That Bitmain is a behemoth is hardly news.
CoinDesk had previously reported that the cryptocurrency mining hardware maker brought in revenues of $2.5 billion in 2017 and $2 billion in Q1 2018, but with the publication on Wednesday of Bitmain’s draft initial public offering (IPO) prospectus – a step towards its much-anticipated listing on the Hong Kong Stock Exchange, the firms’ sheer size and blistering growth can now be parsed in significantly greater detail.
The 438-page prospectus includes detailed information about Bitmain’s sales and profitability going back to 2015, as well as a breakdown of its revenues it takes in from different lines of business.
The prospectus also includes a picture of Bitmain’s costs – which are particularly notable, given that they illustrate how much the company is investing in growth and how unpredictable returns on that investment can be due to volatile cryptocurrency prices.
Revenues and profits
Bitmain’s dominance of the global market for cryptocurrency mining equipment is common knowledge (its market share is 75 percent, according to the prospectus), and its financial statements show just how lucrative it is to be in that position.
From just $137.3 million in 2015, Bitmain’s sales logged a blistering 328 percent compound annual growth rate to reach $2.5 billion in 2017. At $2.8 billion, this year’s revenues had already surpassed last year’s total by the end of June, according to the document.
Profits have also shot up in a few short years, from $48.6 million in 2015 to $952.6 million in 2017 – a 280 percent compound annual growth rate. While profits for the first half of 2018 have not quite surpassed the total for the whole of last year, they are close, at $952.2 million.
For comparison, Nvidia, a chip manufacturer that enjoyed a windfall when crypto miners began to adopt its graphics processing unit (GPU) chips, but which long predates the invention of cryptocurrency, earned $3 billion on $9.7 billion in revenues in 2017.
Intel, the semiconductor giant, earned $9.6 billion on $62.8 billion in revenues.
The recently published prospectus also provides a detailed view of the sources of Bitmain’s revenues.
The breakdown makes it clear that the bulk of Bitmain’s sales have consistently come from selling mining hardware, specifically the application-specific integrated circuits (ASICs) that have displaced GPUs in a number of markets (in many cases, because Bitmain introduced the ASICs).
Notably, however, mining hardware sales have grown as a share of total revenue, from 79 percent in 2015 to 94 percent in the first half of 2018.
The revenues contributed by other lines of business – most importantly, proprietary mining – have shrunk as a proportion of Bitmain’s total sales. In absolute terms, however, revenues from every source grew from 2015 to 2017 and appear set to grow again by the end of 2018.
This breakdown could potentially raise questions about shrinking revenue diversification at Bitmain, as the company depends more and more on selling mining hardware. On the other hand, this monolithic category (“mining hardware”) hides Bitmain’s recent expansion into new sorts of mining hardware, which decreases its reliance on the market for bitcoin and bitcoin cash ASICs.
“We have focused on developing mining hardware with different algorithms covering major cryptocurrencies, including Bitcoin, Bitcoin Cash, Ether, Litecoin, Dash and Zcash,” the prospectus says, “which makes us one of the few companies offering mining solutions for various cryptocurrencies.”
Costs and investments
Crunching Bitmain’s revenue and profit numbers, something stands out: profit growth has lagged behind revenue growth by a noticeable margin, meaning that the company is either re-investing money in the business, or facing higher costs.
It turns out, the answer is a bit of both. The largest increase in spending came from materials and manufacturing costs, which the company notes in its prospectus: “represent our payment to our production partners for the fabrication and the packaging and testing of our ASIC chips.”
The steep rise in these costs – from just $93.7 million in 2017 to $1.5 billion in the first half of 2018 – signal that Bitmain is ramping up production fast.
The increase in manufacturing and materials costs, the firm notes, “is in line with our business growth.”
The picture is not entirely rosy, however.
The company took two big hits of around a quarter-billion dollars each in 2017 and 2018, which it describes as “provisions for impairment of inventories and prepayment to suppliers.”
The document explains that these costs are ultimately due to the unpredictability of cryptocurrency prices: “the fluctuation of certain cryptocurrencies caused the anticipated selling price of certain mining hardware below their cost.”
Crypto and other assets
Bitmain is vulnerable to cryptocurrency market turns on more than one front.
While it does mine on its own behalf and takes a share of mining pool rewards, those lines of business accounted for a fraction of revenues in the first half of 2018. Most of Bitmain’s (considerable) cryptocurrency holdings, the prospectus notes, come from sales of hardware settled in crypto.
At the end of June, Bitmain held $886.9 million worth of bitcoin, bitcoin cash, ether, litecoin, dash and other crypto assets – more than twice what it held in fiat currency.
At 28 percent of total assets, Bitmain’s crypto holdings made up a slightly smaller share in June than at the end of 2017 (30 percent). However, given the broad decline in crypto assets’ value in dollar terms, back-of-the-envelope math suggests that Bitmain’s crypto holdings grew considerably, in terms of the number of tokens.
Techcrunch on 26 SEP 2018:
Crypto mining giant Bitmain reveals heady growth as it files for IPO
After months of speculation, Bitmain — the world’s largest provider of crypto miners — has opened the inner details of its business after it submitted its IPO prospectus with the Stock Exchange of Hong Kong. And some of the growth numbers are insane.
The document doesn’t specify how much five-year-old Bitmain is aiming to raise from its listing — that’ll come later — but it does lift the lid on the incredible business growth that the company saw as the crypto market grew massively in 2017. Although that also comes with a question: can that growth continue in this current bear market?
