Huge changes in revenue in 2019! IPO prospectus unveils the mystery of Cambrian

Following the disclosure on the Beijing Securities Regulatory Commission website on February 28 that CITIC Securities and Cambricon Technologies Co., Ltd. (Cambricon) signed a coaching agreement on December 5, 2019, and the latter plans to list on the Science and Technology Innovation Board, on the evening of March 26, the Shanghai Stock Exchange announced that it had accepted Cambricon's application for listing on the Science and Technology Innovation Board and posted the IPO prospectus.

According to the IPO prospectus, Cambricon plans to issue no more than 40.1 million shares and raise RMB 2.801 billion. The sponsor is CITIC Securities. The raised funds will be used for the next-generation cloud training chip and system projects, the next-generation cloud inference chip and system projects, the next-generation edge AI chip and system projects, and to supplement working capital.

The draft prospectus finally allows the outside world to understand this AI unicorn through a series of data. These data are the best response to the doubts about Cambrian and are also an important basis for judging Cambrian's future.

Cambrian was registered and established in Beijing on April 20, 2016. It is one of the few companies in the world that can provide a series of intelligent chip products and platform-based basic system software with cloud-edge-end integration, software-hardware collaboration, training and reasoning integration, and a unified ecosystem.

In the year of its establishment, Cambricon launched its first intelligent processor IP Cambricon 1A, which was integrated into Huawei's Kirin 970 processor and installed in Huawei's flagship mobile phone Mate 10 that year, which made the newly established Cambricon both famous and profitable. In 2017, Cambricon launched an upgraded version of the IP Cambricon 1H, which was also integrated into the Kirin 980 processor. The shipment of more than 100 million mobile phones equipped with Kirin 970 and Kirin 980 processors brought Cambricon a lot of revenue.

According to the details published in the prospectus, Cambrian has signed four technology licensing contracts with Company A (Huawei), with unit prices ranging from 19 million to 28 million, and one contract is currently in the process of being fulfilled.

However, with Kirin 990, Huawei's NPU no longer uses Cambrian's IP but instead uses self-developed IP, which has a huge impact on Cambrian, and Cambrian's revenue data also reflects this situation.

In 2017, Huawei brought Cambrian 7.7127 million yuan in revenue, accounting for 98.34% of the company's operating income that year. In 2018, Company A contributed 110 million yuan in revenue to Cambrian, accounting for 97.63% of the company's revenue that year.

In 2019, the year when Huawei's Kirin processor adopted its self-developed NPU, the revenue contributed by Company A to Cambrian dropped sharply to 63.65 million yuan, accounting for only 14.34% of the company's revenue that year, ranking only fourth among the company's top five customers that year.

Having lost Huawei as a major customer, Cambrian can only look for new customers quickly.

Fortunately, Cambricon clearly defined its end-to-end cloud layout at its first press conference, and has been promoting the research and development and commercialization of cloud products since its establishment. In 2018 and 2019, it launched the MLU100 chip and cloud-based intelligent acceleration card, the MLU270 chip and cloud-based intelligent acceleration card, and the MLU220 chip and edge-based intelligent acceleration card.

The upcoming new product, Siyuan 290, is also undergoing chip sample testing.

The early completion of the layout of AI chips in the cloud, edge and terminal prevented Cambrian from being crushed by the loss of a major customer, and its revenue also changed dramatically in 2019.

Therefore, we can see that the largest contribution to Cambrian's revenue in 2019 was the Intelligent Computing Platform (Phase II) project of the Commerce Bureau of the Hengqin New Area Management Committee of Zhuhai City. The total contract price was as high as 440 million yuan, which brought Cambrian 200 million yuan in revenue in 2019, which was more than the total revenue that Company A brought to Cambrian in 2017 and 2018.

Judging from the purpose of Cambrian's listing and fundraising on the Science and Technology Innovation Board, it can also be seen that Cambrian will focus on cloud and edge AI chips in the future.

Although Cambrian has gained more revenue in the cloud market, this market is currently monopolized by giants such as Intel and Nvidia. It is conceivable how difficult it is to break the monopoly of giants, but a breakthrough can bring very high returns. This also explains why Cambrian has been generating revenue since its establishment, and it has continued to increase significantly. The main business revenue in 2017-2019 was 7.7947 million yuan, 11,702.52 yuan and 443.906 million yuan respectively.

