Canaan Inc. (CAN) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to Canaan's Inc. First Quarter 2023 Earnings Conference Call. At this time, all participants are in listen-only mode. After the management's prepared remarks, we will have a question-and-answer session. Please note that this event is being recorded. Now I would like to hand the conference over to your speaker host today, Mr. Clark Soucy, Investor Relations Director of the company. Please go ahead, Clark.

Thank you. Hello, everyone, and welcome to our earnings conference call. The company's financial and operating results were released by 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. Leo Wang, IR Senior Director; and Ms. Xi Zhang, IR Manager, 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 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. Today's call will include forward-looking statements. These statements include, but are not limited to, our outlook for the company and statements that estimate or project 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 from GAAP results. You can find additional disclosures regarding these non-GAAP measures, including reconciliations with comparable GAAP results in our earnings press release, which is posted 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.

Hello, everyone. I'm Nangeng, the CEO of Canaan. Thank you for joining our conference call. James and I are at the company's headquarters in Singapore, sharing the quarterly report conference call with you. Compared to Q4 of previous year, Q1 of 2023 has brought more hope to become mining industry. Although the Bitcoin price still fluctuates, it has generally stepped out of the bear market as is shown an upward trend. The confidence of miners has gradually recovered and decoupled with the traditional peak season in the first quarter, there are signs of our revival in purchasing demand. Although the purchasing power of large miners is still limited by cash flow phase of facility construction and the financing environment. This has not affected the positive trend of the market. [indiscernible], the selling price in the mining machine market is still declining, and the first quarter is still in a bad market state. In this ever-changing market environment, we believe that maintaining strategic continuity and timely adjusting tactical decisions according to market economics are equally important. In other words, we need to keep investing in business and assets that bring long-term value while also carefully handling our company's balance sheet. I would like to introduce to investors the 4 strategic focuses that we have been concentrating on and our actions in this area. First, we insist on long-term R&D and production capacity investment. Second, we continue to develop and improve our market sales system to connect and assist global customers. Third, we have adhered to our own mining strategy, overcome difficulties and continue to expand mining deployment. Finally, we maintain a solid balance sheet and accumulate valuable assets with great potential. I will elaborate on these 4 points one by one. Firstly, we are committed to R&D and production capacity. Product development and capacity assurance remain our major input and investment in the first quarter of 2023. The specific data will be shared by James later. The technology and the product-oriented company, the importance of product powers our industry is self-evident. We always put product development first. As mentioned in the last financial report, our latest generation A13 series Mining Machine was introduced in the industry's winter in late October last year. We insisted on maintaining close cooperation with upstream foundries, max producted in the first quarter and the further improve the yield and the computing power efficiency through technical adjustments and process improvement. Our A13 series has reached and exceeded our product design expectations in terms of yield rate and actual performance. In the first quarter, we have achieved stable supply actual uses by customers, the excellent computing power, power consumption and the quality of A13 series has also been recognized and the shipment of volume has grown rapidly. Whether in a bear market or bull market, we always insist on integration and strive to make the best mining machines. Even when A13 series was not yet much productive and the market was at its most bearish, our new product deployment -- development was always in full swing. We are well aware that the market requires the performance of mainstream products to take a big step forward about every half year, and we must keep up. And the continuous launch of new products opening continued supply chain investments. In the first quarter, our mass production and investment in the supply chain exceeded USD 50 million. I believe that our efforts and resource input will pay off in the subsequent product performance improvement and supply chain stability. Secondly, we are dedicated to developing and enhancing our sales system to reach global customers. The industry we are in is a fast-growing and unpredictable. In each bear full-cycle, the industry and the goals reshuffling, with someone of us leaving and the new ones joining. As mangers continually stick and develop standard chip energy worldwide, transforming listed energy into reusable power, both the identity and location of miners are constantly changing. Starting from the first quarter of this year, we accelerated the construction, development and the improvement of our comprehensive international sales system. Our sales system is now divided into 3 parts: large clients, channels and retail. And it is assisted by online stores and original business development, allowing us to better reach and convert customers worldwide. In the first quarter of 2023, the overall industry was affected by inventory, competition, financing conditions and cash flow. Although sales volume in the mining machine markets showed a slight recovery compared to Q4 of 2022, we still remain in a bear market with a continuous decline in average selling price of computed power. A series of small and medium-sized bank failures in the U.S. late in the quarter also had some impact causing delays in payment and shipment for some orders. These factors resulted in less the IBO sales revenue for this quarter. We achieved total sales of 4.22 million terahashes per second sequential growth of 126.8%, but the total quarterly revenue of RMB 55 million was below our expectations. However, we also see positive aspects. Overall demand from large clients in U.S. fluctuated. Our expanding sales system quickly sees many sales opportunities in other regions. With the total number of purchase orders rising to over 500 in Q1, in the first quarter, we actively developed sales channels in Southeast Asia and established cooperation with local distributors in Thailand and Malaysia for the first time. Our online store targeting overseas retail customers attracted orders from about 20 countries include first-time contracts in several countries such as Greece, Netherlands, Argentina, Brazil, Mexico and the Philippines. As we enter Q2 and the market [indiscernible], the intensive and active efforts we implemented in Q1 are starting to show more