Canaan Inc. (CAN) Q3 2022 Earnings Call
Canaan Inc. (NASDAQ:CAN) Q3 2022 Earnings Conference Call November 14, 2022 7:00 AM ET
Company Participants
Clark Soucy - IR Director
Nangeng Zhang - Chairman and Chief Executive Officer
James Cheng - Chief Financial Officer
Conference Call Participants
Song Jiaji - Guosheng Securities
Kevin Dede - H.C. Wainwright
Jiaer Zhu - China Renaissance Securities
Hans Chung - D.A. Davidson
Michael Legg - The Benchmark Company
Operator
Ladies and gentlemen, thank you for standing by and welcome to Canaan Inc.'s Third Quarter 2022 Earnings Conference Call. [Operator Instructions] After the management's prepared remarks, we'll 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, Mr. Clark Soucy, Investor Relations Director of the company. Please go ahead, Clark.
Clark Soucy
Thank you, Mel. Hello, everyone, and welcome to our earnings conference call. The company's financial and operating results were released by our Newswire services earlier today and are currently available online. Joining us today are our Chairman and CEO, Mr. Nangeng Zhang; and our CFO, Mr. Jin Cheng James. In addition, Mr. Xiaoming Lu, our SVP; Mr. Leo Wang, IR Senior Director; and Ms. Xi Zhang, IR Manager, 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 up the call 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 are not limited to, our outlook for the company and statements that estimate or project future results of operations or the performance of the company. These statements speak only as of the date thereof, 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'll 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 will now turn the call over to our Chairman and CEO, Mr. Nangeng Zhang. Please go ahead.
Nangeng Zhang
Hello, everyone. This is Nangeng, CEO of the company. Our CFO James and I are delighted to share our quarterly results in English from New York. Since the beginning of third quarter of this year, cryptocurrency and blockchain industry has been experiencing a great deal of turbulence, especially during the past weeks, there is a lot going on in the industry. And now that we are together on this conference call, we want to take this opportunity to speak openly with our investors and stakeholders.
Market conditions have become more severe since the beginning of the third quarter of 2022. The Bitcoin price continue to decrease impacted by Federal Reserve’s interest rate increases and market expectations of further hikes. Meanwhile, Bitcoin’s total network hash rate remained at the high level and the miners’ incomes decreased. We are fully aware of the great difficulties in the mining industry. The current situation resembles similar difficult cycles we have previously navigated through.
However, the situation is different today as we are facing more challenges, such as globally surging energy prices, miner’s credit risks, and the high financing costs caused by excessive leverage and high operating expenses for new miners. These factors have led to serious issues in miner’s operations. Furthermore, what has been happening in the industry has eroding industry [business] confidence. Turbulence in the industry is inevitable in the short term.
On top of these headwinds, mining machine inventories in some regions remain high. All of these factors will negatively impact customer demand for and the pricing of our mining machines in the near term. What I want to emphasize is that although currently, participants in the industry are enduring a particularly difficult time, we remain confident of navigating through the bitcoin cycle. What we are going through now will turn into a valuable experience for us to develop our business as the industry evolves.
During these difficult times, we continue our investment in R&D to increase our products hash rates, and energy efficiency. In late October, we released two models of our new generation of mining machines making a breakthrough in computing power and energy efficiency. Regardless of whether we are in a bull or bear market environments, we will launch new products and develop our business strategy. This commitment demonstrates our confidence in the market’s long term prospects.
Regarding the sale of mining machines, in late October, having received the full testing results, we immediately launched our new generation mining machines, Avalon Made A13 series. Specifically two models are introduced, the A1346 and A1366. Model A1346 features a hash rate of 110 terahash per second and a power efficiency of approximately 30 joules per terahash. Model A1366 is equipped with a hash rate of about 130 terahash per second and power efficiency of approximately 25 joules per terahash. Both models’ computing power and the power efficiency demonstrates a significant improvement over the previous generation of mining machines.
