Canaan Inc. (NASDAQ:CAN) Q4 2021 Earnings Conference Call March 3, 2022 7:00 AM ET

Company Participants

Nangeng Zhang – Chairman and Chief Executive Officer

James Cheng – Chief Financial Officer

G. Zhang – Investor Relations

Neshi Zhang – Interpreter

Conference Call Participants

Shuang Sun – Grow Shuang Securities

Lewis Fan – Benchmark Company

Operator

Ladies and gentlemen, thank you for standing by and welcome to Canaan, Inc Fourth Quarter and Full-Year 2021 Earnings Conference Call. At this time, all participants are in a 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 host today, Ms. G. Zhang, Investor Relations Manager of the company. Please go ahead, Ms. Zhang.

G. 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. James Cheng. In addition, Mr. Jingjie Wu, 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 statement in our earnings press release.

Today's call will include forward-looking statements. These statements include but not limited to our outlook for the company and statements and estimates, and project future results of operations or the performance of the company. These statements speak only as of the date hereon, 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. This statement will not guarantee a future performance and are subject to risks, uncertainties, and assumption. Please refer to the press release and the risk factors and documents we file with Securities and Exchange Commission, including our most recent annual report, our Form 20-F, where 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 our webcast, we will discuss both GAAP financial measures as certain as non-GAAP financial measures, which we believe are useful as supplemental measures of the company's performance. This non-GAAP measures will be completed in addition to [Indiscernible] as a substitute or in isolation for GAAP results, [Indiscernible] With that, I will now turn the call over to [Indiscernible].

Neshi Zhang

[Foreign Language]

G. Zhang

The fourth quarter of 2021 we faced a wide range of challenges including a high volatility in Bitcoin prices and that makes evolvement complex impact due to Geo-Political factor and continued Semiconductor supply shortages across different fabrication production lines. With a pragmatic attitude and flexible, yet steady operations, we see the opportunities and 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 the overseas markets, we maintain growth momentum in lower computing power sales, reaching a record high of 7.74 million Terahash per second.

For the quarter, we achieved a 55.8% quarter-over-quarter increase in revenue to RMB2.18 billion mashing 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 32.34 million Terahash per second in total computing power sold, up 238.5% year-over-year. Total net revenues reached an R&D RMB4.99 billion, up more than tenfold than 2020, generating a net profit of RMB 2 billion for the year.

Nangeng Zhang

[Foreign Language]

G. Zhang

Let's look at our detailed operations during the quarter. In terms of our mining machine 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 the new historical high for our quarterly sales performance. Market amount remained robust despite considerable volatility in fixed point 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 the hunting production capacity, a yield rate, acquiring new customers, leveraging flexible pricing strategies, maintaining stable supply, and [Indiscernible] of adjusting the proportion of spot sales. We continue to diversify our computing power sales to more over of these markets, especially in Southeast Asia and Southeast 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 market 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, [Indiscernible] repeat repurchases from last mining companies, and maintain a consistent and stable supply chain allows us to more efficiency [Indiscernible] market demand into our sales.

Neshi Zhang

[Foreign Language]

G. Zhang

We were very confident in our revenue for the quarters to come as we have recorded a solid pre -sales performance and secured production capacity with our [Indiscernible] for the year. In addition to our production capacity allocation for spot sales on mining business, we received [Indiscernible] advances of RMB 1.34 billion from contract sales customers as of December 31, 2021, setting a new record. This demonstrates over 6 million Terahash per second to be delivered. The strong contract sales lack potential cash inflow for our company and reflects strong demand from Bitcoin miners and their recognition of our product quality and delivery capabilities.

Nangeng Zhang

[Foreign Language]

Neshi Zhang

[Interpreted] Regarding our Bitcoin mining business, we still have overseas operations center to carry out the mining operations and other Bitcoin -related business. During this quarter, our mining operations in product percent we encountered multiple challenges, including pandemic factors, logistic congestion, and the 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 SOP 15 are making faster efforts and proactively communicate with our partners to solve those problems as soon as possible. We will also be prudent in carrying out additional deployments.

