Ladies and gentlemen, thank you for standing by, and welcome to Canaan Inc.'s fourth quarter and full year 2021 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 host today, Ms. Xi Zhang, Investor Relations Manager of the company. Please go ahead, Ms. Zhang.
Thank you, operator. Hello, everyone. Welcome to our earnings conference call. The company's financial and operating results were released by our news wire 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. Xiaoming Lu, our SVT, Mr. Leo Wang, IR Senior Director, 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 the call up 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 not limited to, our outlook for the company, and statements and estimates, and projections of future results of operations or the performance of the company. These statements speak only as of the date hereof, 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 for, GAAP results. You can find additional information regarding these non-GAAP measures including which is posted on the company's website. Without further ado, I would like to turn the meeting over to Mr. Nangeng Zhang.
We earned a net profit of CNY 1.2 billion, another record high for our company. For the full year, we completed 22.34 million terahash per second in total computing power sold, up 238.5% year-over-year. Total net revenues reached CNY 4.99 billion, up more than tenfold than 2020, generating a net profit of CNY 2 billion for the year.
[Non-English content]
Next, let's look at our detailed operations during the quarter. In terms of our mining machine sales, we realized a 16.5% quarter-over-quarter increase to deliver 7.74 million terahash per second of computing power to our clients, setting a new historical high for our quarterly sales performance. Market demand remains robust despite considerable volatility in Bitcoin prices during the fourth quarter. We were able to increase the overall average selling price and drive revenue growth through various measures. These measures include enhancing production capacity and yield rates, acquiring new customers, leveraging flexible pricing strategies, maintaining stable supply, dynamically adjusting the proportion of spot sales. We continue to diversify our computing power sales to more overseas markets, especially in Southeast Asia and South America. For the first time, we have customers from Malaysia, UAE, Argentina, Peru, and other emerging markets.
Orders by new customers contributed a significant portion of our computing power sold, reaching 41%. Meanwhile, demand remained strong in traditional overseas markets like Central Asia, North America, and Europe, as orders by our existing clients represented 59% of total computing power sold. Our ability to expand our geographic coverage, foster repeat purchases from large mining companies, and maintain a consistent and stable supply chain allows us to more efficiently convert market demand into our sales.
[Non-English content]
We remain confident in our revenues for the quarters to come as we have recorded a solid pre-sale performance and secured production capacity with our founding partners for the year. In addition to our production capacity allocation for spot sales and mining business, we received contract advances of CNY 1.34 billion from contract sales customers as of December 31st, 2021, setting a new record. This demonstrates over 6 million terahash per second to be delivered. The strong contract sales brought substantial cash inflows for our company and reflect strong demand from Bitcoin miners and their recognition of our product and product quality and delivery capabilities.
[Non-English content]
Regarding our Bitcoin mining business, we set up overseas operation centers to carry out the mining operations and other Bitcoin-related business. During this quarter, our mining operations in Kazakhstan encountered multiple challenges, including pandemic factors, logistic congestion, and the power supply shortage in the winter, which all negatively impacted our mining machine online rate. We are closely monitoring the local energy supply situation. Our staff on site are making best efforts and proactively communicate with our partners to solve the problems as soon as possible. We will also be prudent in carrying out additional deployment.
[Non- English content]
It's necessary to emphasize that although our mining business encounters headwinds in the near term, developing the mining business is still one of our long-term strategies. With lessons from past experience, we will decisively execute this strategy. We will continue to leverage the advantages of our mining machine supply through expanded presence and deepened collaborations, as well as dynamic allocation of production capacities between machine sales and mining. We endeavor to further enhance the overall economic benefits of our operations.
[Non-English content]
We remained steadfast in developing our AI business in the fourth quarter. Feedback has been positive thus far, and we are seeing continued interest from customers in intelligent educational hardware, smart home, and various other application scenarios. Recently, we reached a strategic cooperation agreement with OpenAnolis, a leading open source operating system community and innovation platform. We will jointly explore the development and application based on the OpenAnolis open operating system and the Canaan AI chip platform, promoting localized open source projects in the field of edge computing AI chip applications.
