Canaan Q4 2024 Earnings Call Transcript

Quartr
Provided by Quartr
March 26, 2025

There are 9 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Cayman Inc. Fourth Quarter and Full Year of twenty twenty four 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.

Operator

Now I'd like to hand the conference over to your speaker host today, Ms. Gwen Lauber, Investor Relations Director of the company. Please go ahead, Gwen.

Speaker 1

Thank you, operator. Hello, everyone, and welcome to our earnings conference call. Joining us today are our Chairman and CEO, Nangan Zheng and our CFO, Jin James Cheng Leo Wang, Vice President of Capital Markets and Corporate Development and Shi Zheng, Senior IR Manager will also be available during the question and answer session. Our CEO will start the call by providing an overview of the company and performance highlights for the quarter. Our CFO will then provide details on the company's operating and financial results for the period before we open up the call for your questions.

Speaker 1

Before I begin, I would like to refer you to our safe harbor statement in our earnings press release. Today's call will include forward looking statements. These statements include, but are not limited to, our outlook for the company and statements that estimate or project future operating results or the performance of the company. These statements speak only as of today, and the company assumes no obligation to revise any forward looking statements that may be made in today's press release, call or webcast except as required by law. These statements do not guarantee future performance and are subject to risks, uncertainties and assumptions.

Speaker 1

Please refer to the press release and the risk factors and documents we file with the Securities and Exchange Commission, including our most recent annual report on Form 20 F for information on risks, uncertainties and assumptions that may cause actual results to differ materially from those set forth in such statements. In addition, during today's call and webcast, we will discuss both GAAP financial measures and certain non GAAP financial measures, which we believe are useful as supplemental measures of the company's performance. These non GAAP measures should be considered in addition to and not as a substitute for or in isolation from GAAP results. You can find additional disclosures regarding these non GAAP financial measures, including reconciliations with comparable GAAP results in our earnings press release, which is posted on the company's website. With that, I will now turn the call over to our Chairman, CEO, Nangen Zhang.

Speaker 1

Please go ahead.

Speaker 2

Hello, everyone. This is MG, CEO of Canon. Thank you for joining our call. James, our CFO, and I are pleased to speak with you from our headquarters in Singapore and share our updates for the fourth quarter and the recent developments. In the fourth quarter of twenty twenty four, the trends of bitcoin price and total net work hash rate was relatively favorable for miners.

Speaker 2

Bitcoin price steadily rose from USD 61,000 at the beginning of the quarter to USD 93,000 at the end. The total network hash rate also increased from US622x hash per second to US842x hash per second. That said, in Q4, bitcoin price grew faster than the hash rate. We see a typical electricity cost of USD 0.06 per kilowatt hour minus using our A50 machines. So their gross margin rise from about 40% at the start of the quarter to as high as 60% by the end.

Speaker 2

This created a more profitable environment for mining and boosted miners' confidence. We fully leveraged this positive market trend and pushed sales and the delivery of mining machines and to grow the energized hash rate for our mining operations. We achieved approximately US89 million dollars in total revenues this quarter, well above our guidance of US80 million dollars For the full year, we achieved almost USD $270,000,000 in revenue, up 27.4% year over year. For mining machine sales, we focused on new product resales. The high performance A15 series officially entered mass product delivery in Q4.

Speaker 2

We sold 9,100,000 terahash per second of computing power, up 66% year over year and up 24.7% quarter over quarter, reaching a record high in our company's history. This contributed US73 million dollars to mining machine revenue, up 64% year over year and making a two year quarterly high. In this quarter, we fulfilled large orders from North American public mining companies, like Cipher, CleanSpark and Hyffe, and received strong positive feedback. For the full year of 2024, North America became our largest regional market, accounting for approximately 40% of mining machine sales, showing the success of our expansion in the region during the past years. The rising bitcoin price also helped us clear per year generation's inventory.

Speaker 2

In Q4, the per year generation products remained popular in regions with energy advantages like Southeast Asia and Africa. To date, saleable inventory of traditional models like A16 and A14 has been mostly cleared and A15 has become our main product. This completes the upgrade of our inventory portfolio. Our first consumer product, the NanoString Mining Heater, continue to be welcomed by individual users around the world. By year end, consumers from 80 countries around the global have ordered our products through our online shop.

Speaker 2

Since their launch, we received a total of 24,000 nano orders, with more than 50% coming from customers in Europe and North America. This also helped increase our brand recognition in these regions. In 2025, we launched several new Avalon Home products, including the Nano3s, Avalon Mini three and Avalon Q. These new products are available on our website for preorder with small batches being delivered in Q1. As of now, total orders for these new consumer grade products have reached 12,000 units with total amount of over US5 million dollars Some of these orders also come from distributor clients who have now established cooperation with us.

Speaker 2

Considering that Northern Hemisphere will soon enter summer and the indoor heating demand will gradually decline, this level of presale performance has greatly exceeded our expectations. It also shows that many individual customers are eager to try and participate in bitcoin mining. Our mining business also delivered a strong performance this quarter. We mined 186 bit points, up 84% year over year. With higher online cash rates and stronger bitcoin prices, our mining revenue reached US15.3 million dollars up 313% year over year.

