Ladies and gentlemen, thank you for standing by and welcome to Canaan Inc.'s Third Quarter of 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the management's prepared remarks, we will have a question-and-answer session. Please note that this event is being recorded. Now I'd like to hand the conference over to your speaker host today, Ms. Gwyn Lauber, Investor Relations Director of the company. Please go ahead, Gwen.

Thank you. Hello, everyone, and welcome to the earnings conference call. Joining us today are our Chairman and CEO, Mr. Nangeng Zhang; and our CFO, Jin "James" Cheng. Leo Wang, Vice President of Capital Markets and Corporate Development, and Xi Zhang, Senior Manager of IR, 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 questions. Before we 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. 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's website. With that, I'll now turn the call over to our Chairman and CEO, Mr. Nangeng Zhang. Please go ahead, sir.

Hello, everyone. This is Nangeng, the CEO of Canaan. Thank you for joining our conference call. Our CEO James and I are pleased to share with you our third quarter results and recent developments. I believe everyone is thrilled with the Bitcoin price reaching new heights. And I share in this excitement. Q3 2024 marked our first complete quarter after the halving. During this quarter, global Bitcoin mining market faced another round of challenges from Bitcoin price volatility. We saw average Bitcoin price decline by over 7% compared to the last quarter. At the same time, the total network hash rate grow by more than 10%. This combination puts the hash price to historical lows, putting pressure on miners' profits. Despite these headwinds, we executed our plans efficiently, paying careful attention to every detail. Throughout Q3, we continued back delivers our -- of our A14 products. We completed the transition to mass production of our A15 series. We expanded our global sales reach and we optimized our mining operations. And these three points that we are not only met our targets, but slightly exceeded them, reaching $73.6 million in total revenue. Let me walk you through each area in detail. Innovation remains the cornerstone of our business. Our ongoing R&D investments allow us to constantly deliver high performance products that meet market demands and drive our business growth. This quarter we began the initial small-scale delivery of our new A15 series ahead of schedule through internal improvements and by working closely with our boundary partners through the [DTCO] (ph) process, we have made substantial improvements to both performance and the yield rate of the A15 series over recent months. Our top model in the A15 series, the A15 Pro, delivers 215 tera hash per second of computing power with power…

Thank you, NG. And good day, everyone. This is James, CFO of Canaan. I'm very glad to share our Q3 financial results with you together with our CEO. As NG stated at the top of the call, the third quarter of 2024 was a challenging quarter, given that it was the industry's first complete quarter post-halving. The average Bitcoin price declined by over 7% sequentially, but the total network hash rate grew by more than 10%. As a result, miners' margin was further squeezed. Facing this challenging quarter, we continued with the bulk delivery of A14 products, further improved the performance of yield and energy efficiency of the A15 series. Completed the mass production introduction for the A15 series strived to expand the global sales and continuously optimize the operations. Let me give a quick summary of our financial performance in quarter three. First, with continuing large scale deliveries of our A14 series, we achieved total revenue of nearly $74 million, which beat our guidance of $73 million, marking year-over-year growth of around 121%. This was the highest revenue that we generated in the past five quarters. Moreover, our penetration into the North American market enabled some important breakthroughs. By the date of this earnings call, we have secured some significant orders for our A15 series from customers, including listed mining companies in North America, such as HIVE and CleanSpark. Together with Cipher and Stronghold, more and more listed companies are choosing our A15 series products for their mining operations. Secondly, compared to the overall situation of the industry, our mining performance this quarter exceeded our expectations despite the unfavorable average Bitcoin price because of our ongoing expansion in mining operations. We mined 147 Bitcoins and generated $9 million of mining revenue in this quarter, with an average revenue per…

We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Kevin Cassidy with Rosenblatt. Your line is open.

Yes, thanks for taking my question and congratulations on the good quarter. You described a lot of demand picking up. How would you compare this to, say, when the having event in 2020 and then you had a very strong year in 2021? How does 2025 look like as far as visibility and the amount of demand you're seeing.

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

Thank you for that answer. And just what systems do you have in place to make sure you're going to be able to meet the demand, make sure there's no shortage of the ASICs or boundary space, and even just the assembly of the mining rigs?

Yes, we've been focused on developing new products, delivering models with approximately 17 joules per terahash power efficiencies this year. And we also participated market trends early and secured our production capacity by placing advanced orders to the foundries. Close collaboration with our partners has further improved the yield rates and shortened production cycles. These interactives require financial support. At the end of September, we complete $15 million financing to invest in self-money and joint money sites in the US. Because we know the bull market is coming, so we have to have our supply chains to stop us for customer orders. Recently, the [indiscernible] compliance rising inversely, the bull market is already there. So we secured another [indiscernible] in financing. This reflects our advantage of being a listed company, allowing us to deploy capital swiftly to expand capacity and meet growing market demand. I think the wafers we placed in September will start to deliver in the end of this year, but usually the production will use about close to five months. We are doing our everything we can to shorten to certain time. The next year, performance of products will deliver, we will deliver needs to improve further. I believe a range of 10 to 15 joules per terahash is achievable. This requires continued investment in chip development. And I expect most of the design work of A16 products to be completed this quarter. And additional to the chips, we also have to refine the entire product ecosystem. This includes machines of different power levels, whether targeting B2B or B2C customers, different cooling methods, system or under solution integration, as well as both software and hardware. Over the past few months, we have conducted extensive product development work and this will continue in the coming months. Yes, thank you.

