VNET Group Q4 2022 Earnings Call Transcript

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March 21, 2023

Key Takeaways

  • Strong Top‐Line Growth: Q4 revenue rose 7.7% YoY to RMB1.88 billion and full‐year revenue increased 14.1% to RMB7.65 billion, with adjusted EBITDA up 6.8% to RMB1.873 billion.
  • Margin Pressure and Net Loss: Q4 gross margin declined to 17.5% from 21.8%, adjusted EBITDA margin fell to 22.6%, and net loss widened to RMB64.2 million from RMB27.3 million YoY.
  • New and Extended Wholesale Deals: Extended a 33 MW data center contract with a leading social platform and won a >100 MW multi‐phase IDC project with a top Internet giant in the Yangtze River Delta.
  • 2023 Outlook: Plans to deploy 8,000–9,000 cabinets, targeting 7.6–11.8% revenue growth (RMB7.6–7.9 billion) and 8.1–13.5% adjusted EBITDA growth (RMB2.025–2.125 billion).
  • ESG Recognition: Achieved an MSCI A rating, ranked in the top 10% by Sustainalytics globally, and received a B grade on CDP’s climate change questionnaire, outperforming 96% of Chinese peers.
AI Generated. May Contain Errors.
Earnings Conference Call
VNET Group Q4 2022
00:00 / 00:00

There are 7 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by for the 4th Quarter and Full Year 2022 Earnings Conference Call for Vimp Group, Inc. At this time, all participants are in a listen only mode. After the management's prepared remarks, there will be a question and answer session. Participants from our management include Mr. Jeff Dong, Chief Executive Officer Mr.

Operator

Tim Chen, Chief Financial Officer and Ms. Xinyuan Liu, Investor Relations Director of the company. Please note that today's conference is being recorded. I will now turn the call over to your first speaker today, Ms. Xinhua Mil, please go ahead.

Speaker 1

Thank you, operator. Hello, everyone, and welcome to our Q4 and full year 2022 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 the discussion today 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 obligations to update any forward looking statements, except as required under applicable laws. Please also note that Vina's earnings press release and this conference call includes the disclosure of unaudited GAAP financial measures as well as unaudited non GAAP financial measures.

Speaker 1

Vina'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 IR website at ir.vina.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 Q4 and full year 2022 earnings conference call. Laden with macroeconomic headwinds and COVID related disruptions, 2022 was an extraordinary year. Amid these challenging environments, we delivered solid financial and operational results through excellent execution of our dual core strategy.

Speaker 2

We achieved our 2022 delivery target by ending approx 8,400 self built cabinets. By the end of the Q4, our total CapEx under management had grown to approximately 87,320 from 78 540 a year ago. Meanwhile, cabinets utilized by customers increased sequentially by approx 2,500 to approx 48,000 compared to approximately 41,701 a year ago. Our overall utilization rate was 55%. In addition, our retail MRR per company increased to RMB9300 and 71 in the 4th quarter, up from RMB9287 in the 3rd quarter.

Speaker 2

We concluded 2022 with a resilient 4th quarter revenue of RMB1881 1,000,000, an increase of 7.7% year over year and adjusted EBITDA of RMB424 1,000,000. For the full year, our revenue grew 14.1 percent to RMB765 1,000,000 and adjusted EBITDA increased 6 0.8 percent to RMB1873 1,000,000. Before we get deeper Into our business details for the Q4, I'd like to touch on the broader macro climate in China for some context. According to 2023 government work report issued earlier this month, the central government set a GDP growth target of Around 5% for this year, up from last year's 3%. In addition, the government will continue to accelerate the digital transformation of traditional industries and small and medium sized enterprises, we are also supporting the development of the platform economy.

Speaker 2

Last month, the Central Government rolled out a plan to build a digital China by 2025, which highlights the country's focus on expanding data resources and improving digital infrastructure. Encouraged by these supportive measures and positive signals, we expect industry vitality to gradually recover and the business confidence to rebound. In particular, we believe the Internet giants will play to their strengths in technology to empower Development of the digital economy and unleashing greater demand across the markets, as China's leading IDC service provider. We are well positioned to capture new growth opportunities ahead. Now let's Take a closer look at our Q4 business updates.