Nangeng Zhang

[Foreign Language]

G. Zhang

[Interpreted] It's necessary to emphasize that although our mining business in convert headwinds in the near term. Developing the mining business is still one of our long-term strategy. With letters from past experience, we will decisively execute this strategy. We will continue to elaborate the advantages of our mining machines supply, through expanded presence on people and collaborations, as well as dynamic allocation of production capabilities between production capacity between machine sales and mining. We endeavor to further enhance the overall economic benefits of our operations.

Nangeng Zhang

[Foreign Language]

Neshi Zhang

We remain steadfast in developing our AI business in the fourth quarter. Feedback has been positive thus far, and we are seeing continued interest of our customers in intelligent educational hardware [Indiscernible] and various other application scenarios. Recently, we reached a strategic cooperation agreement with open analyst, a leading open source operating system community and innovation platform. We [Indiscernible] and application based on the open analyst operating systems and the attendant AI chip platform, promoting localized open source projects in the field of computing AI chip applications.

Nangeng Zhang

[Foreign Language]

G. Zhang

[Interpreted] Regarding our R&D, in terms of our research and development, we continue to expand our R&D team and enhance our design capabilities. We have achieved the ability to independently implement chip front and logic and back-end physical design for multiple advance note, covering the entire packaging [Indiscernible] and mass production processes. In the fourth quarter, our total number of R&D staff increased by 99% year-over-year.

Neshi Zhang

[Foreign Language]

G. Zhang

[Interpreted] We possess a deep staff developed IP metrics and have established an even more comprehensive, self-developed IP system. We carefully prepared the achievement of our R&D efforts with a range of active patients as of December 31st of 2021. We have accumulated 156 authorized per patients, 70 ICU layout design-wise and 105 software copy-wise.

Neshi Zhang

[Foreign Language]

G. Zhang

[Interpreted] We also continue to make steady progress on a number of R&D projects for new generations of this point mining machines. We are dedicated to pollinate in the industry and providing better products for mining. Going forward, we will disclose specific performance parameter of new generation mining machines only after we ship in and successfully tape-out and complete the full half-day for the launching.

Neshi Zhang

[Foreign Language]

G. Zhang

[Interpreted] As we continue to prepare forward our business, we remain committed providing value for our shareholders. As of today, we have completed a repurchase program approved in September 2021, representing repurchasing approximately 3.6 million ADS for the total of $20 million while repurchase program progresses 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.

Neshi Zhang

[Foreign Language]

G. Zhang

[Interpreted] In 2021, we achieved sustained growth and a strong performance despite various uncertainties and market challenges. It's adamant to the efficacy of our strategy and our quality institution capability.

Nangeng Zhang

[Foreign Language]

G. Zhang

[Interpreted] In 2022, we remain committed to amplify our research and development capabilities, deep diving in chip design and improving product performance in 2022. We will also hopefully enhance our customer organization as we shift our focus towards overseas market and expanded our progress across the globe, with highly in close communication and providing backlog class services becoming increasingly important. To better serve our customers, we are exploring more client - centric way across product R&D, manufacturing, transportation, and after sales services. Additionally, we will further leverage our pragmatic, flexible, and resilient operations with slide and made some market uncertainties.

We will continue to mitigate the impact for market evolvement, and key point price block duration with steady supply and secure production capacity. As we maximize our profit through strategic balancing, our mining machine sales are mining business.

Nangeng Zhang

[Foreign Language]

G. Zhang

[Interpreted] We expect our total net revenue in the first quarter of 2022 will be in the range of RMB 1,500 million, were RMB 1,600 million representing an interest of 275% to 300% compared with the fourth quarter of 2021. Please note that this forecast reflects our current and preliminary view on the market and operational conditions, which are subject to change.

Nangeng Zhang

[Foreign Language]

G. Zhang

[Interpreted] This concludes my prepared remarks. I will now turn the call over to our CFO, James.

James Cheng

Thank you, Mr. Zhang, and hello, everyone. This is James speaking. Despite volatile market environments and various challenges, we achieved another robust quarter with solid financial results from top line to bottom line. In the fourth quarter, we delivered the computing power sold of 7.7 million Terahash, representing a sequential growth of 15.5%. Our total net revenues reached RMB 2,184.6 million, up at 65.8% quarter-over-quarter, which was 15.8% higher than the upper limit of our previous forecasting November. For the full-year of 2021, our total next revenue reached RMB 4,986.7 million, up more than 10 times year-over-year. The good [Indiscernible] result came from our record high computing power sold and a responsive delivery, as well as our effective pricing strategy that enables most post-sales driving higher average selling price.

