VNET Group - Earnings Call - Q1 2025

Transcript

Operator (participant)

Hello, ladies and gentlemen. Thank you for standing by for the Q1 2025 earnings conference call for VNET Group, Inc. After the management's prepared remarks, there will be a Q&A session. Please note the Chinese line is in listen-only mode. If you wish to ask questions, please dial in through the English line. Participants from our management include Mr. Ju Ma, Rotating President; Mr. Qiyu Wang, Chief Financial Officer; Ms. Xinyuan Liu, Head of Investor Relations of the company. Please note that today's conference call is being recorded. I will now turn the call over to the first speaker today, Ms. Xinyuan Liu. Please go ahead.

Xinyuan Liu (Head of Investor Relations)

Thank you, our preacher. Hello, everyone, and welcome to our Q1 2025 earnings conference call. Our earnings release was distributed earlier today, and you can find a copy on our IR site as well as our newswire services. Please note that today's call 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 and non-GAAP financial matters.

VNET's earnings press release contains reconsideration of the unaudited non-GAAP matters to the unaudited GAAP matters. A summary presentation, which we will refer to during this conference call, can be viewed and downloaded from our IR website at ir.vnet.com. Next, I'd like to alert you that we will be utilizing text-to-speech technology powered by NewLink.ai to deliver this quarter's prepared remarks by Mr. Ju Ma, our Rotating President, and Mr. Qiyu Wang, our CFO. The management team will join the Q&A session in person. Additionally, this conference is being recorded. A webcast of this conference call will also be available on our IR site at ir.vnet.com. Now, let's get started with today's presentation. Mr. Ma, please go ahead.

Ju Ma (Rotating President)

Good morning and good evening, everyone. Thank you for joining our call today. I would like to begin by sharing our primary accomplishments during the Q1 of 2025. As we embarked on the new year's journey, we achieved a strong set of results that set a positive tone for the year ahead. On the operational side, our wholesale IDC business recorded another impressive performance, supported by our robust deliveries and our customers' fast-moving pace. As of March 31st, 2025, our wholesale capacity in service grew 18.1% quarter-over-quarter to 573 MW, an increase of 88 MW. Wholesale capacity utilized grew 23.9% quarter-over-quarter to 437 MW, a record high increase of 84 MW, while the utilization rate increased by 3.6 percentage points to 76.2%, indicating that newly delivered orders are being moved in faster than ever before.

Meanwhile, our retail business continued to progress smoothly, benefiting from the rapid deployment of DeepSeek. Furthermore, propelled by our dual-core strategy, we consistently secured high-quality orders from customers across various industries. I will elaborate on this in detail on the next slide. On the financial side, we maintained our solid growth trajectory across both total net revenues and Adjusted EBITDA. Our total net revenues increased by 18.3% year-over-year to RMB 2.25 billion for the Q1. Notably, wholesale revenues reached a new record high of RMB 673 million for the quarter, representing an impressive year-over-year growth rate of 86.5%. Thanks to the rapid growth of our wholesale IDC business, our Adjusted EBITDA for the Q1 also increased by 26.4% year-over-year to RMB 682 million, with an Adjusted EBITDA margin of 30.4%, up 1.9 percentage points year-over-year.

Excluding the one-off impact of asset disposals last quarter, Adjusted EBITDA increased by 18.1% quarter-over-quarter. We also further strengthened our financing capabilities, diversifying our channels at a relatively low cost. In March, we issued $430 million of convertible senior notes due in 2030 at an interest rate of 2.5% per annum. We also secured our first sustainability-linked loan of RMB 500 million with a 3.7% interest rate per annum. Furthermore, our all-in cost for one of our new loan projects reached a record low at 3.05%, 55 basis points lower than the five-year LPR. Next, let's delve into our Q1 accomplishments in more detail. Moving on to our new order wins on slide five, we continue to win quality wholesale and retail orders in the Q1.

