Ladies and gentlemen, thank you for standing by and welcome to Canaan Inc.’s Second Quarter 2023 Earnings Conference Call. At this time, all participants are in 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'd like to hand the conference over to your speaker host today, Mr. Clark Soucy, Investor Relations Director of the company. Please go ahead, Clark.

Thank you. Hello, everyone, and welcome to our earnings conference call. The company’s financial and operating results for the second quarter 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 Jin Cheng. In addition, Mr. Leo Wang, IR Senior Director and Ms. Xi Zhang, IR Manager, 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 we open up the call 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 are not limited to, our outlook for the company and statements that estimate or project future results of operations or the performance of the company. These statements speak only as of the date thereof 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. 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 measures including reconciliations with comparable GAAP results in our earnings press release, which is posted on the company website. With that, I will now turn the call over to our Chairman and CEO, Mr. Nangeng Zhang. Please go ahead.

Hello, everyone. This is NG, the CEO of Canaan. Thank you for joining our conference call. James and I are at the company's headquarters in Singapore and to share our quarterly results with you. During the second quarter of 2023, the price of Bitcoin remained at around $28,000 to $30,000 US dollars at both the beginning and the end of the quarter. However, for most of the quarter, it experienced a downward trend, while the overall network cash rate continued to steadily increase by about 15%. The rise in mining difficulty coupled with sluggish Bitcoin price did have certain adverse impact on both over mining profitability and at our willingness to make purchases. With the industry's inventory level remaining relatively high, the highly approaching and the pressure of product updates all mining machine providers are eager to clear their inventory. As a result, the competition in the mining machine market has intensified and the price of computing power continues to be under pressure. In summary, the mining machine market remains in a bear market. Given this situation, our efforts are twofold. On the other -- one hand, we are dedicated to upholding our financial resilience and ensuring stable operations. On the other hand, we are also actively allocating resources towards future growth opportunities. I would like to take this opportunity to discuss several strategic points that we are focusing on. First, we are committed to long term investments in R&D and the production capacity to continuously upgrade and integrate our products. As we mentioned earlier, our A13 Series products achieved stable supply and again customer recognition for their performance, leading to a record increase in shipment volume in the first quarter of this year. During the second quarter, computing power cells of A13 series significantly surpassed that of the A12…

Thank you, NG, and good day, everyone. This is James speaking at our Singapore headquarters. As NG started the call with, I would like to say the second quarter of 2023 was still a very dynamic bear market period for the Bitcoin mining machine industry with a complicated range of influences and mixed factors. First, as we observed in this period of interest rate hikes, there was no significant upside for the price of Bitcoin in quarter two. The Bitcoin price settled into a range between $28,000 to $30,000 compared to the rapid growth from $16,500 to $28,500 in quarter one. Secondly, in May, there was the BRC-20 incident helping miners enjoy higher transaction fees, signaling the possibility of increased future mining revenue from these fees. Thirdly, the total Bitcoin hash rate continued to climb, increasing by 15% over the quarter. Total demand for mining machines increased compared to quarter one. Moreover, we observed intensified competition among mining machine manufacturers. Inventory levels remained high and selling prices continued to decline in quarter two compared to quarter one. All the above factors should be considered when analyzing our Q2 numbers. Of course, we also did our best to deliver the numbers and keep our operation resilient. Let's start with profit and loss. Overall speaking in quarter two, total revenue generated was $73.9 million, which beat our guidance of $72 million and represents an increase of 33.7% quarter-over-quarter. Additionally, our mining revenue reached a record high of $15.9 million and contributed more than 20% to our total revenue in this quarter. Regarding our machine sales, our revenue from mining machine sales was $57.8 million in this quarter, 32.2% higher than $43.7 million in the last quarter. We delivered a total computing power sold of 6.1 million terahash per second, representing a sequential…

We will now begin the question-and-answer session. As a courtesy to other investors and analysts who may wish to ask a question, please limit yourself to three questions at a time. If you have any follow-up questions after the Q&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 Instructions] Thank you. We will now take our first question. And your first question today comes from the line of Mike Legg from The Benchmark Company. Please go ahead.