After our new products hit the market, we quickly coordinate our supply chain to move forward our mass production. We expect to commence mass production and start shipments at the end of this year or early next year. Through prepayments, we have secured production capacity for the next year. This allows us to continuously provide high performance products with reliable quality and superior services for our clients.
As for our existing mining machine products, we delivered a total of 3.45 million terahash per second of computing power, generating revenues up on the last RMB940 million. Our global headquarters in Singapore continues to attract local Tech Titans, who join us and further enhance its operations. The headquarters has already established R&D, operations, finance, supply chain, and other functions.
Our Singapore based chip design team has contributed significantly to the development of our new products as well as the mass production process. The Southeast Asia supply chain, headquartered in Singapore is performing well and has been steadily fulfilling shipments since it entered operation during the previous quarter. It provides diversified parts of our production process and the logistics share that demonstrates our commitment and ability to continue our internationalization.
Although the overall market is relatively sluggish this year, we have built a strong foundation of the trust and the cooperation with our industry leading business partners. Meanwhile, we also insist on serving our small and mid-sized customers in a variety of flexible ways. Our online store for retail customers further augmented our sales systems to address demand from all types of customers. Since its launch in the second quarter, it has fulfilled the customer's orders from 21 countries and regions worldwide.
By end of the third quarter, having shipped our prepared orders, our total computing power to be delivered have decreased to 1.01 million terahash per second. Under current market conditions, the industry is facing stronger headwinds and more uncertainty, most customers are taking a wait and see approach. Soft demand of mining machines has dropped to a low point. However with current market challenges, our business is likely to face higher pressures over the next two quarters.
At this point, facing a severe winter in the industry, profitability is no longer our first priority. We will get through this difficult time and prepare for the future by shifting our focus to the stability of cash flows, reducing unnecessary expenses and continuing to invest in the research and the development of new products.
During the current downturn, we are strengthening operations of our mining business for long term. With our operational flexibility, we are propelling forward, our mining business in overseas markets. Mining [for] mutual support and maximize synergies within our mining machine sales and our mining business. Notably, our mining collaborations of the United States we up 260,000 terahash per second of computing power online during this quarter.
At the same time, the electricity from supply for our mining operations in Central Asia has further improved enabling more stable operations for our deployed mining machines. Consequently our mining business’ total online computing power is approximately 3.2 exahash per second, generating mining revenue of RMB 62 million in the third quarter, up 19%, quarter-over-quarter.
After using proportion of our bitcoins to cover mining costs, we have a 535.5 Bitcoins in the total at the end of this quarter. The balance demonstrates an increase of 188.7 Bitcoins from end of the last quarter. We are also actively exploring the geographical diversification of our mining business to mitigate concentration risk while steadily expanding our global layout at the scale of our mining business and a bearish market.
Let's now turn to our AI chip business. During the third quarter, sales of our AI chips improved compared to the previous quarter. Our downstream manufacturers resumed building up their inventories. As a result, our AI chips business sales grow by 52% quarter-over-quarter. However, weak end-user demand for consumer goods remained a headwind to our AI chip sales performance.
On the other hand, we have achieved good progress in terms of growth in the develop ecosystem. For example, our proprietary AI development spot has been used for learning and practice developments by college students from over 100 universities across China. At the same time, we have drawn many in [potential] developed platforms actively participating in constructing the risk profile ecosystem. We will continue to closely collaborate with our downstream and the technology partners in the industry, uphold our open source philosophy and prepare for its potential growth in the demand of AI field.
During this quarter we continue to make good progress on our current share repurchase program approved in March, under which we may repurchase up to US$100 million worth of our outstanding ADS or Class A ordinary shares over 24 months. We have repurchased 3.4 million ADS for a total of US$11.2 million from August 12 to November 4th this year. As of November 4, 2022, we have repurchased over 6.2 million ADS for a total of US$21.5 million with an average price of US$3.46 per ADS. Our ongoing execution of this buyback program delivers increased value to our shareholders and it shows our confidence in the company's current and long term prospects.
