things may be sorted out before then, considering SEC and CSRC are working closely to figure out a better solution. Ultimately, as a listed company, Canaan has been committed to operational compliance and continues to optimize its management operation and corporate governance. It takes a good blacksmith to make steel. Despite all the challenges ahead, we are confident in our effective strategies, solid execution, as well as our nine year experience in the industry. We will keep sharpening our R&D capabilities and stay vigilant and proactively mitigate risks with our dynamic operation.

Now, I would like to briefly walk you through our financial results for the quarter. Total net revenues in the fourth quarter were RMB2,184.6 million compared to RMB38.2 million in the same period of 2020 and RMB1,317.6 million in the third quarter of 2021, representing a sequential increase of 65.8%. Gross profit was RMB1,486.9 million compared to RMB9.1 million in the same period of 2020, representing a sequential increase of 100.5%. Total operating expenses in the fourth quarter of 2021 were RMB273.7 million compared to RMB80.1 million in the same period of 2020 and RMB278.4 million in the third quarter of 2021.

Income from operations was RMB1,213.2 million, up 161.9% sequentially. Net income attributable to ordinary shareholders was RMB1,196.5 million, up 114.6% sequentially. Non-GAAP adjusted net income was RMB1,250.7 million, up 112.9% sequentially. Non-GAAP adjusted net income or loss excludes share-based compensation expenses. Basic and diluted net earnings per ADS for the quarter were RMB6.90 and RMB6.81. As of December 31, 2021, the company had cash and cash equivalents of RMB2,684.2 million, up 586.0% compared to RMB391.3 million as of December 31, 2020.

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

(Operator Instructions) Our first question comes from Shuang Sun with Guosheng Securities.

I'm Shuang Sun, Guosheng Securities. In early 2022, we saw the Bitcoin price experience a dramatic drop. So what was the impact on your sales? How countermeasures have you implemented to mitigate the impact? (foreign language)

(foreign language) Okay, let me translate. So we are still in the first quarter of 2022 and the price of Bitcoin is still fluctuating. As such, we can only share our observations from a macro perspective. Previously when the price of Bitcoin fell sharply, customers' demand for our mining machines would decline. They would generally have a wait and see attitude, resulting in a decline in sales. Historically, the first quarter is also traditionally the off-season as production and sales are usually lower due to the holidays, including Christmas, New Year, and the Chinese New Year.

(foreign language) However, there are other factors at play during the first quarter of this year. This primarily includes continuing industry-wide supply shortage of chips and mining machines caused by miners, growing deployments of mining machines last year. As clients tend to be highly institutionalized and institutional clients hold long term horizons in terms of financing and investment activity, therefore, the price fluctuation of Bitcoin during this period have had little impact on our sales price and sales volume. Our guidance for the first quarter of 2022 reflect our forecast of performance.

(foreign language) Meanwhile, we are mitigating the negative impact of the Bitcoin price decline through a variety of measures. First, we are actively expanding new channels to reach new clients. Second, we leverage future contracts to reduce inventory pressure as evidenced by the stable future contract relationships that we have with a number of large mining companies. Finally, if Bitcoin price continue to fall and depending on the changes in market conditions, we will also adjust the allocation of machines between inventory and mining deployments to balance long term and short term revenues.

Our next question comes from Lewis Fan with Benchmark Company.

Congratulations on a very strong quarter. My first question for management is, could you please elaborate on your progress and plan on your computing power deployment for the mining business? Hello. Can you here me?

Hey, Lewis, can you please translate your question into English?

Sure. No problem. (foreign language)

(foreign language) As of December 31, 2021, we had 1.126 million Thash/s of mining computing power under deployment. As of February 28, 2022, this has risen to 2.38 million Thash/s of mining computing power under deployment. We are currently in the process of deploying more computing power and negotiating potential joint mining projects. (foreign language) In the future, we will continue to increase deployment of computing power to our mining business, but we do not consider rapidly increasing our computing power as a priority. We will adjust the deployment pace to balance allocation between future sales, spot sales and mining computing power. In this way, we strive to obtain maximum value and avoid potential risk. In addition, all machines deployed in our mining businesses can also be reallocated to spot sales, if necessary.

