VNET Group - Q1 2023
May 24, 2023
Transcript
Operator (participant)
Hello, ladies and gentlemen. Thank you for standing by for first quarter 2023 earnings conference call for VNET Group, Inc.. At this time, all participants are in listen-only mode. After management's prepared remarks, there'll be question and answer session. Participants from our management include Mr. Jeff Dong, Chief Executive Officer, Mr. Tim Chen, Chief Financial Officer, andMs. Xinyuan Liu, Investor Relations Director of the company. Please note that today's conference call is being recorded. I'd now like to turn the call over to first speaker today, Ms. Xinyuan Liu. Please go ahead.
Xinyuan Liu (Director of Investor Relations)
Thank you, operator. Hello, everyone, and welcome to our first quarter 2023 earnings Conference Call. Our earnings release was distributed earlier today, and you can find a copy on our website as well as on news wire services. Please note that the discussion today will contain forward-looking statements made under the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from our current expectations. For detailed discussions of these risks and uncertainties, please refer to our latest annual report and other documents filed with the SEC. VNET does not undertake any obligations to update any forward-looking statements except as required under applicable laws.
Please also know that VNET's earnings press release and this Conference Call include the disclosure of unaudited GAAP financial matters as well as unaudited non-GAAP financial matters. VNET's earnings press release contains a reconciliation of the unaudited non-GAAP matters to the unaudited GAAP matters. As a reminder, this conference is being recorded. In addition, a webcast of this conference call will also be available on our IR website at ir.vnet.com. I will now turn the call over to our CEO, Jeff.
Jeff Dong (CEO)
Thank you, Xinyuan. Good morning and good evening, everyone. Thank you for joining our call today. I will start with the overview of our first quarter results. After that, I will turn the call over to Tim, our CFO, who will discuss our financial results and outlook in more detail. We got off to a great start in 2023 with a solid first quarter performance, thanks to our effective dual-core growth strategy and competitive service offerings. In the first quarter, we successfully ended 1,300 utilized cabinets, growing our overall utilization rate to 56.5% from 55% last quarter. Total cabinets under management reached 87,310 by the end of the first quarter, compared with approx 78,961 one year ago.
Notably, our retail MRR per cabinet reached a record high of RMB 9,486 during this quarter, up from RMB 9,371 in the previous quarter. First quarter revenue of RMB 1.81 billion represent an increase of 9.7% year-over-year, just EBITDA grow about 10% year-over-year to reach RMB 756.2 million, demonstrating our ability to drive stable growth amid China's steady post-pandemic recovery. Before I talk more about our business results, I want to share some color on the broader macro climate. Official statistics show China's GDP grow 4.5% year-over-year for the first quarter, existing a clear post-pandemic recovery path.
With the digital economy poised to become China's key growth driver in the coming years, China's government is diligently advancing its digital China vision. Its strategic efforts, including taking forward-looking steps in building digital infrastructure, fostering more innovation and value creation in the platform economy, and accelerating digital transformation across a broader swath of economy and the general population, according to the NDRC. Given this context, advanced infrastructure facilities such as 5G connectivity and data centers will serve as strategic cornerstones for the development of the digital economy, fulfilling growing demand from a broad spectrum of industries, including internet players as well as the traditional industries. As a leading player in China's IDC space, we are well-positioned to provide ever-improving services to customers and seize opportunities arising from the favorable policy landscape and digital economy boom. Now, let's take a closer look at our first quarter business updates.
Execution of our dual-core strategy continued to prove strongly effective in both the wholesale and the retail IDC markets. Our wholesale service offerings continued to gain traction among leading internet players during the quarter. As we mentioned during the last earnings call, in the first quarter, we won a bid for a new customer, one of China's internet giants, to deploy IDC services to support its business expansion through our IDC assets located in the Yangtze River Delta region. The overall project will total more than 100 megawatt and be delivered in multiple phases. The project is now progressing smoothly, and the initial phase of the cabinets will be delivered by the end of this year as scheduled. This project once again exemplifies our compelling value proposition and service capabilities for wholesale customers. Moving on to our retail business.