The company grossed more than $2.5 billion in revenue last year, a near-10X leap on the $278 million it claims for 2016. Already, it said revenue for the first six months of this year surpassed $2.8 billion.
Bitmain is best known for its ‘Antminer’ devices — which allow the owner to mine for Bitcoin and other cryptocurrencies — and that accounts for most of its revenue: 77 percent in 2016, 90 percent in 2017, and 94 percent in the first half of 2018. Other income is generated by its mining farms, shared mining pools, AI chips and blockchain services.
The company is fabless, which means it develops its own chip design and works with manufacturing partners who bring them to life as physical chips. Those chips are then used to power mining hardware which lets the owner earn a reward by mining Bitcoin and other cryptocurrencies. Bitmain claims over 80,000 customers with just under half of sales in China and the rest overseas.
The company said it posted $701 million in net profit in 2017, up from $104 million in 2016. For the first half of this year, it is claiming a gross profit of $743 million. (Operational profit touched $1 billion for that period.)
That’s quite staggering growth, but there are some signs that 2018 comes with more challenges.
Margins are down. Gross margin in the first six months was 36 percent, down from 48 percent in 2017 and 54 percent in 2016. Contributing to that, the cost of sale percentage in the first half of 2018 rose to 64 percent from 51 and 52 percent in 2017 and 2016, respectively.
Bitmain is trying to bat away those concerns by using H1 2018 figures, rather than splitting that period into two quarters. That’s important because the crypto market has plunged massively since January, losing more than half of its value. That has impacted most crypto companies — whether it is exchanges seeing less trading or wallets less traffic — and it is sure to have had a toll on Bitmain.
The question is to what extent?
That’s crucial because it is what will give this IPO momentum, but Bitmain isn’t playing ball and showing us the full picture.
Interestingly, Bitmain accepts Bitcoin and other cryptocurrencies as payment for its miners, with some 27 percent of purchases last year paid for using crypto. As a result, those payments aren’t included in revenue but do show up as “investing cash inflow” when they are converted to fiat and used in the business. That’s a 2018 accounting problem right there.
As a result, Bitmain has a negative net cash used in operating activities position but those become positive when factoring in the crypto. The company said it held $887 million in crypto as of the end of the first half of 2018, that’s up from $872 million in 2017, $56 million in 2016 and $12 million in 2015. The company said that changes in the market saw it lose $102.7 million in value from its crypto hoard. During the first six months of 2018, it cashed out $516.5 million worth of crypto, having exchanged $529 million in 2017.
The wild ride of 2017, however, led the company to over-estimated demand and, as a result, its inventory ballooned by $1 billion.
Here’s Bitmain explanation of how it managed to get it so wrong:
In early 2018, we anticipated strong market growth for cryptocurrency mining hardware in 2018 due to the upward trend of cryptocurrencies price in the fourth quarter of 2017, and we placed a large amount of orders with our production partners in response to the anticipated significant sales growth. However, there had been significant market volatility in the market price of cryptocurrencies in the first half of 2018. As a result of such volatility, the expected economic return from cryptocurrency mining had been adversely affected and the sales of our mining hardware slowed down, which in turn caused an increase in our inventories level and a decrease in advances received from our customers in the first half of 2018. Going forward, we will actively balance our business growth strategy, inventories and cryptocurrency asset levels to ensure a sustainable business growth and a healthy cash flow position, and we will adjust our procurement and prediction plan to maintain an appropriate liquidity level.
Despite an extra $1 billion in inventory, Bitmain estimates it has the working capital — including crypto pile and the result of its IPO — to sustain operations for at least another 12 months. That, according to its figures, is around $343 million in cash and cash equivalents but clearly it needs another megahit product or for the market demand to rise again.
Indeed, Bitmain just last week announced its newest mining chip — shrunk down to 7nm — which it believes will offer more power and greater efficiency for miners. That progress coupled with the rising value of crypto — i.e. what owners of Bitmain miners can earn — has helped the company steadily raise the price of its hardware.
Average selling price for its Bitcoin mining machines in 2015 was just $463, but that jumped to $767 in 2016, $1,231 in 2017 and $1,012 in the first half of 2018.
Beyond mining, the company is also developing AI chips, the first of which launched last year. They are used for developing cloud systems, as well as object, image and facial recognition purposes.
Citing third party figures, Bitmain claims to have a dominant 75 percent of the ASIC mining hardware market. It is investing heavily in R&D, which reached $73 million last year and $86 million during the first half of 2018. In addition, around one-third of its 2,594 employees are listed as working in research and development.
It’s likely that Bitmain sees more revenue in crypto than any other company on the planet
Bitmain’s document confirms the company raised some $784 million across Series A, Series B and Series B rounds.
Its investor roster is fairly public thanks to leaks and it includes the likes of IDG, Sequoia China, and Kaifu Lee’s Sinovation fund. However, the prospectus does confirm that shareholders include retailer NewEgg, EDBI — the corporate investment arm of Singapore’s Economic Development Board — and Uber investor Coatue. Founders Ketuan Zhan and Jihan Wu are the largest shareholders and they control 36 and 20 percent, respectively.
We can expect Bitmain to flesh out the prospectus with more juicy information, including a target raise which will also generate its valuation. But for now there are over 400 pages of information to process, you can find them all right here.