However, the high R&D investment resulted in Cambrian's net profits of -380.7004 million yuan, -41.0465 million yuan and -1179.1253 million yuan respectively.

This situation is likely to continue, because for cloud AI chips, both the software and hardware ecosystems are very important, and cloud-edge-end integration is also a future trend. In addition to hardware system design, Cambricon will continue to invest in research and development of Cambricon Neuware, compilers, drivers, and more.

Although Cambricon said that its self-developed basic system software platform Cambricon Neuware breaks the development barriers between cloud, edge and end, and has the advantages of high performance, flexibility and scalability, it only requires simple porting to allow the same artificial intelligence application to run conveniently and efficiently on the company's cloud, edge and end series chip/processor products.

However, chip migration itself is difficult and costly. Cambrian's chip price-performance ratio must be very attractive, and the software must be able to minimize development difficulty and cost in order to attract potential customers. In addition, the construction of an ecosystem is a long-term process and will not produce immediate results in one or two years.

However, Cambrian's business model may be able to help. Cambrian said that from 2017 to 2019, the company has been adopting a direct sales model, with a dedicated sales team to contact customers in a timely manner. The company's main customers are chip design manufacturers, server manufacturers and local governments with data center construction needs. The company has established strategic partnerships with well-known companies in many industries in China.

This business model helps Cambricon provide more cost-effective products and leverage its advantages in cloud, edge, and hardware integration. Once it achieves a breakthrough in the cloud market and builds an ecosystem, Cambricon will be able to gain a foothold in the AI ​​chip market.

Once Cambrian can gain a foothold in the cloud market, its future is worth looking forward to. According to the prospectus, Cambrian's main business has the highest gross profit margin of 100% for terminal intelligent processor IP, and the lowest gross profit margin of intelligent computing cluster system is 58.23% (higher than the average of 51.1% of Inspur Software and IBM).

In 2017, 2018 and 2019, Cambrian's comprehensive gross profit margin was 99.96%, 99.90% and 68.19% respectively, showing a downward trend. The main reason was that in 2019, the company expanded its cloud-based smart chips and acceleration cards, and intelligent computing cluster system businesses. The gross profit margins of these two businesses were lower than those of terminal intelligent processor IPs.

Therefore, edge and cloud AI chips can make Cambrian a world-leading AI chip company, or they may overwhelm Cambrian. This shows the importance of Cambrian's work focus since last year.

Judging from the current situation, there are reasons to be optimistic about Cambrian's future. Cambrian's CEO Chen Tianshi is a talented young man who worked at the Institute of Computing Technology of the Chinese Academy of Sciences from July 2010 to September 2019 (left his job to start his own business in April 2018), and served as an assistant researcher, associate researcher, master's supervisor, researcher, and doctoral supervisor.

Other core technical members of Cambrian also come mainly from the University of Science and Technology of China and Tsinghua University, which guarantees the continuous iteration and update of products. At the same time, Cambrian's team is growing rapidly. The prospectus mentioned that the number of employees who signed labor contracts on December 31, 2017, December 31, 2018, and December 31, 2019 were 80, 352, and 858, respectively. R&D technicians currently account for 79.25%, and there are 38 doctoral graduates.

In addition, with the country vigorously developing the integrated circuit industry and AI, this chip independently developed by top technical talents trained by many domestic universities can obtain more support.

It is worth mentioning that Cambrian’s main products already generated revenue from overseas in 2019.

In addition, Cambrian has won the favor of many capitals, including important domestic AI companies iFlytek and Alibaba Capital.

For the chip industry, especially companies developing AI cloud chips with the most advanced semiconductor manufacturing processes, continuous and larger amounts of financial support are needed. Cambrian Technologies has gained recognition for its IP products through its cooperation with Huawei, and has also attracted attention from the outside world and received recognition from capital. However, it is difficult for a company to grow smoothly. After losing a major customer, Cambrian quickly expanded into the edge and cloud markets in 2019 and performed well, which helped increase the outside world's confidence in Cambrian.

Being listed on the Science and Technology Innovation Board is an opportunity for Cambricon. As for whether it can eventually become a global leader in AI chips, Cambricon's performance in the edge and cloud AI chip markets will be the focus of future attention.

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