Canaan (NASDAQ:CAN) Q2 2020 Earnings Call

0:00 Ladies and gentlemen, thank you for standing by and welcome to Canon Incorporated Second Quarter 2020 earnings call. At this time, all participants are in a listen-only mode. After the management's prepared remarks, we will have a Q&A session. Please note that this event is being recorded. Now, I'd like to hand the conference over to your speaker host today, Mr. Shao Kuei, Board Secretary of the company. Please go ahead, sir. Thank you very much, and hello, everyone. Welcome to Canaan Inc.'s second quarter 2020 earnings conference call. The company's financial and operating results were released by our newswire services earlier today and are currently available online.

0:49 Joining us today are our chairman and CEO, Mr. Nangeng Zhang, and our CFO, Mr. Chen Fuheng. In addition, Mr. Xiaoming Lu, our VP, and Mr. Dongzheng Zhang, our executive assistant, will also be available during the question and answer session. Mr. Zhang will start the call by providing an overview of the company and the performance highlights for the second quarter of 2020. Mr. Hong will then provide the details on the company's operating and financial results for the period before we open the call up for your questions. Before we continue, I would like to refer you to our safe harbor statement in our earnings press release, which also applies to this call as well, as we will be making forward-looking statements. Please also note that we will discuss non-GAAP measures today, which are more through roughly explained and reconciled to the most comparable measures reported on the general accepted accounting principles in our earnings release and the filings with the SEC.

1:52 With that, I will now turn the call over to our Chairman and CEO, Mr. Nangeng Zhang. Mr. Zhang will deliver his remarks in Chinese, and I will provide the corresponding English translations. Please go ahead, sir. Thank you, Mr. Zhang. Hello, everyone. I am Zhang Nangeng, the Chairman and CEO of Jannan Technology. Please allow me to briefly introduce the company in the second quarter of this year. Hello everyone, this is Nangeng Zhang, Chairman and the CEO of Canon Inc. I will now provide a brief overview of our progress in the second quarter of 2020. In May 2020, Bitcoin finished its first half in a stable way.

2:40 Compared to the first quarter, where the price fluctuated dramatically, the second quarter's Bitcoin price remained stable and rose slowly. The military price is close to the first quarter. During the quarter, Bitcoin's price volatility declined in comparison to the first quarter as a result of the Bitcoin halving event in May 2020. As Bitcoin's price began to recover in the post-halving period during the second quarter, we recorded meaningful improvements on a sequential basis in our financial and operating performances. The most important thing to note is that our total net income has increased by 160.8% in the first quarter, reaching RMB1.781 per yuan.

3:27 This is mainly due to the increase of 198.5% in the total net profit of this quarter, and the increase of 153.5% in the amount of Bitcoin in the quarter. In addition, our profit capacity has also improved. Our net profit has increased from RMB2.4 million in the first quarter of 2020 to RMB43.3 million in the second quarter. Most notably, our total net revenues increased by 160.8%, quarter over quarter, to RMB 178.1 million, given by a 198.5% sequential increase. in our total computing power sold and a 153.5% sequential increase in the number of Bitcoin mining machines sold during the quarter.

4:27 In addition, we also improved our profitability as we grew our gross profit to RMB 43.3 million in the second quarter from RMB 2.4 million in the prior quarter. while significantly narrowing our net loss to RMB 16.8 million in the second quarter from RMB 39.9 million in the prior quarter. 这样强劲的表现证明了我们有能力在完成减半和价格提稳以后迅速提升财务的表现 第二就是中国的雨季带来大量的水电 这样的电价更便宜而且挖矿的利润更高 These factors have accelerated the recovery of mining market demand.

5:12 In the second quarter, our stock has basically been emptied. In the third quarter, the production of mining has also been emptied. Now we are already receiving delivery orders for the fourth quarter and next year's beginning of the year. So I expect that our third quarter will have a lot of growth in our strong market demand. This strong performance was a testimony to our ability to rejuvenate our business and financial growth as Bitcoin prices stabilized in the post-halving period. Additionally, China's raining season brought an excess of hydropower in the second quarter, making electricity cheaper and mining more profitable.

5:57 As a result, the welcoming environment for Bitcoin and the blockchain has accelerated the rebound. of market demand for mining machines. In fact, during the second quarter, we came close to clearing out our entire inventory and our Bitcoin mining machines that are now currently under production in the third quarter have all been pre-ordered. To date, we have already started accepting pre-orders for mining machine deliveries in the fourth quarter of 2020 and early 2021. These pre-orders will result in significant increases in customer advances and prepaid expenses in the third quarter. We are encouraged by the strong market demand.