Additionally, our effective business development across the continents helped us record a strong contract advances of RMB 1,340.7 million as of 2021 end, ensuring substantial cash inflow and a steady revenue recognition for quarters ahead. Our gross profit for the quarter of [Indiscernible] sequentially to RMB 1,486.9 million and a gross margin rate is a 68%, which is an outliner in the past four quarters. Gross margin rates for full-year 2021 is 57.2%. Please note that coal mining machines delivered during the fourth quarter, we secured a correspondent wafer costs of several quarters earlier from ongoing demand ended supply imbalance across the semiconductor industry and the feedback from our foundry partners we expect wafer cost of price increases in 2022.

Which we all have an impact on our future gross margin rates. Regarding our Bitcoin mining business as of December 31st, 2021, we have 1.13 million tera-hashes computing power deployed at mining farms. As of the 2021 end, we sell the 70.5 Bitcoins with a carrying value of RMB 20.3 million. Our AI business revenue achieved the RMB 5.5 million in the quarter, representing a year-over-year growth rates 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 the equal system platform partner open analysts.

Research and development expenses were RMB112.0 million increasing by a 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 capability. As a result of our strong revenue efficient to operation and expense management we realized a record high net profit of RMB 1196.5 million for Quarter 4, representing a sequential growth of a 114.6%. For the full year of 2021, net profit achieved RMB 2,000.3 million. non-GAAP adjusted Net Income was RMB 1,250.7 million for Quarter 5 representing a sequential growth of 112.9%. For the full year of 2021. non-GAAP adjusted net income of this RMB 2,000 to RMB301.6 million.

While we are very pleased with our performance achieved in quarter 4 and in the full year of 2021, we are fully aware that the existing challenges may perceive 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 factor and how we tackle them. From [Indiscernible] environments perspective, we are in the fed interest rate hike cycle for US dollar. The pace of interest to rate increase has and will continue to have an impact on Bitcoin price fluctuation. On the other hand, geopolitical conflicts, even military operations, may also bring further uncertainties to Bitcoin price fluctuations. As Bitcoin prices closely linked to the demand and the price for our mining machine, its fluctuation always has an impact on miner’s willingness to expand the kind of their mining scales.

In past quarters, we continue the building up of the capability of flexible, allocating group among contract sales, spot sales, and mining operations to cease the opportunities 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 the ensuing price increase, we expect our production costs to scroll up and bring pressure on the gross margin rate. To sustain adequate water supply, we have been actively communication with our foundry partners and secured the production capacities with considerable amount of cash through payments.

We will also continue to support our R&D teams to further improve products and better utilize wafers to have higher products efficiency at a lower cost. For our Bitcoin Mining businesses, we manage to deploy our computing power as scheduled. And we encounter the awnings speculative, we incur electricity shortage in both quarter four 2021 and the quarter one 2022. We closely monitor the local conditions involvement and it will continue to be cautious in deploying additional computing power. We also actively evaluate target markets to diversify operational risks. We are aware of the over stack holds and we remain resilient in the mining business as one of our strategies. We are also aware that some investors have question about the lifting risk as the U.S. listed a Chinese company.

Canaan is different from some other China companies listed in the U.S. We are not under a VIE instruction and we are running a B2B business, with markets and the corporate customers, mostly located outside of China. And our principal business activities do not involve large numbers of rigid to the user or deal with backed amounts of new user data. Additionally, there is still around two-year window before SEC gives the final decision and things maybe 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 this 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 years’ experience in the industry. We will keep sharpening our R&D capabilities and stay vigilant and proactively mitigate risks with our dynamic operations. Now, I would like to briefly walk you through our financial results for the quarter. Total net revenues in the fourth quarter were RMB 2,184.6 million compared to RMB 38.2 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 RMB 1,486.9 million compared to RMB 9.1 million in the same period of 2020, representing a sequential increase of 100.5%. Total operating expenses in the fourth quarter of 2021 or RMB 273.7 million compared to RMB 80.1 million in the same period of 2020. And RMB 278.4 million in the third quarter of 2021.