In today's business operating environment, companies of all sizes and sectors are pursuing digital transformation with increasing urgency. Our high-quality, scalable retail IDC service offerings are attracting more and more enterprise demanding fast, reliable, and secure digital access to facilitate their digital transformation agendas. In the first quarter, growing demand from cloud services, media, and the traditional sectors drove an expansion in our number of new customers. At the same time, we continue to win extended orders from existing customers across a variety of industries, including local services, IT services, online gaming, and financial services. Our comprehensive service offerings and customized solutions create an excellent service experience for customers, solidifying our customer loyalty and boosting our overall competitiveness. Next, I want to share an update on the BlueCloud business.
In April, Microsoft and our BlueCloud jointly launched Microsoft Teams, one of Microsoft 365's core modules for the Chinese market. Together with Office 365, Microsoft Teams will be operated under Microsoft 365 by our BlueCloud in China, bringing more robust and efficient functionality supported by BlueCloud's secure and reliable cloud services. As China's digital transformation accelerates, we'll leverage BlueCloud's cloud operation expertise and decade-long strategic partnership with Microsoft to further unlock its unique value proposition. Last but not least, I'd like to provide an update on our ESG performance, which is an important part of our growth and long-term value creation philosophy. Last month, we released our third annual ESG report detailing our 2022 ESG initiatives and outcomes, including third-party verification of our carbon inventory results.
We also highlight achievements such as our average annual PUE of 1.37, a green power purchase agreement with a supply guarantee of approx 500 million kWh over the next five years, and an increase in our percentage of female employees in management positions to 29%. Going forward, we will continue to deepen our ESG engagement and embrace our responsibility to deliver sustainable value to our shareholders. In summary, our solid first quarter performance underscores our core strengths and execution capabilities. With China's post-pandemic economic recovery well underway, alongside support from policies designed to boost the digital economy, we are optimistic about the domestic IDC service industry's growth prospects for the rest of the year.
We'll remain committed to our effective dual-core growth strategy, focusing on our core business by providing our retail and wholesale customers with reliable and customizable services while fulfilling incremental digital demand to facilitate digital transformation across verticals. Thank you, everyone. I will now turn the call to Tim to discuss our financial performance for the quarter and our business outlook.
Tim Chen (CFO)
Thank you very much, Jeff. Good morning and good evening, everyone. Before we start the detailed discussions of our financials, please note that we will present non-GAAP measures today. Our non-GAAP results exclude certain non-cash expenses, which are not part of our core operations. The details of these expenses may be found in the reconciliation tables included in our earnings press release. Please also note that unless otherwise stated, all the financials we present today are for the first quarter of 2023 and in renminbi terms. Now, let me walk you through the first quarter financial results. Unless otherwise specified, the growth rates I'll be reviewing are all on a year-over-year basis. We delivered solid results in the first quarter amidst a steady post-pandemic recovery in China.
In the first quarter, our net revenues increased by 9.7% to $1.81 billion from the same period last year, mainly driven by the continued growth of our IDC business, as well as our cloud and VPN services. Gross profit was $352.4 million in the first quarter of 2023, representing a decrease of 0.9% from the same period of 2022. Gross margin was 19.5% in the first quarter of 2023, compared to 21.6% in the same period of 2022. Adjusted cash gross profit, which excludes depreciation, amortization, and share-based compensation expenses, was $754.3 million in the first quarter of 2023, an increase of 10.1% from the same period of 2022.
Adjusted cash gross margin in the first quarter of 2023 was 41.8% compared to 41.6% in the same period of 2022. Adjusted operating expenses, which exclude share-based compensation expenses and compensation for post-combination employment in an acquisition were CNY 228.8 million in the first quarter of 2023, compared to CNY 200.8 million in the same period of 2022. As a percentage of net revenues, adjusted operating expenses in the first quarter of 2023 were 12.7% compared to 12.2% in the same period of 2022. Adjusted EBITDA in the first quarter of 2023 was CNY 556.2 million, representing an increase of 9.9% from the same period of 2022.
