Canaan’s first post-IPO results exposed a $148.6 million annual loss

Canaan Inc. disclosed on April 9, 2020 that it lost RMB1.0345 billion, or US$148.6 million, in 2019, turning the newly Nasdaq-listed bitcoin-mining equipment maker into an unusually transparent gauge of stress in the hardware business. The company reported RMB1.4226 billion, or US$204.3 million, of full-year net revenue.

Coinburn calculates from Canaan’s reported renminbi figures that revenue fell 47.4% from RMB2.7053 billion in 2018. That decline arrived even though the aggregate computing power attached to machines sold rose 47.1%, to 10.5 million terahashes per second from 7.2 million TH/s. In other words, Canaan sold substantially more hashing capacity but collected much less revenue. The filing attributes the revenue decline mainly to a lower average selling price per terahash after bitcoin’s price decline that began in 2018.

More hash power, weaker economics

The mismatch between volumes and revenue mattered because mining hardware is a leveraged expression of bitcoin economics. Manufacturers must commit to chips, assembly and inventory before customers know the future value of the machines’ output. Falling coin prices and improving chip efficiency can rapidly reduce the resale value of an older machine.

Canaan’s fourth-quarter accounts showed that pressure plainly. Revenue for the three months ended December 31, 2019 rose 66.8% year over year to RMB463.2 million, while computing power sold rose 86.6% to 2.9 million TH/s. Yet cost of revenue reached RMB1.1367 billion. The company recorded RMB729.0 million, or US$104.7 million, of inventory and prepayment write-downs, producing a quarterly gross loss of RMB673.4 million and a net loss of RMB798.2 million, or US$114.7 million.

For the full year, cost of revenue was RMB1.9386 billion against RMB1.4226 billion of revenue. The resulting gross loss was RMB516.0 million. General and administrative expense also rose to RMB347.6 million, including RMB247.4 million of share-based compensation. Canaan’s non-GAAP measure, which excluded share-based compensation, still showed a RMB764.3 million loss. That adjustment therefore did not reverse the central result.

A public window into mining supply

Canaan had completed its U.S. initial public offering in November 2019. Its April 9 release was its first earnings report after that listing, giving public-market investors a direct financial view of a business that had largely been assessed through private manufacturers, distributor prices and network data.

The results did not measure miner profitability across the Bitcoin network, and Canaan’s sales are not the same thing as active hash rate. They did, however, demonstrate that rising shipments of computational capacity could coexist with collapsing manufacturer margins. That distinction was especially important as the industry prepared for Bitcoin’s expected 2020 block-subsidy reduction, which would tighten revenue for miners unless offset by price, fees or efficiency gains.

Canaan ended 2019 with RMB516.6 million, or US$74.2 million, in cash and cash equivalents. For the first quarter of 2020, it projected revenue of at least RMB60 million. Management said the COVID-19 outbreak had disrupted general commerce, financial markets and cryptocurrency activity, and had caused it to lower its expectations for 2020. That forecast was a contemporaneous company estimate, not a verified outcome.

What the record established on April 9

The strongest conclusion available on April 9, 2020 was narrow but significant: one of the few publicly traded suppliers of specialized Bitcoin mining machines had converted higher delivered computing power into lower annual revenue and a large loss. The numbers exposed the inventory and pricing risk embedded in the hardware layer of Bitcoin, while leaving unanswered how demand, manufacturing disruption and the approaching subsidy change would affect the remainder of 2020.