Overall, during the third quarter, we are -- we faced a difficult environment. Under this macroeconomic and the industry headwinds, many miners encountered operating difficulties leading to the decline in demand of mining machines, lower mining machine prices and more. To overcome these challenges, we work diligently to deliver products and further [positive] to the market, achieving our currency asset guidance. In addition, we successfully completed the shipping progress for the new generation of computing power chips and launched our new series of mining machines.
Looking ahead, with the rising interest rates and other macroeconomic dynamics, continue to expect downward pressure on Bitcoin prices and erode industry confidence. There is also the possibility of further energy price increases during the coming winter. Considering these combined headwinds, weaker demand in the mining industry is expected. As a result, we expect our performance to come under further pressure, at least during the next two quarters.
Based on our current projections, we expect our total revenues of the fourth quarter of 2022 to be approximately RMB310 million. Please note that this forecast reflects our current and preliminary views on the market and the operational conditions, which are subject to change. It has been almost 10 years since Canaan’s inception. And we have navigated through much of different cycles, regardless of macro environments.
We remain firmly committed to always doing our utmost to develop new products and pursue a superior computing power and power base. We have continuing to push forward on our internationalization, adhering to our [indiscernible] and prudent operating strategy. We endeavor to enhance synergies between our machines sales and mining business. At the same time, we will keep a conservative approach to our capital management and streamline our cash outflows while continuing on our investments R&D and the relating operations. It's paramount for us to sustained operations across the bull and the bear market cycles upholding our responsibility and the commitment to our shareholders.
This concludes my prepared remarks. I will now turn the call over our CFO, James.
James Cheng
Thank you, Mr. Zhang. And good day everyone, this is James and with our CEO in New York City. As we discussed in August on our second quarter earnings call, in the third quarter of 2022, as we expected, the overarching industry environment started to negatively impact our demand and average selling price. We reported a total revenue of RMB978 million in the quarter, meeting our guidance range despite the year-over-year and sequential decrease. Specifically as the Bitcoin price further decreased to $16,000 recently, we expect the overall demand for mining machine remain constrained.
In the third quarter, we delivered the total computing power sold of 3.5 million terahash per second. In response to the softening market, we lowered our selling price too, leading to a certain decline in the average selling price for the quarter. As a result of the combined effect, sales of our Bitcoin mining machines decreased to RMB 940 million for the quarter. In a challenging market downside cycle, we take the mining business as a hedge against the weakening mining machine sales. It has helped us better utilize our machine inventory and bringing additional revenue. Specifically, our mining business generated a mining revenue of RMB62 million, representing a quarter-over-quarter increase of 19%.
In the third quarter, we started mining in the United States by deploying a trial batch of mining machines. Our increase in the Bitcoin production is also due to further improved electricity supply in our mining operations in Kazakhstan. Collectively, we have 3.2 exahash per seconds of total computing power deployed for our mining business as of the end of the third quarter. After paying certain direct costs, especially electricity bills with Bitcoins mined we held 535.5 Bitcoin, as of the quarter’s end representing 188.7 additional Bitcoin compared with 346.8 Bitcoin balance as of June 30, 2022.
We remain prudent in machine deployments and are thoroughly exploring multiple geographical regions with favorable mining conditions to diversify our mining operation. Please also note that with the increase of our deployed machines for mining, we expect to have more machine depreciation in our total cost. Our AI revenue, realizing a sequential increase of 52% reached RMB2.4 million in the third quarter. The total AI chip sales performance reflected a softer demand for its end-user used consumer IoT products.
Our gross profits for the third quarter was RMB234 million, probably reflecting the impact at the top line level. Additionally, as we lowered the selling price of some older generation machines to even below their costs, we incurred an inventory write down of RMB221 million in third quarter. Resulting from the complex effects of declining ASP, inventory write down, and a relatively flat product costs, our gross margin was further squeezed to 23.9% for the third quarter. Please note that if we had not implemented this inventory write down, our sales margin for the third quarter or would have been 46.5%.