results. For instance, we recently signed a contract order of 11,000 units of our A13 product with Cipher, a publicly listed institutional mining clients in North America. Before that, the contract we assisted the contract alliance to conducting extensive on-site tests for our products at their mining site in Texas. The client ultimately recognized excellent performance of our A13 series products under relative extreme weather conditions. Recently, we have also signed a series of large-scale contract orders for an additional 36,000 mining machines in other regions, which are expected to be delivered in the section before the end of the fourth quarter of 2023. The recent appearance of these large contract orders across the multiple markets confirm that our business and product strategies are correct. Lastly, the return of contract sales orders will also help us improve our cash flow situation. Thirdly, we speak our mining strategy and continue to expand our mining deployment. Since the company started mining operations in the second half of 2021, we have faced many challenges. Despite this, we have firmly established mining as the strategic priority and the secure place for ourselves in the global -- rapidly developing industry of Bitcoin mining. In the first quarter of 2023, the profitability of mining improved due to recovery of Bitcoin prices and [indiscernible] that were forced to shut down in the fourth quarter of 2022 were able to restart operations. This quarter, we produced 476 Bitcoins, contributing a mining revenue of USD 11 million, a slight increase from the previous quarter and a new record high. We are continuously exploring more mining opportunities in different regions and reducing our comprehensive mining operation costs. Even though the total network computing power is still rising, the increase in Bitcoin price and the recent industry events like BRC20 have boosted money income during certain periods. We anticipate that the company's mining income will reach a new high in the second quarter. As of March 31, 2023, we have deployed the computing power of over 5 exahash per second to our mining sites. However, due to severe cold weather and contract execution issues, the total power installed is over 4 exahash per second. This figure is lower than our forecast in the previous quarter's financial report. We will continue to strive to improve our deployment, deploy computational power data with our cash flow and operational capabilities. Lastly, we are dedicated to maintaining a healthy cash flow and accumulating assets with strong growth potential. Canaan has just completed a full decade from this instruction in early 2013 to the first quarter of 2023. We weathered many market ups and downs, and have gained some unique experience in managing our balance sheet. In the first quarter of this year, our prediction about the price of Bitcoin was mostly accurate, but the sales of our mining machines proved to be more difficult. We achieved improvements in sales and the return of contract sales orders in the second quarter, which continued to contribute our revenue and cash flow. This also was noting that the healthy and stable supply chain resources we accumulated over the years have helped us to seize opportunities to mass produce and deliver mining machines at a price of Bitcoin prices. Meanwhile, our Bitcoin assets continue to grow. Once again, we emphasize our strategy of holding Bitcoins. Bitcoins generated from mining are only used to pay for direct operation costs such as electricity. Our self-developed and self-produced mining machine products and the mining power deployed to the mining site are important assets for producing Bitcoin, contains huge growth potential at decent price continue to rise in the medium and long term. In some cases, already deployed mining machines can be restored with warranties. In this brand-new industry, we are making history every day. Even for me, the first quarter of 2023 was a challenging start. The uncertainty in the reality has made our performance left ideal. However, our direction has not divided significantly. Since the second quarter, although the price of Bitcoin has not risen sharply, the company's original results have been more positive, which is the result of the hard work of all Canaan employees. However, we must also see that the current economic environment is not optimistic. The cloud of uncertainty still roams over us and the price of Bitcoin may still continue to fluctuate. At least, in the United States, the financing ability and the processing power of miners in large miners' farms have not yet recovered. Coupled with current situation where industry inventory has not yet been completed or the decision has not yet been completed, both sales prices and the gross profit will continue to be concentrated. Based on the above comprehensive situation, we are extremely cautious about expectations for the second quarter of 2023. The revenue for the second quarter of 2023 is expected to be about USD 72 million. This forecast is based on the current market and operating conditions of the company and actual [ statutory measures ]. In the final section, I would like to share some new insights on my personal beliefs about decentralization and Bitcoin. We open here thoughts about the utility of Bitcoin. In fact, the use of Bitcoin is complementary in the development of new technologies and this function of a medium of payments and value of storage has never changed. Over the past 10 years, the 2 pieces of power leading to Web3 has been largely completed, namely blockchain-based digital currencies and the smart contract technology. In our last earnings call, someone asked me whether I'm thinking Bitcoin is a risk asset. I spoke more about this question since then. In the short term, Bitcoin indeed shows some characteristics similar to risk assets. But in the medium term, Bitcoin should be seen as a powerful hashing tool against system risk and -- in a region in the current global financing system and even as a tool against global, political and economic uncertainties. This isn't hard to understand. But in the long term, in the new information driving work of Web3, blockchain-based digital currencies are likely to become mainstream applications and have broader prospects. Once I had a long discussion with GPT 4 about the future of AGI becoming mainstream in the world. I'm almost certain that AGI will be the last piece of puzzle of Web3. The final creation of Web3 will be decentralized individually distributed AI system. At that time, digital currency and smart contracts based on blockchain, we will reshape the financing system of the new world on the basis of cost success. Most trustworthy, efficient, transparent, greatly improving the level of productivity and promoting the process of the entire societies. Today, we are a provider of computing power products and services in the blockchain industry. Going forward, I hope to further expand our technology and have opportunity to participate in the broader changes in the future, bringing value to customers with computing power products and services and support the progress of society. This concludes my prepared remarks. Thank you, everyone. I will now turn the call over to our CFO, James. Thank you.

