Intchains Group Ltd

NASDAQ:ICG

Earnings Call Analysis

Intchains' 2023 Performance Amidst Market Volatility

In the narrative of Intchains' 2023, the company navigated a year marked by significant challenges due to industry-wide short-term volatility, resulting in an 83% decline in annual revenue. However, an optimistic turn arose in Q4 with a market rebound, driving a 418% sequential revenue growth and propelling the company back to profitability.

Strategic Acquisitions and Product Innovations

A strategic acquisition of the Goldshell brand marked Intchains' entry into mining machine production and sales, showing intent to expand its footprint in the WEB3 domain. The company also highlighted its 12-nanometer process chip's successful trial, with expectations to launch new mining products in 2024's second quarter. These moves demonstrate Intchains' proactive steps despite not offering specific financial forecasts due to market uncertainties.

Financial Highlights and Transitioning into a New Phase

The fourth quarter brought financial recovery with a 5.3% increase in revenue compared to the previous year, attributable predominantly to sales of intelligent router products. Notwithstanding, the total operating expenses swelled by 79%, influenced by hikes across R&D, sales, marketing, and general expenses. The company's leadership exudes confidence, believing the WEB3 industry has embarked on an upward trend that could lead to broader application and long-term growth.

Looking Toward a Promising 2024

Expectations are set for an improved 2024, with Intchains' 12-nanometer node products primed for a market debut by the second quarter. Further, the company's absorption of Goldshell aligns with strategic aspirations to excel as a significant WEB3 infrastructure provider, potentially producing positive outcomes in the future despite short-term unpredictability.

Investor Considerations

Investors should note that Intchains exhibits resilience and adaptability, with a focus on R&D and an aim to deliver new solutions that track with the transformative trajectory of blockchain and WEB3 technologies. The acquisition of Goldshell and a suite of new products on the horizon evidence a palpable commitment to securing a robust position in the evolving market landscape.

Earnings Call Transcript 2023-Q4

[Operator]

Good day, ladies and gentlemen. Thank you for standing by. Welcome to Intchains Fourth Quarter and Full Year 2023 Earnings Conference Call.Today's conference is being recorded. If you have any objections, you may disconnect at this time.Joining us today is Mr. Chaowei Yan, Chief Financial Officer of Intchains. Mr. Yan will provide an overview of the company's performance and the details of the company's financial results. After that, we will conduct a question-and-answer session to take your questions. During the question-and-answer session, Mr. Yan will deliver the answers in Chinese and the company's representative will provide corresponding English translations.Before we continue, I would like to remind you that today's discussion will contain forward-looking statements. These forward-looking statements involve known and unknown risks and uncertainties that are based on the company's current expectations and projections about future events that the company believes may affect its financial condition, result of operations, business strategy and financial needs. The company undertakes no obligation to update or revise publicly any forward-looking statements to reflect subsequent or current events or circumstances or changes in its expectations, except as may be required by law. Although the company believes that the expectations expressed in these forward-looking statements are reasonable, it cannot assure you that such expectations will turn out to be correct. And the company cautions investors that actual results may differ materially from the anticipated results and encourages investors to review other factors that may affect its future results in the company's registration statement and other filings with the SEC.With that, I will now turn the call over to Mr. Chaowei Yan, the company's CFO. Mr. Yan, please go ahead.

[Chaowei Yan, executive]