In the third quarter, we continued to enhance our research and development. We launched our new generation mining machines in October as we propelled the commercialization of our R&D efforts. We also made upfront payments to secure the production capacity for advanced node wafers to ensure stable supply in the future.
As the vast majority of our sales contracts were denominated in US dollars, we recorded our foreign exchange gain of RMB101 million in the third quarter due to the depreciation of RMB against US dollars. Conversely, if RMB appreciates against the US dollars in future, we will incur foreign exchange losses correspondingly. For our bottom line, our net income reduced to RMB 61 million in the third quarter.
Turning to our balance sheet, as of September 30 2022, the company had a cash and cash equivalents of RMB2003 million. The decrease in cash balance was primarily due to upfront prepayments for securing wafers and payments of operating and tax expenses which was partially offset by cash inflow from the spot sales of mining machines during the third quarter.
With the rollout of mass production for the new generation of mining machines, we expect our cash balance by the end of this year may further decrease as we make additional prepayments to secure production capacity. We don't have any interest bearing debt. In a downward market, it's critical for us to preserve cash and sustained cash flows. We will continue to closely monitor our cash balance and manage it prudently.
From August 13, 2022 to November 4, 2022, we used approximately US$11.2 million to repurchase 3.4 million ADSs under our current stock repurchase program approved in March 2022. With an average repurchase price of US$3.29 per ADS, in light of an increasingly volatile macro environment, we may reevaluate our repurchase program in accordance to our cash balance.
Looking into the near term, with the unfavorable factors may become even worse in the market, including constrained Bitcoin prices and the US rates hike and the high energy costs. Recently, the Bitcoin price has continued to decline after a series of industry incidents. As such, we expect lingering very soft demands in the near term for worldwide total hash rate expansion and mining machines purchase.
To conclude, the third quarter was a difficult one. We strived to maintain sufficient cash balance and seek opportunities in the market downturn. As a company, while the macro economic factors and the industry trends are out of our control, we endeavor to control the decisions and efforts we make to streamline our business operations, maintain cash flow and effectively manage our liquidity level to sustain our operation is our minimal and optimal strategy during the hard time.
Now I would like to briefly walk you through our financial results for the quarter. Revenues in the third quarter of 2022 were RMB978.2 million, US$137.5 million, representing a decrease of 48.8% from RMB1,652.7 million in the second quarter of 2022 and a decrease of 25.8% from RMB1,317.6 million in the same period of 2021. Gross profit in the third quarter of 2022 was RMB234.2, million US$32.9 million, representing a decrease of 74.8% from RMB929.7 million in the second quarter of 2022 and a decrease of 68.4% from RMB741.7 million in the same period of 2021.
Total operating expenses in the third quarter of 2022 were RMB275.0 million US$38.7 million US dollars, representing an increase of 1.7% from RMB270.5 million in the second quarter of 2022 and a decrease 1.2% from RMB278.4 million in the same period of 2021.
Net income attributable to ordinary shareholders in the third quarter of 2022 was RMB61.1 million, US$8.6 million, representing a decrease of 19.0% from RMB608.9 million in the second quarter of 2022 and a decrease of 88.1% from RMB512.5 million in the same period of 2021.
Non-GAAP adjusted net income in the third quarter of 2022 was RMB166.3 million US$23.4 million, representing a decrease of 75.8% from RMB688.2 million in the second quarter of 2022 and a decrease of 71.7% from RMB587.5 million in the same period of 2021. Basic and diluted net earnings per ADS for the quarter both were RMB0.36 and US$0.05. Contract liabilities as of September 30, 2022 or RMB 300 million, US$42 million, decreasing from RMB1,340.7 million as of December 31, 2021.
This concludes our prepared remarks. We are now open for questions.
Question-and-Answer Session
Operator
Thank you. We will now begin the question-and-answer session. [Operator Instruction] Your first question comes from the line of Song san from Guosheng Securities. Please go ahead, your line is open.