Thank you, Nangeng, and good day, everyone. This is James speaking in our Singapore headquarters. Firstly, I would like everyone to notice that we have changed our reporting currently. Starting from January 1, 2023, we decided to change our reporting currency from renminbi or so-called Chinese Yen to U.S. dollars. The change of the reporting currency will better illustrate the results of our global sales and is another important step in our internationalization strategy. We have applied the change of reporting currency retroactively to our historical results of operations and financial statements. It will also be easier for our investors to read and analyze our financial reports in 1 currency. As Nangeng started the call with the first quarter of 2023 was challenging due to the revised but still weak market demand and declining selling price. From company perspective, we are committed to maintaining our strategic continuity. We kept investing in R&D and production capacity. We developed and upgraded our sales system to reach global customers, we continued to expand our mining deployment, and we strive to maintain a healthy cash flow and accumulate assets with strong growth potential for our shareholders. Overall speaking, in quarter 1, total revenue generated was USD 55.2 million, which did not meet our guidance of USD 65 million. The gap consisted of approximately USD 6 million in machine sales and USD 4 million in mining business. Let's begin by discussing our machine sales. Our revenue of mining machine sales was USD 43.7 million in this quarter, 7.6% lower than USD 47.3 million for the last quarter. In the first quarter of 2023, the industry was affected by inventory competition, financing environment and cash flow, and the average selling price of computing power continued to decline. We actually increased our sales volume in computing power, reaching 4.2 million terahash per second with a substantial increase of 126.8% compared to Q4 last year. However, the average selling price dropped to $10 per terahash per second as we needed to adjust our prices in line with the overall market for Bitcoin mining machines. Additionally, affected by a series of U.S. bank failure events in mid-March, payments and shipments of some orders have been delayed. After that period, we received more orders and recorded customer advances of USD 8.3 million at the end of March. This laid a good foundation for the machine sales revenue in the second quarter. Our gross profit for mining machine sales was USD 5.2 million and our gross margin rate for mining machine sales was 11.9% in this quarter. Turning to our mining business. Our mining revenue was USD 11 million in this quarter, 3.3% sequential increase compared to USD 10.7 million in quarter 4 last year. It's a new record high. However, this revenue did not meet our expectations. We temporarily shut down the machine at several mining sites during January due to low Bitcoin prices. We believe this was a necessary measure to minimize operating losses. This had an impact on the quarterly mining revenue results. In this quarter, our total deployed hash rates reached more than 5 exahash per second, and our installed hash rates reached more than 4 exahash per second. We mined 476 Bitcoin in this quarter and achieved 19.8 Bitcoin for mining profit. Gross profit was USD 0.2 million for our mining business in this quarter. Please notice here that mining profit or loss is defined as a proportion of mining revenue, deducting costs for energy and hosting in terms of mining revenues without consideration of depreciation. Now talking about our AI business, we recorded USD 0.41 million for AI revenue in this quarter. It is 68.6% increase compared to USD 0.24 million for quarter 4. The sequential revenue growth was mainly driven by the increased sales volume for AIoT customers. Switching to the expense. Our R&D expenses stood at USD 19.1 million in this quarter compared to USD 33.4 million in the last quarter and USD 15.2 million in the prior year period. The quarter-over-quarter decrease was due to the one-off expenditure for our new generation chip incurred in the last quarter. Excluding this one-off expenditure impact, our R&D expenses remained stable sequentially. The steady year-over-year growth reflected our continuing commitment to building our talented R&D team. Our sales and marketing expenses were USD 1.5 million compared to USD 1.1 million in the last quarter and USD 3.0 million in the prior year period. Sales commissions reduced year-over-year because of revenue downsizing. Our