In addition to the wholesale orders, we disclosed last quarter a 55 MW order from a leading cloud computing customer and a 64 MW order from an internet customer through our JV project. We won a 6 MW wholesale order from an intelligent driving customer for our data centers in the Greater Beijing area. Furthermore, breakthroughs by DeepSeek are propelling growing demand among customers for our retail IDC services to deploy intelligent applications. During the quarter, we secured a combined capacity of around 4 MW in retail orders from customers in the internet, finance, local services, intelligent driving, and gaming sectors. These orders span multiple retail data centers in the Greater Beijing area, the Yangtze River Delta, the Greater Bay Area, and other regions. At the beginning of 2025, China's AI development entered an explosive new phase of growth driven by DeepSeek breakthrough technology.

This created surging AI-related demand for premium IDC services, boosting the IDC industry's growth. As an industry leading player known for our high-performance data centers and reliable premium services, we quickly seized growth opportunities, winning quality new orders and driving progress. Notably, fueled by the rising demand for private deployments triggered by DeepSeek, our retail IDC business's revenues from customer private deployments of open-source large language models increased by 309% in March compared to January. Looking ahead, we remain confident in the China market's growth potential. We believe that the increasing maturity of open-source model technology and the continuous expansion of intelligent application scenarios will continue to drive high demand for computing power and premium IDC services, further fueling our sustainable, high-quality growth. Now, let's delve into our business updates.

Starting with our wholesale business on slide eight, our wholesale business maintained its robust growth momentum, with capacity in service increasing to 573 MW and utilization rate rising to 76.2%. Thanks to our strong delivery capabilities at our N-OR Campus 01 and E-JS Campus 03, and faster-than-expected moving at our E-JS Campus 02 and NHB Campus 01B, we also delivered a mature capacity utilization rate of 94.5%, a relatively high level, and a ramp-up capacity utilization rate of 32.1%. We have a clear growth path for our wholesale data center capacity. Let's move on to slide nine. Our overall wholesale data center capacity continued to grow. In the Q1, our capacity under construction was 377 MW, with a pre-commitment rate for capacity under construction stable at 81.6% as of the end of March. Additionally, capacity held for short-term future development remained relatively steady at 256 MW.

Capacity held for long-term future development further expanded to 414 MW. As we remain confident in China's market growth potential as AI spurs greater demand for premium IDC services, we will maintain our robust expansion plan to ensure we are well-prepared for further business growth. Moving to our retail IDC business on slide 10, our retail business continued to progress smoothly in the Q1. Retail capacity in service was 51,960 cabinets, with the utilization rate increasing slightly to 63.7% as of the end of March. MRR per retail cabinet increased to RMB 8,898 this quarter. Turning to our delivery plan on slide 11, supported by our robust and efficient delivery capabilities, we successfully delivered a total of 88 MW in the Q1. We currently have eight data centers under construction, with six in the Greater Beijing area and two in the Yangtze River Delta.

We plan to deliver 377 MW of capacity over the next 12 months, or around 165 MW during the second and Q3s of 2025, and around 212 MW during the Q4 of 2025 and the Q1 of 2026. This ambitious delivery plan reflects strong demand from our customers and our outstanding delivery capabilities. Now, turning to our non-IDC business, a key component of our overall business, DCN continued to expand its customer base by acquiring new customers from several state-owned enterprises, as well as the financial services and home appliances sectors for their premium dedicated Internet services and Internet connection services. What's more, I am pleased to share that DCN recently received approval as a zero-outage supplier for a fifth consecutive year from T-Systems, which is part of Deutsche Telekom, in recognition of DCN's reliable, outstanding services.

In conclusion, thanks to the strong execution of our effective dual-core strategy, we delivered robust Q1 results, propelling progress across both our wholesale and retail businesses. Going forward, we will continue leveraging our high-performance data center network, reliable solutions, and outstanding delivery capabilities to meet our customers' growing demand, driving growth and advancing the development of China's digital economy. Now, I will turn the call over to our CFO, Qiyu Wang, for further discussion of our operating and financial performance. Thank you, everyone.

Qiyu Wang (CFO)

Good morning and good evening, everyone. Before we start the detailed discussion of our Q1 performance, please note that, unless otherwise stated, all the financials we present today are for the Q1 of 2025 and are in RMB terms. Furthermore, unless otherwise specified, all the growth rates I am reviewing are on a year-over-year basis. Let's turn to slide 13. In the Q1, we continued to pursue high-quality, high-margin business. Our total net revenues increased by 18.3% to RMB 2.25 billion, mainly driven by rapid growth of wholesale business. Our adjusted cash gross profit rose by 26.4% to RMB 967.8 million, while our Adjusted EBITDA also grew year-over-year by 26.4% to RMB 682.4 million. Meanwhile, excluding the one-off impact of asset disposals last quarter, our adjusted cash gross profit and Adjusted EBITDA increased by 11.5% and 18.1%, respectively, quarter-over-quarter.