Thank you, operator, and everyone for joining Intchains earnings conference call for the fourth quarter and full year 2023.On today's call, we will provide an overview of our operational and financial performance for the fourth quarter and full year 2023. After that, we will conduct a Q&A session to take your questions.2023 was a challenging year for the WEB3 industry, while we witnessed sustained rapid innovation in both underlying technology and application layers. The industry was deeply affected by short-term volatility. Influenced by these fluctuations, the company's revenue for the full year of 2023 decreased by 83% year-over-year. However, in the fourth quarter of 2023, the cryptocurrency market rebounded significantly from the third quarter downturn, driving sustainable development of application layers as well as heightened demand for blockchain products. This propelled sequential revenue growth of 418% for the fourth quarter and empowered us to deliver quarterly profitability.2023 was also a year of remarkable milestones for Intchains. In March, we successfully listed on NASDAQ in the United States, marking the beginning of a new chapter in our development alongside numerous other outstanding firms. As a young WEB3 practitioner, Intchains has focused on refining cheap processes and upgrading algorithms to enhance our core competitiveness, while persistently advising our products and expanding our product and service offerings across the industry value chain.In the Q4, we entered into an agreement to acquire the Goldshell brand, officially entering downstream mining machine production and sales. The entire transaction is processing smoothly and have been completed today. Furthermore, our latest 12 nanometer process chip featuring a brand new algorithm successfully complete IC verification and the trial production processes and we expect to officially launch our new mining machine products in the second quarter of 2024. As we step into 2024, we are observing a distinct upward transaction market-wide. Despite lingering short-term uncertainties, we remain confident in the industry's development for 2024 and the long-term prospects of entire WEB3 landscape. We firmly believe that the ongoing evolution of blockchain technology will not only enhance the WEB3 industry, but also drive deeper integration with traditional industries, promoting innovation within these sectors. Ultimately, this transformative process will change people's lifestyle and propel progress across society as a whole.As a key industry participant, Intchains is currently pioneering privacy computing applications in WEB3. The development of our first related new product is nearing completion with the associated chip product slated for official tape-out in 2024. Furthermore, in 2024, we intend to further expand our investments across the cryptocurrency value chain, increasing capital utilization efficiency through carefully chosen development opportunities to solidify the Company's foundation in anticipation of the industry's full market. In this dynamic environment, we will leverage our extensive industry experience and advanced technological capabilities to relentlessly explore and expand opportunities for the development of WEB3 at application level. By propel integration of blockchain technology with traditional industries, we aim to improve users lifestyle and drive brand development across industries and the society as a whole.Now, I will provide a brief financial overview of the fourth quarter and full year 2023. Let's first take a look at the financial overview for the fourth quarter. Our revenue was RMB 75.5 million or $5 million in the fourth quarter, a year-over-year increase of 5.3%. The increase was mainly due to -- primarily this was due to one-off sales of intelligent router products, which generated RMB 12.6 million in revenue in fourth quarter 2023. Our cost of revenue decreased by 29.3% year-over-year to RMB 14.1 million or $2 million in the fourth quarter. Due to the sales of the WEB3 intelligent router products, which have been recorded in inventory write downs of RMB 11 million in the previous quarters of 2023.Our total operating expenses increased by 79% year-over-year to RMB 22.8 million to $3.2 million in fourth quarter, primarily due to an increase in all categories operating expenses. Specifically, research and development expenses increased by 40.2% to RMB 14 million or $2 million for the fourth quarter 2023 from RMB 10 million for the same period of 2022. The increase was primarily attributable to an increase in IP expenses and labor costs for the design of the IC chips. Sales and marketing expenses increased by 65.3% year-over-year to RMB 1.8 million or $0.3 million in the fourth quarter, mainly due to an increase in personnel-related expenses. General and admin expenses increased by 316.6% year-over-year to RMB 7 million or $1 million in the fourth quarter, largely due to an increase in lease-related expenses, labor costs and professional expenses.Our interest income increased by 22.3% year-over-year to RMB 4.2 million or $0.6 million in the fourth quarter, mostly attributable to our effective fund management. Other income decreased by 29.6% year-over-year to RMB 7.5 million or $1.1 million in the fourth quarter, primarily due to the decrease in grants received from the local government. Our net income was RMB 8.1 million or $1.1 million in the fourth quarter. Basic and diluted net earnings per ordinary share was RMB 0.07 or $0.01 in the fourth quarter. Each ADS represents 2 of our company's Class A ordinary shares.Now, let's look at our full year 2023 financial results. The revenue was RMB 82.2 million or $11.6 million in 2023, a year-over-year decrease of 83.6%. The decrease was mainly due to the challenging cryptocurrency market in 2023, which resulted in decrease in sales volume and average selling price of our ASIC chips. Cost of revenue decreased by 59% year-over-year to RMB 73.1 million or $10.3 million in 2023. The decrease was mainly attributable to the decrease in sales volume of our ASIC chips, largely offset by an inventory write down and prepayment write down, totaling approximately RMB 24.7 million.Total operating expenses increased by 15.7% year-over-year to RMB 75 million or $10.4 million in 2023, primarily due to increase in sales and marketing expenses and general and administrative expenses, partially offset by research and development expenses. Our R&D expenses decreased by 12.6% to RMB 42.3 million or $6 million in 2023 from RMB 48.4 million in 2022. The decrease was primarily attributable to the different stage of our research and development projects we're in during the respective period, offset by increase of labor costs and depreciation and amortization expenses. Sales and marketing expenses increased by 60.5% year-over-year to RMB 6.5 million or $0.9 million in 2023, mainly due to an increase in personnel-related expenses. General and admin expenses increased by 118.1% year-over-year to RMB 25.2 million or $3.6 million in 2023, largely due to an increase in rental expenses, labor costs and professional expenses. Interest income increased by 50.5% year-over-year to RMB 16.8 million or $2.4 million in 2023, mostly attributable to our effective fund management. Other income decreased by 55.6% year-over-year to RMB 13 million or $1.9 million in 2023, primarily due to a decrease in grants received from local government. Our net loss was RMB 26.8 million or $3.8 million in 2023. Our basic and diluted net loss per ordinary share was RMB 0.22 or $0.03 in 2023. Each ADS represents 2 of our company's Class A ordinary shares.In 2023, industry volatility exerted great pressure on our business development, resulting in year-over-year declines in both top line and bottom line performance. However, as the industry evolves, crypto related applications are increasingly embraced by regulators and the mainstream investors. We have clearly sensed that the industry has entered a new upward cycle. In this phase, we anticipate a much broader range of WEB3 applications to emerge. We remain confident in the long-term prospects of the WEB3 industry and are deeply committed to its development. As such, we continue to pursue initiatives that bolster our competitiveness and strengthen our foothold along the value chain. As we step into 2024, we will increase our investment in progress, proactively exploring development opportunities within the industry to better position ourselves for sustained long-term growth.Thank you for your continued support. We look forward to updating you on our progress in the future. Now, I'd like to turn the discussion over to operator for any questions.