general and administrative expenses in this quarter were USD 17.6 million compared to USD 24.6 million in the last quarter and USD 19.8 million in the prior year period. The decrease was mainly due to USD 2.6 million of realized gain on Bitcoin sold in this quarter for electricity costs, which offset our G&A expenses. Please note when we do disposal of Bitcoin, the gain or loss amount booking value will be recorded into G&A. The net result of the foregoing was an operating loss of USD 85.7 million for this quarter, which is 31.4% narrower than the last quarter. The net loss was recorded at USD 84.4 million, which is 8% narrower than the last quarter. It is important for us to keep our eyes on the cash flow. We held cash and cash equivalents of USD 72 million at March 31. As our CEO shared, we committed to securing future production capacity during this quarter. We spent USD 53.9 million to secure wafer supply and machines production. Other cash payments included USD 28.6 million for operations and USD 4.7 million in the tax expenses. Please note that as we paid the year-end bonus in January, the outflow of operation was higher than usual run rate. The cash out totaling USD 87.1 million was net off by inflows of USD 54.8 million from sales and the proceeds of USD 3.1 million by the ATM facility. Turning our attention to our Bitcoin assets. We held 623 Bitcoin as of March 31, decreased from 757 Bitcoins by the end of 2022. First, we mined the 476 Bitcoins in this quarter. In order to reduce the effect of Bitcoin price fluctuation on the profitability of our mining business, we implemented a pre-change plan in this quarter. That is at the beginning of each month, we would exchange Bitcoins to U.S. dollars based on the current price in advance for the monthly electricity costs. This new process eliminated possible risks triggered from significant Bitcoin price fluctuations. In total, we exchanged 699 Bitcoin for the electricity cost in this quarter. This aforementioned resulted in a decline of 134 Bitcoin quarter-over-quarter. It is a onetime change. From March 7, 2023, the date we reported our financial results for the fourth quarter of 2022 to May 25, 2023, we utilized the ATM for a small amount of fundraising to tax the financing facility. During the above period, we sold 1,532,219 ADSs with net proceeds of approximately USD 4.2 million at an average price of USD 2.73 per ADS. We executed the above sales within 10 trading days in March and we did not utilize the ATM after March 31. From March 7, 2023, the date we reported our financial results for the fourth quarter of 2022 to May 25, 2023, we did not purchase any ADS back. In future, we will prioritize our shareholders carefully monitor cash flows and stock prices and practically execute ATM or stock repurchase. In quarter 2, we anticipate the revenue of USD 72 million, a 30% increase from quarter 1. Despite the market's gradual recovery, we have secured some contract sales orders from major clients and distributors. This has bolstered our cash flow and allowed us to invest in strategic areas of focus. However, it is important to note that we operate in a dynamic market with uncertainties. So our estimation reflects our current perspective and understanding of the operation. Now I would like to briefly walk you through our financial results for the quarter. Revenues in the first quarter of 2023 were USD 55.2 million as compared to USD 58.3 million in the fourth quarter of 2022 and the USD 201.8 million in the same period of 2022. Gross loss in the first quarter of 2023 was USD 47.5 million compared to a gross loss of USD 64.1 million in the fourth quarter of 2022 and a gross profit of USD 123.5 million in the same period of 2022. Total operating expenses in the fourth quarter of 2023 were USD 38.1 million compared to USD 60.8 million in the fourth quarter of 2022 and USD 38.0 million in the same period of 2022. Loss from operations in the first quarter of 2023 was USD 85.7 million compared to a loss from operations of USD 125.0 million in the fourth quarter of 2022 and the income from operations of USD 85.4 million in the same period of 2022. Net loss in the first quarter of 2023 was USD 84.4 million compared to a net loss of USD 91.6 million in the fourth quarter of 2022 and a net income of USD 65.1 million in the same period of 2022. Basic and diluted net loss per ADS in the first quarter of 2023 were USD 0.51. As of March 31, 2023, the company had cash and cash equivalents of USD 72.0 million. This concludes our prepared remarks. We are now open for questions.

