Canaan(CAN) - 2023 Q1 - Quarterly Report

Financial & Operational Highlights Q4 2022 Highlights In Q4 2022, Canaan experienced a significant downturn, with total computing power sold dropping 75.8% year-over-year, leading to an 82.1% decrease in total revenues, while mining revenue showed substantial growth, increasing by 368.2% YoY, reflecting a strategic shift towards its own mining operations | Metric | Q4 2022 | Q4 2021 | Change (YoY) | | :--- | :--- | :--- | :--- | | Total Computing Power Sold | 1.9 million Thash/s | 7.7 million Thash/s | -75.8% | | Total Revenues | RMB 391.9 million | RMB 2,184.6 million | -82.1% | | Mining Revenue | RMB 72.2 million | RMB 15.4 million | +368.2% | Full Year 2022 Highlights For the full year 2022, total computing power sold decreased by 32.4% compared to 2021, resulting in a moderate decline in total revenues, with a key positive being the tenfold increase in mining revenue, highlighting the successful expansion of this business segment | Metric | Full Year 2022 | Full Year 2021 | Change (YoY) | | :--- | :--- | :--- | :--- | | Total Computing Power Sold | 15.1 million Thash/s | 22.3 million Thash/s | -32.4% | | Total Revenues | RMB 4,378.9 million | RMB 4,986.7 million | -12.2% | | Mining Revenue | RMB 218.6 million | RMB 21.7 million | +907.4% | Management Commentary Management acknowledged the challenging market due to the low bitcoin price but emphasized strategic progress, exceeding revenue guidance for Q4, expanding its own mining operations significantly, and making key investments in R&D (A13 series) and wafer supply to prepare for the next market upswing, despite a negative impact on gross margin from a substantial inventory write-down - CEO Nangeng Zhang highlighted that despite a tough Q4, the company is positioning for a market resurgence by investing in production capacity and expanding mining operations, achieving an installed hash rate of 3.8 EH/s by the end of February 2023[4] - CFO James Jin Cheng noted that Q4 gross margin was dampened by an inventory write-down of RMB 205.3 million and one-time higher R&D expenses for the A13 series tape-out, with the company also making substantial prepayments to secure wafer production capacity[6] - Strategic milestones in 2022 included global expansion with an overseas headquarters in Singapore and the debut of a new mining machine series with a cutting-edge process node[5] Financial Results Q4 2022 Financial Performance The company reported a significant downturn in Q4 2022, with revenues falling 82.1% YoY to RMB 391.9 million, and a gross profit of RMB 1,486.9 million in Q4 2021 turning into a gross loss of RMB 230.9 million, driven by lower sales, a RMB 205.3 million inventory write-down, and a 99.5% YoY surge in R&D expenses, consequently posting a net loss of RMB 438.3 million Revenue Analysis | Revenue Stream | Q4 2022 (RMB M) | Q4 2021 (RMB M) | Change (YoY) | | :--- | :--- | :--- | :--- | | Products Revenue | 319.6 | 2,168.9 | -85.3% | | Mining Revenue | 72.2 | 15.4 | +368.2% | | Total Revenues | 391.9 | 2,184.6 | -82.1% | - The sharp decline in product revenue was mainly due to a decrease in total computing power sold and lower selling prices resulting from the declined bitcoin price[7] Profitability Analysis - The company recorded a gross loss of RMB 230.9 million, compared to a gross profit of RMB 1,486.9 million in Q4 2021, primarily due to a RMB 205.3 million inventory write-down and RMB 74.9 million in depreciation for mining machines[9] - Loss from operations was RMB 624.4 million, a significant reversal from an income from operations of RMB 1,213.2 million in the same period of 2021[13] Operating Expenses | Expense Category | Q4 2022 (RMB M) | Q4 2021 (RMB M) | Change (YoY) | | :--- | :--- | :--- | :--- | | Research & Development | 223.5 | 112.0 | +99.5% | | Sales & Marketing | 7.6 | 30.7 | -75.2% | | General & Administrative | 162.4 | 131.0 | +24.0% | | Total Operating Expenses | 393.5 | 273.7 | +43.8% | - The surge in R&D expenses was primarily due to a RMB 96.0 million one-off expenditure for the A13 series products[11] Net Income and EPS | Metric | Q4 2022 | Q4 2021 | | :--- | :--- | :--- | | Net (Loss)/Income | (RMB 438.3 M) | RMB 1,196.5 M | | Non-GAAP Adj. Net (Loss)/Income | (RMB 341.8 M) | RMB 1,250.7 M | | Basic (Loss)/Earnings per ADS | (RMB 2.61) | RMB 6.90 | Full Year 2022 Financial Performance For the full year 2022, Canaan's revenue decreased by 12.2% to RMB 4,378.9 million, with profitability significantly impacted as gross profit fell by 38.7% and net income dropped 67.1% to RMB 658.2 million, driven by lower product sales, substantial inventory write-downs (RMB 421.9 million), and a 64.2% increase in R&D spending Revenue Analysis | Revenue Stream | FY 2022 (RMB M) | FY 2021 (RMB M) | Change (YoY) | | :--- | :--- | :--- | :--- | | Products Revenue | 4,159.6 | 4,956.9 | -16.1% | | Mining Revenue | 218.6 | 21.7 | +907.4% | | Total Revenues | 4,378.9 | 4,986.7 | -12.2% | Profitability Analysis - Gross profit decreased to RMB 1,747.9 million from RMB 2,850.7 million in 2021, with the increase in cost of revenues mainly due to RMB 421.9 million of inventory write-downs and RMB 198.5 million of depreciation from the growing mining fleet[21] - Income from operations was RMB 557.8 million, a significant decrease from RMB 1,828.3 million in 2021[23] Operating Expenses | Expense Category | FY 2022 (RMB M) | FY 2021 (RMB M) | Change (YoY) | | :--- | :--- | :--- | :--- | | Research & Development | 546.6 | 332.8 | +64.2% | | Sales & Marketing | 63.0 | 100.5 | -37.3% | | General & Administrative | 580.5 | 589.1 | -1.5% | | Total Operating Expenses | 1,190.1 | 1,022.4 | +16.4% | Net Income and EPS | Metric | FY 2022 | FY 2021 | | :--- | :--- | :--- | | Net Income | RMB 658.2 M | RMB 2,000.3 M | | Non-GAAP Adj. Net Income | RMB 1,041.0 M | RMB 2,301.6 M | | Diluted Earnings per ADS | RMB 3.83 | RMB 11.65 | Financial Position As of December 31, 2022, the company's financial position showed a significant reduction in cash and cash equivalents to RMB 707.3 million from RMB 2,684.3 million at the end of 2021, while inventories nearly doubled and cryptocurrency holdings increased substantially, with total liabilities seeing a major decrease primarily due to a reduction in contract liabilities | Balance Sheet Item | Dec 31, 2022 (RMB M) | Dec 31, 2021 (RMB M) | | :--- | :--- | :--- | | Cash and cash equivalents | 707.3 | 2,684.3 | | Inventories | 1,512.1 | 812.4 | | Cryptocurrency | 87.3 | 20.3 | | Total Assets | 4,870.1 | 5,632.3 | | Total Liabilities | 462.5 | 2,173.6 | - The company held 757.14 bitcoins with a carrying value of RMB 87.3 million (US$12.7 million) as of December 31, 2022[25] Business Updates and Outlook Recent Developments The company is aggressively expanding its bitcoin mining business, having installed 3.8 EH/s by February-end 2023 with a target of 5-5.5 EH/s by the end of Q1 2023, continued its US$100 million share repurchase program, having bought back US$27.1 million in ADSs, and established an At-the-Market (ATM) offering to potentially raise up to US$750 million in capital - The company is developing its bitcoin mining business as a second engine, with an installed hash rate of 3.8 EH/s as of February-end 2023, targeting 5 to 5.5 EH/s by the end of Q1 2023[27] - Under its share repurchase