Adjusted EBITDA in the first quarter of 2023 excluded share-based compensation expenses of $8.3 million. Adjusted EBITDA margin was 30.8% in both the first quarter of 2023 and 2022. Our net income attributable to ordinary shareholders in the first quarter of 2023 was $82.3 million, compared to a net income of $90.7 million in the same period of 2022. Basic and diluted earnings were $0.09 and $0.07 per ordinary share respectively, and $0.54 and $0.42 per ADS respectively. Each ADS represents six Class A ordinary shares. Turning to our balance sheet. As of March 31st, 2023, the aggregate amount of the company's cash equivalents, and restricted cash was $3.24 billion.
Meanwhile, net cash generated from operating activities in the first quarter of 2023 was CNY 455 million, compared to CNY 482.6 million in the same period of 2022. Our CapEx in the first quarter of 2023 was CNY 611 million. Next, moving to our outlook. For the full year of 2023, our outlook remains unchanged, with net revenues expected to be in the range of CNY 7,600 million-CNY 7,900 million, representing a year-over-year increase of 7.6%-11.8%. Adjusted EBITDA to be in the range of CNY 2,025 million-CNY 2,125 million, representing a year-over-year increase of 8.1%-13.5%.
Looking forward, we will continue to explore new opportunities arising from the robust digital demand and to further strengthen our presence as a leading IDC player. As always, we are dedicated to delivering sustainable value to all of our stakeholders in the long run. This concludes our prepared remarks for today. Operator, we are now ready to take questions.
Operator (participant)
Thank you. We will now begin the question-and-answer session. To ask a question, please press star one one on your telephone. To withdraw your question, please press star one one again. Our first question comes from the line of Yang Liu from Morgan Stanley. Please ask your question, Yang.
Yang Liu (Executive Director)
Thanks for the opportunity. I have three questions here. The first one is about the demand and move-in. We see a steady improvement of the utilization rate in first quarter. Does management believe that overall customer move-in will continue to improve further in third quarter? We have this question because of the overall macro data turning down a little bit in April. That's why I think there's some concern on the overall demand side. Can management share with us the latest observation in the operation? The second question is that we observed a few public cloud vendors are cutting their price or unit price recently in the market. What is the management view in term of the this kind of price action transferring to data center?
No matter from the volume demand perspective or from the pricing pressure or whatever, this kind of commercial negotiation perspective. That's the second question. The third question is, we are glad to see that the company introduced Microsoft Teams in China. What makes the market more excited is that Microsoft launch of Office Copilot. Does VNET have any plan to introduce the new generation of AI product to China? Thank you.
Jeff Dong (CEO)
Hi, Yang. It's Jeff. Let me give you some colors on the three questions you just asked. The first one is about the demands. We are glad as we keep repeating. Actually, from the macro sets, such as China reopening favorable regulatory environments like supporting the development of the platform economy and digital economy, we have seen kind of the trend is being recovered from the market. To be honest, given the fact to the real market, we need to be, I mean, a bit more patient for the market to warm up. You know, to wait to be fully recovered from the market.
As we mentioned, we have already obtained a large, very large order actually from the market as well, which is a signal, can see, we have the ability and the market has already been recovered especially from some of the customer like the short video players instead of the other cloud service players. Second question, regarding the cloud service players, you just mentioned price cut. There are some observations we can share with you. The first I would say, you know, we don't have any direct competition with cloud service players regarding our price cuts, as we have a different customer base.
The second is, the companies we are in several sectors like financial services will only be able to use IDC instead of a cloud, a public cloud to meet the compliance requirements. I'll take example. We recently signed contracts with Morgan Stanley, which is an example. They only can do with IDC instead of a cloud. Plus, in terms of pricing, all the pricing we have signed are already been determined in the contract as well. There's, we don't see any immediate or direct feedback actually from their price cut.
Yang Liu (Executive Director)
Well, actually my question is relate here is that, do you think their price cut will generate more business volume to overall public cloud and then transfer to IDC suppliers?
