Ladies and gentlemen, thank you for standing by. Welcome to Canaan Incorporated Fourth Quarter and Full Year 2019 Earnings Call. At this time, all participants are in a listen-only mode. After the management prepared remarks, we will have question-and-answer session. Please note this event is being recorded.

Now, I would like to hand first over to your speaker for today Mr. Shaoke Li, Board Secretary of the Company. Please go ahead, sir..

Thank you very much. Hello, everyone and welcome to Cannan Inc. fourth quarter and the full year 2019 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. Quanfu Hong.

In addition, our Co-CEO, Mr. Jianping Kong; and Senior Vice President, Mr. Li Zhang and Mr. Jingjie Wu will also be available during the question-and-answer session. Mr. Zhang will start with a call by providing an overview of the Company and the performance highlights for the first quarter of 2019.

I will then provide the details on the Company's operating and the financial results on behalf of our CFO, Mr. Hong. Following our prepared remarks, we will open the call up for your questions.

Before we continue, I would like to refer you to our Safe Harbor Statement in our earnings press release, which also applies to this call as we are making forward-looking statements.

Please also note that we will discuss non-GAAP measures today, which are mostly roughly explained at the written files to the most comparable measures reported on the general accepted accounting principles in our earnings release and the filings with the SEC. With that, I will now turn the call over to our Chairman and the CEO, Mr. Nangeng Zhang. Mr.

Zhang will deliver his remarks in Chinese and I will provide corresponding English translation. Please go ahead, sir..

We have successfully completed our initial public offering in 2019, which has proven to be a pivotal year for both our company and the industry with great regard. For Canaan, our listing on NASDAQ marks a milestone of growth of our company.

For our industry, our IPO demonstrated as capital markets recognition on blockchain technology and its confidence in the future growth prospects of the application specific AI chips market.

Throughout our IPO, we provided the firsthand and the transparent data on our operations offering the public an opportunity to gain insights into the blockchain technology and as an industry overall. Going forward, we will continue to foster technology, innovation and expand blockchain applications to further strengthen our foothold in the industry.

With regard to our AI business where we put continuous efforts in cultivating the market and exploring customer and the commercial applications scenarios, we believe that our core business lines blockchain application specific AI chips and further growth drivers of IC industry, by constantly improving our chips computing power, optimizing power consumption rate and the manufacturing cost to expand the application scenarios and reducing cost of ownership.

We are well positioned to empower the whole industry from the upstream of the industry chain. Meanwhile, as we continue to grow with the industry, we will generate healthy financial results and create value for our shareholders in return.

We believe that the IC industry is one of the few industries that still have significant headroom for growth and the current marketing environment. Canaan as an IC designer is one of the most rapidly growing subsector of the dynamic IC industry. Today's world is in an era of abundance.

The market demand for our device, for diversified business, services and the product is stronger than it ever worse. The first comes from artificial intelligence of things or IoT, customer electronics, various end-user products, electric vehicles and many other areas.

Such blooming of product and their service types caused for more and more types of applications specifically IC chips for fulfill and design brings immense market opportunities for our business and secures our first mover advantage in future development.

In terms of our financial results, our total net revenue in the fourth quarter of 2019 which the RMB400 in Q4 and particularly in the second half of the quarter yet maintained the solid performance in October and November, but our revenue declined considerably in December as a result of the significantly increase the outside pressure.

Our total net revenue in the fourth quarter of 2019 missed our previous expectations, yet increased significantly year-over-year under the similar market pressure as of 2018 by taking management measures mentioned later in this speech.

In order to further strengthen our competitiveness and over potential market obstacles in the future, we will continue to focus on the following three areas; the first, strengthen our R&D capabilities; second, providing improving efficiency of our R&D expenses; and third, balancing and development of our AI product offerings.

As a leading designer of IT chips, our R&D capabilities are the cornerstones of our business growth, despite the short-term volatility of Bitcoin price, our commitment to continue investing in R&D, optimizing our IT design spend remain unchanged, leveraging our advanced R&D capabilities, we established partnership with three top foundries, multiple suppliers enhanced our flexibility and bring option to find the best match with regard to different generations of our chip fabrication process.

In cooperation with world leading partners, our R&D team gained variable experiences and are more prepared to secure competition. In terms of miner chips, we believe that this first generation miner chip based on Samsung 8 nanometer process and the completed research work based on three 14 nanometer process.