6:46 At the same time, we continue to enhance our research capabilities to ensure that the product maintains the leading advantage of technological innovation. In the first quarter, we produced the first generation of Samsung 8nm chips. In the second quarter, we completed the research work of the second generation of chips. In the meantime, we further strengthened our research and development capabilities to ensure that our products maintain their position at the cutting edge of technological innovation. After mass producing the first generation of the Samsung 8nm chip in the first quarter, we completed the R&D process for the second generation of the same chip in the second quarter.

7:36 During our test, the second generation chip has displayed a 20% overall improvement in comparison to its predecessor. We are planning to utilize the new generation of the Samsung 8nm chip to begin our mass production of new Bitcoin mining machines on early September. In addition, in the second quarter, we completed the design and projection work of the first generation of N1 N1 N1 N1 N1 N1 N1 N1 N1 N1 N1 N1 N1 N1 N1 N1 N1 N1 N1 N1 N1 N1 N1 N1 N1 N1 N1 N1 N1 N1 N1 N1 N1 N1 N1 N1 N1 N1 N1 N1 N1 N1 N1 N1 N1 N1 N1 N1 N1 N1 N1 N1 N1 N1 N1 N1 N1 N1 N1 N1 N1 N1 N1 N1 In addition, during the second quarter, we completed the tape-out process for the SMIC first generation N plus 1 chip, which was one of the first N plus 1 chips to have a successful tape-out at SMIC. In late August, we have already received the N plus 1 chip from SMIC, and its performance during the test has exceeded our expectations.

8:46 Currently, we are expecting to start delivering mining machines with the N-plus-1 chip in the middle of the fourth quarter. 公司非常重视海外客户的拓展。 哈萨克资产采矿公司AQ Group Limited从2019年以来多次向江南订购采购订单。 另一家哈萨克资产采矿公司呢, While refining our product offerings, we also remain committed to the expansion of our overseas customer base in Kazakhstan For example, we have secured multiple large-scale purchase orders from local mining companies, such as Eco Group Limited and AMEC.

9:48 Furthermore, we are currently in the process of tendering several international Bitcoin mining farms, each of which involves more than 10,000 machines. As of now, we are optimistic about our ability to secure these projects. and we will continue to keep the market updated on our progress. According to the stock market, as the Bitcoin price stabilizes in the second half of the year, the demand for high-quality mining machines is on the rise. However, the COVID-19 pandemic and other uncontrolled factors have had some impact on the distribution of global capital production. In order to ensure that we can complete the customer orders in the next few months and promote business expansion, As the price of Bitcoin stabilized in the post-harving period, the market demand for high-quality mining machines is snowballing.

10:38 However, the global capacity for and others. Wafer fabrication and distribution has been impacted by a series of factors, such as the COVID-19 pandemic and geopolitical issues. To ensure that we can continue delivering our products to customers in the coming months, we have made sure to place a sufficient number of orders with our production partners. As a result of our efforts to diversify our supply sources since 2019, we are well prepared to fulfill our customers' orders and drive our business expansion going forward.

11:34 AI方面第二季度公司的工作重点仍然是加速和主要合作伙伴的产品商业化。 In terms of our AI products, we remain focused on expanding our AI partnership and accelerating the monetization of our AI products during the second quarter. As the COVID-19 outbreak is gradually brought out under control in China, we believe that the social distancing practice people have developed during the epidemic will help to accelerate the digitization process for government agencies, businesses, and individuals.

12:29 We are very happy to announce the cooperation between the company and the U.S. office sector,感感器硬电, and the SaaS enterprise WorldSense. In line with this strategic focus, we partnered with VergeSense, a U.S.-based workplace management service provider specializing in sensor hardware and SaaS solutions. Through this partnership, our K210 chips will be implemented in VergeSense's new generation of motion sensors developed to analyze safe social distances aimed at the pandemic.

13:15 Mass production for this new generation of motion sensors began in July. As mentioned in the previous episode, the mask recognition smart door system developed during the pandemic has officially been sold to the market. Currently, there are more stable orders. On the previous earnings call, we mentioned that we had developed an intelligent door-lock system capable of running facial recognition on people wearing masks. This system is now available on the market, and the system orders are ramping up. K110 has been selected as one of the AI functions of a theme education product. The project has been launched in July.