Thanks. Good morning. I'm curious about your focus on rig efficiency and how you view your product versus the competition, specifically versus what's miners and ex-miners and then also wanted to understand your viewpoint on self-mining versus hosted environments given the release last week. Thanks.

Hi, good evening, or good morning. Yeah, for the -- in terms of the power efficiency, I think it's a critical factor for customers. In the first half of this year, our products have already entered a range of 25 to 30 joules per terahash. This is a significant improvement compared to last year. And by the second half of this year, the power efficiency of the products were simple for customers is already below 35 joules. This fulfilled our commitment. The progress in our products, our efficiency improvement is on track and as planned. We are gradually narrowing the gap with our main competitors. Yeah. And I think the R&D and switch, the progress takes some time. But yeah, we are closing. So I think beyond that, I mean, beyond the power efficiency number, our products are balanced in terms of stability, environmental adaptability and cost effectiveness. And our production -- product line is diverse. So the miners -- I think the miners return on investment and profitability are influenced by both OpEx and CapEx and our goal is to have an advantage in both of these indictors, making our products is preferred -- is a preferred choice for customers. Yeah. About the self-mining. Regarding the policy environment, Kazakhstan has issued a new regulatory process related to mining. Since the detailed revolutions came into effect in early July, the company immediately issued applications for licenses. However, in the actual process, we found that due to the early stage of the entire regulatory process, their specific requirements in execution, which leads to the license application is taking longer than initially anticipated. For instance, we learned through particular operations that we need to wait for our mining partners to obtain a Type 1 license before we can submit applications for Type…

Thank you very much.

Thank you. We will now take our next question. Please stand by. This is from the line of Kevin Dede from H.C. Wainwright. Please go ahead.

Hello, gentlemen. Thank you so much for taking my questions. NG, you spoke a little bit to inventory. I think, so did James. Inventory levels worldwide. Could you give us a little more color on what you're seeing. Clearly, there's lots of pressure on pricing. But I was wondering if you could compare global inventory levels with the end of March. Do you think they're still high? Do you think they've come down a little bit? Clearly, you're seeing -- you've sold more of the A13 series. So congratulations on that. I'm just kind of curious about future price per terahash trends.

Hey, thank you. Good morning. I think in the past few months, the mining machine market’s main focus has been on product upgrades and clearing inventory. So as a result of the overall market entry has aggressively decreased. However, it's important to note the market inventory still remain at relatively high levels. Taking a global view of the market, I think with the gradual recovery Bitcoin price this year, both the company and some clients worldwide have been provisioning themselves ahead of the next [indiscernible]. However, it is crucial to understand that the private market sentiment is somewhat fragile and policy exchanges and reform price fluctuations. So due to the competitive reasons, we cannot disclose specific client improvement plans. But the overall trend in the second half of the year is clear. High-quality expansion minded clients will prepare for the next four years, after having by preceding related to machines. [indiscernible] While many small and medium-sized miners, will operation for cost-effective traditional models to expand short-term gain with a lower rate. So due to the current instance competition in the mining machine market, computing power price is generally at a minimum profit or even negative margin levels. So I think from the prospective money machine prices, the current [indiscernible] pushing in mining machines, offering great value. We hope that the customers who are still considering their purchase platform will face orders as soon as possible. Yeah, thank you.

So NG, you also spoke to maybe Holding back on your wafer orders from your foundry suppliers. I'm curious on how you see being able to resume those orders if and when the mining machine market returns to strength. Are you at all concerned that you will not be able to get wafers that you need to build new inventory? How concerned are you about your supply chain?

Let me see. I think currently, we are building the machines from when we have -- when we started the contract with our customers. Recently, I think that the semiconductor foundries have relatively ample production competitive. So with a good wafer price. However, in order since wafer for advanced process nodes have a higher cost due to the high technology and lower supply. So, yeah, so I think for the next maybe two quarters, the supply chain is not the primary problem for us. Our -- we will focus on the -- our sales system and provide machines with best performance in the market, continue to invest in our R&D, yeah.

