Canaan Inc. (CAN) Q3 2024 Earnings Call Transcript

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Overview

Canaan shows strong financial performance with a 121% YoY revenue growth, reduced net loss, and record Bitcoin holdings. The positive market strategy includes a preferred stock financing agreement and increased demand for A15 series. Despite challenges, operational efficiency is improving. Q&A insights reveal strong demand anticipation and strategic planning for North American growth. The financing agreement and optimistic guidance suggest a positive stock price movement over the next two weeks.

Key Financial Performance

Total Revenue $73.6 million, year-over-year growth of 121%. This was driven by large scale deliveries of A14 series and expansion into North American market.

Mining Revenue $9 million, year-over-year increase of 175%. This was primarily due to the increase in mining operations and production of 147 Bitcoins.

Bitcoins Mined 147 Bitcoins, a year-over-year increase of 26%. This growth was driven by the expansion of mining operations in Africa.

Gross Margin for Mining Operations 22%, stable performance despite challenges from Bitcoin price fluctuations.

Operating Expenses $35 million, a decrease of 19% year-over-year, mainly due to organizational optimization.

Non-GAAP EBITDA Loss $36.8 million, narrowing 46% year-over-year.

Cash Reserves $72 million at quarter end, an increase of approximately 8% compared to the end of the previous quarter.

Bitcoin Holdings 1,231 Bitcoins, a sequential increase of 98 Bitcoins, reflecting strong confidence in Bitcoin's long-term value.

Average Selling Price (ASP) of Computing Power $8.8 per terahash per second, a year-over-year increase of 12%.

Inventory Write-downs $22.9 million, representing a year-over-year decrease of 58%, driven by ongoing stock clearance.

Average Revenue per Bitcoin Mined Over $61,000, a decrease of 7.5% primarily due to the decline in Bitcoin prices.

Total Computing Power Sold 7.3 million terahertz per second, representing a year-over-year increase of 93.8%.

Cash Outflow for Production and Operation $69 million, offset by cash inflow of $42 million from sales.

Fair Market Value of Owned Bitcoins $77 million as of September 30, reflecting the increase in Bitcoin price.

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Operating Highlights

A15 Series: The A15 Pro delivers 215 tera hash per second of computing power with power efficiency as low as 16.8 joules per terahash. Small-scale delivery of A15 series began ahead of schedule.

Nano 3 Heater: Over 10,000 units of the Avalon Nano 3 heater were shipped, with accumulated orders reaching 17,000 units.

North American Market Expansion: Secured significant orders from CleanSpark for 3,800 A1566I Immersion Cooling Miners and HIVE for 11,500 units, with deliveries planned for Q4.

Middle East Market Expansion: Delivered over 10,814 miners to customers in the Middle East, enhancing brand awareness and reputation.

Mining Operations: Mining revenue reached $9 million, with 147 Bitcoins mined, a 5% increase quarter-over-quarter.

Cash Reserves: Cash reserves reached $72 million at quarter end, enabling accelerated investment in A15 mass production.

Joint Mining Projects: Announced a 30 megawatts joint mining project with Luna Squares in Texas, involving 3,480 A14 series and 5,654 A15 series units.

R&D Investments: Continued investments in R&D for A16 series, aiming for power efficiency in the 10-plus joules per terahash range.

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Risk or Challenges

Bitcoin Price Volatility: The global Bitcoin mining market faced challenges from Bitcoin price volatility, with an average price decline of over 7% compared to the last quarter, impacting miners' profits.

Network Hash Rate Increase: The total network hash rate grew by more than 10%, leading to historical lows in hash price and further squeezing miners' margins.

Regulatory Environment: In North America, the regulatory environment is relatively stable, which is beneficial for mining operations and partnerships.

Supply Chain Challenges: The company is focused on securing production capacity and has placed advanced orders with foundries to meet growing market demand.

Economic Factors: The company anticipates a recovery in demand for mining machines as Bitcoin prices stabilize and rise, influenced by market conditions post-halving.

Operational Efficiency: The company is working to optimize management and increase operational efficiency while facing external challenges.

Cash Flow and Financing: The company has secured $30 million in preferred stock financing to support its operations and expansion plans.

Inventory Management: The inventory balance has declined significantly, with older series inventory sharply reduced, indicating improved inventory management.

Market Demand Fluctuations: Demand for mining machines is expected to rebound after the halving, but the company acknowledges that market fluctuations can impact sales.

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Guidance & Outlook

Product Development: Continued back deliveries of A14 products and completed transition to mass production of A15 series, with a focus on innovation and R&D investments.