Song Jiaji
[Foreign Language] [Interpreted] So you have established headquarters in Singapore, have you ever thought about being a completely foreign company?
Nangeng Zhang
Okay. First and foremost, we are a US business company. The globalization of our business and operations has progressed along with global diversification of our client base. The goal of our company's globalization is to better serve of our clients. We established our headquarters in Singapore as we like its business environment, local R&D and the [tech titans], as well as this is Southeast Asia's business hub. It also has an open attitude for digital currencies.
We have set up local R&D and operations teams, and established Southeast Asia's supply chain by leveraging our operations in Singapore. For a long term perspective, we aim to grow into an international company with operations not only in Singapore but also in the US and Southeast Asia. By leveraging the geographical advantages of each market we are present in, we will better serve our customers globally and create values for shareholders. Thank you.
Song Jiaji
[Foreign Language] [Interpreted] So considering the recent decline of Bitcoin price, we will have inventory write down, when will it occur?
James Cheng
I will take this one. Thank you, Song for this difficult question. I think that you might have already noticed, in this quarter, we recorded RMB221.1 million for inventory write-downs as we determined that the estimated realizable value of our inventory will be lower than the holding costs. That was due to the lower sales price for subsequent orders. Of course, it's linked to the bigger picture like Bitcoin price drop and the softening market demand from the miners. The inventory write down was recorded in the cost of revenues and had a net material negative impact on our gross margin of the current quarter.
If the severe impact of Bitcoin price continue to decline in the coming quarters, we may have to consider further decreasing our selling price, which will probably lead to additional inventory write down and also lead to P&L also hit in the bottom line. I think we should prepare the worst in balance sheets and to do our best in operation. On the other hand, going forward, if we could be able to sell such inventories above their costs, the cost of sales for those machines will be net of such write downs, which in turn will have the effect of increasing our gross profits for the period. Thank you.
Song Jiaji
Okay, thank you, James. [Foreign Language] [Interpreted] How is your total sales and future contract sales ratio?
James Cheng
I think the currently vast majority of the sales are future contract sales. Those sales are at a relatively pretty small quantity. As CEO previously mentioned, our new generation of mining machine is progressing towards mass production. We are still not 100% sure whether shipments will begin at the end of this year or at the start of next year. Therefore, we expect the sales of our new mining machines to be primarily contract sales. And we have already secured production capacity for our new generation machine for next year to maintain a stable supply. Thank you.
Song Jiaji
Okay. [Foreign Language] [Interpreted] What’s the progress of collaboration with foundries?
Nangeng Zhang
Oh, okay, we have been considering our market foundries currently and expanding our comprehensive R&D radius so as to prepare to capture [indiscernible] comparatively in advance for such nodes. Therefore, we continue to actively maintain productive collaborations with our foundry partners, supporting their operations through like prepayments and orders and in return our foundry partners relentlessly working with us to optimize the product’s fabrication and R&D and production. I think mining machine’s supercomputing chips, etc., the [indiscernible] for advanced process, having foundries will stabilize their production. Our collaboration with foundries is definitely a win-win partnership. I think the current talent base across industry and which I personally believe will be a short term issue, we will continue to amass in advance for procurement. And so we strive to capture more market opportunities and higher market share. Thank you.
Song Jiaji
[Foreign Language].
Operator
Thank you. We'll now move on to our next question. Please stand by. Our next question comes from the line of Kevin Dede from H.C. Wainwright. Please go ahead, your line is open.
Kevin Dede
Good morning to all of you in New York. Thank you very much for taking my question. I'm curious now on how much of the cash decline was attributed to foundry prepayments and how much of the September quarter shipments were to customers versus Canaan self-mining?
Nangeng Zhang
Okay. You know we temporarily secure our foundry partner’s production capacities through prepayments. We have recently paid for production of a batch of the new generation of mining machine chips that because the wafer fabrication process will take about five to six months. Typically we will prepare some inventories for new model machines in advance. Yeah, so I think it's really hard to have the accurate number. But we are also actively have in our production the [design] to better support our foundry partners. We’re actively managing wafer costs through platform flexible negotiation.