[Non-English content]
Regarding our R&D. [Non-English content ]. In terms of our research and development, we continue to expand our R&D team and enhance our design capabilities. We have achieved the ability to independently implement chip front-end logic and back-end physical design for multiple advanced nodes, covering the entire packaging heat dissipation and mass production process. In the fourth quarter, our total number of R&D staff increased by 99% year-over-year.
[Non-English content]
We process a deep self-developed IP matrix, and have established an even more comprehensive self-developed IP system. We carefully protect the achievements of our R&D efforts with a range of active patents. As of December 31st, 2021, we have accumulated 156 authorized patents, 70 IC layout design rights, and 105 software copyrights.
[Non-English content]
We also continue to make steady progress on a number of R&D projects for new generations of Bitcoin mining machines. We are dedicated to cultivating the industry and providing better products for miners. Going forward, we will disclose specific performance parameters of new generation mining machines only after we chip in and successfully tape out and complete the full testing for the machine.
[Non-English content]
As we continue to push forward our business, we remain committed to providing value for our shareholders. As of today, we have completed the repurchase program approved in September 2021, representing repurchasing approximately 3.6 million ADS for the total of $20 million. The repurchase program progresses smoothly, and we were able to complete the program earlier than the expiration date. Subsequently, the Board of Directors will continue to evaluate new repurchase plans from multiple aspects. We will keep you updated on any further progress.
[Non-English content]
In 2021, we achieved sustained growth and a strong performance despite various uncertainties and market challenges. A testament to the efficacy of our strategy and our solid execution capability.
[Non-English content]
In 2022, we remain committed to amplifying our research and development capabilities, deep diving in chip design and improving product performance. In 2022, we will also comprehensively enhance our customer orientation as we shift our focus towards overseas markets and expanded our presence across the globe. Maintaining close communications and providing best-of-class services become increasingly important. To better serve our customers, we are exploring more client-centric ways across our product R&D, manufacturing, transportation, and after sales services. Additionally, we will further leverage our pragmatic, flexible, and resilient operations to thrive amidst the market uncertainties. We will continue to mitigate the impact from market volatility and Bitcoin price fluctuations with steady supply and secure production capacity, and to maximize our profits through strategic balancing our mining machine sales and mining business.
[Non-English content]
We expect our total net revenue in the first quarter of 2022 will be in the range of CNY 1,500 million-CNY 1,600 million, representing an increase of 275%-300% compared with the first quarter of 2021. Please note that this forecast reflects our current and preliminary view on the market and operational conditions, which are subject to change.
[Non-English content]
This concludes my prepared remarks. I will now turn the call over to our CFO, James.
Thank you, Mr. Zhang, and hello, everyone. This is James speaking. Despite volatile market environments and various challenges, we achieved another robust quarter with solid financial results from top line to bottom line. In the fourth quarter, we delivered the computing power sold of 7.7 million terahash, representing a sequential growth of 15.5%. Our total net revenues reached CNY 2,184.6 million, up 65.8% quarter-over-quarter, which was 15.8% higher than the upper limit of our previous forecast in November.
For the full year of 2021, our total net revenue reached CNY 4,986.7 million, up more than 10x year-over-year. The good top line results came from our record high computing power sold and a responsive delivery, as well as our effective pricing strategy that enables more spot sales, driving higher average selling price. Additionally, our effective business development across the continents helped us record a strong contract advances of CNY 1,340.7 million as of 2021 end, ensuring substantial cash inflow and steady revenue recognition for quarters ahead. Our gross profit for the quarter doubled sequentially to CNY 1,486.9 million. The gross margin rate hit 68%, which is an outlier in the past four quarters.
Gross margin rates for full year 2021 is 57.2%. Please note that for mining machines delivered during the fourth quarter, we secured the corresponding wafer cost several quarters earlier. From the ongoing demand and supply imbalance across the semiconductor industry and the feedback from our foundry partners, we expect wafer cost price increases in 2022, which will have an impact on our future gross margin rate. Regarding our Bitcoin mining business, as of December 31st, 2021, we have 1.13 million terahashes computing power deployed at mining farms. As of the 2021 end, we held 70.5 Bitcoin with a carrying value of CNY 20.3 million.