Speaker 2

We continued to take advantages of low electricity costs in Africa and expanded local mining capacity. By the end of twenty twenty four, our total installed mining hash rate reached 5.4x hash per second with 4.8x hash per second energized. Our average OEM power cost remained at US0.4 dollars per kilowatt hour. With bitcoin price trending up in Q4, our mining gross margin increased to 42%, much higher than the 22% in Q3. Our efficient mining operations also helped grow our bitcoin holdings.

Speaker 2

By the end of twenty twenty four, our owned bitcoins on balance sheet reached $12.93, a new high. The rising price of Bitcoin at quarter end also resulted in fair value gain to this asset. This gain shows the preliminary benefits of our mining operations as a long term strategy and our decision to hold bit points. As our mining business expands, we provide additional information to the capital markets as it's standard with the other public miners. Starting in January 2025, we began releasing monthly mining updates.

Speaker 2

By the February 2025, we announced that we had seven active joint mining projects worldwide with 6.28xHash installed and 5.73xHash energized. Our owned Bitcoin holdings had reached thirteen fifty five by the February. As we previously announced, since Q1 twenty twenty five, we have expanded two North American mining projects through upgraded partnerships. We are moving towards our mid-twenty twenty five goal of reaching 10x hash per second deployed in North America and 15x hash per second globally. We expect our mining business to achieve a new high yield revenue in the first quarter of twenty twenty five.

Speaker 2

Today, we are also pleased to announce that we recently signed new cooperation agreements with two partners to expand mining capacity at sites in Pennsylvania and Texas. Once these two projects gradually go online in Q2 twenty twenty five, We expect to increase our operated hash rate in North America to approximately 4.7x hash per second. We have already built a strong and experienced operations and business development team in North America. And they are actively in discussions with several potential partners for droid mining. Based on our current observations, the cryptocurrency site resources in North America market still show strong potential, which is in line with our earlier strategic assessment.

Speaker 2

The expansion of joint mining and hosted mining in North America has been progressing very smoothly. As a manufacturer with minor research and development capabilities. We are increasingly welcomed by mining sites owners for joint mining ventures. The new U. S.

Speaker 2

Administration is expected to ease regulations, provide more energy resources to the industry and support bitcoin mining at both federal and state levels. Recently, our key competitors, critical affiliate company has been added to U. S. Entities list. We believe we will benefit from the growing tension and rising costs in the mining hardware supply chain.

Speaker 2

And that many mining site owners will increasingly view Canon as a preferred partner. We also hope to reinvest more of the funds raised in US capital markets back to local projects and gradually build ourselves into a company with a strong mining footprint in The US states in The United States. Both our mining machine sales and mining operations rely on continuous R and D efforts. In the fourth quarter, we successfully wrapped up mass production of A15 series. Working closely with our foundry partners, we carried out ongoing process improvements to boost product performance and yield rate.

Speaker 2

Looking ahead, we expect to deliver more computing power using the same number of wafers, including more high end A15pro models. In addition to our standard air cooled miners, we continue to provide customized mining solutions based on clients' specific needs and their site conditions. For example, in our previous collaboration with public miner CleanSpark, we delivered 3,800 units of our A1566I emerging cooled miners. These machines ran steadily on-site, performed beyond the contract specifications and received very positive feedback from the client. In 2024, although mining chips were generally not subject to U.

Speaker 2

S. Export control restrictions at the time, We continue to proactively manage our supply chain to prepare for potential regulatory changes in the future. In January 2025, the U. S. BIS issued new rules that suddenly imposed additional questions on the global semiconductor supply chain.

Speaker 2

Off source assembly and testing vendors were now effectively limited to those on an approved white list, drastically narrowing available operations overnight. Thanks to our early planning, we were able to sweep the transition A15 chip packaging to OSAT partners within the white list, minimizing delays in the manufacturing process caused by the new regulations. Subsequently, through continued collaboration with our foundry partners to support license applications, We were informed this month that all our in production wafers have received the necessary license to be released even to the OSAT without approved white list status. As a result, our choices of OSAT is largely no longer restricted. This put us in a strong position to scale up production and reduce costs more quickly in response to rising market demand.

Speaker 2

It is the result of our long standing commitment to compliance. We will continue to working to anticipate and mitigate the potential impacts of future policy changes. Additionally, we have completed R and D on our next generation A16 minuteing machines and finished the tape out process. Once again, we are pushing the limits of manufacturing technology due to the advanced chip design of our products. The production is very complex and time consuming, but we continue to work closely with our foundry partners to bring the ultra performance product to customers as soon as possible.

Speaker 2

The standard ARPUDA A16 is expected to reach nearly 300 terahertz per second. As usual, we will release new products and send simple machines to customers after we finish the full system testing and obtain real world data. In our consumer production product line, during the first quarter of twenty twenty five, we successfully launched several new additions to the Avalon Home series. This includes the upgraded Nano3S desktop mining heater, the Avalon Mini three, a quiet home heater with integrated mining capabilities and the Avalon Q, our first low noise home mining device, the device that supports 110 volts and is compatible with major global voltage standards. Through this portable side end aesthetically designed and functionally home oriented consumer products, we aim to make bitcoin mining more accessible to everyday users and future promote the concept of decentralization.

