VNET Group Q3 2023 Earnings Call Transcript

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November 15, 2023

There are 8 speakers on the call.

Operator

Hello, ladies and gentlemen. Thank you for standing by for the 3rd 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 will be a question and answer session. Participants from our management include Mr.

Operator

Jeff Dong, Chief Executive Officer Mr. Qiyu Wang, Chief Financial Officer Mr. Ping Chen, Chief Strategy Officer and Ms. Xinyuan Liu, Investor Relations Director of the company. Please note that today's conference call is being recorded.

Operator

I'd now like to turn the call over to the 1st speaker today, Ms. Xin Yuan Liu. Please go ahead.

Speaker 1

Thank you, operator. Hello, everyone, and welcome to our Q3 2023 earnings conference call. Our earnings release was distributed earlier today, and you can find a copy on our IR website as well as on newswire services. Please note that today's call will contain forward looking statements made under the Safe Harbor provisions of the U. S.

Speaker 1

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 obligation to update any forward looking statements, except as required under applicable laws. Please also note that VNet's earnings press release and this conference call include the disclosure of unaudited GAAP and non GAAP financial measures.

Speaker 1

VNet's Earnings press release contains a reconciliation of the unaudited non GAAP measures to the unaudited GAAP measures. As a reminder, this conference is being recorded. In addition, a webcast of this conference call will also be available on our website, .vnet.com. I will now turn the call over to our CEO, Jeff.

Speaker 2

Thank you, Tianyuan. Good morning and good evening, everyone. Thank you for joining our call today. I'd like to start with the overview of our Q3 performance. Our solid growth in the Q3 reflects our continued Capital deliveries are progressing smoothly.

Speaker 2

By the end of the quarter, we had grown our Total cabinets under management were approx 88,900 compared with approx 82,660 year ago. The number of utilized companies increased by 1092 to 52 1408 in the 3rd quarter. Turning our overall utilization rate to 59%. Furthermore, our retail MRR per capita during the quarter stayed high at RMB9495. We remain dedicated to ending high quality revenues in both the wholesale and the retail ADC markets in the 3rd quarter, Generating solid year over year growth with our total net revenues increasing by 4% to RMB1.89 billion Adjusted EBITDA growing by 11.6 percent to RMB507.9 million.

Speaker 2

With the rapid pace of large language model training and AI application deployments, computing power is becoming a new productive force To meet the growing need for computing power, China's governing authorities have recently unveiled an action plan For the high quality development of computing power infrastructure nationwide, as the industry leading player, We are seeing increasing demand for premium ITC services and we remain a clear choice for customers to ride the wave of Digital Transformation. Now let's take a closer look at our Q3 business updates. First, AI is Driving increasing demand for computing power and IoT services. Our wholesale data center continues to meet the increasing AI demand, Large language model training and the deployment for Internet platforms. Our core competencies, spending resources and execution capabilities enable us to support our customers' evolving and sustained business development needs.

Speaker 2

As we mentioned on our last call, in August, we won an extended order of 45 megawatt from the existing Internet Giant customer, which speaks to our superior wholesale service offerings appeal amid the competitive landscape. Moreover, Our CapEx deployment execution has been stellar. During the Q3, we successfully delivered over 2,600 High power density cabinets in the Yangtze River Delta region to 1 wholesale customer and the approx 800 High power density cabinets in the northern region of China to another wholesale customer. Throughout the delivery process, We maintain strict quality standards. We are offering customization options tailored to customer requirements.

Speaker 2

This execution is a testament to our commitment to timely delivery and top notch quality, which has earned us Our retail customers' AI driven demand continue to rise, Particularly from existing customers in the industries such as local services, healthcare and VR. Building on this momentum, we expect to attract more retail customers from a wider range of industries such as Autonomous Driving and AI Solutions. I'd also like to highlight our distinctive proficiency in designing and implementing Power and equipment upgrades for our cabinets to meet existing customers' high power density computing needs. This capability is well supported by our engineering experience and expertise as well as our existing high power density cabinets, which allows us to promptly address growing diverse AI demands from retail customers. In addition, We further expanded and diversified our retail customer base in the 3rd quarter, attracting new customers and securing extended contracts from an existing customer in various industries, including IoT, Financial Services, Gaming and Mobility.