14:05 In addition, during the second quarter, DJI Technologies selected our K210 chips for one of its STEM education projects. This project was launched in July and we expect it to start implementing our chips into DJI technologies products in late 2020 or early 2021. Moreover, our AI products, jointly developed with both the leading STEM learning solution provider, UBTECH, and the leading developer of PEN and TUTE stabilizer, Guilin Jusheng Information, have begun production testing.

15:04 We are also working around the clock to develop our next generation AI chip, the KE510. The new chip has already received a large number of customer requests for testing, and we expect to start mass production before the first quarter of 2021. At the same time, we have maintained our commitment to integrating our AI products into our open source community. Our strategic goal is to build an open source AI application platform.

16:01 Recently, the company has also made adjustments to the management structure and board members. Currently, the management team of the company, in addition to the chip field, also has experience in international market strategy planning, enterprise management, and high-tech industry future layout, etc. We believe that good company governance, in fact, the decision of the company controller, is most conducive to the development of company value improvement and investment in investors' wealth. Recently, we also announced the changes to our organizational structure and the board of directors. The new additions to our executive team will help to ensure that we have an in-depth understanding of the future trends in the high-tech industry. Additionally, these executive changes have also helped to ensure that our management team has extensive experience not only in the IC industry but also in global market strategic planning.

16:57 and the corporate governance. We firmly believe that effective corporate governance will enable us to generate the most value for both our company and our shareholders going forward. 我们也相信虽然全球经济还面临着不确定性 但是科技无国界 科技将成为提升社会运行效率 改善人类生活方式的根本途径 我的介绍就到这里 谢谢大家 Although the global economy is still facing uncertainties, we are confident that the technology transcends borders and will become a vital tool for us to enhance society's operational efficiency and improve everyone's way of life.

17:44 This concludes the remarks of our CEO, Mr. Zhang. Now, on behalf of our CFO, Mr. Chang Fu Hong, I will provide an overview of our second quarter financial results Before I start, please note that all numbers are in RMB terms, unless otherwise noted. Total net revenue in the second quarter of 2020 decreased by 26.3% to $178.1 million from $241.5 million in the same period of 2019. The year-over-year decline was primarily attributable to the outbreak of COVID-19 and the Bitcoin hogging event in the second quarter of 2020, both of which led to the decrease in our total computing power sold and our average selling price per terahash in the same period. On a secretional basis, total net revenue grew by 160.9% from RMB 68.3 million in the first quarter of 2020, Cost of revenue in the second quarter of 2020 was $133.8 million compared to $230.8 million in the same period of 2019 and $65.9 million in the first quarter of 2020.

19:06 The year-over-year decrease and the quarter-over-quarter increase in the cost of revenues were in line with the change in both our TerraHash sales volume and the cost of TerraHash. Gross profit in the second quarter of 2020 increased to $43.3 million, representing an increase of 302.5% from $10.8 million in the same period of 2019, and an increase of 1,711.5% from $2.4 million in the first quarter of 2020. Growth margin in the second quarter of 2020 expanded to 24.3% from 4.5% in the same period of 2019 and 3.5% in the first quarter of 2020. Research and development expenses in the second quarter of 2020 decreased to 26.1 million from 35.9 million in the same period of 2019 and 41.8 million in the first quarter of 2020.

20:16 The reduction of R&D expenses was mainly due to the decrease in materials used for research and development purposes during the second quarter. As a percentage of total net revenue, R&D expenses in the second quarter of 2020 was 14.6% compared to 14.9% in the same period of 2019 and 61.2% in the first quarter of 2020. Let's now take a look at other operating expenses in the second quarter. One, selling and marketing expenses in the second quarter of 2020 were $6.5 million compared to $5.6 million in the same period of 2019 and $4.1 million in the first quarter of 2020.

21:07 The increase in selling and marketing expenses was mainly driven by higher salaries for our sales and marketing department staff. as a percentage of total net revenues selling at the marketing expenses in the second quarter of 2020 was 3.7% compared to 2.3% in the same period of 2019 and 6.1% in the first quarter of 2020. General and administrative expenses in the second quarter of 2020 were $29.6 million compared to $238.1 million in the same period of 2019 and $27.6 million in the first quarter of 2020. In the second quarter of 2019, a total of $213.1 million in share-based compensation allocated to general and administrative expenses was caused by the excess of appraised fair value over the transfer price of ordinary shares transferred from the existing shareholders to other existing shareholders who were also employees.