Let's look more closely at our top line. As you can see on slide 14, in the Q1, wholesale revenues, our key revenue growth driver, increased significantly by 86.5% to RMB 673.2 million, mainly attributable to sales at the E-JS Campus 02 and NHB Campus 01B. Also, excluding the one-off impact of asset disposals last quarter, wholesale revenues increased by 14.1% quarter-over-quarter. Retail revenues continued to account for the largest part of our total net revenues and increased by 4.8% to RMB 968.3 million. Our non-IDC business remained stable. During the Q1, we maintained solid margins thanks to our continuous efforts to enhance overall efficiency. As shown on slide 15, our adjusted cash gross margins improved to 43.1% from 40.3% in the same period last year. Our Adjusted EBITDA margin rose to 30.4%, compared with 28.4% in the same period last year.

Moving on to liquidity on slide 16, we maintained robust and healthy liquidity, bolstered by net operating cash inflow of RMB 195.7 million during the Q1. Our cash positions remained solid, with total cash and cash equivalents, restricted cash, and short-term investments reaching RMB 5.79 billion as of March 31, 2025. Next, let's take a look at our debt structure on slide 17. We maintained our prudent approach to debt management, with our net debt to the trailing12 months Adjusted EBITDA ratio at 5 and total debt to the trailing twelve months Adjusted EBITDA ratio at 6.5, both remaining at a healthy level. Our trailing twelve months Adjusted EBITDA to interest coverage ratio improved to 7.5 as of March 31, 2025. We prioritize long-term debt maturity planning in our debt and strategic management to ensure the security of debt repayments.

Additionally, the company's short and medium-term debt maturing in 2025-2027 comprises 45.6% of our total debt. Turning now to CapEx spending. As you can see on slide eighteen, for the Q1, our CapEx was RMB 1.82 billion, with the majority allocated to the expansion of our wholesale IDC business. As disclosed last quarter, we expect our CapEx for full year 2025 to be in the range of RMB 10 billion-RMB 12 billion. The increase is mainly to support our planned delivery of 400 MW-450 MW in 2025, or approximately three times 2024's total deliveries and surpassing our total deliveries in the past three years combined. Now, moving to our full-year guidance for 2025 on slide nineteen.

We are reiterating our previous guidance for the full year of 2025, with anticipated total net revenues to be between RMB 9.1 billion to RMB 9.3 billion, representing year-over-year growth of 10%-13%. Adjusted EBITDA is expected to be in the range of RMB 2.7 billion-RMB 2.76 billion, representing year-over-year growth of 15%-18%. Based on our new orders and the delivery plan, our capital expenditure for 2025 is still expected to be in the range of RMB 10 billion-RMB 12 billion, representing year-over-year growth of 101%-141%. Before I conclude, I'd like to briefly update you on our ESG initiatives. In April, we issued our fifth annual ESG report detailing the company's 2024 endeavors and progress in sustainability, including our verified carbon inventory results. During 2024, we upgraded our shield sustainability system to broaden stakeholder coverage and amplified our impact.

We achieved encouraging progress across green power engagement, efficient energy consumption, and employee diversity and equality. Notably, our total energy usage from renewable sources reached about 360,880 MW-hour during the year, marking a five-fold increase year-over-year and accounting for 18% of total resources utilized by VNET. Also, our average annual power usage efficiency reached 1.27%, and the percentage of female employees in our management positions increased to 33%. These efforts continued to garner recognition from top ESG rating authorities. This year, we ranked first among Chinese enterprises in the IT services industry in the China edition of the S&P Global Sustainability Yearbook for the third consecutive year and won the 2025 Top 1% and Industry Mover Awards. Moving forward, we will remain committed to integrating ESG best practices across our business, facilitating the development of China's green digital economy.

In summary, we got off to a strong start for 2025, highlighted by robust business growth and enhanced profitability. We'll remain dedicated to our sustainable, high-quality growth strategy and continue to invest in future developments, capturing market opportunities and creating sustainable long-term value for our stakeholders. This concludes our prepared remarks for today. We are now ready to take questions.