Speaker 2

We invite everyone to visit our official website to learn more about these products. On the operation side, we achieved significant positive changes in the fourth quarter, thanks to the large scale delivery of our A15 products, strong growth in mining revenue and continued cost optimization. Our gross loss narrowed sharply by 70.5% quarter over quarter to US6.4 million dollars At the same time, after excluding noncash adjustments such as fair value changes and their prudent accounting treatment, returned profitable at the EBITDA level. In Q4, we achieved an adjusted EBITDA gain of US19.3 million dollars This marks our first EBITDA profitability since the mining machines market downturn began two years ago. Looking into 2025, we will continue to push forward with the sale and the mass delivery of our A15 series products.

Speaker 2

Thanks to their strong performance, the test bench of A15 products received high recognition from customers and others have been coming in actively. Our delivery schedule is now booked into May and June for this year. Our key focus now is to work closely with our foundry partners to ramp up production capacity and steadily increase our delivery volume. We also aim to future improve computing power and yield rate through process optimization, which will enhance profitability, product competitiveness and customer satisfaction. In addition, we are actively balancing the allocation of mining machines between customer orders and our mining operations based on real time market dynamics to achieve better synergy between the two business segments.

Speaker 2

The first quarter is traditionally a slow season. We completed the first phase of our supply chain compliance adjustment, mostly during the Lunar New Year holiday. So the impact on the chip production cycle was kept within a limited range. However, starting in February, major changes in the global political and economic environment have caused significant Bitcoin price volatility. This has negatively affected market sentiment, future expectations and especially financing activities across the markets.

Speaker 2

Given these combined factors, we are maintaining a very cautious outlook for the fourth quarter of twenty twenty five, we expected Q1 revenue to be approximately US75 million dollars We expected that in Q2, the production capacity ramps up and our mining project deployment move towards completion. Our performance will see a big improvement compared to Q1. We currently estimate total revenue for Q2 of twenty twenty one twenty twenty five to be in the range of USD 120,000,000 to USD 150,000,000. We are maintaining our previously issued full year 2025 guidance with total annual revenue expected to be in the range of US900 million dollars to US1.1 billion dollars This outlook is based on the company's current market and the operational conditions. However, given the recent market volatility and uncertainty about how long it may continue, actual results may differ.

Speaker 2

From Beijing to Singapore to Silicon Valley, from TD brewing to first ASIC miner to going public NASDAQ and launching home series mining machines, K9 has been, for being ahead on the path of decentralization. Looking back at the past year, we remain firmly committed to R and D and to delivering high quality, high performance and customized Bitcoin mining solutions. Our A15 series has been embarrassed by demanding customers by the North American market. Our Avino Home series, which combines bitcoin mining and home use functionality, is designed to meet the needs of a diverse global customer base. We have continued to strengthen our global presence, winning orders from and building our strategic partners with leading publicly listed miners in North America, thus rising our brand awareness and the market share in the region.

Speaker 2

As a net stock listed company, we are impressed by inspired by America, empowered by America and dedicated to America. We have actively leveraged the strength of U. S. Capital markets to support our growth, and we are rapidly advancing heavy assets projects such as mining operations in U. S, which is now beginning to take shape.

Speaker 2

At the same time, we continue to push forward our global strategy. We are optimizing our strategy for R and D supply chain manufacturing and logistics. We are exploring local production to adapt to the evolving compliance environment. We remain confident in the long term potential of Bitcoin. We will stay focused on innovation, operational excellence and reinforcing our role as an important player in the Bitcoin ecosystem.

Speaker 2

This concludes my prepared remarks. Thank you, everyone. I will now turn the call over to our CFO, James. Thank you.

Speaker 3

Thank you, Angie, and good day, everyone. This is James, CFO of Kainan. I'm very glad to share our Q4 financial results with you today. As Njie stated at the start of the call, in quarter four last year, the trends of Bitcoin price and total network hash rate were relatively favorable for miners. We fully leveraged this positive market trend, leading to increased sales and the delivery of mining machines and to the growth in energized cash rates of our own mining operations.

Speaker 3

Let me give a quick summary of our financial performance for the fourth quarter. First, the computing power sold reached 9,100,000 terahash per second, breaking our previous record. Total revenue reached approximately US89 million dollars beating our guidance of US80 million dollars and resulting in year over year growth of approximately 81% as well as the highest quarterly revenue in the past two years. Secondly, through the increased deployment in our mining operations, our mining revenue reached US15.3 million dollars in this quarter and increased approximately 313% year over year, exceeding the preharving level in 2024. We mined 186 Bitcoins in this quarter, an increase of 84% year over year.

Speaker 3

As we've reported in our monthly production updates, in quarter one, we continued the trajectory of accumulating more Bitcoins. In the February, our total Bitcoin holding reached $13.55. We are steadily advancing towards our target of achieving $10 in North America and $15 per second globally by middle of twenty twenty five. As announced today, we further expanded our North American mining capacity by signing agreements with two new partners in Pennsylvania and Texas, which will add 4.7 exahash per second to our North America mining capacity. This will bring our global deployed mining capacity to have potential to grow to 11xHash per second with 6xHash per second in North America.