Okay. Last question for me, NG. Understand maybe 2 exahash not running in Kazakhstan and perhaps 2 exahash not running in the US, given about 5 exahash installed, can you talk to what you expect your self-mining hash rate to be through the September quarter and what your investment thinking is regarding Canaan self-hash rate for the balance of the year?

For the numbers, I will pass this question to James.

Yeah. Kevin, this is James. We are talking about total of 4.9 exahash of mining power. And the loss from Kazakhstan is about 2 exahash as you said. But the loss from US is only 1 exahash, it's not 2. So the total loss for here is 3 exahash compared to the total 4.9 exahash and also in quarter two, we have already successfully deployed 0.4 exahash with Stronghold in the United States. And we have another 0.2 exahash to collaborate with Stronghold as well as in the United States. And also in quarter three, we start to -- brought some pilot runs in the new cooperative sites in Africa, South America and North America. But of course, get electricity is a slow progress, it will take some time. So in my estimation about quarter three, we definitely will lose half -- at least half of our total capacity if the Kazakhstan machines could not recover quickly. So that's also reflected in our total revenue estimation about quarter three. But we are looking for different sites in different locations, so we can recover this quickly in quarter four. So from my estimation, in quarter four, we will have a bigger chance to recover the mining operation hash rate and we will continue to take mining as one of our important strategies and execute the strategies consistently. Thank you, Kevin.

Well, thank you, James. I really appreciate it. Thank you for chiming in and thank you so much, NG, for offering additional color. Thanks, gentlemen.

Thank you. We'll now take our next question. This is from the line of Shuang Zhang from Guosen Securities. Please go ahead.

[Technical Difficulty]

This is the operator. Shuang Zhang, your line is not too clear. Could you please try asking your question again?

Okay. My first question is, when do you expect to clear out the A12 inventory?

Thank you, Shuang. I think we are actively working on clearing the inventory of A12 models. And the progress has been a little bit slower than we anticipated. At this point, we expect to complete the clearance by the fourth quarter of this year for A12 series. Thank you.

My second question is, how was your progress on mining cash rate deployment and installment? [Foreign Language].

Yeah. As just now I referred to Kevin, we have lost the 3 exahashes in Kazakhstan and also one site in United States. We quickly installed another 0.4 exahashes during quarter two with Stronghold, one of our important mining partners in the United States. And we implemented another 0.2 exahashes in quarter three with Stronghold. And also, we deployed some new sites in Africa, South America and North America during quarter three with pilot runs. Those small sites together, I don't think we can recover 100% of the total hash rate back to 4.9 exahash at quarter two. That means we definitely will lose some of our capacity in quarter three, but we will step by step recover that in quarter four with all the new sites ready and we have the shipment scheduled to make our total capacity come back to the bigger ones. So I think to your question, I will still consistently say we put mining as our important strategy, and we will consistently invest and deploy machines to support that strategy. Thank you. Thank you, Shuang.

Thank you. And the last question is, how do you expect the upcoming events impact computing power demand and price? [Technical Difficulty]

Okay. Okay. Good evening. As previously mentioned, we observed two trends in the past half year. On one hand, our high quality and expansion minded customers opting to procure the latest machines models through futures contracts. On the other hand, a significant number of more to medium-sized miners are hedging the having risk by purchasing older models at lower prices. So in general, the market demand is recovering this fluctuation. However, due to the reactively high market inventory and intense competition, the mining sector will continue to experience pressure on computing power prices. Yeah, thank you.

Okay. Thanks for answer.

Thank you. As there are no further questions now, I'd like to turn the call back over to the company for any closing remarks.

Hi, everyone. This is Clark. Thank you so much again for joining us today. If you have any further questions, please feel free to reach out to us to the contact information provided on our website, and have a nice day.

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