Speaker 2

Execution of our dual core strategy continues to prove strongly effective both in the wholesale and On wholesale front, we continue to gain robust sales momentum with 2 major orders Despite the macro challenges, in the Q4, we extended our wholesale data center services contract with one of our largest existing customers, a leading social platform in China. This extended order will generate capacity of approximately 33 megawatt. More encouragingly, we recently won the bid to deploy IDC services in multiple phases to support the business expansion for a new customer, one of China's Internet giants. During the first phase, we Thanks to provide customer with capacity of over 100 Megawatt through our IDC assets located in the Yangtze River Delta region. This collaboration represents a significant development opportunity for us and into our proven track record of providing IDC services to powerhouse companies across China's Internet Industry.

Speaker 2

Moving on to our retail business, We continue to make meaningful progress on our customer base expansion in the 4th quarter, supported by our premium Core location and interconnectivity offerings as well as our value added services, we continue to extend our services to existing customers and attract new customers, meeting increasing demands from a wide spectrum of industries including financial services, Local services, mobility, online gaming and some traditional industries, in particular, our connectivity services have tapped into a variety of sectors, including public transportation, public cloud and healthcare, another testament to our industry leading service capabilities. Next, I would like to highlight our progress on hybrid cloud offerings. In the Q4, we successfully facilitated digital transformation for the Mainland China operations of Walthus, A leading Asian health and beauty retailer, we provided the customer with a one stop infrastructure as a service, Our IaaS solution as well as complete operations and maintenance services for both software and hardware to optimize customers' IT architecture enhances business reliability and improve operational efficiency. Looking ahead, we will continue to empower our customers' transitions into the evolving digital area by leveraging our IDC asset, Network and Service Capabilities. Turning to our ESG initiatives, we have always held our long term commitments and the responsibilities to our industry, environment and society as a foundation of our ongoing success.

Speaker 2

Our dedication and hard work are paying off, earning the company broad recognition from global renowned and ESG Rating Agencies. We made great progress in our ESG ratings in 2022, Thanks to our continuous efforts in improving our ESG performance, MSCI upgraded us to an A rating in December 2022, which represents the highest ranking today in China's Internet service and infrastructure industry. In addition, our ESG score measured by the S and Operating sustainability assessment reached 57 ranking in the top 10% among all companies in the IT services industry globally. We also submitted CBP's climate change questionnaire in 2022 and achieved a B grade, which exceeded that of 96% of participating companies in China. These accomplishments and accolades Clearly demonstrate the effectiveness of our ESG strategy, while strongly affirming our long term investment value and development prospects.

Speaker 2

Moving to 2023, while the economic recovery is still underway and may need time to realize the full rebound, We remain confident in the long term growth potential of China's market as well as IDC service industry as a whole. As a result, we set our 2023 delivery plan in the range of 8,000 to 9,000 cabinets. We believe supportive government policies will accelerate China's digitalization across multiple industries and our proven dual core growth strategy and industry leading service capabilities will keep us at the helm of the market recovery. We will remain agile as we anticipate shifting market dynamics and capitalize our future growth opportunities, creating sustainable and long term value for our shareholders. Thank you, everyone.

Speaker 2

I will now turn the call to our CFO team to discuss our financial performance for the quarter and our business outlook.

Speaker 3

Thank you, 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.

Speaker 3

Please also note that unless otherwise stated, all the financials we present today are for the Q4 of 2022 and in Moonbeam terms. As Jeff just mentioned, we concluded 2022 with resilient operating and financial performance amidst a myriad of external challenges, which speaks to our outstanding execution. Next, let me walk you through our Q4 financial results. Unless otherwise specified, the growth rates I will be reviewing are all on a year over year basis. In the 4th quarter, our net revenue increased by 7.7% to $1,880,000,000 from the same period last year, mainly due to increased customer demand for our highly scalable carrier and cloud neutral IDC solutions from both wholesale and retail IDC businesses as well as the continued growth of our cloud and VPN services.

Speaker 3

Gross profit was $328,400,000 in the Q4 of 2022, representing a decrease of 13.6% from the same period of 2021. Gross margin was 17.5% in the Q4 of 2022 compared to 21.8% in the same period of 2021. Adjusted cash gross profit, which excludes depreciation, amortization and share based compensation expenses, was $740,100,000 in the Q4 of 2022, an increase of 3.7% from the same period of 2021. Adjusted cash gross margin in the Q4 of 2022 was 39.4% compared to 40.9% in the same period of 2021. Adjusted operating expenses, which excludes share based compensation expenses, compensation for post combination employment and acquisition, Impairment of loan receivable to potential investee and impairment of long lived assets were 355,400,000 in the Q4 of 2022 compared to $273,700,000 in the same period of 2021.