Speaker 2

It's also worth noting, we recently won a new order of 1.5 Megawatt from an existing customer award leading consumer electronic tech brands. Now turning to our value added services. During the Q3, our full stack One stop, Biometal as a service solution continue to gain new customers, one of which is a pioneering unicorn in the VR industry. We won the contract based on our flexible computing power resources that can rapidly meet these customers' specific demands during peak business hours underpinning the replay growth of its metaverse business. Our diverse IDC services offerings include a solid IT infrastructure, premium operations and maintenance services An impressive cost efficient solutions making VNET an outstanding choice for potential customers looking for a trusted partner To support their current and future business development needs, we have also attracted a leading Chinese EV Automaker for our interconnectivity services throughout our robust data center and network resources nationwide, The customer can store their business data in adjacent data centers and transmit with low latency backhaul.

Speaker 2

This customer reaffirms our compelling value proposition and advanced interconnectivity services capabilities. In summary, our robust 3rd quarter results showcase our ability to effectively address both wholesale and retail business agency needs, Thanks by timely and strong execution. Looking ahead, AI prevalence and adoption of its emerging cross industries and supportive government policies will accelerate the development of computing power infrastructure in China. As a dedicated industry leader, We look forward to meeting this newest wave of demand driven by AI application and further unleashing our long term growth potential. Thank you, everyone.

Speaker 2

I will now turn the call to Ji Yu to discuss our financial performance for this quarter.

Speaker 3

Thank you, Jeff. Good morning and good evening, everyone. Before we start the detailed discussion of our financials, Please note that we will present non GAAP measures today. Our non GAAP results include 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 Q3 of 2023 and in renminbi terms.

Speaker 3

Now, let me walk you through our Q3 financial results. Unless otherwise specified, the growth rates I will be reviewing are all on a year over year basis. In the Q3, We continue to deliver solid results with our focus on high quality revenues. Our net revenue increased by 4% to RMB1.89 billion from the same period last year, mainly driven by the Continued growth of our mine business. Gross profit was RMB306.5 million in the Q3 of 2023, representing a decrease of 3.2% from the same period of 2022.

Speaker 3

Gross margin was 16.2% in the Q3 of 2023 compared to the 17.5% in the same period of 2022. Adjusted cash gross profit, which includes depreciation, amortization and share based compensation expenses was CNY 738.4 million in the Q3 of 2023, an increase of 4.3% from the same period of 2022. Adjusted Cash gross margin in the Q3 of 2023 was 39.1% compared to 39% in the same period of 2022. Adjusted operating expenses, which excludes share based compensation expenses and the compensation for the post combination employment in the acquisition were RMB264.8 million in the Q3 of 2023 compared to RMB275.1 million in the same period of RMB75,100,000 in the same period of 2022. As a percentage of the net revenue, Adjusted operating expenses in the Q3 of 2023 were 14% compared to 15.2% in the same period of 2022.

Speaker 3

Adjusted EBITDA in the Q3 of 2020 The increase was RMB507.9 million, representing an increase of 11.6% From the same period of 2022, adjusted EBITDA in the Q3 of 2023 Excludes share based compensation expenses of 9,500,000 Adjusted EBITDA margin was 26.9% in the Q3 of 20 23% compared to 25.1% in the same period of 2022. Our net loss Attributable to Vnet Group in the Q3 of 2023 was RMB50.5 million Compared to a net loss of CNY 425.2 million in the same period of 2022. Basic and diluted loss were both 0.06 Per ordinary share and both $0.36 per ADS, each ADS presents 6 class Turning to our balance sheet. As of September 30, 2023, The aggregate amount of the company's cash, cash equivalents and restricted cash was RMB3.02 billion. Meanwhile, net cash generated from operating activities in the Q3 of 2023 was RMB454.3 million compared to RMB607.4 million in the same period of 2022.

Speaker 3

Our capital expenditure in the Q3 of 2023 was RMB964.7 million. Before I conclude, I'd like to provide an update on our financial outlook for full year 2023. For the full year of 2023, the company currently expects total net revenue to be between RMB7400,000,000 RMB7600,000,000 Representing a year over year growth of 4.7% to 7.6% and adjusted EBITDA to be in the range of RMB 2,000,000 to RMB260 1,000,000, representing a year over year growth of 6.8% to 10%. This compares with total net revenue expected between RMB7600 1,000,000 and RMB7900 million and adjusted EBITDA between RMB 20 And 25,000,000 and 2,125,000,000 as previously stated. The outlook update is mainly due to our continuous focus on high quality revenues to maintain the long term Sustainability of our operations.