I do have couple follow-up questions. And I will go ahead and ask the question in English first. Then I will translate them into Chinese myself. My second question is in terms of computing power deployment. In the management's opinion, what is the company's moat against competition? (foreign language)

(foreign language) When compared to the more vibrant blockchain industry, our industry's competitive landscape have indeed become more stable over the years. There is a reason for that. Recently some very large companies have started to enter the industry after years of planning and preparation. However, based on our analysis of the products so far, they still need substantial equipments in order to be competitive in the market, in niche markets of the industry such as Bitcoin mining chips. Our team has accumulated extensive technology patents and great deal of know-how over many years. By leveraging the strength, we have developed our products through our industry-leading levers, thereby forming the company's technological format or technological moat.

(foreign language) In addition, we continued to solidify and optimize our supply chain over the past few years of operations. Our multi-foundry partnership strategy powered by our strong technology and R&D capabilities has enabled us to build cooperation with several competitive foundry partners. This partnership allowed us to secure production capacities with advanced nodes. Our effective cash management also allows us to lock in these capacities through advanced payments in a timely manner. In addition, our Bitcoin mining business launched in 2021 will also help us navigate the supply chain risks in the future.

(foreign language) As we strive to expand our business globally, our customers and partners have become more diversified and institutionalized. As such, our collaboration model has developed -- more developed from mining machine sales to joint mining, creating a deeper win-win proposition. You can also see that some of our large scale institutional mining enterprise customers continue to repurchase for us, forming long term and stable relationship. At the same time, we are constantly exploring new geographic markets and establishing cooperation with new customers.

(foreign language) In essence, our business model with chip design as the core technology and selling mining machines, operating Bitcoin mining business and selling AI chips, our businesses complement one another and combined with our underlying technology, that form a continuously self reinforcing business model. (foreign language) In addition, we accumulated extensive operational experience and capabilities from the upstream supply chain. For the downstream market, as we operated through cycles of significant Bitcoin price volatility during the past nine years, we are able to respond to changes in the market and Bitcoin prices with flexible and swift operational adjustments, strategically mitigate risks and seize opportunities.

(foreign language) As a US-listed company, we are more transparent and compliant in terms of company operations, governance and the disclosure. At the same time, we also have access to more financing options and opportunities. (foreign language) So to answer your question, these factors form our multi-layer competitive moat. Hope I answered your questions.

Just couple quick -- couple more quick follow-up questions. First of all, could you please share some color kind of market share? (foreign language)

(foreign language) Okay, let me translate. So previously we generally estimated our market share according to our computing power sold and the delta of network hash rates in the responsive period. However, in 2021, a severe fluctuation of the network hash rate made it difficult to estimate the market scale. Specifically, mining machines went offline, transited their physical locations and connected online back and forth due to regulatory reasons. Nevertheless, in 2021, we achieved 22.3 EH/s in total computing power sold compared with 6.6 EH/s in 2020. In 2021, our total revenues reached nearly RMB5,000 million compared with RMB400 million in 2020. Therefore, we believe we gained some market share to some extent. Hopefully, we can have guidance from professional market research institutions for those specific figures. Hope I answered your question.

Just one last question. I know the management has just talked about share repurchase plan. Does the management have any stock dividend program or plan in mind? I'll translate that into Chinese. (foreign language)

(foreign language) The Board has recognized our execution in the latest share repurchase program. The early completion of our share buyback plan demonstrates the long term confidence of both the Board and our management team. We are evaluating the situation and we will submit a new stock repurchase proposal to the Board, accordingly. We will make formal announcements once the proposal is approved.

(foreign language) Okay. The year 2021 saw our rapid growth and we will forge ahead further. We look forward to continue and expedited growth through our best endeavor. To fulfill this goal, we need to invest more into our R&D to further enhance our market development, expand our business, and optimize our services. We are committed to generating more for our clients and shareholders, driving mid to long term value. Hope that answers your question.

And that's all the time we have for questions, I'd like to turn the call back over to management for 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.

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