Jeff Dong (CEO)
Yeah. Yes. We think that will be probably true. We agree with that.
Yang Liu (Executive Director)
Okay. Thank you.
Operator (participant)
All right. Thank you.
Yang Liu (Executive Director)
Sorry, how about the third-?
Jeff Dong (CEO)
Yes, yes. In terms of Microsoft, we, I would say, you know, the Blue Cloud and Microsoft, you know, we recently launched the in China. We would expect, you know, the enterprise will build out integrated modern office management system and intelligent and scalable collaboration platform to help us to help those customers operate efficiently. That's what we looking for. In terms of their the what we have, we will have, you know, cloud from Teams. We, you know, we'll see.
We'll see what we can do in terms of the income and also the further additional products add on from Teams going forward. We'll see. We will keep the, keep the monitoring and see what we can, you know, after we launch, we'll see what we can, you know, give to the market immediately.
Yang Liu (Executive Director)
Thank you.
Operator (participant)
Thank you. Our next question comes from the line of Edison Lee from Jefferies. Please ask your question, Edison.
Edison Lee (Equity Research Analyst)
Okay. Hi. Good morning management. I got 3 questions. The first one is, in the first quarter you added 1,400 utilized cabinets. Can you share with us the split between retail and wholesale and what sort of demand you are seeing from retail versus wholesale so far? Number 2 is the non-IDC business. Can you actually share some color on the growth of the Microsoft business and the VPN business so far, and what is your outlook in the rest of the year? Number 3 is on your CB that will be puttable next year. Can you discuss whether you have a plan or what are you thinking of in terms of the refinancing of the CB? Thank you.
Tim Chen (CFO)
Thank you, Edison. Let me, let me take a crack at this and then, I'll have Jeff add additional comments from his side as well. In terms of the additional billable cabinets, I would say that the majority of those additional cabinets are coming from the wholesale business. That is also not a surprise, given the fact that those customers do ramp up in larger volume in terms of cabinets as compared to our smaller scaled enterprise customers. Again, it's driven largely by the wholesale customers. Jeff, earlier on, I talked about and we've mentioned for the last few quarters already, a bifurcation in the wholesale customer as well, between the cloud service provider customers, versus the large internet companies.
I think that again, you've seen, I would say, more ramp up and a faster ramp up with regards to large internet companies. That would be comprising the wholesale side of that split. For the non-IDC business outlook, you know, there is a continued growth in that business. Obviously, you've seen that Microsoft has launched or landed new products. We do expect that that will continue to grow. As that business grows, then obviously our BlueCloud related business will grow as well in a similar fashion. Last but not least, very much aware of the market's questions around the upcoming CB for next year, the $600 million CB. We have already received the requisite NDRC approvals.
We actually have a number of both, onshore renminbi as well as, offshore U.S. dollar, alternatives solutions in progress. As soon as we have further details, we will then announce them to the market. Jeff, I don't know if you wanted to add anything else, with regards to the retail wholesale growth or the non-IDC business outlook.
Jeff Dong (CEO)
Inc. (NASDAQ: VNET) Q4 2023 Earnings Call was held on March 20, 2024, at 8:00 A.M. U.S. Eastern Time. The call featured Jeff Dong, Chief Executive Officer; Tim Chen, Chief Financial Officer; and Xinyuan Liu, Investor Relations Director. The company discussed its financial performance and strategic initiatives, including its dual-core growth strategy focusing on wholesale and retail IDC markets.</p> <p>In Q4 2023, VNET reported a net revenue of CNY 1.82 billion, a 0.7% increase year-over-year. The adjusted EBITDA was CNY 460.7 million, with an adjusted EBITDA margin of 25.3%. The retail MRR per cabinet reached a record high of RMB 9,486. The company also highlighted its progress in ESG initiatives, including a PUE of 1.25 for its new generation data centers.</p> <p>During the Q&A session, analysts from Jefferies, Nomura, UBS, and Morgan Stanley asked questions. Edison Lee from Jefferies inquired about the company's CapEx plans and the impact of AI on its business. Ethan Zhang from Nomura asked about the wholesale business outlook and customer acquisition. Jasmine Huang from UBS focused on the retail segment's growth drivers and pricing strategies. Yang Liu from Morgan Stanley questioned the company's debt structure and financing plans.</p> <
We will see, you know, we'll see more domestic LLMs, which are required to provide computing power for training. Demand from those models will boost for data centers, especially in the low-tier areas, as latency is now a major concern going forward. I think that's probably one of the positive things going forward. Also the higher level of the intra data center communication, what we call cross connection, which is a VNET one of the unique advantage, with enterprise utilizing interconnect-connections, to reduce latency as AI is continuously trained on the new data sets for improved accuracy and response with those information. We would think about, you know, this probably be the next direction for the data centers as well.