[Operator Instructions] Your first question today comes from the line of Kevin Dede from H.C. Wainwright.

I was wondering if you might be able to offer a self-mining hash rate target for the year, maybe disclose a little bit on what you're seeing in terms of the availability of hosting sites? And then secondly, I was hoping you could share a little bit more geographic information on equipment sales. It's very comforting to see that sales are growing outside of North America. And I was wondering if you might be able to segment sales from Asia, North America and European framework.

As we mentioned, as of March 31, the deployed computing power at our mining farms exceeded 5 exahash per second. However, in the first quarter, the install of computing power was lower than expected due to weather conditions and the contract execution issues, resulting in total installed hash rate was over 4 exahash per second. In the second quarter, we entered into a mining partnership with Stronghold in early May, which involved 4,000 mining machines, which is a total capacity of 0.4 exahash per second. At the same time, we are also exploring more mining partnership opportunities in regions with abundant energy resources around the world. Our mining business has expanded into many geographical regions where we had no premise present. The local critical economic and infrastructure conditions in these areas are complex and subject to change, which cause changes to our discoordination and development efforts. This further attacks our team's operational capabilities and ability to adapt to changes. And therefore, we have a more conscious outlook on mining expansion. We currently estimate that the installed mining hash in Q2 will be around 4.5 exahash. This forecast is based on the current operating conditions and the actual situation may be different. Mining is a long-term strategic focus for us, and as it complements our mining machine sales business and allow for the effective utilization of more inventory, we will actively and [ pro gently ] collaboration of alternatives negotiated terms of cooperation, and strive to continuously increase the stock mining habit to generate Bitcoin mining.

