Jia Nan Technology: Selling mining machines is just making friends, and it's not profitable

Author: Chris, Techub News

Canaan Inc. recently announced its unaudited financial report for the second quarter of 2024. The report shows that the company's overall operating conditions have improved compared to the second quarter of 2023 and the first quarter of 2024, with profitability moving in a positive direction. However, despite several indicators showing progress, Canaan Inc. still faces significant financial challenges and market pressures.

Summary

In the second quarter of 2024, Canaan Inc. reported an operating loss of $46.6 million, narrowing by 60.9% compared to a loss of $119 million in the same period last year, and by 31.5% compared to a loss of $68 million in the previous quarter. Although losses still exist, the magnitude of the losses is significantly decreasing.

In terms of total revenue, Canaan Inc. achieved $71.9 million in revenue in the second quarter of 2024, exceeding the previous market expectation of $70 million, and representing a growth of 104.8% compared to the previous quarter. This growth indicates that the company has enhanced its competitiveness in the market, particularly with the successful launch of new products and efforts in global sales expansion.

However, despite the revenue growth, Canaan Inc.'s financial situation remains concerning. The financial report indicates that the company's core business is still operating at a loss. Specifically, in the second quarter of 2024, the cost of products, excluding inventory write-downs, prepayment write-downs, and inventory purchase commitment provisions, was $62.4 million, while product revenue was only $61.8 million, resulting in a product loss of $600,000. In the first quarter of 2024, the company achieved a product profit of $11.1 million under the same calculation method, indicating a decline in the core business performance in the new quarter.

Additionally, Canaan Inc.'s cash flow also shows some pressure. The financial report reveals that the company's cash and cash equivalents decreased from $96.2 million on December 31, 2023, to $66.8 million at the end of the second quarter of 2024, a decline of 30%. This indicates that the company faces challenges in capital management and operations, and may require further capital investment in the future to support its ongoing R&D and market expansion.

Key Financial Data

• Q2 2024 revenue was $71.9 million, exceeding the previous expectation of $70 million, and grew by 104.8% compared to the previous quarter.

• Total computing power sold in Q2 2024 was 6.2 million TH/s, a quarter-on-quarter increase of 83.9%.

• Q2 2024 operating loss was $46.6 million, narrowing by 60.9% year-on-year and by 31.5% quarter-on-quarter.

• General and administrative expenses in Q2 2024 decreased by 27.0% quarter-on-quarter. This led to a total expense decrease of 44.0% year-on-year and 10.6% quarter-on-quarter. The operating loss narrowed by 60.9% year-on-year and by 31.5% quarter-on-quarter to $46.6 million.

Canaan Inc.'s Chairman and CEO, Zhang Nangeng, stated: "In the quarter of Bitcoin block reward halving, despite market volatility, Canaan Inc. executed its product delivery plan, strengthened global sales activities, and optimized operations, achieving revenue of $71.9 million. The mass delivery of Canaan's A14 products and further sales of traditional models resulted in total computing power sales reaching 6.2 million TH/s, an increase of 83.9% quarter-on-quarter."

Canaan Inc. also noted that sales in the North American and Middle Eastern markets saw significant growth. The company's new product, the A1566, has received numerous orders since its launch, and with the continued pre-sale of the A14 product, customer prepayments increased by 30.2%. Canaan Inc. has also optimized its mining project matrix in response to local regulatory changes, resulting in $9.3 million in stable mining revenue.

The author believes that despite the increase in market demand, Canaan Inc. still needs to further optimize its revenue structure. In the second quarter of 2024, the company's product revenue was $61.8 million, a 164% increase compared to $23.4 million in the previous quarter, and a 6.7% increase year-on-year compared to the second quarter of 2023. However, despite the revenue increase, the company still faces pressure in product cost control, leading to an overall product business that failed to achieve profitability. Particularly in the context of fierce competition in the global mining machine market, how the company further optimizes product costs will be key to achieving sustainable profitability in the future.

Revenue and Cost Analysis

Revenue

Q2 2024 revenue was $71.9 million, a 104.8% increase compared to Q1 2024 revenue of $35.1 million, and a 2.7% decrease compared to Q2 2023 revenue of $79 million. Total revenue includes product revenue of $61.8 million, mining revenue of $9.3 million, and other revenue of $800,000.

In the second quarter of 2024, the company's product revenue was $61.8 million, a 164% increase compared to $23.4 million in the previous quarter, and a 6.7% increase year-on-year compared to the second quarter of 2023. However, despite the revenue increase, the company still faces pressure in product cost control, leading to an overall product business that failed to achieve profitability. Particularly in the context of fierce competition in the global mining machine market, how the company further optimizes product costs will be key to achieving sustainable profitability in the future.

In addition to product sales, Canaan Inc.'s mining revenue in the second quarter of 2024 was $9.3 million, a decrease of 11.5% compared to $10.5 million in the previous quarter, and a decrease of 41.5% compared to the same period in 2023. The decrease in mining business revenue reflects the impact of Bitcoin market fluctuations on the company. Especially in the context of Bitcoin block reward halving, market uncertainty has increased, and the company needs to take more proactive measures in the operation of its mining business and control electricity costs.