22:23 Consequently, our total operating expenses in the second quarter of 2020 decreased to $60.4 million from $279.7 million in the same period of 2019 and 73.5 million in the first quarter of 2020. Loss from operations in the second quarter of 2020 decreased to 18.9 million from 268.9 million in the same period of 2019 and 71.1 million in the first quarter of 2020, excluding share-based compensation expenses of 0.7 million. Non-GAAP loss from operations in the second quarter of 2020 was 18.2 million.

23:08 Net loss attributable to ordinary shareholders in the second quarter of 2020 decreased to 16.8 million from 263.1 million in the same period of 2019 and 39.9 million in the first quarter of 2020. Non-GAAP adjustable net loss in the second quarter of 2020, which excluded share-based compensation expenses, was 16.8 million. Diluted net loss per ADS in the second quarter of 2020 was RMB 0.11 compared to RMB 1.88 in the same period of 2019 and RMB 0.25 in the first quarter of 2020.

23:54 Turning to our balance sheet, as of June 30th, 2020, we had a cash and a cash equivalents of $157 million. compared to $516.6 million as of December 31, 2019. The decrease was mainly due to the higher short-term investments. As of June 30, 2020, we had invested $347.6 million in short-term investments compared to RMB $11 million in short-term investments as of December 31, 2019. We purchase the short-term financial products to receive higher returns by no withdrawal restrictions.

24:41 This concludes our prepared remarks for today. Operators, we are now ready to take questions. Thank you so much. Ladies and gentlemen, we will now begin the question and answer session. As a reminder, if you wish to ask a question, we'll need to press star and one on the dowels. and wait for your name to be announced. If you wish to cancel your request, please press the hash key. Again, it's star and one if you wish to ask a question. And as a reminder as well, when asking the question, please state your question in Chinese first then immediately repeat your question in English for the convenience of everyone in the call. Again, it's star and one if you wish to ask a question.

25:42 Thank you very much. I apologize, I don't speak Chinese, so I have to ask the question in English. Can you make any comments on deposits made by customers for orders for your mining equipment. Please help the client explain the sales order situation to us.

27:13 Okay, hello. I will answer in Chinese first, and then I will translate it into English later. Currently, our current customers, the main order is our current A10 series of products. There are all kinds of models now. This part of the product is more mature from last year to this year. In the second quarter, our sales are mainly based on Our inventory is the main focus. However, from the end of the second to the end of the third quarter, our entire inventory has been sold and basically completed. So now, some new customers and some old customers, when they order from us again, they have to go and buy the orders of the stock. This is a very normal situation in our industry.

28:13 If the order volume is relatively large, it is generally difficult to have a limited supply. Generally, we have to wait for a period of time. Our current期货单基本上是从第三季度晚一些时候一直到明年的一季度这么长的一个时间里来交付。为什么时间比较长呢?是因为咱们现在的晶圆生产的时间 OK. Our existing customer orders are mainly from the A10 series product.

29:13 And this is part of because the A10 product was more mature. And in the second quarter, our sales are mostly are based on selling on our inventory. And starting from the third quarter, our inventory was completely sold. So the new orders are now future orders are booking our future new series of products. This is fairly a common practice in our industry, and especially for big orders, they normally have to wait for a certain period. Now that our expected delivery time is between the third quarter this year and the first quarter next year, Delivery time a bit longer is because of the processing and manufacturing of the foundry takes longer time. Recently, our number of orders are increasing because our new product series has better performance and better cost efficiency.

30:41 Okay, thank you. Thank you so much. Thank you. Ladies and gentlemen, if you wish to ask a question, you will need to press star and one on your telephone. Again, it's star and one on your telephone. Your next question comes from the line of Michael Parker from PDF Records Limited. Michael, your line is now open. Thank you. Yes, my question is to the CFO.

31:31 What international accounting standards does the company work with and towards, please? Hi, our accounting principle is following the US GAAP standard. Thank you.

32:57 Thank you so much. There were no further questions at this time. I'll hand back over to the management for closing remarks. All right, thank you for joining us today, and we look forward to talking with you next quarter. Thanks. See you. And that is the end of the conference for today. Thank you for participating. You may all now disconnect.