Operator (participant)

Thank you. We will now begin the Q&A session. If you wish to ask a question, please press star one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press star two. If you're on a speakerphone, please pick up the handset to ask your question. We will now pause a moment to allow to order our queue. Your first question comes from Tom Tang from Morgan Stanley. Please go ahead.

Tom Tang (Equity Research Analyst)

Okay, thanks for answering for the opportunity to ask questions and congratulate on a very robust result for the Q1. I have one question on the demand side. We know that H20 Chip has been banned by the U.S. I just want to have an update on the customer demand and all the procurement processes after the chip has been banned. Just wondering if there's any changes and if we have any outlooks in the future. Thank you.

Ju Ma (Rotating President)

[Foreign Language]

Qiyu Wang (CFO)

Thank you for your question. Let me take your very first question. Yes, as we are aware that the H20 embargo was in place starting from this year, and because of that, it has caused a short-term impact on our client's demand, particularly for those hyperscalers. However, there was a quick adjustment. Now everything is back on track. Our current order on hand is sufficient to fill all the capacities to be delivered this year, as well as the first-half of next year.

Ju Ma (Rotating President)

[Foreign Language]

Qiyu Wang (CFO)

Like I said, the hyperscalers quickly adjusted their demand after the short-lived impact because of the chip embargo. Now everything is back on track, and we expect that there is going to be sustained demand from these hyperscalers, and they are also asking us to scale up the capacity to be delivered to them. We expect that there is going to be still a lot of demand for GPUs used for large language model training, as well as scaled-up data centers. Therefore, there is going to be continued and sustained demand from these hyperscalers. Thank you.

Xinyuan Liu (Head of Investor Relations)

Next question, please.

Operator (participant)

Thank you. As a reminder, for the benefit of all participants on today's call, please ask your question to management in English and then repeat in Chinese. Your next question comes from Edison Lee from Jefferies. Please go ahead.

Edison Lee (Head of China Telecommunications and Technology)

Thank you for taking my questions. I have two quick questions. Number one is on your retail demand. I think that right now you disclosed that 4 MW of new retail contracts. I want to know if these are AI-driven applications and whether you are charging based on power rather than cabinets. And number two question is that your MRR has gone up materially in the Q1 of this year, and maybe you can share some colors on the drivers behind that increase in MRR. [Foreign Language]

Ju Ma (Rotating President)

[Foreign Language]

Qiyu Wang (CFO)

Thank you for 1the question. As you rightly mentioned, we did win a 4-MW order for our retail IDC business in the Q1. As you correctly mentioned, most of the demand is from AI-driven, and that covers the demand for fintech, local services, internet companies, as well as intelligent driving. These are all AI-driven demand for these retail IDC services, and very little of that demand is for cloud-based gaming.

Ju Ma (Rotating President)

[Foreign Language].

Qiyu Wang (CFO)

This is Qiyu Wang, just to make a quick add to what Mr. Ju Ma has mentioned, that on the drivers behind the MMR, most of the recent orders that we win for the retail IDC business is indeed from AI-driven, and that requires high-voltage cabinets. Therefore, the company has been continuously repurposing some of the cabinets to accommodate such needs. For that, we do charge a higher price, so the bill is higher. That explains the upgrowing MMR. Thank you.

Xinyuan Liu (Head of Investor Relations)

Next question, please.

Operator (participant)

Thank you. Your next question comes from Timothy Zhao from Goldman Sachs. Please go ahead. Pardon me, Timothy, your line may be muted. Your next question comes from Daley Li from Bank of America Securities. Please go ahead.

Daley Li (VP and Equity Research Analyst)

Hi, thanks for taking my question. Firstly, congrats on the strong Q1 results. I have two questions here. Number one is regarding our gross profit margin in Q1. We see a strong "improvement." Could the management give some color? What are the key drivers for the gross profit margin improvement, and what should be our future target or normalized gross profit margin? The same question is about our REITs progress. If you look at our peer company, they also submitted the application. How do we see our REITs plan for private REITs or public REITs sent out this year? [Foreign Language].