Yeah, and during the third quarter, we start our mining operation in the US and we cooperate with local mining firm to bring in the first batch over 2000 machines online, or bringing in clients with laws and regulations. I think due to non-disclosure agreements, we are not able to disclose partner’s name. And at the end of third quarter 2022, we have 3.2 exahash, computing power online for mining. Through this employed mining computing power, mining is -- we are -- mining has already run with the top 10 of these companies in US.
Compared to our computing power sale, our manufacturing is still relatively small. We have mining operations in Central Asia and North America. We are also exploring and pushing forward our business in other regions with favorable energy prices and the market dynamics. Given the current, great uncertainties in the industry environments, we adhere to the prudent strategy for exploring partnership opportunities in regions with variable power supply and the market policy vision that are based in North America and Southeast Asia. Yeah, thank you.
Kevin Dede
Do you have a target for Canaan’s internal mining hash rate for the end of the year?
Nangeng Zhang
Yeah, I think there's still some opportunities for us to extend our self-mining business. As you know, the demand in the market is virtually low. So I think we will move more machines from sales down to self-mining. Yeah, but I think there's no exact number for our target at the end of this year. Thank you.
Kevin Dede
Well, thank you very much too. One last question for me, please, if I may? Would -- can you characterize Canaan’s position on immersion? And how the company might be working in R&D to develop machines particularly suited for that type of application?
Nangeng Zhang
Oh, yes. We have been providing modules to customers for evaluation and they are ready to be mass produced if we have orders from our customers. Our immersive design demonstrates more stable performance in their difficult conditions and the current of improvements of computing power by maybe 30% to 50% per chip units compared to AR coded products. Some clients will overclock for even a higher computing power. Of course, and overall, purchase cost is also a very important factor for customers to who are choosing between immersion and AR coded products. Yeah, thank you.
Kevin Dede
[Foreign Language]. Have a great day. Thank you.
Nangeng Zhang
Have a good day. Bye-bye.
Operator
Thank you. We'll now move on to our next question. Please stand by. Next question comes from the line of Jiaer Zhu from China Renaissance Securities. Please go ahead. Your line is open.
Jiaer Zhu
Thank you. My first question is, how does the Bitcoin chain especially in a down cycle?
Nangeng Zhang
Okay. I think in the near term, we see the Bitcoin price remains under pressure of Federal Reverse is still rising interest rates. The recent strong downward trend in the Bitcoin price is clearly event driven. Entry and going through the low points is necessary part of navigating through every cycle. However, I think -- I don't think that anyone's accurate or predicted the broad term of Bitcoin price trend. In regard to the price of Bitcoin, I have always believed that there's no need to forecast the Bitcoin price in the long term. As Bitcoin becomes the most important for currency, it has increasingly large user base. Meanwhile, based on Bitcoin’s having mechanism, it's foreseeable that the supply of Bitcoin will be lower than market demand. As a result, I remain confident in Bitcoin’s long-term prospects. From the mid-term prospect to mark up the work that we are doing now is in preparation of potential business opportunities in the coming maybe one or two years are seeking each opportunities that arise in this portfolio in our industry. Yeah, thank you.
Jiaer Zhu
Okay, thank you. My next question is, we know renew that recently, the [indiscernible] issue has greatly impacted industry. Just wondering what's our view on this event and maybe how we react to this situation?
Nangeng Zhang
I think this is a very sensitive. So I will say something maybe from the industry side, not the purely exchange. I believe cryptocurrencies such as Bitcoin, actually provide people with decentralized and trackless ways to hold high density assets 100% on their own. For the operational way of this system’s transactions, trade should be completed blockchains. However, due to technical bars for ordinary people to hold and trade for currencies, many of them tend to use centralized for the currency exchanges when there is [indiscernible] and trading. This performance makes management’s actions switch from blockchain based trading to off-chain trading during the last two or three years.
