Canaan (NASDAQ:CAN) Q1 2020 Earnings Call

0:00 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 the listen-only mode. After the management's prepared remarks, we 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. Xiaoke 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 the CEO, Mr.

0:51 Nangeng Zhang, and our CFO, Mr. Hong Xuanfu. Mr. Jianping Kong, our co-CEO, and Mr. Xiaoming Lu, and Ms. Li Zhang, our senior vice president, 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 first quarter of 2020. Mr. Hong will then provide the details on the company's operating and the financial results for the period before you open the call up for your questions. Before we continue, I would like to refer you to our safe harbor statement in our earnings press release, which also applies to this call as we will be making forward-looking statements. Please also note that we will discuss non-GAAP measures today, which are more roughly explained and reconciled to the most comparable measures reported under general accepted accounting principles in our earnings release and the filings with the SEC.

1:55 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. Thank you, Mr. Liu. Thank you. Hello, everyone. I am Zhang Nangeng, the CEO and CEO of Hainan Technology. Please allow me to explain the situation of the company in the first quarter of this year. This time, it is only about a month away from the last time. However, in May, in the market, the price of Bitcoin fell to a steady low after Bitcoin fell to a steady low. Bitcoin's network operation was stable, and there was no significant fluctuation in the algorithm.

2:47 All in all, Bitcoin has completed its third half-life in history. In addition, with the arrival of the curfew, the information market is warming up to the demand for mining machines. In the first three months of this year's March 31st, the impact of the epidemic, our total income is 68.3 trillion yuan, which increased by 44.6% from the first quarter of 2019. The growth of the company's total revenue is due to the promotion of the total sales. The company's sales revenue has grown from Q1 2019's 700,000 units to the same period this year's 900,000 units. The growth has reached a rate of 18.4%, and the MSP is relatively high. The company's net profit is 2.38 million yuan, but the annual loss is 71.1 million yuan.

3:39 This is mainly because of the 4,179,000 research and development services included in it. The previous period increased by 3.3%. The reason why the profit is lower is because of the market environment. The price is relatively low, and the simple supply and demand has caused a negative impact. We will carry out a series of integrated management and product upgrades in the future. We hope that the profit will be reduced and increased in the next quarter. Hello, I'm Nangeng Zhang, Chairman and the CEO of KM&E. 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 12th. From the general market perspective, after halving, the Bitcoin price is steady and rising.

4:54 We haven't seen computing power volatility. The Bitcoin network is running stable. In general, the third halving in Bitcoin history has successfully completed. Upon completion, the coming raining season further rebounded the market demand of mining machines. In Q1 this year, affected by the COVID-19, our total net revenue was RMB 68.3 million, reflects a 44.6% year-on-year increase. The company's total net revenue growth aligns with the computing power sales. The company's total sales grew from 700,000 THB per second to 900,000 THB per second in Q1 2020, representing an 18.4% year-on-year increase and with an increased ASP. The company's first quarter gross profit was RMB 2.38 million, while operating loss was RMB 71.1 million, which mainly includes RMB and others. We have performed a series of refinements and management procedures and the product upgrades, we expect a strong increase

6:31 in gross profit margin during the next coming window of market recovery. On behalf of the King, 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 operation of the society. We are grateful to our safe working environment. In terms of the mining industry, we achieved the first record this year based on the mass production of Samsung 8nm chip. We have produced tens of thousands of products based on this kind of manufacturing. We are collaborating with Samsung and SMIC to promote the next generation of advanced manufacturing chips.