Speaker 3

Next, we completed the upgrade cycle of the product portfolio of our mining machines, and the A15 series is now our main sellable product, leading to USD73 million of machine sales revenue. More than 17,000 units of the A15 series were delivered in quarter four, of which over 80% came from the large orders of public mining companies, including Cipher, CleanSpark and Hyve. These results demonstrate that our North American focus, which began just over two years ago, is having a positive impact on our business. On the consumer front, our first home series consumer product, the Avolon Nano three, continued to gain adoption by individual users globally. In 2024, the total orders for Avolon Nano three reached approximately 24,000 units and contributed $2,700,000 to the full year revenue.

Speaker 3

At the beginning of 2025, our Avalon Home series was further expanded. And to date, the orders for the new products reached more than 12,000 units valued at USD 5,000,000. Finally, thanks to the significant narrowing of gross loss and the upward Bitcoin price, we achieved a gain of quarterly adjusted EBITDA of $19,000,000 for the first time since the start of market downturn two years ago. Additionally, our cash flow from production and operations turned positive, contributing $17,000,000 in this quarter, strengthening our cash balance and allowing us to end the year with $96,000,000 Moving to our profit and loss for the quarter. Total revenue was approximately $89,000,000 As I mentioned earlier, mining revenue contributed $15,300,000 in Q4, an outstanding year over year increase of 313%.

Speaker 3

We mined 186 Bitcoins in the quarter, year over year increase of 84%. This increase was primarily driven by more computing power installed for our mining business, which reached 5.4 extra hash at the end of this quarter, resulting in a historical high. As announced today, we have recently expanded our North American mining footprint by 4.7 extra hash per second through two new projects in Pennsylvania and Texas. When fully operational, these additions will bring our worldwide mining capacity to have the potential to grow to around 11xHash per second with 6xHash per second in North America. We will continue to disclose the operational progress in our monthly mining report.

Speaker 3

Now turning to product revenue. Revenue from machine sales was approximately $73,000,000 an increase of approximately 64% year over year. We delivered a total computing power load of 9,100,000 per second, representing a year over year increase of 66% and marking a record high quarterly sales volume. The average selling price, or we say ASP, remained stable at $8.1 per tahash per second compared to $8.2 per tahash per second in the same quarter of 2023. With the destocking of our A13 and A14 series nearly completed, we expect the average selling price to return to a more reasonable level in the first quarter of twenty twenty five.

Speaker 3

More than 17,815 minuteer rigs were delivered in Q4, of which nearly 80% were delivered to the public mining companies in North America, including Cipher, Lynxbark and Hyatt. Turning to the revenue from our Avalon Home series. By end of twenty twenty four, we received orders for approximately 24,000 units of our Nano products, reaching customers in 80 countries and contributing revenue of approximately $2,700,000 since their launch. Our newly launched Avolon Mini and Avolon Q have also attracted significant attention to this consumer product line. To date, we have received orders for more than 12,000 units of this new Avlon Home products with a total amount of $5,000,000 For our mining machine costs, we accrued $13,600,000 for inventory write down in the quarter.

Speaker 3

With a successful clearance of pre year generation product inventory, inventory slide down decreased 76 year over year. The non cash write down is made on The U. S. GAAP rules impacting on our gross profit but with no impact on our cash balance. Excluding the above write down, our mining machine sales would have breakeven for this quarter.

Speaker 3

Leveraging the rising Bitcoin price and our efficient management of mining operating costs, our direct mining margin improved to 42%. Please note that direct mining margin is calculated by subtracting our mining operation costs for energy and hosting from our mining revenues but without the depreciation of deployed machines. Demonstrating our robust top line growth and our effective cost optimization measures, our gross loss for the fourth quarter was $6,400,000 a substantial reduction of 88% year over year. Turning to the expenses. Our operating expenses totaled $49,300,000 increasing 10,100,000 year over year.

Speaker 3

This rise was primarily driven by our global business expansion and our risk mitigation activities, including staff costs, professional service fees and R and D expenditures. We recorded $9,300,000 for one off expenses in the quarter, including share based compensation cancellation, one time R and D expenditures and consulting fees. If these one off expenses were excluded, operating expenses would have been $39,800,000 remaining stable year over year. As mentioned in quarter one twenty twenty four, we chose to adopt the FASB new accounting rules on cryptocurrency assets on 01/01/2024. These new rules allow cryptocurrencies to be carried at their fair market value.

Speaker 3

In the fourth quarter, the price of Bitcoin increased to around $95,000 at the year end of 2024 versus around $63,500 on 09/30/2024, contributing to an aggregate gain on crypto assets of $39,000,000 during this quarter. All things above considered, our adjusted EBITDA was again of $19,300,000 mainly driven by the solid revenue growth and the significant narrowed gross loss as well as the upward Bitcoin price. This is the first time we achieved the quarterly EBITDA profitability since quarter one twenty twenty three. In quarter four twenty twenty four, we recorded a valuation allowance against our deferred tax assets as well as unregionalized tax benefit liability. This follows the conservatism principle in accounting and resulted in a noncash income tax expense of $85,000,000 When we generate profits in the future, this deferred tax asset can still be used to offset our income tax expenses.