Speaker 3

As a percentage of net revenues, adjusted operating expenses in the Q4 of 2022 were 18 0.9% compared to 15.7% in the same period of 2021. Adjusted EBITDA in the Q4 of 2022 was $424,300,000 representing a decrease of 8.3% from the same period of 2021. Adjusted EBITDA in the Q4 of 2022 excluded a reversal of share based compensation expense of $7,800,000 Adjusted EBITDA margin in the Q4 of 2022 was 22.6% compared to 26.5% in the same period of 2021. Our net loss attributable to ordinary shareholders in the Q4 of 2022 was $64,200,000 compared to a net loss of $27,300,000 in the same period of 2021. Basic and diluted loss were both 0.07 per ordinary share and both 0.42 per ADS.

Speaker 3

Each ADS represents 6 Class A ordinary shares. Now turning to our balance sheet. As of December 31, 2022, the aggregate amount of the company's cash, Cash equivalents and restricted cash was $2,990,000,000 Meanwhile, Net cash generated from operating activities in the Q4 of 2022 was $569,600,000 compared to $664,000,000 in the same period of 2021. Our CapEx in the Q4 of 2022 was $1,210,000,000 and the total CapEx for the full year 2022 was 3,350,000,000 Now moving to our outlook. We expect net revenues for the full year of 2023 to be in the range of $7,600,000,000 to $7,900,000,000 representing a year over year increase of 7.6% to 11.8% and adjusted EBITDA to be in the range of $2025,000,000 to $2,125,000,000 representing a year over year increase of 8.1% to 13.5%.

Speaker 3

Looking forward, we will continue to execute on our dual core growth strategy and remain focused on our core business as well as higher quality revenues. In addition, we will continue to explore more capital resources to further strengthen our financial position. This concludes our prepared remarks for today. Operator, we're now ready to take questions. Thank you.

Operator

Thank you. At this time, we will conduct a question and answer session. Our first question comes from the line of Yang Liu of Morgan Stanley. Please proceed with your question.

Speaker 4

Good morning. Thanks for the opportunity to ask questions. Two questions from my side. The first one is about moving. Could management share the color year to date what is the moving look like from your retail and wholesale customer.

Speaker 4

And what should be the utilization rate by the end of this year If we add another 8000 to 9000 cabinets. Yes, that's the first question. And the second question is, we're glad to see that company onboard a new wholesale customer with a pretty big order size. When should we expect the financial contribution will be visible in future? Thank you.

Speaker 2

Hi, Yang.

Speaker 5

Can you hear me?

Speaker 3

Yes, I can. Okay. Let me take the second question and then I'll pass back to Jeff and the team on the first question on the ramp ups. For the new customer that we've announced just now, we're expecting the financial contribution to take place next Basically end of this year, early next year. So obviously, it's going to take us time to deliver the cabinets.

Speaker 3

So by the time meaningful financial contribution takes place at the I hope that's helpful. Let me pass the ramp up in terms of what we've been seeing in 4th quarter and the 1st few months of the Q1 to Jeff and team.

Speaker 2

Hi, Yao. It's Jeff. We wrap up regarding the wrap up at the end of the 2022, we will be 55% utilization rates. We expect more for this year and given the let me give you some colors on the new customers just as Tim mentioned. It certainly is actually the large majority of the available cabinets in Q4.

Speaker 2

So we can see, as you mentioned, the move in from the Internet players is very good and faster than what we expect from the cloud service Providers, given the contribution to our financials, I would say In terms of this contract, we'll see by the end of this year, it's all over 70 megawatts will be next year. So we see substantially and large ball Financial contributions will be come up by the end of this year early next year.

Speaker 4

Thank you.

Operator

One moment for our next question. Our next question comes from the line of Sarah Wang of UBS. Please proceed with your question.

Speaker 6

Hi. Thank you for the opportunity to ask a question. So I have one question. So would management please walk us through the Financing plan and also the major cash inflows and outflows for this year, especially given one of the convertible bond might be putable Early next year. Thank you.