Income from operations was RMB 1213.2 million up 161.9% sequentially. Net income attributed to ordinary shareholders was RMB 1196.5 million up 114.6% sequentially. Non-GAAP adjusted Net Income was RMB1215.7 million up 112.9% sequentially. Non-GAAP adjusted net income or loss excludes share-based compensation expenses. Basic and the diluted Net earnings per ADS for the quarter were RMB 690 and RMB 681 respectively. As of December 31st 2021, the company had cash and cash equivalents of RMB 2,684.2 million up 586% compared to RMB 391.3 million as of December 31st, 2020. This concludes our prepared remarks. We are now open for questions.

Question-and-Answer Session

Operator

We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Shuang Sun with Grow Shuang Securities. Your line is open.

Shuang Sun

Hi. Can you hear me?

James Cheng

Yes.

Shuang Sun

Hi there. I'm Shuang Sun from Grow Shuang Securities. In early 2022, we saw the Bitcoin price experience a dramatic drop. So, what was the impact on your selves? How control measures have you implemented to mitigate impact?

Neshi Zhang

[Foreign Language]

Nangeng Zhang

[Foreign language]

Neshi Zhang

[Interpreted] Let me translate. So, we're still in the first quarter of 2022 and the price of bitcoin is still fluctuating. As such, we can only share our operations for a macro. Previously when the price of bitcoin fell sharply, customers along for our mining machines with a decline, they will generally have a wait and see attitude resulting in a decline in sales. Historically, the first quarter is also traditionally the off season and production and sales are usually lower due to the holidays, including Christmas, New Year, and Chinese New Year.

Nangeng Zhang

[Foreign Language]

Neshi Zhang

However, there are other factors at play during the fourth quarter of this year. This primarily includes the continuing industry-wide supply for the issue of chip and mining machines cost by miner growing deployment of mining machines last year. As clients tend to be highly institutionalized and institutional client hold a long-term horizon in terms of financing and investment activities therefore, the price fluctuation of Bitcoin during this period have had little impact on our sales price and sales volume. Our guidance for the fourth quarter of 2022 reflect our forecast of performance.

Nangeng Zhang

[Foreign Language]

G. Zhang

[Interpreted] Meanwhile, we are mitigating the negative impact of 3.5 decline through a variety of measure. First, we are actively sending new channels to reach new clients. Second, we elaborate future contract to review inventory pressure as evidenced by the stable future contract relationships that we have with a number of large mining company. Finally, Bitcoin's [Indiscernible] continues to fall, and depending on the target market condition, we will also adjust the allocation of machines between inventory and mining deployments to balance long-term and short-term revenues.

Operator

Thank you. Our next question comes from Lewis Fan with Benchmark Company. Your line is open.

Lewis Fan

Hi, thanks for taking my call. Congratulations on a very strong quarter. My first question is sort of management is, could you please elaborate on your progress and plan on your computing power deployment for the mining business. Hello, can you hear me?

G. Zhang

Hey Lewis can you please translate your question into English -- into Chinese.

Lewis Fan

Okay. Sure. No problem. [Foreign Language]

Neshi Zhang

As of December 31st, of 2021, we had 126 million Terahash of mining computing power under deployment. As of February 28th 2022, this risen to 2.38 million Terahash of mining computing power under deployment. We are currently in the process of deploying more computing power and negotiating potential [Indiscernible] mining projects.

Nangeng Zhang

[Foreign Language]

Neshi Zhang

[Interpreted] In the future, we feel continue to increase the deployment of computing power to our lines of business. But we do not consider rapidly increasing our computing power as a priority. We will adjust the deployment phase, to balance allocation between future sales, spot sales and mining, computing color. In this way, we try to obtain maximum value and avoid potential risks with. In addition, all machines deployed in our mining business. And also, be reallocated to spot sales if necessary.