That's some comments I can share with you on the Microsoft Teams.
Edison Lee (Equity Research Analyst)
Thank you, Jeff. Is it possible to talk about the growth rate of the non-IDC business in the first quarter? Sorry, can you hear my question, Tim and Jeff?
Tim Chen (CFO)
Sorry. You're saying the growth rate of the non-IDC businesses?
Edison Lee (Equity Research Analyst)
Yeah, in the first quarter.
Tim Chen (CFO)
Yeah.
Edison Lee (Equity Research Analyst)
If possible, just some color on that.
Tim Chen (CFO)
We, I mean, we don't give that segment breakdown, but I would say that the growth rate probably would be somewhere in the high single digit.
Edison Lee (Equity Research Analyst)
I see. Do you expect that to be similar in the rest of the year?
Tim Chen (CFO)
Difficult to say at this moment because again, you know, if you're looking at the non-IDC business, you're looking at the VPN business but also the Microsoft side. I think that is the Microsoft side, we do have less visibility. I mean, you have visibility around the growth of the underlying business, but only as it is shown to us. Again, we don't have that end connection to the end customer, right? In terms of Microsoft's final business.
Edison Lee (Equity Research Analyst)
Right.
Tim Chen (CFO)
Hard to say at this moment. I would say if you look at the overall trend, you know, first quarter, it's still early and China is still coming out of COVID. I think after another quarter or so, we probably will have a much better gauge if this, is going to accelerate, or flatten, at the same levels or decelerate in terms of the growth. We'll have a better idea probably next quarter.
Edison Lee (Equity Research Analyst)
Okay. Thank you.
Operator (participant)
All right. Thank you. Our next question comes from the line of Ethan Zhang from Nomura. Please ask your question, Ethan.
Ethan Zhang (Equity Research Analyst)
Okay. Good morning, management. I have one question. I note that your retail IDC MR has been continuously
Increase since second quarter of last year and already reached around RMB 9,500. Just wonder what's the driver behind the sequential improvement in our retail MRR. Also could management give us more colors on our wholesale IDC MRR and what's your expectation on the future trend for our pricing? Thank you.
Tim Chen (CFO)
Okay. Let me take the first one, then I'll see if Jeff has some color on the second. In terms of retail MRR, I mean, I think we've always talked about the fact that we expected the MRR to be north of RMB 9,300 or so. I think if you look at historical data, it's been, you know, up and down certain quarters. I think in this quarter in particular, I would say there'd be two key factors. The first is that there are additional value-added services being added by existing customer cabinets. So, as an example, you have increase in O&M services from customers. So that effectively does not increase the total number of underlying cabinets you're dividing by, but rather increasing the top, the revenue side.
Obviously the MRR for the overall retail cabinets will go up. Secondly is that the new cabinets that we are adding are higher MRR cabinets. Again, there is a demand for the co-location and value-added services from our customers, that is another trend. I would say less than the first one. The first one is, how you say, bigger driver for this quarter, is really customers adding to already their suite of services that are being offered by VNET, increasing the overall MRR for the segment as a whole. For, I guess, pricing on the wholesale side and kind of where we see it going, maybe I'll pass that to Jeff to provide some comments there.