Timely as previously expected, the former is in mass production and the delivery process in Q1 and later has completed critical prototypes in Q1 and is ready to begin mass production and delivery in Q2. The second generation 8-nanometer chip, designing work completed in February despite the pressure from coronavirus outbreak.

This new generation reduced the production cost and improve 20% to 30% energy efficiency is as a leading position among the category. Furthermore, our research based at TSMC 5-nanometer process is on track.

Anticipating market volatility and challenges despite the mining chip production alone will further improve the platform-wise design to increase universality and compatibility of peripheral hardware component and the software developments in order to reduce costs and R&D cycle time.

Furthermore, we're actively researching liquid cooling technology to simplify physical implementation and added cloud mining ready native software support to prepare for future needs. In terms of business operations, we released the product promotions providing the machine deployment support and tested machine leasing services.

Our shipments volumes and the revenue are increased because of value added service mentioned above.

In terms of AI business developments, based on our K210 AI chip started cooperation with the number of famous companies and the university labs including Tencent, [indiscernible] Intelligence and the Soho regarding development of service, several projects were jointly established AI algorithm labs [indiscernible] cooperates with Intelligence to provide AI solutions to agriculture industries, cooperative with a world-class food as a beverage provided targeted to provide a smarter manufacturing solutions.

We also have reached out to [indiscernible] and the UBTECH targets to integrate AI in STEM education vertical. In terms of AI products during coronavirus periods, we have developed face recognition with mask compatibility and they started application inside the Company. This design prevented contacts and alerts employees to keep wearing masks.

We also integrated intelligence attendance in populous gate control to help with corporate human resources management needs. Overall, we made significant progress in intelligent door lock, smart manufacturing, and the smart energy efficiency control devices and so on.

Since 2020, overseas AI marks also made significant advancements and our AI chips and the modules are very popular among North America customers. K210 also built a stronger developer foundation in Japan and acquired the [indiscernible] attention from AI technology in [indiscernible].

In near future, we plan to launch the second generation K510 AI chip in 2020, expecting significantly better performance and the seat wider application scenarios. In terms of R&D expenses, we maintain the high R&D investment for years to retain our technologies accumulation the products competency.

During 2020, we are to focus to further improving R&D expense efficiency in terms of G&A expenses. We are focusing on cost reduction and the efficiency improvements. We believe through refi management measures we will complete our project was reduced the management costs.

On the other hand, we are to easily round off surface the conversation this year, understanding the importance of inspiring employees' commitment and dedication especially is reserved core research personal. Mining had a development for 10 years along with cryptocurrency history from the [indiscernible] facility.

ASIC mining has grown to 10 billion businesses in the past 2 years. We are confident in this business all along. On the other hand, we should not overlook the short-term volatility bought by outside environment.

We're actively assessing new business initiatives other compliances and the regulation requirements to provide one stop solution to our clients, including leasing, cloud computing and other measures that improves user experience, customer thinking and reduce the entry barriers.

In terms of AI business, we believe computing power is the key to the adaptability of diverse and complex application scenarios, and the overall product cost is the key for market competency.

Our solid designing experiences and the supply chain through ASIC mining business, we will provide the strong technology support and the human resources reserved to our AI business.

AI is a next generation scenario of ASIC chips where design chips based on scenarios and the specific applications, along with the cooperation risk of an industry leading conglomerate provides a comprehensive computing platform for the industry.

The coronavirus outbreak since the beginning of 2020 impacted business operations and daily life all over the world. With the efforts of all our colleagues, we have undertaken health care protocols following government's guidelines last well protecting our employees.

The virus did impact the Company operations and we will pay continuous attention to the situation. Challenges come with opportunities, our commitments we will not waiver. In February and March, we overcame difficulties caused by the coronavirus via remote collaboration to complete our product designed timely.

Despite external environments, we are always dedicated to our duty. In 2020, we’re confident that we will continue to improve R&D efficiency, technology development, product quality, and the talent management.

Our following duties including recover our business from coronavirus impact, prepare for the upcoming rainy season and the Bitcoin having continued to develop traditional air cooling mining machines and also liquid cooling system.