7:29 are also working together with TSMC to develop 5nm ASM chips. In addition, we continue to develop the hardware and software platforming of the mining machine. We believe that the design of the public hardware platform can reduce costs, shorten the cycle of design production, and make it convenient for customer deployment and operation. The first product of our platforming design, 1666 Pro, has been released. Our new product, A1146 Pro, will also have a 20-day interview. We are in the process of breaking through the technical field of night energy and other advanced technologies to further improve the energy efficiency of mining machines. In addition to optimizing the energy efficiency of mining machines in the physical design, we have also used a series of SaaS solutions to reduce the threshold for customers to enter the Bitcoin 8 mining field, helping customers to reduce the cost of maintaining mining machines. We will do our utmost in terms of performance, reliability, and usability of our products. As the pandemic subsides, investors, especially financial institutions in Wall Street, are starting to invest in Bitcoin, representing the mainstream financial market for Bitcoin's growth, including the traditional people who have invested in Bitcoin, including the traditional people who have invested in Bitcoin, including the traditional people who have invested in Bitcoin, including the traditional people who have invested in Bitcoin, including the traditional people who have invested in Bitcoin, including the traditional people who have invested in Bitcoin, including the traditional people who have invested in Bitcoin, In terms of mining business, we studied the mass

8:59 production and the shipments based on the Samsung 8nm chip in Q1 this year. We have 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 SMIC is ongoing. Also, 5 nanometer process ASICs with TSMC are in progress and accelerating.

9:49 We continuously optimize the universality of hardware and software design in our mining business. We believe platform design of mining machines can reduce costs, shorten design cycles, and simplify customer development and maintenance. Avlo 1066 Pro is our first serialized product under such concepts which are currently available to our clients. The Avalon 1146 Pro will be made available soon after. To improve competitiveness in real-world operation, we are about to launch immersion cooling mining to further improve thermal performance and reduce noise level, leading to improved energy efficiency, prolong the mining lifecycle, and increase application scenarios.

10:43 We further provide our customers staff platform to lower energy barrier and free our clients for our maintenance work. It is always our relentless pursuit to provide the product of extreme performance, reliability, practicality, and accessibility. As COVID-19 impact easing, Individuals and institutional investors, especially Wall Street investors, are entering the Bitcoin trading market. It is seen in media reports that legendary trader Paul Tudor Jones is entering Bitcoin's futures market, Galaxy Digital's positive attitude and active participation, etc. We also see more and more big players interested in our products and services. Market confidence is recovering.

11:38 Furthermore, the May to October is raining season and brings cheap hydroelectricity that would pressure the price of thermal power, resulting in overall cost reduction of mining. Both increased trading and cost reduction should create demand for miners and are favorable to payment. In the AI business, we are very happy to see that K220 has selected Forrester's second quarter chip industry report and successfully selected the level of hardware experts, marking that K220 chip performance is strong, number is low, functions are many, easy to acquire, and the whole point of improvement is recognized.

12:24 In April this year, Linux 5.7's internal box increased support for K220, This means that the in-depth development of the main operating system accepts KRM. It also means that China can easily recover more scenarios and allow users to quickly use KRM chips, which means that users' learning cost is reduced. Only two days after the release of this news, the world's largest technical community GitHub showed that three H5 RAP technical team members shared the support of KRM with the IT development language RAP. During the pandemic, we have enhanced the company's ability to calculate and use software. We have launched a new range of door-to-door products with a mask detection model, a mask contact test model, and a currency detection model.

13:15 These products can be used in banks, hospitals, schools, districts, and districts. A large number of customers have come to visit us. This is a positive feedback from the community. For our AI chip business, it is a good start. In the future, we will continue to actively promote the opening and opening of AI chip KR20, perfect product collection and opening attack chain, and attract more overseas developers to use it to build a perfect AI developer community. We are also pleased to report that our AI chip K210 has received the hardware specialist certificate by Forrester's IC chip industry report in Q2 2020, acknowledging its solid performance, low power consumption, suitable for various application scenarios and easy accessibility.

14:11 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 AI 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 own world's largest technology community, GitHub. A team of three RISC-V RASC developers has shared the support to K210 in RASC language. We improved the synergy between algorithm, hardware setup, and the software design.

14:59 We developed the smart gate control further incorporated mask detection, masked face recognition, and the lightness detection mode. Our product satisfied many application scenarios at banks, schools, communities, and commercial and industrial parts and have received many customer inquiries. The positive feedback is a good starting point for our AI business. We are committed to open source of K210, refining product menu and open source tool chain. and attracting domestic and foreign developers to build an active and skillful developer community.