Jeff Dong (CEO)
Yeah. In terms of MRR on the wholesale side, I would answer from two aspects. One is from the market supply side. As you know, a lot of the smaller players has been capital-starved recently, especially since last year. Actually, has helped to slow down the supply side as well. The larger players like us, you know, with our other peers, we have also scaled back for the market to make sure we match the supply side. That's the one thing we would see from supply demand side.
Also in terms of pricing of the order and we do see, you know, especially for the MRR on the wholesale side, it's trend down a little bit. We, you know, especially from our, you know, our analysis, we can see, you know, we, you know, we see especially since the starting from the 2023, we see some of the recovery signals actually is come up from early of the year. You know, there were a few smaller players in the market, especially, and some established big players like us have been more cautious about the cash spending.
That being said, we don't finally to go after client deals at any cost, which is, you know, to some extent, the pricing will be stable up and down in a certain level. Going forward from our side, we would, you know, do better cost control and also to improve our efficiency to, you know, to compromise any up and down from the market side.
Ethan Zhang (Equity Research Analyst)
Thank you.
Operator (participant)
All right. Thank you. Our next question comes from the line of Jasmine Huang from UBS. Please go ahead, Jasmine.
Jasmine Huang (Research Analyst)
Hi. Thank you for taking my question. I have two questions. The first one is on ChatGPT. I'm wondering if you have any, have seen any growing customer demand or accelerate removing some recent AI deployment in China. The second question is on EBITDA margin. I noticed your Q1 EBITDA margin remained stable year-on-year. I'm wondering what's the reason behind, and maybe you could mention, please give us some color on the EBITDA margin going forward. Thank you. Hello? Hi, Jasmine? Yeah, sorry. Can you hear me?
Jeff Dong (CEO)
Yeah. Yeah.
Ethan Zhang (Equity Research Analyst)
Yeah, yeah.
Jeff Dong (CEO)
Yeah.
Tim Chen (CFO)
Your question on the ChatGPT is whether or not we've seen increased customer demand?
Jeff Dong (CEO)
Yes.
Tim Chen (CFO)
Yeah. I mean, I would say it's probably still early stage in terms of the direct impact. You know, there are customers that have announced obviously to the market that they're developing relevant products and services linked to the AI AIGC. Having said that, I would say that, you know, it has not yet turned into very tangible, you know, new tenders and so forth around that product. So I would still say it's quite early stage. Secondly, in terms of the EBITDA margins, you know, for first quarter, actually it as we mentioned in our earnings release as well, it did also exceed our own internal forecasts and expectations. There are a couple of key drivers.
One is, there's a seasonality aspect as well. In the first quarter, there are a certain non-recurring revenues that come in or benefits from that impact in a positive way the EBITDA and therefore the margins. We also did see some costs that were actually delayed from first quarter into second quarter. What you'll probably see is slightly higher than expected margin in the first quarter as compared to if you look at your modeling, lower than what we expected for the second quarter. That's purely just a timing issue.
Third, which is relevant still is, you know, we've been going through quite a challenging time in our industry, we have very much focused on cost controls. On our utility side and cost management side, we've been continually rolling out new measures. That's a positive again to the margin. Yes, you know, I'd say in terms of your overall question, it is in line with last year, but I think there are a number of factors, and again, higher than what we had expected. Does that help to answer the question, Jasmine?
Jasmine Huang (Research Analyst)
Yeah. Thank you.
Tim Chen (CFO)
You're most welcome.
Jeff Dong (CEO)
And let me-
Jasmine Huang (Research Analyst)
Thanks.
Jeff Dong (CEO)
Let me give you some colors on AI demand, as you mentioned. We do see, you know, the trend from AI based customers as well, but it's mainly from our retail side. Let's take example. We recently got some feedback from a Beijing government agencies, especially around the Beijing area. Those customers with AI related computing needs is very strong. It's mainly from retail side. We are keeping the dialogue with some of the customers with AI AI-based in nature and, but we haven't seen much demands actually from the wholesale side.
Jasmine Huang (Research Analyst)
Okay. Thank you.
Operator (participant)
All right. Thank you very much for all your questions. With that, ladies and gentlemen, we conclude our conference for today.