Yes, thank you.

Thank you. Our next question comes from Nick Giles with B. Riley Securities. Your line is open.

Hey, good morning, everyone. Congratulations on the recent deals with North American customers. I was wondering if you could expand on your growth efforts in this market. What targets do you have in the coming quarters, either on an exahash sold basis, gross revenue or percentage of total revenue. I'll start there. Thanks.

Thank you. I think the rising Bitcoin price has triggered recovery in market demand, and we anticipate even stronger demand next year. In the first quarter we achieved 7.3 million terahash per second in computing power sold, marking 93.8% year-over-year increase and 16.4% sequential growth. Taking a record high over the past 11 quarters. Recently we announced large scale orders with North American publicly traded mining companies CleanSpark and HIVE, reflecting a notable recovery in demand. As Bitcoin price surpassed $85,000, we began adjusting our sales prices in line with fair market value and increasing the upfront payment required for contract sales orders. We believe Bitcoin bull market will still be in the early stages. And moving forward, we will actively adapt our pricing policies and sales strategies to align with a lowing market supply and demand dynamics. Thank you.

Thank you for that, NG. My next question is just around R&D spend expectations in 2025. How should we think about the split between an A16 series and other initiatives such as your [indiscernible] series. Thank you.

Yeah, I think we focus on our miner series development. But for the [indiscernible] side, we -- I think we -- I have something -- I can say something about this. Yes, let me see. Okay. I think for our company, in the past few years, I have closely monitored advancements in AI and had discussions with industry leaders about the direction of this rapidly evolving field. In the last two years, I think [indiscernible] has, and its ecosystem has emerged as clear winners. This is all about -- All about is my personal opinion. So, [indiscernible] So capturing the -- and I think they are capturing the majority of profit. This reminds me of Bitcoin mining boom that began in 2011. So the question is, how can Canaan position itself to ride this wave of technological process? One that could define the next 10 or 20 years. Canaan has a strong foundation in areas like the Edge AI products development, the [indiscernible] series you just mentioned, chip design and operational computing infrastructure. This gave us multiple avenues to participate. Making the right business decisions require foresight. So today, I think the demand for large model training is already consolidating among a small number of major companies. In just two or three years, there might be fewer than 10 companies globally comparable that have [indiscernible] large models. That means the competition in large model training hardware is essentially over, and the winners are already clear. So the next major opportunity will likely emerge with AI applications based on these models become mainstream, leading a sharp increase in demand of inference compute power that exceeds training requirements. However, the shift will take time. At this stage, it would be wise to invest heavily in designing and producing -- especially for producing…

So, NG, I really appreciate all the color and commend you on the foresight in those segments. So, continue best of luck.

Thank you. Our next question comes from Kevin Dede with H.C. Wainwright. Your line is open.

Hi, NG. Hi, James. Thanks for having me on the call. NG, I was hoping you could look a little bit at the A14 versus A15 series and the demand you're seeing. Obviously, with the increase in compute density, heat becomes a greater issue and I'm wondering what you're seeing on the demand side for air cool versus immersion as your orders shift from A14 to A15?

Okay. Firstly, hello. I think the A14 series is very close to the [indiscernible] because the A15 has much more advantages. The power efficiency is -- the A14 is about $22 to $23 per exahash, and the A15 is now today is lower than $17. So there's more than 20% improvement. So we are switching all our capacity from A14 to A15. And for demand side, I think the A15 is much -- the demand is much bigger, because the performance is comparable to our competitors, and the machine is super stable. We tested under over 50 degrees Celsius by our air cooling system. And in our [indiscernible], the water-cooled liquid cooling system is running close to 400 terahash today. So everything is -- A15 is much better. So for the machine's cooling method, I think that the liquid cooling model is increasing. I think the reason is some of our customers are trying to use the machines to generate heat, especially in the winter. So we have multiple customers working with us using our liquid cooling models to generate hot water. And the temperature is from 55 degrees Celsius to over 70 degrees Celsius. So it's a very valuable equipment in many different regions. And also I think after that, because the data center for Bitcoin mining is -- sometimes it's very noisy. So to operate with lower noise is also a very important requirement for our customers. So this also led them to switch to the liquid cooling. Yes, I think the water cooling model is very important. So at the end of this year, we will -- I think we have plans to announce the liquid or the water cooling system to the public, maybe in the next month or January 2025. Thank you.

And NG, thank you for all the color on AI development. I appreciate your perspective immensely, as you know. I'm curious though, do you think you're going to hold back to further development until you see a path to develop an ASIC to address that market? I just want to make sure I understood your comments correctly. Thank you very much.