15:47 In terms of corporate management, we continue to optimize the company's governance structure, improve the management system and organization framework, and continue to promote corporate culture and business management. We will continue to provide better products, stricter control, and higher-end financial management. In this regard, we will maximize the guarantee of mobility, Our R&D team is 32 years old, with an average of 8 years of experience. It is a young team with a lot of passion and experience. In addition to having extensive R&D and management experience in today's field, our management team also has extensive experience in strategic planning, corporate management, and the future layout of high-tech industries. These experiences and abilities are to ensure the growth of future core assets.

16:33 Finally, our mission is to enhance social efficiency and improve human life. In corporate management, we have optimized the management procedures, refined the government system and the organization structure, linked the corporate culture with performance review in order to ensure product quality. control risks and optimize capital allocation to benefit our shareholders on every front. With an average age of 32 and work experience of 8 years, our R&D team is passionate and experienced.

17:22 Our management team has extensive experience in R&D, corporate governance, and strategic planning in the IC industry, as well as 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 macroeconomic uncertainty, we have maintained a strong growth momentum through technological and 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. Chan Fu Hong.

18:13 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 68.3 million from 47.2 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 TH. Cost of revenues in the first quarter of 2020 increased to 65.9 million from 46.8 million in the same period of 2019, which was in line with the increased sales volume of TH.

19:00 Gross profit in the first quarter of 2020 increased to $2.4 million compared to $0.5 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 supercomputing solutions, we remain committed to continuously enhancing our technology and refining our product offerings in the quarter. Consequently, our research and development expenses in the first quarter of 2020 increased to $41.8 million from $31.3 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%.

19:54 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 $4.1 million from $2.3 million in the same period of 2019. This increase was due to the increased cap count of companies' sales and marketing departments. 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 $27.6 million or 40.4% of total net revenues from $24.8 million or 52.6% of total revenues in the same period of 2019.

20:46 G and A expenses in the first quarter of 2020, the increase was mainly due to higher insurance fee in the first quarter of 2020. Total operating expenses in the first quarter of 2020 was $73.5 million compared to $58.5 million in the same period of 2019. Loss from operations in the first quarter of 2020 was $71.1 million compared to $58 million in the same period of 2019, excluding share-based compensation expenses of $1.7 million. Non-GAAP loss from operations in the first quarter of 2020 was 69.4 million.

21:32 Net loss attributable to ordinary shareholders in the first quarter of 2020 was 39.9 million compared to 67.9 million in the same period of 2019. Non-GAAP adjusted net loss in the first quarter of 2020 which excluded the share-based compensation of 1.7 million was 38.2 million. Diluted net loss per ADS in the first quarter of 2020 was RMB 0.25 compared to RMB 0.5 in the same period of 2019. Turning to our balance sheet, as of March 31st, 2020, We had cash and cash equivalents of 264.4 million compared to 516.6 million as of December 31, 2019.

22:30 The decrease was mainly due to higher short-term investments. As of March 31, 2020, the company invested RMB 173.4 million in short-term investments. compared with 11 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 impact on its business and the markets in which it operates. As a result, the company will not issue a business outlook for the second quarter of 2020 since Cayman believes that it is not appropriate to provide financial forecasts that could be materially different due to the rapidly changing market and operational conditions.

23:29 This concludes our prepared remarks for today. Operators, we are now ready to take questions. Thank you. Yes, thank you. We will now begin the question and answer session. To ask a question, you may press star then 1 on your touchstone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble the roster. And once again, please press star, then 1 if you would like to ask a question.

24:19 And the first question comes from Zhang Jilong with a hash key capital. Please go ahead. Can I hear? Yes, we hear clearly. Okay. Hello, Mr. Guan. I'm from Hashi Capital. I have a few questions for you. The first one is about our income. I see that our income is pretty good this year. Then there is a problem, because we calculated that our income per T-hash is about 4.6 billion yuan this year. .

25:38 So I would translate more for myself, but my first question is regarding the pro-THash revenue. I think the pro-THash revenue in the first quarter in 2020 has been dropped from the $160 from the first quarter last year to I think $76 THash per B. I know there are some reasons that new products to be released in this quarter. So I'd like to know more details regarding how this happened. Thank you. Hello.