Speaker 3

In the quarter, we issued 30,000 Series A1 preferred shares with the gross proceeds of $30,000,000 The third tranche of the Series A preferred shares issued in quarter three, twenty twenty four, was still recognized as a convertible liability at fair value as of the year end. This financing incurred an excess of fair value over proceeds received and the fair value changes. This non cash accounting treatment hit our Q4 bottom line for a total of $4,800,000 In order to represent our performance more accurately and more comparably, we excluded the impact of these accounting treatments from our non GAAP measures. Turning to our balance sheet and cash flow. At the end of quarter four, we held cash of $96,000,000 on our balance sheet, an increase of around 34% compared to the end of Q3.

Speaker 3

During the quarter, our cash flow from production and operations turned positive, generating $17,000,000 A cash outflow of $71,000,000 for production and operation was offset by a cash inflow of $82,000,000 from sales and $6,000,000 from export VAT refunds. In quarter four, we received $30,000,000 from our preferred shares financing and we paid $22,000,000 to secure our wafer supply. With stable cash flow and the forced carving completed, we have leveraged strategic financing tools to secure product capacity through prepayments. These activities will allow us to capitalize on the upcoming bull markets, while preparing for long term mining demand despite short term volatility of Bitcoin price. At the end of twenty twenty four, we entered into an ATM agreement.

Speaker 3

From the end of twenty twenty four to 02/19/2025, we utilized the ATM for fundraising with net proceeds of $42,500,000 at an average price of $2.08 per ADS. We did not utilize the ATM after 02/19/2025. In early March, we closed the first tranche of new Series A1 preferred shares with net proceeds of $99,700,000 Total proceeds of approximately $145,000,000 will be used to fund the expansion of our production scale and manufacturing or investing in our mining operation in North America. At the end of the Q4, the aggregate balance of inventory and prepayments and other current assets was $185,500,000 a decline of $40,600,000 compared to the end of Q3. This decline was driven by the clearance of pre year generation product inventory and upgraded inventory composition.

Speaker 3

Now turning to our Bitcoin assets. Bitcoin held as our own holding assets increased in this quarter, reaching a record high of $12.93 Bitcoins as of December 31. This is 81 more than $12.12 at the end of last quarter. On 12/31/2024, the fair market value of our owned Bitcoins totaled around $123,000,000 and our holders strategy gain was approximately $66,000,000 higher than the original value of the bitcoins that we gained from mining or other operations. As of February 28, our total Bitcoin holdings increased to thirteen fifty five dollars as already disclosed.

Speaker 3

By the end of twenty twenty four, we pledged 600 Bitcoins for secured loans with an aggregate carrying value of $24,000,000 which we believe is a reasonable interest level. The secured loans enable additional liquidity for our production expansion and operations. We also transferred 100 bitcoins into a fixed term product with a guaranteed minimum annual return. In the future, as part of our Hodul strategy, we will explore more ways to increase capital liquidity through our owned crypto assets. Please note that Bitcoin pledged or transferred into fixed term products are recognized as crypto currency receivables in our balance sheet and the classification between current and the non current assets is consistent with the periods of corresponding secured loans of fixed term products.

Speaker 3

In the first quarter of twenty twenty five, as CEO mentioned, we anticipate the revenue of $75,000,000 due to the seasonality of our business compounded by the uncertain economic environment as well as the volatility of Bitcoin prices. Based on our current visibility on orders and wafer capacity, we anticipate revenue of RMB120 million to RMB150 million for the second quarter of twenty twenty five. This concludes our prepared remarks. We are now open for questions.

Operator

Thank you. We will now begin the question and answer session. Please limit yourself to three questions at a time. If you have any follow-up questions after the Q and A session, the Investor Relations team will be available after the call. For the benefit of all participants on today's call, if you wish to ask your question to management in Chinese, please immediately repeat your question in English.

Operator

Thank you. We will now take our first question. This is from the line of Nick Giles from B. Riley Securities. Please go ahead.

Speaker 4

Thank you, operator, and good morning, everyone. Angie and team congrats on the progress here more recently. My first question is, can you give us an update on any site acquisition activity or how you're approaching procuring power infrastructure in the current environment? I'm curious if you've observed any changes or challenges here in 2025 as demand for power assets remains very strong. Thanks very much.

Speaker 2

I think we have been actively looking for the size in energy rich regions across North America. Our cooperation model is very flexible. We can do like fixed rate hosting, joint mining with profit sharing or even acquire and build our own sites. Right now, the site resources we've secured are high actually more than enough to support our current deployment plan, which targets its 10xHash in the first half of the year. Since shift our focus to U.

Speaker 2

S. From last year, we have seen more opportunities than we originally expected. And then recently, during the due to some changes in U. S. Policy, it seems that new power generation capacity maybe become available in the near future, which would be benefits us even more.

Speaker 2

We have also noticed that some institutional players in North America are thinking about allocating part of their power resources to AI or HPC hosting. We truly hope those efforts succeed. AI and HPC business can bring more predictable cash flow for our customers, which in turn could attract more institutional interest and arise the overall valuation of their operations would help their broader their business, including having more power and capital available than they can go through Bitcoin mining to consume the electricity. So while Bitcoin mining has much lower CapEx needs for than AI or HPC, it consumes far more energy. On the other hand, AI and HPC over very stable cash flows.

Speaker 2

That's why we believe these two sectors are actually complementary in the mid to long term. I hope we can see both Bitcoin mining and AI applications grow side by side going forward. Yes. Thank you.