Ju Ma (Rotating President)

[Foreign Language]

Qiyu Wang (CFO)

This is Qiyu Wang. I will take your questions. First, on the drivers of the improved gross profit margin. Reason number one, the share or proportion of our wholesale IDC service is gradually improving. This is a business that has a higher gross profit margin. Therefore, overall, it is contributing to a higher gross profit margin on a corporate level. Reason number two, we are repurposing some of the cabinets to accommodate the demand for retail IDC services, and because that brings a higher MRR. With that going in progress, we are automatically closing or gradually phasing out some of those low-margin services. These two reasons combined have pushed up the overall gross profit margin, and we expected that to continue in the future.

Ju Ma (Rotating President)

[Foreign Language]

Qiyu Wang (CFO)

As you rightly mentioned, this year marks a critical year for the Chinese rates sector, and the two peers in the IDC business have also seen fairly smooth progress in terms of their public REITs. As we see it, the valuation of these REITs is reasonable, and our public REITs project is also progressing well. As the current situation stands, the current valuation of these private REITs is reasonable, and it is progressing as we have expected. As you have noticed, our private REITs project has been formally accepted and approved by the Shanghai Stock Exchange. Hopefully we will hear some good results in the second half of the year.

Ju Ma (Rotating President)

[Foreign Language]

Qiyu Wang (CFO)

With our successful pre-REIT project, we are actively advancing all types of asset securitization projects, and we will maintain our annual target of recovering RMB 2 billion target unchanged, and we are confident in achieving that goal for this year. Thank you.

Xinyuan Liu (Head of Investor Relations)

Next question, please.

Operator (participant)

Thank you. Your next question comes from [Louis Zhang] from [Citi]. Please go ahead.

Okay. Thank you. Thank you very much for taking my question. Congratulations on the strong results. I have two quick questions. First of all, wondering if we have any plans for the [HCIP] in Hong Kong, and if you do, wondering if we can share more details. That's my first question. My second question is about the electricity tariff, because we spoke that there is some downswing for some electricity tariffs. Wondering if you see there's any positive impact to the EBITDA margin that had, or there's no impact. [Foreign Language].

Ju Ma (Rotating President)

[Foreign Language]

Qiyu Wang (CFO)

Thank you for the question. Yes, we are looking at the potential Hong Kong listing. We know that the Hong Kong Stock Exchange extends its hands wide open to welcome those U.S.-listed companies to do dual listing in Hong Kong. We have held in-depth conversation with the Hong Kong Stock Exchange, and we have also had formal engagement in written form. It's progressing. However, at this moment, I cannot give you a specific timeline on that.

[Foreign Language].

With regard to your question on the electricity bills, we at the moment do not see a declining trend for the utility bills across our IDCs. It's fairly stable, so no change whatsoever on that front. Thank you.

Xinyuan Liu (Head of Investor Relations)

Next question, please.

Operator (participant)

Thank you. Your next question comes from Sarah Wang from UBS. Please go ahead.

Sara Wang (Equity Research Analyst)

Thank you for the opportunity to ask a question, and congratulations on a solid result. I only have one question on the wholesale business. I noticed that our delivery plan is actually rolling forward by a quarter to cover the Q1 of next year. Does that mean we also have visibility of utilization ramp-up into next year? In other words, given our solid delivery plan, how shall we think about utilization rate for the next three to four quarters? [Foreign Language].

Ju Ma (Rotating President)

[Foreign Language].

Qiyu Wang (CFO)

Thank you. I'll take your question. As you really mentioned and have observed from our financials, our clients do have a lot of demand for the capacity. To accommodate their capacity need, we have actually responded actively and delivered the capacity needed, and they have been moving in fairly quickly. Actually, we have just hit a record high in terms of the capacity that's utilized. That's what we just added for the past quarter.

Ju Ma (Rotating President)

[Foreign Language].

Qiyu Wang (CFO)

According to the communications with these clients, as well as assessing their willingness and also how firm they are about moving in scheduling, we are confident that for the upcoming three quarters plus another quarter next year, we are going to see very pleasant move-in rhythm from these clients.

Ju Ma (Rotating President)

[Foreign Language].

Qiyu Wang (CFO)

Thank you.

Operator (participant)

Ladies and gentlemen, that concludes our conference for today. Thank you for participating. You may now disconnect your line.