As such user’s assets and trading transaction fee, which has been a way to enhance the security of blockchains have been redirected to cryptocurrency exchanges, centralized cryptocurreny exchanges, more due to lack of a really effective revelation in this area. This kind of exchanges, exchange based transaction poses strict requirements, on exchange’s management abilities and add to or more frankly a test of [human] nature. I think [indiscernible] wrong, the bear market’s incidence on crypto exchanges are similar to the issue also occur. Therefore, we are not surprised. So we sincerely hope there -- through this round of turbulence, the market can return to the broad sense of the centralization of private currencies through representing the buyer thereby the Bitcoin demonstrates the advantages that are far beyond or more the way of the speculation today that the industry will better like with the increase in [indiscernible].
Jiaer Zhu
Thanks for the color. And my next question is, could you give us the guidance of the ASP average mining machine selling price, computing power sold and gross margin for next quarter?
James Cheng
I will take this one. I think you just noticed from our earnings release, the gross margin decline in the third quarter. I think that this decline was partially because we adjusted down the selling price for some machine models with is lower hash rates in response to market conditions. Some models or other certain sales packages were sold at a lower than cost price. So in addition, we -- our new generation of machines launched in October has just become available for preorder. Some machines may be delivered in the fourth quarter but as of today, we're not able to give specific guidance. The selling price for contract sales of our new model demonstrates a certain level of gross margin. So in a combination, we expect in the fourth quarter, gross margin probably decrease compared to the third quarter. You know, the ASP could be a little bit lower compared to third quarter. So I think currently that's our prediction. Thank you
Jiaer Zhu
Okay, thank you.
Operator
Thank you. We'll now move on to our next question. Please stand by. Our next question comes from the line of Hans Chung from D.A. Davidson. Please go ahead.
Hans Chung
Hi, good morning, Nangeng and James, thank you for taking my question. So, first, I was wondering how much inventory level -- how much is the inventory level in the industry right now? And how long is good take for a market to digest the inventory? [Foreign Language]?
Nangeng Zhang
Okay, I think this is a good question. Currently the amount of inventory in the US market is relatively high. Under current market conditions, it might take -- I think it might take, I think it might take at least six months to digest the inventory. It mainly depends on how the electricity cost will decrease and the speed of mining facility structure. If these supply chain related issues were -- be solved soon then the overstock of mining machine could be digested. So, we have observed that the Bitcoin network’s total computing power is showing an upward trend lately. But the Bitcoin price is around US Dollars 20k for more than one quarter and there is a trend to further decrease basically. I think this situation will accelerate to the elimination of older models from mining machine inventories in the markets and the miners will be more inclined to deploy mining machines with higher computing power and energy and a lower energy efficiency. I think when Bitcoin price returns to its upward trend in future, inventory destocking will be at or at that rate. Yes, thank you.
Hans Chung
Okay. Next question, so, did you start to engage with the customer regarding your new A13 generation machine? And then what’s the initial feedback especially with US based customer? [Foreign Language]?
Nangeng Zhang
Well, I think so in the new series launched in October, the A13 machine is still in the pre-stage for mass production, and we haven't started to ship the products in large quantities. Currently we are still introducing our new products to the market and have started to obtain small batches of preorders, which while having many other orders, in terms of its cost is [indiscernible]. I think in terms of our older procurement plans, we expect it to ramp up the production of our 110 terahash model at the end of this year. But middle of the next year, our production activity will become concentrated to producing the 110 terahash to 120 terahash models. As fabrication technologies improvements and the cost reduce over time, machines with over 130 terahash are expected to become our mainstream products. With enhanced fabrication technology and performance, our new generation of mining machines, these has similar performance parameters compared with our peer’s mainstream products. We believe that our new machines there so will be an excellent option for mining.