program, the company has repurchased a total of 8.2 million ADSs for US$27.1 million as of February 28, 2023[28][30] - An At-the-Market (ATM) offering program was established, allowing the company to sell up to US$750 million of its ADSs to access public capital markets flexibly[31] Business Outlook Reflecting the ongoing challenging market conditions, Canaan projects total net revenues for the first quarter of 2023 to be approximately RMB 450 million (US$65 million), based on the company's preliminary assessment of market and operational conditions - For the first quarter of 2023, the Company expects total net revenues to be approximately RMB 450 million (US$65 million)[32] Unaudited Financial Statements Consolidated Balance Sheets The unaudited consolidated balance sheet as of December 31, 2022, shows total assets of RMB 4.87 billion and total liabilities of RMB 462.5 million, with key changes from year-end 2021 including a significant decrease in cash and contract liabilities, alongside a substantial increase in inventories | (Amounts in thousands RMB) | As of Dec 31, 2022 | As of Dec 31, 2021 | | :--- | :--- | :--- | | Total current assets | 3,994,630 | 5,273,461 | | Total non-current assets | 875,448 | 358,796 | | Total assets | 4,870,078 | 5,632,257 | | Total current liabilities | 448,261 | 2,085,104 | | Total liabilities | 462,463 | 2,173,567 | Consolidated Statements of Comprehensive Income (Quarterly) For the fourth quarter ended December 31, 2022, the company reported total revenues of RMB 391.9 million and a net loss of RMB 438.3 million, contrasting with a net income of RMB 46.1 million in Q3 2022 and a net income of RMB 1,196.5 million in Q4 2021, reflecting a significant deterioration in performance | (Amounts in thousands RMB) | Q4 2022 | Q3 2022 | Q4 2021 | | :--- | :--- | :--- | :--- | | Total revenues | 391,926 | 978,207 | 2,184,555 | | Gross profit/(loss) | (230,905) | 219,336 | 1,486,949 | | Income/(loss) from operations | (624,388) | (55,687) | 1,213,225 | | Net income/(loss) | (438,332) | 46,060 | 1,196,529 | Consolidated Statements of Comprehensive Income (Annual) For the full year ended December 31, 2022, the company generated total revenues of RMB 4.38 billion and a net income of RMB 658.2 million, representing a significant decline from 2021, where revenues were RMB 4.99 billion and net income was RMB 2.0 billion | (Amounts in thousands RMB) | Year Ended Dec 31, 2022 | Year Ended Dec 31, 2021 | | :--- | :--- | :--- | | Total revenues | 4,378,907 | 4,986,706 | | Gross profit | 1,747,948 | 2,850,745 | | Income from operations | 557,817 | 1,828,325 | | Net income | 658,245 | 2,000,282 | Non-GAAP Reconciliations The company provides non-GAAP financial measures to supplement its U.S. GAAP results, with Q4 2022 non-GAAP adjusted net loss at RMB 341.8 million after excluding share-based compensation, and full year 2022 non-GAAP adjusted net income at RMB 1.04 billion after excluding share-based compensation and changes in the fair value of warrant liability Quarterly Non-GAAP Reconciliation (in thousands RMB) | | Q4 2022 | Q4 2021 | | :--- | :--- | :--- | | Net income/(loss) | (438,332) | 1,196,529 | | Add: Share-based compensation | 96,548 | 76,364 | | Add: Change in fair value of warrant liability | - | (22,148) | | Non-GAAP adjusted net income/(loss) | (341,784) | 1,250,745 | Annual Non-GAAP Reconciliation (in thousands RMB) | | FY 2022 | FY 2021 | | :--- | :--- | :--- | | Net income | 658,245 | 2,000,282 | | Add: Share-based compensation | 407,397 | 491,461 | | Add: Change in fair value of warrant liability | (24,598) | (190,178) | | Non-GAAP adjusted net income | 1,041,044 | 2,301,565 |