Our AI business revenue achieved CNY 5.5 million in the quarter, representing a year-on-year growth rate of 150.3% and a sequential growth rate of 20.9%. We kept getting positive feedback from customers in different industries, and we newly cooperated with the ecosystem platform partner, OpenAnolis. Research and development expenses were CNY 112.0 million, increasing by 179.6% year-over-year, and 20.8% quarter-over-quarter. The increase was primarily attributable to the increased research and development costs for new products and new hires in research and development team. We will continue to invest in R&D to advance our technology capabilities.
As a result of our strong revenue efficient operation and expense management, we realized a record high net profit of CNY 1,196.5 million for quarter four, representing a sequential growth of 114.6%. For the full year of 2021, net profit achieved CNY 2,000.3 million. Non-GAAP adjusted net income was CNY 1,250.7 million for quarter four, representing a sequential growth of 112.9%. For the full year of 2021, non-GAAP adjusted net income hit CNY 2,301.6 million. While we are very pleased with our performance achieved in quarter four and the full year of 2021, we are fully aware that the existing challenges may persist and new challenges may emerge.
It's time to think and plan the new year in a prudent way. I would like to talk more about risk factors and how we tackle them. From market environment perspective, we are in the Fed interest rate hike cycle for U.S. dollar. The pace of interest rate increase has and will continue to have an impact on Bitcoin price fluctuation. On the other hand, geopolitical conflicts, even military operation, may also bring further uncertainties to Bitcoin price fluctuations. As Bitcoin price is closely linked to the demand and the price for our mining machine, its fluctuation always has an impact on miners' willingness to expand their mining scales.
In past quarters, we continued building up the capability of flexibly allocating goods among contract sales, spot sales, and mining operations to seize the opportunity during the Bitcoin price fluctuation and to maximize the average selling price and the overall value. On the supply front, given the ongoing wafer demand and supply imbalance across the semiconductor industry and the ensuing price increase, we expect our production costs to roll up and bring pressure on the gross margin rate. To sustain adequate wafer supply, we have been actively in communication with our foundry partners and secured the production capacities with considerable amount of cash prepayments.
We will also continue to support our R&D team to further improve products and better utilize wafers to have higher product efficiency at a lower cost. For our Bitcoin mining businesses, we managed to deploy our computing power as scheduled, and we encountered unexpected winter electricity shortage in both quarter four, 2021 and quarter one, 2022. We closely monitor the local condition involvement and will continue to be cautious in deploying additional computing power. We also actively evaluate target markets to diversify operational risks. We are aware of the obstacles and we remain resilient in mining business as one of our strategies. We are also aware that some investors have questions about the delisting risk as a U.S.-listed Chinese company. Canaan is different from some other Chinese companies listed in the U.S.
We are not under a VIE structure, and we are running a B2B business with markets and corporate customers mostly located outside China. Our principal business activities do not involve large numbers of registered users or deal with vast amounts of user data. Additionally, there is still around two-year window before SEC gives the final decision, and things may be sorted out before then, considering SEC and CSRC are working closely to figure out a better solution. Ultimately, as a listed company, Canaan has been committed to operational compliance and continues to optimize its management operation and the corporate governance. It takes a good blacksmith to make steel. Despite all the challenges ahead, we are confident in our effective strategies, solid execution, as well as our nine-year experience in the industry. We will keep sharpening our R&D capabilities and stay vigilant and proactively mitigate risks with our dynamic operation.
Now, I would like to briefly walk you through our financial results for the quarter. Total net revenues in the fourth quarter were CNY 2,184.6 million, compared to CNY 38.2 million in the same period of 2020 and CNY 1,317.6 million in the third quarter of 2021, representing a sequential increase of 65.8%. Gross profit was CNY 1,486.9 million, compared to CNY 9.1 million in the same period of 2020, representing a sequential increase of 100.5%.