For this question, by my personal reveals, I think today the model training is using the NVIDIA system like H100 or some more advanced models. But most of the inference customers are using the ASIC [indiscernible]. So this remind me that in the very early stage of Bitcoin mining, people use CPU to mine Bitcoins. And rapidly they switched to GPUs. They used GPUs to mine Bitcoins. So today the stage is the AI players is using GPUs to mine, or you can say it to generate tokens. So we are currently at this stage. Yes, personally I have plans to do something on how to generate AI tokens, by using the ASIC technology. Yes, but I think what is the disadvantages, today the inference demand is not come over the training demand. This is what I'm seeing today. So as I just mentioned, to invest a lot of cash in the next one or two quarters to this kind of AI ethics is a wise movement. So I will continue to look closely to this industry. Thank you.

James, One quick question for you. I understand the Bitcoin loans you've made still have 1,200 plus Bitcoin. How do you see using that Bitcoin? Do you think you might offer more loans and how are you evaluating your counterparty risk?

Thank you, Kevin. I think that's a wonderful question. I think as a listed company, we are very proud to be listed in NASDAQ. So we do have the access to the capital market. So for the company, usually we have different methods of doing fundraising, just like what we have demonstrated in the past. We can do preferred shares. We also can do at-the-market offering. And also, we can use our Bitcoins to generate liquidity. So if asking me this question, to be very honest, we just usually balance between all those possible methods. Usually we would like to take preferred shares, because it's easy and it's quite transparent. And then sometimes if the market demand is strong, ATM would maybe be more suitable. And last but not least, I think currently Bitcoin price is increasing to all-time high. Of course, we can consider using more bitcoins to do pledge. But of course, we have to consider to utilize these bitcoins for other methods of generating cash flow. For example, doing some financing to generate interest is also something we are testing. So I think currently we are still learning in this all kinds of methods. We haven't yet fixed in whatever terms how we do this fundraising. Of course we can try all the methods and then our shareholders can provide more suggestions to us to fully consider what's the best for our shareholders. I think that's the purpose of doing all this fundraising. Thank you, Kevin.

Thank you, James. Appreciate it. Congratulations on the quarter.

Thank you.

Thank you. Our next question comes from [Mike Grandel] (ph) with Northland. Your line is open.

Hey, thanks, guys. For 3Q product revenue or the A6, can you break that down between the A14 and the A15? And then roughly your $80 million guidance for the December quarter, could you break that down roughly between the A14 and the A15?

I think for this question -- I will take this question, Mike. I think the major delivery of quarter three is from A14 series. NG has mentioned that we only delivered like 1,500 pieces of A15 series. So the major deliveries from A14 series and also we did a lot of stock clearance for A13 series, also occupies a good kind of percentage. But I think the major part is still A14 series. And the deliveries to different geographies is mainly Middle East and North America. Does that answer your question, Mike?

Yes. That was the 39% to the Middle East and 16% I think to North America. And then roughly in 4Q, you're forecasting $80 million of revenue. What's the split between A14 and A15 going to be?

Yes. I think currently the A14 series is still doing ongoing delivery. I think it's still a major part of our delivery. But A15 series is climbing in a kind of introduction period. And in this quarter, in quarter four, we will still have A14 series as the major delivery and we will have the first mass production batch of A15 delivered to the main customers from North America like Cipher, CleanSpark and HIVE. So that will be this quarter's look like. So if you're asking me about percentage, I would say A14 series still occupies the biggest percentage and then rest go to A15. And we still have some A13 to clear, but the value is quite relatively smaller.

Got it. And just to follow up to that, roughly how much of A13 inventory is sitting on the balance sheet?

If you calculate the inventory, you can consider 20% of the inventory value is now A13 series.

20%. Okay. And then just lastly, do you have a rough pro forma cash balance and share count after the recent financing? You said the cash balance was [Multiple Speakers]

Hey Mike, we have all disclosed our shares outstanding in our earnings release as of today. What's the question?

Mike, are you asking for the cash balance?

Yeah, I was just after the recent financing that you guys talked about. I think it was the preferred. If you just have a pro forma cash balance after that financing?

Yeah, I think the $30 million is just happening today. We haven't yet received all the cash. Hopefully in the end of this week or next week we can receive that $30 million cash. But the previous $50 million in the last trench of previous preferred shares have already been received in the end of September. So it's counted to the $72 million cash balance in the end of September. Does that answer your question?

Yeah, we would take that $72 million plus $30 million for this new financing minus anything for operations and whatnot. I'm just trying to run that forward a little bit.

Yes, you can calculate it based on that. But of course, In this quarter, we will invest more in the operation, not only about the wafer supply, but also we are going to invest together with Luna Square in West Texas to do the mining sites build up.

Got it. That's helpful. Thank you.

Thank you, Mike.

Thank you. That's all the time we have for questions. I'd like to turn the call back over to the company for any closing remarks.

Thanks again for joining us today. If you have further questions, please feel free to reach out to us directly or through the contact information that we have on our website. Thanks, operator.

You're welcome. Thank you. That concludes the call today. Thank you everyone for attending. You may now disconnect.