26:25 I'm Zhang Nangeng. I'm here to answer this question. In fact, in December of last year, due to the decline in sales, The overall market is in a bad situation. So in the first quarter of this year, in January, the market situation continued. But we still got a good sales. But the unit price is indeed relatively low. This is the situation. Then in February, after the Spring Festival, This is one of the main reasons for the price to drop. Then, for us, in the first two seasons of this year, our old products will basically be UL. Then, in the third and fourth seasons of this year, we will have new products. So, I think in the second half of this year, our new products Okay, this is Nangeng

28:10 Zhang. I'm trying to translate Nangeng Zhang's answers to your questions. In fact, we understand that in the last December, the overall British price is seen a little bit dropping. and the overall market is not performing so well and it has been observed and it's extension also in January this year. But still under such kind of circumstances and also market situation, Canang was able to do sales Of course, the sales you see a small impact on the unit price of per terahash.

28:59 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 logistics and transportations 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 our price dropping, but we have confidence that in the coming month, especially in the quarter, 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 will have sales increase and also a very good unit price for Josh. Thank you.

30:07 Thank you. Thank you, Mr. Zhang. My second question is to ask, because we have no experience in this field, I'd like to ask about the second quarter as the company will now issue a different outlook for the next quarter. So along with the football market and also the financial situation, starting from early May, how can we outlook the second quarter journey of Canada? Thank you.

31:03 Hello, I will continue to answer your question. In terms of the Feng Shui season, China started from May 25th. So basically, from next week, From our point of view, in the past two weeks, the number of customers in and out of China and abroad has increased significantly. The number of customers in and out of China and abroad has increased significantly. and many more. So, I think, although we can't give a precise guidance in the Q&A, we expect to get a relatively high sales volume in the second quarter compared to the first quarter.

32:14 Okay, we know that in the Chinese rainy 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 and more, more and more demanding inquiries in the coming, in those weeks. After, even after the having, we see more and more inquiries and we enlarge the amountings, enlarge order, potential order inquiries.

33:04 And these informations 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 Canada. Thank you. Thank you, Mr. Zhang. The third question is a Taiwan-related one. Last year, in 2016, we had a 7.29 billion dollar I have a question for you. Did you broadcast the first quarter? Because I didn't see the final report. I guess I didn't broadcast it.

33:49 But when will it be broadcasted? Because the market is moving now. The second quarter is okay. I'm wondering when it will be broadcasted. My third question is regarding the cost of revenue. I remember that in the last four quarters, the company has a write-down of inventory on the procurement about 329 million RMB. So let's know that in this quarter or maybe in the next quarter, we'll be right back to your balance sheet or event plan Hello, I am Hong Chuanfu.

34:44 I would like to answer your question. We were short on time when we released the annual report, and we also considered the climate situation when we evaluated the stock last time. So, from the release of the annual report last time to now, the whole market has changed, the price has not changed much. So, we haven't destroyed most of the stock yet. In the future, it depends on the market situation and our sales situation.

35:38 It is hard to judge now. There are two main factors. One is that the price will go up or the market situation will be better. The other is that the sales of our products will slowly turn into our business cost if the price doesn't go up later. Please allow me to translate for Mr. Hong. 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 to decide whether and when we are going to write back that impairment.

36:29 We believe if sales goes better, we will surely do that. I'd like to know that the new product regarding cannons and cooperation with TSMC of the new 5 nanometers Inc. miner machine.

37:14 I'd like to know that is there any concrete template for this new product? Thank you. Hello, I'm Zhang Danggong. Regarding the new product, our entire ER team is working on a very tense product development. 5nm is a particularly hard manufacturing process. It requires a long production cycle. I think this product will be mass-produced next year. This year, we will produce products under 40W or 30W. All these products will be our main products in the second half of this year. The last product of the first half of the year is 1146 Pro.

38:05 This product has a minimum power consumption of 40W. The products of the second half of the year have a minimum power consumption of 30W. This is the current supply chain of this product. Okay, this is Nangeng Zhang, and I will take your questions. Regarding the new product, in fact, we haven't stopped ourselves in Quarter 1, Quarter 2 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 products.