Total operating expenses in the fourth quarter of 2021 were CNY 2,273.7 million compared to CNY 80.1 million in the same period of 2020 and CNY 278.4 million in the third quarter of 2021. Income from operations was CNY 1,213.2 million, up 161.9% sequentially. Net income attributable to ordinary shareholders was CNY 1,196.5 million, up 114.6% sequentially. Non-GAAP adjusted net income was CNY 1,250.7 million, up 112.9% sequentially. Non-GAAP adjusted net income excludes share-based compensation expenses. Basic and diluted net earnings per ADS for the quarter were CNY 6.90 and CNY 6.81 respectively. As of December 31st, 2021, the company had cash and cash equivalents of CNY 2,684.2 million, up 586.0% compared to CNY 391.3 million as of December 31st, 2020. This concludes our prepared remarks. We are now open for questions.
We will now begin the question and answer session. To ask a question, you'll need to press star one on your telephone. To withdraw your question, you press the pound key. Our first question comes from Shuang Sun with Guosheng Securities. Your line is open.
Hi. Hi. Can you hear me?
Yes.
Hi there. I'm Shuang Sun from Guosheng Securities. In early 2022, we saw the Bitcoin price experienced a dramatic drop. What was the impact on yourselves? What countermeasures have you implemented to mitigate impact?
[Non-English content]
Okay, let me translate. We are still in the first quarter of 2022, and the price of Bitcoin is still fluctuating. As such, we can only share our observations for a macro perspective. Previously, when the price of Bitcoin fell sharply, customers' demand for our mining machines would decline. They would generally have a wait-and-see attitude, resulting in a decline in sales. Historically, the first quarter is also traditionally the off-season, and production and sales are usually lower due to the holidays, including Christmas, New Year and the Chinese New Year.
[Non-English content]
However, there are other factors at play during the first quarter of this year. This primarily includes the continuing industry-wide supply shortage of chips and mining machines caused by miners growing deployment of mining machines last year. As clients tend to be highly institutionalized, and institutional clients hold a long-term horizon in terms of financing and investment activities. Therefore, the price fluctuation of Bitcoin during this period have had little impact on our sales price and sales volume. Our guidance for the first quarter of 2022 reflects our forecast of performance.
[Non-English content]
Meanwhile, we are mitigating the negative impact of the Bitcoin price decline through a variety of measures. First, we are actively expanding new channels to reach new clients. Second, we leverage futures contracts to reduce inventory pressure, as evidenced by the stable futures contract relationships that we have with a number of large mining companies. Finally, if the Bitcoin price continues to fall, and depending on the changes in market conditions, we will also adjust the allocation of machines between inventory and mining deployment to balance long-term and short-term revenues.
[Non-English content]
[Non-English content]
Thank you. Our next question comes from Lewis Fan with The Benchmark Company. Your line is open.
Hi. Thanks for taking my call. Congratulations on a very strong quarter. My first question is for the management is could you please elaborate on your progress and plan on your computing power deployment for the mining business? Hello? Hello, can you hear me?
Hey, Lu, can you please translate your question into Chinese.
Okay, sure, sure, sure, No problem.[Non-English content]
As of December 31st, 2021, we had 126 million terahash of mining computing power under deployment. As of February 28, 2022, this has risen to 2.38 million terahash of mining computing power under deployment. We are currently in the process of deploying more computing power and negotiating potential joint mining projects.
[Non-English content]
In the future, we still continue to increase the deployment of computing power to our mining business, but we do not consider rapidly increasing our computing power as a priority. We will adjust the deployment pace to balance allocation between future sales, spot sales and mining computing power. In this way, we strive to obtain maximum value and avoid potential risks. In addition, all machines deployed in our mining businesses can also be reallocated to spot sales if necessary.