Nangeng Zhang

[Foreign Language]

Lewis Fan

Okay. Thank you. Thank you for the color. I do have a couple follow-up question 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, when is the company's moat against competition? [Foreign Language]

Nangeng Zhang

[Foreign Language]

Neshi Zhang

Through the more wider blockchain industry, our industry competitive landscape has indeed become more stable within a year. There's a reason for that. Recently some very large companies have started to enter the industry after a year for planning and preparation. However, based on our analysis of their products so far, they still need substantial improvement in order to be competitive in the market. In niche market of the industry, such as the big point mining ship. Our key impact accumulated experiences technology paid hand on the great deal of know-how over many years. By leveraging this trend, we have developed our product through an industry-leading level, thereby forming the Company's technological format of both technological malls.

Nangeng Zhang

[Foreign Language]

Neshi Zhang

[Interpreted] In addition, we continuously solidified and optimize our supply chain over the past few years of operation. Our multi-foundry partnership strategy powered by our strong technology and RMB capabilities have enabled us to build cooperation with several competitive partners. This partnership allowed us to secure production capacity with advanced note. Our effective cash management also allows us to lock-in these capacities through advance the pay -- advanced payments in a timely manner. In addition, our Bitcoin mining business launched in 2021 will also help us mitigate the supply changes in the future.

Nangeng Zhang

[Foreign Language]

Neshi Zhang

[Interpreted] 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 through 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 from us, forming long-term and stable relationship. At the same time, we are constantly exploring new geographic markets and establishing cooperation with new customers.

Nangeng Zhang

[Foreign Language]

Neshi Zhang

[Interpreted] In essence, our business model with chip design effort for core technology and selling mining -- is many -- mining machines operating in bitcoin mining business and selling AI chips. Our business complements one another. And combined with our underlying technology that for many continuously self-reinforcing business models.

Nangeng Zhang

[Foreign Language]

Neshi Zhang

[Interpreted] In addition, we accumulated extensive operational experience and capabilities from upgrade supplier chain, for the downplay market. As we operated, your cycles of significant speed coin five volatility during the past nine years. We are able to respond to changes in the market and Bitcoin prices with flexible and smooth operational adjustments. Strategically mitigate risk and seize opportunities.

Nangeng Zhang

[Foreign Language]

Neshi Zhang

The last but not least, as a U.S. listed company, we are more transparent and compliant in terms of company operations, governments, and the disclosure. At the same time, we also have access to more financing options and opportunities.

Nangeng Zhang

[Foreign Language]

Neshi Zhang

[Interpreted] So to answer your question, this factor for our multilayer competitive loss. Hope I answered your questions.

Lewis Fan

That's very helpful. Thank you. Just a couple of quick -- couple of quicker follow-up question. First of all, could you please share some color on market share? [Foreign Language]

Nangeng Zhang

[Foreign Language]

Neshi Zhang

[Interpreted] So previously, we generally estimated -- generally estimated our market share according to our computing power sold. And don't have network cash rate in the correspondence period. However, in 2021, the year fluctuation of the network cash rates 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 hash in total computing power sold compared with 6.6 [Indiscernible] hash in 2020. In 2021, our total revenue reached nearly RMB5,000 million compared with RMB400 million in 2020. Therefore, we believe we gained some market share to [Indiscernible] Hopefully we can have guidance from professional market research institutions for those specific detail. Hope I answered your question.

Lewis Fan

Okay. That's helpful. Thank you. Just one last question. I know the management has just talked about share repurchase plan. Does demand you might have any stock dividend program or plan in mind? I'll translate that into Chinese. [Foreign Language]

Nangeng Zhang

[Foreign Language]

Neshi Zhang

Before 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'll submit a new stock repurchase proposal to the board accordingly will make formal announcement. Once the proposal is approved.

Nangeng Zhang

[Foreign Language]

Neshi Zhang

So, year 2021, so our rapid growth and we will afford to halt further. We look forward to continue. And the expected credited growth through our past endeavor. To fulfill this role, we need to invest more into our R&D, further enhance our market development, expand our business, and optimize our services. We are committed to generating more for our clients and shareholders. Slightly it needs to long term value. Hope I answered your questions.

Lewis Fan

Yes. Thank you very much. And we appreciate again, congratulations on the strong quarter.

Nangeng Zhang

Okay.

G. Zhang

Thank you. And that's all the time we have for questions. I would like to turn the call back over to management for closing remarks.

G. Zhang

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.

Operator

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