North America is very important market for us. Previously, we haven't shipped a large quantity of products to this region. And we had a relatively small market share there. As such, I still need -- we still need some time to build up our brand recognition in this region. We have set up local teams to work on sales, after sales service, or warehouse operations, and other functions to provide more support for local business departments. And but we are seeing that many miners in the North America area are under significant pressure for financing and operating costs. This situation is likely to result in big changes to the competitive landscape in the region. We will closely monitor market dynamics to resize opportunities for how to showcase. At the same time, we are -- we have been actively exploring opportunities in other regions such as Southeast Asia and the Middle East. Yeah, thank you.
Hans Chung
Okay, great. One last question, if I may? So, I was wondering like in terms of the technology roadmap in the A13 series, which is based on Avalon Made process node, given that you’ve spend on the EDA tool for 3nm, I think as announced in August, how do we make sure a new technology transition and product duration going forward? [Foreign Language]?
Nangeng Zhang
Well, I think this is a tough question. I think the results to the US spend, impact is still unclear. So now it has not impacted R&D our existing and new generation of mining machines. In terms of fabrication technology, our new generation of mining machines now stands at the same process now as our peer’s mainstream products. So far we’ve already secured a certain amount of production capacity on the wafer node. I think that then we will also take time to process from evaluation to execution. We will continue to monitor and evaluate the impact. As a listed company, we will continue to operate in compliance with related laws and regulations. And now work to seek solutions in alignment to our products design and the manufacturer’s strategy. Thank you.
Hans Chung
Thank you.
Operator
Thank you. We'll now move on to our next question. Please stand by. Our next question comes from the line of Michael Legg from the Benchmark Company. Please go ahead. Your line is open.
Michael Legg
Thank you. I had two quick questions. One, could you kind of go over your capital allocation strategy during this period of industry weakness? And then secondly, can you just give us your viewpoint on 2024 is expecting having and its impact on the minings and rig demand? Thanks.
Nangeng Zhang
I will take the second one and James will take the first one. I think the point how many methods and values has be on reverse for new block generated. This will impact miners mining then to some extent. We expect that this will result in considerable short term decrease in the Bitcoin’s total computing power. However, I don't see the impact lasts for long. Then how many methods then has been listed since the inception of its fine trading system? It was designed to create a supply of bitcoins over time, especially in the context of the over issuance of paper currency.
So how many methods of bringing support to Bitcoin’s price increase in the long run? For the long term perspective, Bitcoin’s having view for miners to upgrade their devices to -- with higher computing power and better energy efficiency. Because of this, as mining machine manufacturers, we need to constantly upgrade our technology and that's our products to provide the miners with pure mining abilities, higher computing power, is better cost effective. So this is what we have been doing.
James Cheng
Yeah, I will take the capital strategy one. I think at the end of the quarter, we have a cash balance RMB2 billion. So we do not have any interest bearing debt on our balance sheet. That's not like our peers in other listed companies, we don't -- we do not need to pay interest. We do not make any principal repayments. So about the allocation in future, I think the -- with the release and the sales of our new generation of mining machines, I think we will definitely deploy a certain amount of cash to secure a waiver capacity, according to our plans. And also this will enable us to fulfill client’s demand in time, and to maintain our close cooperation with foundries, we make sure we can capture more market share when the market recovers in future. That's the first thing.
And second thing is, I think that we will continue to invest in the R&D part to develop a more advanced product. And also, in addition, we will prudently carry out collaborations in mining and explore business opportunities in different regions. We may need to pay some upfront fees, but it is an investment we are willing to make to develop a new business.
Last but not least, I think we will still use some of our cash to continue share repurchase to show the competence on our business for longer term. I think that's it. Thank you, Mike.
Michael Legg
Thank you, appreciate it.
Operator
Thank you. As there are no further questions now, I'd like to turn the call back over to the company for any closing remarks.
Clark Soucy
Thank you. Hello, everyone, this is Clark. Once again, thank you very much for joining us today for the call. If you have any further questions, please feel free to reach out to us through the contact information provided on our IR website. Thanks again.
Operator
Thank you. That concludes the call today. Thank you everyone for attending. You may now disconnect.