Speaker 4

Thank you very much, Angie. My next question is just on overall demand. Obviously, your 2Q guidance is a nice improvement from the 1Q guidance. And so I was wondering if you could give us a sense for what the second half could look like. Is demand still improving?

Speaker 4

Your annual guidance does imply a stronger second half. So wondering if you could comment on how you're seeing demand today and particularly on the pricing side and how that translates to your annual guidance?

Speaker 2

Okay. I will say something and maybe James will add some numbers to your question. I think looking at our actual sales performance in Q4, it was quite good. We sold 9,100,000 terahash of computing power. Since and it's already achieved our best yes, it's already achieved our best results, historical results.

Speaker 2

And it includes the deliveries to North American listed companies like Cipher, CleanSpark and Types. Yes, this is reflects the success we have had in expanding our presence in North American market. In fact, customer order volumes at the end of the year, it's driven by the price in Bitcoin price starting in November. So, yes, and as a result, we cleared our inventory, then we start to build our new inventory. Most of the the vapers will come out start from Q2 to Q3.

Speaker 2

The machines will come out majorly in Q2 and Q3. So we can foresee that from Q2, the number will be much larger than Q1. For the second half, I think the key is about maybe about the Deepgram price or the economic environment, which is really hard for us to predict today. But what I can say is, if the decompress like, we don't need another historical high, maybe only like $100,000 is very significant for us to achieve our annual target.

Speaker 3

Yes. I will add some color, Nick. I think from our guidance on Q1, it has already showed in twenty twenty five quarter one that revenue is more than double of last year same quarter. So the demand was strong. But as we both know, our orders and the revenue are highly correlated with Bitcoin prices.

Speaker 3

So recently, the turbulence in Bitcoin prices have definitely have an impact on the speed of accumulating more contract orders and also the trajectory of the price increases. But it looks like our customer orders are still quite strong from the market. And we also have our North America mining sites building up on target. That's why I think we are still confident to work on towards the full year target. And I think we are working on that and Anji just shared the capacity perspective.

Speaker 3

But demand perspective in quarter three or quarter four, we definitely need the macro environment turns to be more positive and the Bitcoin price climbs to new high. And then at that time, the demand could be strong and the price trajectory could be favorable to us. And then we will try to maximize our revenue for the full year. But currently, I think we are still stick to the annual target, and we are working towards this target.

Speaker 4

Thank you, Nick. And Gee, James, thank you so much for all the comments and keep up the good work.

Speaker 3

Thank you.

Speaker 2

Thank you. Have a nice day.

Operator

Thank you. We'll now take our next question. This is from the line of Kevin Cassidy from Rosenblatt Securities. Please go ahead.

Speaker 5

Yes. Thanks for taking my question and congratulations also on the great progress. Just as we're talking about the full year revenue, can you say what the your ASIC orders are with your foundry partner that may not be accounted for by customer orders just yet? How far out are your orders with the foundry versus what's your backlog?

Speaker 2

Thank you.

Speaker 6

Yes. Let me see.

Speaker 2

I think we are it just comes from bear markets. We typically when in bear markets, we typically produce based on sales orders, which helps the company control the risks about the product inventory. Currently, we are just out of the bear market and at the early stage pool market for mining machines. And maybe this month, we are in the turbulence of the full market. So we are gradually increasing our production, but we are not place orders at maximum capacity.

Speaker 2

With all the wafers, we must consider many factors include but not limited to like our cost, how tight the supply chain is and what is the demand minus expected profitability about the hash price and the competitive landscape in the market for the next, say, six to twelve months. So for the commercial confidentiality reasons, we are not disclosing the exact number for how many beavers we already ordered at this time. But it appears that the machine production will continue through Q3. If the market demand doesn't increase significantly, it should be sufficient to meet both ourselves and our own mining operations. If demand increases, we still have time.

Speaker 2

So we have room to place additional orders to up like some a few turns of percentage of of the capacity to fulfill the additional orders. And if the demand weakens, we can increase our we also can increase the allocated to the number to our own mining operations. So I think for the current the capacity in the production line, we it should be it shouldn't be a major issue for the inventory. Yes. Thank you.

Speaker 5

Great. Thanks. And you announced the A16 ASIC as 300 Terahash per second. That's a great improvement. Is there anything more than besides the going to the better or lower process node, any architectural changes that you're making to the ASIC that's giving you this improvement?

Speaker 2

Yes. I think ASICs indeed is using the very technology like the GA technology and even smaller transistor sizes compared to A15. But it's not simply a straightforward part of our previous generation. I think if you look back looking back into the history, every generation of our products has often achieved much more to the advanced performance improvements and many different generations of our many machines is in one node process or even one node process upgrades or even using the same process. These performance gains are far greater than the percentage performance indicated by wafer manufacturers during each process of the iteration.

Speaker 2

This is because our designers is doing their innovations and many technical advancements ongoing. And also come to these days, besides the process and the design, we are already at the DTCO, the design technology co optimization stage to even increase the performance even more. Perhaps you can notice that each generation of our product shows about 20% to 30% of the improvements. But what I must say is there isn't a magic number there to give us such and big improvements. It's more likely that we have like fifty, eighty individual technical improvements and we contribute like less than 0.5% to lead to the collectively gather to lead to the overall result.