Sales Expansion: Expanded global sales reach, particularly in North America, securing significant orders from CleanSpark and HIVE.

Mining Operations: Achieved stable mining revenue of $9 million, with a gross margin of 22%, despite challenges from Bitcoin price fluctuations.

New Product Launches: Developing consumer-level products that combine household appliance concepts with decentralized mining principles.

Future Capacity Goals: Aiming to reach 10 exahash per second deployed computing power in North America by the first half of 2025.

Revenue Guidance: Expecting Q4 2024 revenue to be approximately $80 million.

Market Outlook: Cautiously optimistic outlook for Q1 2024, anticipating a recovery in Bitcoin prices and increased demand for mining machines.

Production Capacity: Plans to ramp up production capacity for A15 series and begin large-scale deliveries.

Investment Strategy: Continuing to invest in new product development and production capacity to meet diverse customer needs.

Long-term Vision: Focus on building a strong foundation for future growth in both Bitcoin mining and potential AI applications.

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Shareholder Return Plan

Preferred Stock Financing: Canaan announced a new $30 million preferred stock financing agreement with an existing investor, following a previous $15 million investment in September.

Cash Reserves: At the end of Q3, Canaan's cash reserves reached $72 million, which will support investments in A15 mass production and mining projects.

Bitcoin Holdings: By the end of Q3, Canaan's Bitcoin holdings increased to 1,231 Bitcoins, valued at approximately $77 million.

Future Revenue Guidance: Canaan expects revenue for Q4 to be approximately $80 million, indicating a positive outlook for the upcoming quarter.

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Key Q&A

Q:How would you compare this to, say, when the having event in 2020 and then you had a very strong year in 2021? How does 2025 look like as far as visibility and the amount of demand you're seeing?

A:Overall, I think the patterns are quite similar. About six months before the halving, buyers will be motivated by lower equipment prices, tend to purchase large quantity of machines for a final round of pre-halving money. However, demand usually drops significantly as the halving approach and immediately afterwards. Once the market stabilize again, and when the Bitcoin price is recovered, demand typically will rebound. That said, there are some differences between the two events. The timing of halving Bitcoin price trends, industry inventory levels, and overall scale of demand have all involved. Despite these differences, the key takeaway is that, demand continues to grow. Market fluctuations have lessened and customers have become more professional in their operations. I think for 2025, maybe some -- I think the capacity and like the geographic conflicts will influence the demand and different regions may have different demands in 2025.

Q:What systems do you have in place to make sure you're going to be able to meet the demand, make sure there's no shortage of the ASICs or boundary space, and even just the assembly of the mining rigs?

A:Yes, we've been focused on developing new products, delivering models with approximately 17 joules per terahash power efficiencies this year. And we also participated market trends early and secured our production capacity by placing advanced orders to the foundries. Close collaboration with our partners has further improved the yield rates and shortened production cycles. These interactives require financial support. At the end of September, we complete $15 million financing to invest in self-money and joint money sites in the US. Because we know the bull market is coming, so we have to have our supply chains to stop us for customer orders.

Q:What targets do you have in the coming quarters, either on an exahash sold basis, gross revenue or percentage of total revenue?

A:I think the rising Bitcoin price has triggered recovery in market demand, and we anticipate even stronger demand next year. In the first quarter we achieved 7.3 million terahash per second in computing power sold, marking 93.8% year-over-year increase and 16.4% sequential growth. Taking a record high over the past 11 quarters.

Q:Can you break down the product revenue or the A6 between the A14 and the A15?

A:The major delivery of quarter three is from A14 series. NG has mentioned that we only delivered like 1,500 pieces of A15 series. So the major deliveries from A14 series and also we did a lot of stock clearance for A13 series, also occupies a good kind of percentage. But I think the major part is still A14 series.

Q:Could you break down roughly between the A14 and the A15 for your $80 million guidance for the December quarter?

A:I think currently the A14 series is still doing ongoing delivery. I think it's still a major part of our delivery. But A15 series is climbing in a kind of introduction period. And in this quarter, in quarter four, we will still have A14 series as the major delivery and we will have the first mass production batch of A15 delivered to the main customers from North America.

Q:Review of Unclear Management Responses

A:Management's responses lacked clarity on the specific breakdown of revenue between A14 and A15 series for the upcoming quarter, as well as the exact targets for exahash sold and revenue percentages.

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Earnings Word Cloud

The most frequently occurring keywords in this quarter's earning call

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