39:08 So we believe in next year, probably this kind of product will be involved in mass production. And today, if we're looking at our products, the power efficiency around 40 gel or below 40 gel, it will be a mainstream product. In the coming second semesters, our star product will be 1146 Pro, which is about 42 gel gel hush. This is the product that we will have in the second semester. And if we are looking at further more new product development in the second semester, we will have main products almost all below 30 gel Thank you, Mr. Zhang. I would like to ask Mr.

40:00 Zhang a question. I would like to know what you think about the Bitcoin mining market at the moment. Because on the one hand, Bitcoin has been halved, and mining income has also been halved, but it has reached the peak period. I would like to know what the market thinks about the elimination of the old generation mining machines and the demand for the new generation mining machines. So my next question you also like to know how the management like to see The market is going to like especially on miners' generation, especially the new generation of miners come to market.

41:25 That's a situation based on Bitcoin halving and also the thought season at this point. So how do you see the old generation miners go out of market and new generation miners demand in recent maybe just half years? Thank you. Thank you. Regarding the issue of the elimination of the new miner, from the current situation, most of the 100-watt-level miners have been eliminated. This is a real situation. So, now, because of the beginning of the short-term and long-term crisis, From the demand of our market, the demand is indeed relatively large.

42:22 This is a relatively obvious situation. But now, when we eliminate the old mining machines, the second-hand mining market will have a relatively low price. So it also has a certain impact on the ASP of the economy. Okay, Steve, this is Nangeng Zhang, and I'll take the question. Regarding the old generation miners, which will go out of the market, Those miners are in average with a power consumption around 100 watts. So these miners are actually unable to perform.

43:26 And looking at the current situation, the winning field is coming and also halving has happened already. We're starting to receive huge oil demand. So in the market, there is a strong demand for miners. But of course, there are existing second-hand miners, and they are competing on the price, bloodily. It would, in short time, affect the new miners' price, their average sales price in the short term. But I will see in the long term, the demand from the market for new miners will come, and the new miners will soon take the lead in the mining industries. Thank you.

44:17 I'd like to know about policy changes and different problems regarding the mining industry. Does it have any effect on our miner sales? Thank you. Hello, the news you are talking about is probably what we just saw today or yesterday. We are also in the process of evaluation, so we don't see any real impact at the moment.

45:08 But before that, I think, especially this year, in China's three provinces, Thank you. Thank you. I'll take the question. Steve, this is Nangeng Zhang. Well, you mentioned the government policies regarding mining. 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.

46:12 But of course, we know that The hydroelectricity supporting mining system provinces are 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 minings 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.

47:08 Thank you. Thank you, Mr. Zhang. My last question is about our SaaS platform. In April, we launched a super SaaS platform in China. What is the plan of the SaaS platform for Mr. Zhang and Ms. Zhang? What kind of customers are there now? I'd like to know the new SaaS platform that's been released this April called Canine Cloud. I'd like to know the management thoughts and also strategy plan for this SaaS platform. Also, I'd like to know the programs for marketing and also client connection. Thank you.

48:13 Hello, this is how it is. Currently, in the process of trading mining machines, we have found that there are more and more major customers, and there are also more and more requests to provide a war-like operation solution. So, first of all, we will increase the number of customers in the mining machine software This kind of group management system, which is the support of this kind of management system. This is the first step. The second step, because the actual client wants to provide a algorithm, so this is very similar to the model of Amazon or Alibaba.

49:00 So we provide a bottom-level, and also a middle-level software system. and so on. This is the basic concept of SAP. and we see the minor 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.

49:49 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 our software into and a sort of platform fast management system to support these kinds of needs or demand. And in fact, it's like the Amazon quote, Ali quote, that the customer is asking for a hash rate, not the product or mining itself. And finally, they want to have a hash rate, not the mining itself.

50:35 So this product in terms product itself is trying to giving a lower entry level to our customers to avoid that they involving delay mining operations. But still they can be benefited from those mining industries by using our SaaS platform. Thank you. Thank you. Thank you. And this concludes today's conference call. Thank you for attending today's presentation. And you may now disconnect your line.