Speaker 2

So as we move to advanced nodes, each new generation of technologies also needs a second time to to improve. And I think the performance of ASICs and the GPUs on the same new process may also vary significantly. As a design company, we need to spend a lot of time in the early stages now to reduce these uncertainties and minimize the risks to the tape outs. So maybe your question is maybe why there's many new commerce even when they try to hire key technical talents from the industry, but still struggle to produce competitive products. Sorry for say I don't need I say

Speaker 6

too much.

Speaker 2

Thank you.

Speaker 5

That's okay. No, thank you for the details. And just one other is, the 300 terahash per second is for traditional air cooled. Do you have an estimate of what it would be for immersion or just liquid cooled?

Speaker 2

Yes. I think for today, the emerging version of the machines is more common in the market, not those constrained to U. S. Market. Many different markets, we will see we already observe this.

Speaker 2

So yes, I think maybe the reason is mining machines is now built with much higher energy density and need better energy efficiency. This will bring more strict environment control needs. So liquid cooling can help to manage heat more effectively. So and another reason may be the money hardware now must stay in use longer than old days. So this make it worse while to invest more in the site setup to improve the stability and uptime.

Speaker 2

Yes.

Speaker 5

Okay. Thank you.

Operator

Thank you. We'll now take our next question. This is from the line of Kevin Dede from HCW. Please go ahead.

Speaker 6

Hi, Angie. Hi, James. Thanks very much for having me on the call. I think firstly, I'd just like to congratulate you on managing your supply line and deliveries to The U. S.

Speaker 6

In light of the regulatory changes. I just thought that was very savvy of you gentlemen and the team. First, I was hoping you could offer a little more detail on how customer service has changed over the years. I've been following you for a long time and I just like to understand what you think you're doing better now in The U. S.

Speaker 6

And winning customers.

Speaker 2

Hi, Philip. Yes, I think in recent years, as bitcoin mining has become more global, the company has to provide new maintenance and support service in a way that's closer to our customers. In addition to our standard one year warranty for manual recorders, we have now 26 service stations for spare parts warehouses worldwide. This helps shorten the parts delivery cycle time and allow us to provide more time maintenance and the parts represents services for our customers. We also adjust the location of our service points based on customer distribution for to future improve service efficiency.

Speaker 2

Additionally, based on customer feedback, our products have shown strong operational stability, particularly in very high temperature and film environments, where they continue to run effectively and very reliable. And also the return of the repair is actually very low now, especially for the A15 models. We also for on-site, our customized mining solutions based on customers' specific needs, such as emergency cooling and codevelopment for some systems. It is ensured that our products and services can closely align and adaptable to our customers' diverse needs receiving we are receiving positive feedback. Thank you for recognizing our success, but we're still striving for improvement.

Speaker 2

We believe we can do even better. And we aim to outperform two of our Chinese competitors in the following areas. First, we want to keep the failure rate of our products below the industrial average, which comes from better design and high quality control during the production process. This approach particularly benefits for the high labor cost regions like The U. S.

Speaker 2

Second, we aim to ensure our North American team and management in Singapore work as one cohesive unit. Myself, along with our CFO and R and D and supply chain leaders, are all committed to ensure high customer satisfaction. Finally, from the very beginning, we have been a company driven by the value of decentralization. Therefore, we remain open to all customer requests, evaluating them only based on whether they make resistance and benefit the industry development. We don't want to limit customers' options proactively.

Speaker 6

And Chi, can you talk a little bit about your North American customer pipeline and what the sales funnel looks like? The press release alluded to a new customer for the A15XP. Can you talk about that a little bit and maybe give us a little more comfort regarding where or how you see the second half coming together?

Speaker 2

I think in last year, we actively expanded into North American market and secured several major clients like Cipher, Hyve and CleanSpark. North American customers' orders now represent about 40% of our product sales revenue in full year 2024. In Q4, with the large scale delivery of A15 orders to North America, sales from the region reached historical high. I think in our yes, and also, we are in the second half of this year, our sales system now is increasing their global market coverage. Last year, we nearly 200 professional offline customers.

Speaker 2

And following, we launched the Avalon Home series. We attracted a large number of retail customers, resulting in exponential growth in customer numbers. And in 2024, the total number of customers who have placed orders reached about 2,000. Now the company continue to go globalized. We have established special teams in regions such as South America and South Asia, creating multilayer and comprehensive sales teams that reaches customers worldwide.

Speaker 2

Currently, the number of new customers is substantial and they generally have strong competitive basis and high purchasing intention. However, I think large orders from new customers typically take some time to settle down. If the global political and economic situation along with the different price influenced by these factors continue to rise steadily. I think this process will certainly accelerate. So because in Q2 and Q3, our inventory, we I think our capacity I mean, the machines will pump out majorly in Q2 and Q3.

Speaker 2

I think the capacity issue happens, especially in Q1, will be much satisfied. So we are I think personally, we are I mean, I'm quite optimistic in Q2 and Q3.

Speaker 6

Last question for me, Angie. You mentioned that the A16 is now taped out. I'm wondering when you start placing orders for wafers for those machines?

Speaker 2

We start to place orders back to I think our first big batch is in October to November year. And we have second batch photos in December. So the wafer seal continues to come out from Q1 this year, and we are in the rev up stage. The major part will come out in Q2 and Q3.