With multiple projects going anywhere, we will continue to provide the better products to our clients expand our market share and further provide more shareholder value. We believe by our dedication more potential customers and the investors who were recognized payments value and joined us of course to make a supercomputing available to everyone.

Thank you..

And then now on behalf of our CFO, Mr. Hong Quanfu, I will go through our fourth quarter financial results. Before I start, please note that all numbers are in RMB terms.

Total net revenue in the fourth quarter of 2019 increased by 66.8% to RMB463.2 million from RMB277.7 million in the same period of 2018, this growth was mainly driven by the strong uptick in total computing power sold during a period, growing to 2.9 million terahash per second, which represents a year-over-year increase of 86% to 46%.

Cost off the revenues in the fourth quarter of 2019 increased to 1136.7 million from 266.1 million in the same period of 2018, which was primary attributable to the 729 million of impairment of inventory and the prepayments as well as the increase in overall sales volume of terahash.

The gross loss in the fourth quarter for 2019 was 673.4 million, as established IT designed company, our ability to design high quality ASIC largely depends on our continued investment in research and development, which to a large extends defines our business performance. As Mr.

Zhang mentioned earlier, we have invested substantially in research and development to build and enhanced our competitive edge. Our research and the development investment in the fourth quarter of 2019 increased to 63.6 million from 51.1 million in the same period of 2018. Let’s now take a look at our operating expenses in the fourth quarter.

Sales and the marketing expense in the fourth quarter of 2019 increased to 7.7 million from 4.4 million in the same period of 2018. This increase was mainly due to the higher amount of compensation expenses paid to our sales and marketing staff resulting from the expansion of product sales during the quarter.

As a percentage of the total net revenue, S&M expenses in the fourth quarter of 2019 remained a relatively stable at 1.7% compared to 1.6% in the same period of 2018.

General and administrative expenses in the first quarter of 2019, increased to RMB56.4 million from RMB30.6 million in the same period of 2018, including share based compensation expenses of RMB30 million.

Excluding the impact of share-based compensation, our G&A expense in the fourth quarter of 2019 were RMB26.4 million, or 6% of our total net revenue, compared to RMB28.8 million or 10% of total net revenues in the same period of 2018.

Total operating expenses in the fourth quarter of 2019 were RMB127.7 million compared to RMB86.2 million in the same period of 2018. Excluding the impact of share based compensation, the total operating expenses in the fourth quarter of 2019 were RMB80 million compared to RMB81.8 million in the same period of 2018.

Loss from operations in the fourth quarter of 2018 was RMB801.2 million, compared to RMB74.1 million in the same period of 2018. Service and compensation expenses of RMB47.7 million non-GAAP loss from operations in the first quarter of 2019 was RMB753.5 million.

Net loss attributable to ordinary shares in the fourth quarter of 2019 was RMB798.2 million, compared to RMB27.5 million in the same period of 2018.Non-GAAP adjusted net loss in the first quarter of 2019, which excluded the share-based compensation of RMB47.7 million, was RMB750.5 million.

Diluted net loss per ADS in the fourth quarter of 2019 was RMB5.34 compared to RMB0.21 in the same period of 2018. Turning to our balance sheet, as of December 31, 2019, we have the cash and the cash equivalents of RMB516.6 million, compared to RMB258.9 million at the end of 2018.

Now moving on to our results in the full year of 2019, total computing power sold in the full year of 2019 increased by 47.1% to 10.5 million terahash per second, further demonstrating the competitiveness of our Bitcoin mining machines; however, as previously mentioned, the volatility of a Bitcoin price also increased in 2019, which caused our average selling price per terahash to decline in the full year of 2019.

As a result, total net revenues in the full year of 2018 decreased to RMB1.42 billion from RMB2.71 billion in the [audio gap] [0:33:22]. Cost over revenue in the full year of 2019 decreased by 11.8% to RMB1.94 billion from RMB2.2 billion in the full year of 2018.

As a result of realization of inventories and prepayments write-down of 589.5 million which was recorded in 2018. The decrease was partially offset by the increase in our sales volume of terahash. Loss from operations in the full year of 2019 was a 1.05 billion, compared to income from operations in the full year of 2018 of 133 million.

Notably, our loss fund operations in the full year of 2019 included 217.2 million of share-based compensation expenses or based compensation expenses. Non-GAAP loss from operations was 784.3 million, compared to income operations in the full year of 2018 of 151.6 million.