[Non-English content]
Okay, thank you for the color. I do have a couple of follow-up questions, and I will go ahead to ask the question in English first, then I will translate them into Chinese myself. My second question is in terms of computing power deployment. In the management's opinion, what is the company's moat against competition? [Non-English content ]
[Non-English content]
When compared to the more vibrant blockchain industry, our industry competitive landscape has indeed become more stable in recent years. There's a reason for that. Recently, some very large companies have started to enter the industry after years of planning and preparation. However, based on our analysis of their products so far, they still need substantial improvement in order to be competitive in the market. In niche markets of the industry, such as the Bitcoin mining chips, our team has accumulated extensive technologies, patents and a great deal of know-how over many years. By leveraging this strength, we have developed our products to an industry-leading level, thereby forming the company's technological moat.
[Non-English content]
In addition, we continuously solidified and optimized our supply chain over the past few years of operation. Our multi-foundry partnership strategy, powered by our strong technology and R&D capabilities, have enabled us to build cooperation with several competitive foundry partners. These partnerships allowed us to secure production capacity with advanced nodes. Our effective cash management also allows us to lock in these capacities through advance payments in a timely manner. In addition, our Bitcoin mining business launched in 2021 will also help us navigate the supply chain risks in the future.
[Non-English content]
As we strive to expand our business globally, our customers and partners have become more diversified and institutionalized. As such, our collaboration model has developed more from mining machine sales to joint mining, creating a deeper win-win proposition. You can also see that some of our large scale institutional mining enterprise customers continue to refresh repurchase from us, forming long-term and stable relationships. At the same time, we are constantly exploring new geographic markets and establishing cooperation with new customers.
[Non-English content]
In essence, our business model with chip design as the core technology and selling mining machines, operating Bitcoin mining business and selling AI chips. Our businesses complement one another and combined with our underlying technology, that form a continuously self-reinforcing business model.
[Non-English content]
In addition, we accumulated extensive operational experience and capabilities from the upstream supply chain to the downstream market as we operated through cycles of significant Bitcoin price volatility during the past nine years. We are able to respond to changes in the market and Bitcoin prices with flexible and swift operational adjustments, strategically mitigate risk and seize opportunities.
[Non-English content]
Last but not least, as a U.S.-listed company, we are more transparent and compliant in terms of company operations, governance and disclosure. At the same time, we also have access to more financing options and opportunities.
[Non-English content]
To answer your question, this factor from our multilayer competitive moat. Hope I answered your question. Thanks.
That's very helpful. Thank you. Just a couple more quick follow-up questions. First of all, could you please shed some color on Canaan market share? [Non-English content ]
[Non-English content]
Okay, let me translate. We generally estimated our market share according to our computing power sold and the delta of network hashrate in the corresponding period. However, in 2021, the severe fluctuation of the network hashrate made it difficult to estimate the market scale. Specifically, mining machines went offline, transited their physical locations and connected online back and forth due to regulatory reasons. Nevertheless, in 2021, we achieved 22.3 exahash in total computing power sold, compared with 6.6 exahash in 2020. In 2021, our total revenues reached nearly CNY 5,000 million compared with CNY 400 million in 2020. Therefore, we believe we gained some market share through this plan. Hopefully we can have guidance from professional market research institutions for the specific figures. Hope I answered your question.
Okay, that's helpful. Thank you. Just one last question. I know the management has just talked about share repurchase plan. Does the management have any stock dividend program or plan in mind? I'll translate that into Chinese. [Non-English content]
The board recognized our execution in the latest share repurchase program. The early completion of our share buyback plan demonstrates the long-term confidence of both the board and our management team. We are evaluating the situation, and we'll submit a new stock repurchase proposal to the board accordingly. We will make formal announcement once the proposal is approved. Okay. The year 2021 saw our rapid growth, and we will forge ahead further. We look forward to continuous and expedited growth through our best endeavor. To fulfill this goal, we need to invest more into our R&D, further enhance our market development, expand our business, and optimize our services. We are committed to generating more for our clients and the shareholders, providing mid- to long-term value. I hope I answered your question.
Yes. Thank you very much. Really appreciate it. Again, congratulations on the strong quarter.
Thank you. That's all the time we have for questions. I'd like to turn the call back over to management for closing remarks.
Thank you once again for joining us today. If you have further questions, please feel free to reach out through the contact information provided on our website. Thank you.
Thank you. That concludes the call today. Thank you everyone for attending. You may now disconnect.