Speaker 6

Okay. Thank you very much, John Lee.

Speaker 2

Sorry, Hassink, your question is about 16?

Speaker 6

Yes, 16, right. Yes. No, no, okay. Yes, I was just wondering about the tape out in orders.

Speaker 2

Okay. Phase 16, we will send the machine single machines through our customer in Q I think it's in Q3. So we will follow the risk run and our first mass production batch at that time. This is our schedule. Okay.

Speaker 6

Okay. Thanks, Angie.

Speaker 2

Thank you. Have a nice day.

Operator

Thank you. We'll now take our next question. This is from Joe Flynn from Compass Point Research and Trading. Please go ahead.

Speaker 7

Hi, thanks for the question. I was hoping if you could just touch on the ramp of A15 in a little more detail. I was curious how much of the initial capacity was ultimately covered by North Americans upfront deposits? And is there any balance on those going forward? And then ultimately, how do you what's ultimately the strategy of managing the liquidity risk given the six months lead times?

Speaker 7

What approaches are you ultimately going to continue pursuing from that end?

Speaker 2

I think our A15 orders, we will I think we can deliver most of them in May, yes. Yes, sale preorder. I'm sorry,

Speaker 7

I was talking about the upfront deposits from the North American customers as it relates to the security and fab capacity?

Speaker 2

I think that mostly it comes from North America, yes. And most of them is prepaid for about 50 percent, yes, down payment. Yes.

Speaker 7

So then what's ultimately kind of the approach to funding the additional fab capacity six months out as those start to roll off? Given the kind of the quoting risk of the lead times?

Speaker 2

I think the production for the machines is about I think today it's about five months. But usually, our customers cannot wait for like five months from the first payment to receive the machines. So usually, we will keep our pipeline in about like three to four months. That means our customers will pay the first down payment like 40%, forty five %, fifty % and then pay the other 50% before we ship the machines or they receive the machines in three or four months, yes.

Speaker 7

Thanks. That's helpful. And then most of my questions were asked, but maybe you'll go in different directions. Just curious if there was any portion of DRD still dedicated to the RISC V ASICs because there's been quite a report out there that expected to see huge increased demand in China. And I was wondering if there's anything came about of the partnership with Alibaba a few years ago and if you guys ultimately have the opportunity to compete in that market at all?

Speaker 2

Yes. I think it's a very sensitive question. I think given the tightening regulations environment, we observed recently, especially from middle January, what I can say is we are staying very, very cautious about develop anything related to AI now. So, yes, so that side, we are actively prepared for the future. Over the next two years, our plan is to invest more in building out our infrastructure in U.

Speaker 2

S, what I already mentioned tonight. This is our I mean, personally, I think this is our way to hedging against the risk of missing out the AI phase in the next maybe two, two, three years. If one day AI and HPC become becomes the mainstream computing use case, replacing mining, we want to be ready with the power and the sites and all infrastructures and technologies there. We're already in place. We will be in a very strong position to pivot quickly into the new direction.

Speaker 2

This is what I can say today.

Speaker 7

Thank you. Thank

Operator

you. We'll now take our next question. This is from the line of Bill Paparnastacio from KBW. Please go ahead.

Speaker 8

Good morning and thank you for taking my questions. Angie, may you share some color on your progress of reaching self mining hash rate growth targets and how this may impact external sales of hardware? Can internal production of mining equipment sustain self mining growth targets while also ramping your external sales to grow market share? Thank you.

Speaker 2

Hi. Hello. Yes. At the February year, our company operations seven we have seven active mining partnership projects globally with a total deploy hash rate of more than 6xHash and the power is close to 6xHash per second. And in Q1, we further expanded two existing North American mining projects through upgrades to increase their capacity.

Speaker 2

So we are keeping our target 10xHash in North American in the first half of this year. In the first quarter, I think our North American self money business will very close to 5X cash per second. Yes, because I think for currently, the company's operation is very smoothly, and we will build our money, follow our cash flow and keep our cash flow remain healthy. I think the U. S.

Speaker 2

Government is implementing a series of politics supporting the cryptocurrency industry. The trend toward a bit more broadly remains intact despite short term price fluctuations since the advanced process capacity required by our industry must be deployed in advance. We have chosen using financing tools to fund raising to lock production capacity and fulfill our machine sales and save money. For the for how to expand our market share, we are a non regulated Singapore company. Alongside these two private Chinese companies, our market share is still small compared to our major main competitors.

Speaker 2

So for us, we have opportunities and we must focus on how to gain market share, then we can have much higher revenue. Historically, I think our major competitors have the industry leading products and early forward advantages in North America. They expand their influence with global

Operator

Chinese

Speaker 2

Uh-huh.

Speaker 7

Hi, this is Liu Wang, Vice President of Capital Markets and Corporate Development. I think NG is offline because of technical difficulties. We are more than happy to take your questions after this. I suggest we conclude this session.

Operator

Thank you. In that case, I would turn the call back over to the company for any closing remarks. If there were no further closing remarks, then we can conclude the call today. Thank you everyone for attending and you may now disconnect.

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Earnings Conference Call
Canaan Q4 2024
00:00 / 00:00