Net loss attributable to ordinary shareholders in the full year of 2019 was 1.03 billion, compared to net income attributable to ordinary shareholders in the full year of 2018 of 122.4 million. On a non-GAAP basis, our adjusted the net loss in the full year of 2019 was excluded in share based compensation of 270.2 million was 764.3 million.

Diluted the net loss per ADS in the full year of 2019 was RMB7.21, compared to diluted net income for ADS of RMB0.93 in the full year of 2018. As mentioned earlier, we are actively assessing and monitoring the financial impacts of the coronavirus outbreak of the Company in the first quarter of 2020 and beyond.

We expect our total net revenues to be no less than RMB60 million in the first quarter of 2020. Please note that this first half reflects our current and preliminary views for the market and the operational conditions which are subject to change. This concludes our prepared remarks for today. Operator, we are now ready to take questions..

Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] First question comes from the line of [James Carrion] from [indiscernible] Capital. Please ask your question..

I will translate from myself. Congratulations on the results. I would like to know the combination of power market share for the last fourth quarter of 2019. As Kevin has mentioned that the product Canadian power has increased around 86.6% year on a year. So like to know the market share and the conditions of the peers of other manufactured. Thank you..

Our CFO Mr. Quanfu Hong will answer this question..

So, as for the fourth quarter of 2019, so the major product still is indiscernible] miner, which increased its computing power a lot. And for the fourth quarter, we still in total 290 million terahash, which is like a 50% increase compared with the same period of 2018.

As we don’t have the other manufacturers’ data or financial reports, so we are not positive for the market share for the fourth quarter..

So, my second question is regarding the computable power on the first quarter of 2020, as some managements has based on outlook of the first quarter sales that which is no less than 16 million.

So in computable powers side, which is the level regarding their results?.

So, we expect to adapt for the first quarter of 2020, the computing power so it would be $0.85 million terahash per second..

So my third question regarding the cost of revenues as we see a majority of the cost revenues come from the even from the prepayment of around RMB730 million. So like to know, when this right down will be right back in the future and any policy regarding that? And also I'd like to know this cash cost or other cash cost? Thank you..

So, basically the inventory write-down will be based on the future sales. Actually right now, we are more optimistic about the future sales and that means the situation will be obviously more optic then the previous write-down. So, at end of each quarter, we will reevaluate the write-down based on the miner sales factory..

So such change regarding the sales and also the demand towards the Martinez which is expanding the upcoming of the high workup maybe that from historical, the miner we have prepared some machines before the high work period. So get to the preparation of this half year high yield period.

So I would like to know what is this year’s conditions that regarding that? I think there'll be a starting side of current situation. Thank you..

So, basically, the coronavirus affected minor stock up on mining equipment for the rainy season, and in February we know that the coronavirus outbreak has affected the delivery and also logistics. But in March and April, all is back to normal including logistics and also the manufacturers of the Bitcoin miner.

And we are very confident actually for the rainy season. First of all, more and more miner ready for the rainy season, that’s first. And second, we know that many miners willing to prepare miners to for the upcoming rainy season. And except for only sole miners, we also have mew business model.

This year, we have released a new model, which is rent the miners. The mine equipment of miners, this will help our cash flow. And also we are pretty confident [indiscernible] including also having in may over the Bitcoin would bring our company opportunities.

And one more thing is about the old miners, I mean all generations of mining equipment, many miners they have the demand to replace their old generation mining equipments to newly ones. So, I think basically we think it’s an opportunity for company. Thank you..

So my last question is regarding the AI chips. So as I mentioned that you saw concern of the AI product in the future but you know the percentage that AI product of the total revenues in the last fourth quarter and also I’d like to know what is management estimate or outlook for AI chips revenue percentages in this year? Thank you..

Okay. So, for year 2019, the sales for the AI chip is RMB2.7 million, and for 2020 actually, we don’t think the revenue is being most important part. The most important part is that we now already cooperate with many top players in the AI industry.

And our mission has not being changed which is, we hope that the AI revenue in the next three years will payout significant part of our revenue structure. And right now in different areas like the smart control and agriculture and industry, we already collaborated with many major companies.

So, we basically are very confident in the future market for AI Chip. Thank you so much..

Ladies and gentlemen, this concludes today’s conference call. Thank you for participating. You may all disconnect..