Yes. I will take the second question from Kevin. It's about the geographical situation of the mining industry. I think the leading market is still United States, but it looks like the inventory no matter new machines or secondhand machines are still quite sufficient inside the whole North America market. So it looks like the more opportunities come from Southeast Asia, Middle East and even South America market. And we noticed some retail customers are ordering machines even from Africa and from Western Europe. I think it depends on the energy of the local-level usage. I think the mining business will grow as we expected to global level and more and more areas will join this mining business. And it will rapidly change because of different locations may have different regulations coming out related to mining. But from our perspective, we would like to seize all kinds of opportunities, especially like in this quarter, we had the connection with Malaysia and Thailand distributor, which enabled us to touch the customers locally in those 2 countries. We will develop more, as CEO said, build up our sales channels to make sure we get in touch with our customers locally. And we also would like to continue the dialogue with big clients in North America. Cipher is just beginning of us. So we have confidence to discuss more customers -- discuss with more customers and let them enjoy the A13 series machines for their mining purpose. So I hope that answers your question, Kevin.

Yes. So phenomenal. I really appreciate the detail. I hear great things about the A13, but I cannot leave the call without hearing from Nangeng what Bitcoin price is going to be this year.

Okay. I think short term, I think that we have no need to do midterm or long-term prediction of Bitcoin. But for short term, I think the Bitcoin price is related to the economical environment, especially for U.S. So I think you know the answer. I think you know the numbers. Yes. I hope that will arise in the second half of this year, [ I close my scissors ].

Next, we have the line from Jiaji Song from Guosheng Securities.

[Foreign Language] So I want to ask that please which new deals produce new progress and application scenarios of the company's AI age computing chips?

Okay. [Foreign Language] I recently -- it's an AI industry represented by products like ChatGPT has revealed an important part. The reason -- I think the reason why the AI industry has most evolved as -- developed as expected over the years is not due to AI sales, but rather like many other industries, it is the result of contradiction between the users' expectations for the product capabilities and what the industry can provide at a certain cost. When AI products can truly bring significant benefits to users, then you see the result. So service is very positive. Therefore, I'm currently risk-extracting the company's AI department and business to ensure that our technology and investments can embrace the future of AGI, artificial general intelligence, I mean, word in the short to medium. But in the short-to-medium term, we believe that an important function of AIoT and EDGE AI is to convert real-world like immediate storms and sensor data into text and code or code information that can be understood by large time remodels like ChatGPT. While complex decision-making is not a stress for EDGE AI today. We're the large energy model to excel. Our K230 chip has highly efficient EDGE AI capabilities and advantages in terms of low cost and low power consumption. Therefore, we are adjusting the direction of our product locations to adapt to this trend. In the long run, as I mentioned in the CEO remarks, I will explore ways to horizontally expand our technology and participate in future and broader transformations. We aim to bring value to our customers through more general purpose computing power products and services and support society progress.

[Foreign Language] Is there any upside to the company's mining business going forward due to the very high transaction fees [indiscernible]?

Yes, I think according to Satoshi Nakamoto's vision, transaction fees will become an important component for miners' income after [indiscernible]. It appears that the industry is developing as expected. So recently, due to events like BRC20 on the increase in Bitcoin transaction fees has been beneficial for both miners and our mining business. Situation where the network's total computing power remains constant, miners can earn more mining fees. So we hope that miners and ourselves can improve our financial situation and that our customers can recover their purchasing power more quickly.

[Foreign Language] Overall, as your company has a growing supply of recording on your balance sheet, what is your strategy for potentially selling them?

Currently, we do not have any plans to sell our Bitcoin. And there are several reasons for that. Firstly, our mining operations are still in the early stages of scaling up. So we have been focused on the development. You may notice that we do sell mining Bitcoin to cover our mining facilities, the electricity costs, which helps minimize our cash outflow. Regarding whether we will sell the Bitcoin, we hold to profit from future price appreciation. We have recently heard this question from several investors. We have had many internal discussions on this topic. But due to our belief that Bitcoin is undervalued combined with our long-term confidence in its global adoption, we are currently not considering sales in our Bitcoin in the upcoming quarters. If the price of Bitcoin experienced a significant increase, we will revisit this topic and evaluate.