[Operator]

Thank you. [Operator Instructions]. And it comes from the line of Liz Kenyon with The Piacente Group.

[Liz Kenyon, analyst]

Can you please provide further insights into market conditions in the fourth quarter and that impact on sales growth as well as your outlook for 2024?

[Chaowei Yan, executive]

Thank you for the question. [Foreign Language] In fourth quarter, driven by the anticipation of the BTC ETF approval and other positive industry developments, the price of major cryptocurrency, especially Bitcoin rebounded to a varying decrease. As a result, robust data growth in downstream product orders boosted our fourth quarter sales to $5 million marking our return to a profitability of 2 consecutive quarters of losses.[Foreign Language] Looking ahead to 2024, given the clear market recovery trends, our outlook for the year has improved. First, the company's newly announced products featuring a 12-nanometer process node are scheduled to hit the market no later than second quarter. Additionally, we have accelerated the chip out process. Currently, we have initiated multiple projects related to the 12-nanometer process node technology, particularly in the field of privacy computing and cutting edge non-computing chips. We aim to conclude this project's R&D and publicly disclose the latest development before second quarter.[Foreign Language] In 2024, we will ramp up our investment in R&D to pursue a higher return on capital. However, given the ongoing industry volatility, we are unable to provide a specific financial forecast for the year. Nevertheless, with ample financial reserves, a long-term and diversified industry vision and strategy as well as prudent operational and risk control practices, we have confidence in our ability to grow alongside the WEB3 industry and emerge as a leading provider of WEB3 infrastructure.Thank you for the answer. Now, let's move to the next question.

[Operator]

It comes from the line of [indiscernible]. Please proceed.

[Unknown Analyst]

[Foreign Language] Could you please provide insights on your post acquisition strategy for the Goldshell brand and how they are expected to influence sales and performance?

[Chaowei Yan, executive]

[Foreign Language] We successfully closed the deal today. Starting tomorrow, the company will seamlessly take over the Goldshell brand, its global sales website and all social media channels. This enable us to directly market and to sell mining machines and other computing products equipped with our HPC chips and the Goldshell brand on a global scale, except in certain regulated regions.[Foreign Language] From a strategy perspective, Intchains aim to become a leading provider of WEB3 infrastructure. We have already conducted extensive R&D efforts on blockchain infrastructure products beyond HPC chips. By acquiring Goldshell brand and delivering its brand influence among downstream users, we are establishing new independent sales channels for the company's future WEB3 products.[Foreign Language] Therefore, the brand acquisition represents a structurally significant move. As for the short-term impact on sales and performance, it will ultimately depend on the product offering and the industry dynamics. Given the volatility of blockchain industry, it is very challenging for us to quantify impact at this point. However, we believe it will yield highly positive outcomes in the long run.Thank you for the answer. Let's move to the next question.

[Operator]

And I'm not showing any further questions in the queue. I will just conclude this period and conference for today. Thank you all for participating. And you may now disconnect.