Speaker 3

The forecast reflects the company's current and preliminary views on the market and its operational conditions and is subject to change. Moving forward, we will stay focused on our high quality growth Promoting our premier IDC services to empower digital transformation across a broader source Of Industries, as always, we remain committed to create sustainable growth for all our stakeholders. This concludes our prepared remarks for today. Operator, we are now ready to take questions.

Operator

Thank you. We will now begin the question and answer session. The management welcomes questions to be asked in Chinese. For the sake of clarity and order, please ask one question at a time. Management will respond and then feel free to follow-up with your next question.

Operator

Our first question comes from the line of Yang Liu from Morgan Stanley. Please ask your question, Yang.

Speaker 4

Thanks for the opportunity to ask question. I would like to have an update in terms of The company's upcoming convertible bond repayment in February next year, What has been done or what is the current progress of the asset monetization to prepare for the repayment, Both for the potential REITs issuance and also the setting some minority stakes of your existing project, etcetera,

Speaker 3

I know this is the Most important question for us, taking the liability management issue has Been my top priority take since I task since I took the CFO position. We are busy working on 2 major ways for resolve the issue. 1 is rise new Funding from new equity and debt investments, because we need to follow the NASDAQ rules. So We will be dedicated to pursuing new investor and then It's the right time. We will make the public announcement if there's any concrete progress.

Speaker 3

Also continue to actively engage engaging with our CB creditors to find the best way forward. Also, we also try our best to President's OpEx management and all positive progress in other funding rising, Just you say including the assets sell minority share And also the CREIT. They are this both have some significant progress, but Also need some time to closing this deal. So Yes. We will so We will try our best to leverage this incoming CBs.

Speaker 3

So we are firm our plan to put and leveraging on both internal and external resources. Yes. Thank you.

Speaker 4

Thank you. May I follow-up with another question on the This is an update. For the downward revision of the revenue and the EBITDA guidance, Where do you see more weakness come from? It is from the traditional retail business or more from the wholesale business? Thank you.

Speaker 4

Yes,

Speaker 3

we do some change to our guidance. What I want to share is close to 13 years of IDC industry experience and market insight. We will be navigating our business towards a very, very focused, greater profit Margin business in short or midterms. For example, this year, we have allocating more of The DC resources to areas such the AIMO German wholesale business line Very clearly, the booming market and promote our profit margin. So we focus this high profit business and then we try to close some low profit Low profit business.

Speaker 3

So you can see if you compare the revenue and the EBITDA, EBITDA guidance, the EBITDA guidance we only Decrease of very minor, around 2%. So in addition, we're planning to certain Due call value allowance practice within this year, so As our ongoing financial statement could better reflect the nature and Transmission of our business and then we continue to focus The high profit business, for example, the wholesale and the AI driven demand

Speaker 4

Thank you. I don't have any other questions.

Operator

Thank you, Yang. Our next question comes from the line of Charlie Bai from Jefferies. Please ask your question, Charlie.

Speaker 5

Hi. This is Charlie Bai from Jefferies. My first question is about 3rd quarter MRR. I saw a quarter on quarter decline on both utilization rate and Retail MRR, may I know what's the reason behind it? Thank you.

Speaker 2

Hi.

Speaker 6

In terms of NRR, I would say for the Q3, still stay at a high level I see in line with our expectation, there might be some fluctuations from quarter to quarter, which is quite normal. So we believe For the end of the year and it's come up again. And also in terms of the utilization rates, our estimate Of UR by the end of 2023, we'll be on par of the Q3 2023 level With a faster growth, especially for our wholesale customers, particularly those in the short video sectors, we expect a higher

Speaker 5

Thank you. May I follow-up With another question, may I have some color on the outlook of the CapEx plan this year and in 2024? Thank you.

Speaker 3

Yes. This year, the full year CapEx is expected to be around RMB3.8 billion, which is about 10% more than our guidance. The main reason is that the demand for wholesale data center business It's growing faster. And next year, there will be a significant increase In the full year CapEx, mainly due to the increased growth rate of wholesale business and the high And AI driven the demand. So we will specifically figure The CapEx announced in full year guidance early next year.

Speaker 5

Okay. Thank you. I have no more questions.

Operator

Thank you, Charlie. Our next question comes from the line of Timothy Zhao from Goldman Sachs. Please ask your question, Timothy.