Cost

Canaan Inc.'s cost of revenue in the second quarter of 2024 was $91 million, a 25.6% increase compared to $72.4 million in the previous quarter, and a 36.7% decrease compared to $143.9 million in the same period last year. Among these, the product cost was $79.7 million, a 33% increase compared to $59.8 million in the first quarter of 2024, and a 30% decrease compared to the same period in 2023.

In Q2 2024, the product cost was $79.7 million, compared to $59.8 million in Q1 2024, reflecting a 33% increase, while the product cost in Q2 2023 was $113.3 million, showing a 30% year-on-year decrease. The year-on-year decrease is mainly due to a reduction in recorded inventory write-downs, prepayment write-downs, and inventory purchase commitment provisions. The inventory write-downs, prepayment write-downs, and inventory purchase commitment provisions recorded this quarter amounted to $17.3 million, compared to $47.5 million in the first quarter of 2024 and $45.9 million in the same period of 2023. Product costs include direct production costs of mining machines and AI products, as well as indirect costs related to production, as well as inventory write-downs, prepayment write-downs, and inventory purchase commitment provisions.

By excluding the expenses of inventory write-downs, prepayment write-downs, and inventory purchase commitment provisions, it can be calculated that the product cost for Q2 2024, excluding these provisions, was $62.4 million, while product revenue was only $61.8 million, resulting in a product loss of $600,000. In Q1 2024, product revenue was $23.4 million, and the product cost, excluding these provisions, was $12.3 million, resulting in a product profit of $11.1 million. In Q2 2023, product revenue was $57.9 million, and the product cost, excluding these provisions, was $67.4 million, resulting in a product loss of $9.5 million.

Despite the reduction in costs, Canaan Inc.'s product business still faces pressure from losses. In the second quarter of 2024, the company's product business, excluding inventory write-downs, prepayment write-downs, and inventory purchase commitment provisions, recorded a loss of $600,000, while the previous quarter achieved a profit of $11.1 million. This indicates that the company still has significant room for improvement in product pricing, cost control, and market competition.

It can be observed that Canaan Inc.'s main business of "selling mining machines" is not actually lucrative, and can even be described as "selling mining machines is just making friends, not making money." In terms of product revenue and product costs, except for Q1 2024 being in a profitable state, both Q2 2024 and Q2 2023 were in a loss state, and this loss does not even account for equipment and software impairments.

The mining cost for Q2 2024 was $11 million, compared to $12.2 million in Q1 2024 and $30.6 million in the same period last year. The mining cost here includes direct production costs of mining operations, including electricity and hosting, as well as depreciation of deployed mining machines. The quarter-on-quarter and year-on-year decrease is mainly due to a decline in electricity costs, as well as a reduction in depreciation due to the end of the depreciation period for early deployed mining machines and impairments of currently deployed mining machines. This quarter, the depreciation of deployed mining machines was $4.8 million, compared to $5.2 million in Q1 2024 and $16.2 million in the same period last year.

In Q2 2024, the gross loss was $19.1 million, a decrease of 49% compared to $37.3 million in Q1 2024, and a decrease of 72.7% compared to $70.1 million in the same period last year, indicating that gross losses are decreasing both quarter-on-quarter and year-on-year.

In the second quarter of 2024, Canaan Inc.'s total operating expenses were $27.5 million. This is a 10% decrease compared to $30.7 million in Q1 2024, and a 43.8% decrease compared to $49 million in the same period last year. Among these operating expenses, general and administrative expenses (which typically include salaries for management, office rent, administrative expenses, etc.) decreased by 27.0% compared to the previous quarter.

The author believes that the reduction in expenses indicates that Canaan Inc. has taken effective measures to control and reduce operating costs during this quarter. These measures may include optimizing management processes, cutting unnecessary expenses, and improving operational efficiency, successfully reducing overall expense expenditures. This cost control is crucial for the company to improve its profitability and enhance its financial health.

The company's Chief Financial Officer, James Jin Cheng, stated that the revenue growth in the second quarter of 2024 was mainly due to the concentrated delivery of A14 products, which not only increased revenue but also improved gross margins. Although the mining business was affected by the Bitcoin halving, the company successfully maintained a gross margin similar to that before the halving, which helps further increase its Bitcoin holdings. As of the end of the second quarter, the company held 1,114.2 Bitcoins, a record high.

However, it is worth noting that while Canaan Inc.'s Bitcoin holdings reached a record high, its cash and cash equivalents decreased from $96.2 million on December 31, 2023, to $66.8 million at the end of the second quarter of 2024, a decline of 30%.

The author believes that the decrease in Canaan Inc.'s cash and cash equivalents may be due to:

• Operating expenses and investments: Canaan Inc. may have spent a significant amount of money on daily operations, R&D investments, and market expansion. These expenses may include personnel salaries, R&D costs, marketing, and supply chain management. Although the company has controlled some costs, these operating and investment expenditures may still lead to a reduction in cash reserves.

• Capital expenditures and new project investments: The company may have made capital expenditures during this period, such as purchasing equipment, upgrading infrastructure, or investing in new projects. While these expenditures may contribute to the company's future growth, they will reduce available cash and cash equivalents in the short term.

Canaan Inc. stated that it plans to continue to strictly control operating expenses in the future to maintain cost control and efficiency, and to continue to invest actively in R&D to ensure that the company can maintain and enhance its supply capacity. Additionally, Canaan Inc. also stated that it will further optimize its inventory structure to improve operational efficiency and cash flow.