Speaker 3

Sure. Thank you management for taking my question. I want to understand more about your updated guidance for this year. Just wondering, could you share a little bit more in terms of the revenue breakdown for the full year guidance For your wholesale IDC, retail IDC and also the non IDC business, and you mentioned that you are going to turn down or reduce the Total to those low margin business, could you elaborate more on what exactly are those lower margin business? I believe those include The retail business and like how much more do you expect to reduce the exposure, I think, in this segment?

Speaker 3

Thank you. Yes. Yes, yes. Because now Because the wholesale and the AI driven demand is increased faster, so We try to move find more resources. For example, in some retail data center, We shut down and we closed some business for traditional retail customer and then Move the space and the power supply to the AI customer.

Speaker 3

So this is the My reason, our reduced revenue guidance and on the same way, you see The EBITDA is impact this impact of EBITDA is very minor. So I think this is a note our business is The speed of our business is a lowdown. On the other way, this is the signal is The EBITDA margin and then the EBITDA is more positive than before. Got it. That's helpful.

Speaker 3

Thank you.

Operator

Thank you, Timothy. Our next question comes from the line of Daley Li from Bank of America Securities. You can ask your question, Daley.

Speaker 7

Hi management. Thanks for taking the question. Here, just one on the AI space. You mentioned more high power business deployment for your data center. Could you please share The demand trend driven by AI, do we have any like breakdown how much demand from AI Retail or for the wholesale business.

Speaker 7

And looking into next year, how do we view

Speaker 6

Okay. In terms of AI, which is very popular since of this year, we have seen actually the rapid growth of AIGC in China, Dozens of large language modeling across different sectors has already been launched since early this year. Well, many of them are still being trained and the generic models are dominated, but actually The Internet giants were the verticals led by the leader leading players in specific industries and some tech startups as well Aside from the Internet giants, back to the impact on our IDC demand. I will say from a wholesale side, Demand from wholesale customers are mainly searched by Internet junk customers, especially their short video e commerce business. Notably, we delivered, as announced this quarter, around 3,500 cabinets during the quarter to 2 wholesale customers, all of which actually are high power density cabinets.

Speaker 6

In terms of retail sites, We are still receiving increasing AI demand from retail customers across various industries such Local Services, Healthcare and VR. And also, we are further exploring into the demand From some new economy industries such as Fintech, we are in the dialogue with them. And in terms of high power density cabinets, actually, we Those companies located from VNET located in the Great Beijing area, Yangtze River Delta and also Great Bay area. In terms of their size, we are obviously about from up to 40 kilowatt and over 30 kilowatt From all the delivered we received this quarter, about over 90%, I would say is coming from high power density area.

Speaker 7

Okay. Thank you, management, for your

Speaker 4

introduction. Thank you.

Speaker 2

Thank you.

Operator

Thank you. We have reached the end of the question and answer session. And with that, ladies and gentlemen, that concludes our conference for today. Thank you for participating. You may now disconnect your lines.

Operator

Have a good day.

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Key Takeaways

  • VNet grew its total cabinets under management to 88,900 (up from 82,660 a year ago), achieved a 59% utilization rate across 52,140 cabinets, maintained a high retail MRR of RMB 9,495, and delivered 4% net revenue growth to RMB 1.89 billion with 11.6% adjusted EBITDA growth to RMB 507.9 million in Q3.
  • AI demand is surging, evidenced by a 45 MW extension order from an Internet giant and the delivery of over 3,400 high-power density cabinets across China to support large language model training and platform deployments.
  • Retail customers’ AI needs are rising in sectors like local services, healthcare, VR and autonomous driving, and VNet’s engineering expertise in power and equipment upgrades enables rapid deployment of high-density cabinets.
  • Value-added services continue to expand: VNet won a full-stack Biometal-as-a-Service contract with a VR unicorn and secured interconnectivity services from a leading Chinese EV automaker using its nationwide data center network.
  • Financially, Q3 gross profit was RMB 306.5 million (down 3.2%), adjusted cash gross margin rose to 39.1%, net loss narrowed to RMB 50.5 million, cash on hand reached RMB 3.02 billion, and 2023 guidance was set at RMB 7.4–7.6 billion in net revenue and RMB 2.0–2.6 billion in adjusted EBITDA, with a focus on high-margin wholesale and AI-driven business.
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Earnings Conference Call
VNET Group Q3 2023
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