Speaker 3

Thanks, Sarah, for the question. It's Tim here. With regards to the overall financing plan, we've obviously started already The end of last year, going through the alternatives available to the company, we've seen with quite positive news that The public markets are gradually opening up. As to the major sort of inflows and outflows, obviously, the business continues to generate very healthy Operating cash flow. Outflows would be mainly the CapEx.

Speaker 3

And at this moment, we're expecting CapEx to be quite similar to what it was in 2022, which is between RMB3 1,000,000,000 to RMB3.5 billion. However, I would then point out next is that this CapEx is not all committed or contracted. So we do have the ability to ratchet back during the course of the year and will do so really for 2 areas. 1 is as we see the customer demand And also the customer requirements in terms of delivery dates, if they shift, you've seen us also in 2022 adjust during the course of the year as required. And then secondly, obviously is we are planning our overall Cash flow for the potential refinancing of the convertible bond that would be in Q1 of 2024.

Speaker 3

So that's something that we're keeping a very close eye on and obviously looking to the various alternatives. Given where share prices are for us and our peers, we will be looking mainly at debt and convertible as the main instruments. Also something that we've already mentioned last year, we continue to work on would be onshore renminbi financings, both in the form of private and public REITs. I hope that answers your question, Sarah.

Speaker 6

Thank you. And just a quick follow-up. On the operating cash flow for 2022, it seems it was RMB 2,600,000,000. So how shall we think about The operating cash flow level for 2023? Thank you.

Speaker 3

Yes, I would say that look, the working capital Points will not move very, very much. So you're looking at underlying EBITDA as a good proxy. So obviously, we've given some guidance on EBITDA. I think you can use that a proxy on where directionally we expect operating cash flow to go as well.

Speaker 6

Got it. That's clear. Thank you.

Speaker 5

Thank you, Sarah.

Operator

Please stand by. One moment please. Our next question comes from the line of Edison Li of Jefferies. Please proceed with your question.

Speaker 5

Okay. Hi, thank you. Hi, Tim and Jeff. Thank you for the presentation. I have two questions.

Speaker 5

Number 1 is, on this new customer that you have signed up for over 100 megawatts. So based on your comment a little bit earlier, I assume that the 3,000 cabinets that you are including in your 2023 guidance is Not related to this customer. I just want to confirm that. And also, could you give us some color on the pricing And also on the potential for 4 on 1 orders for this particular customer in the same region or in the same data center campus. And my number 2 question is, is it possible for you guys to give us an update on your joint venture IDC fund with the Changzhou government?

Speaker 5

And in fact, Is that being factored into your 2023 guidance? Or how much of that is being factored into that? Yes, it would be great. Thank you.

Speaker 2

Hi, Edison. Let me answer your question. The first one in terms of new customers, yes, it is. We include the 3,000 companies as this year, which is from the first phase of the new customer.

Speaker 5

Sorry, Jeff. So can I confirm that this 3,000 CapEx will be delivered Toward the end of the year? So that's why the financial contribution in 2020 is what

Speaker 3

the That's correct, Justine here. That's correct. We're Expecting that these will be delivered at the very tail end of the year. And so I don't expect, at least from my side, any meaningful financial contribution, probably a little bit The very beginning of it, but really the meaningful contribution will be in 2024 Q1.

Speaker 5

Sorry, can I also follow-up with just one related question? So will this 100 megawatts be fully delivered within 2024 or it's going to go into 2025?

Speaker 2

It's going to be divided into the different phase. The first phase will be this year and early next year, We will deliver like 1 third sorry, 2 thirds and the remaining will be delivered in the next year.

Speaker 5

So it will be completely delivered in 2024?

Speaker 3

No, no, no. No, no, sorry. The first phase, the first part is going to be mainly in the 2023 into the early part of 2024. But the balance, we will need to see whether the customer will give us the heads up. So it depends on their move in rate.

Speaker 3

If the move in rate is very, very strong, they may give us an earlier go ahead, in which case, yes, it would be in 2024. But if not, it could actually drag into the outer years.

Speaker 5

I'm sorry, I want to further clarify because I think that's an important point. So this 100 megawatt contract, you already signed the MOU with the customer. However, the timing of your delivery is actually not specified in the MOU. Is this understanding correct?

Speaker 3

Only part of it is Specified and the balance is not.

Speaker 5

What's the cost of

Speaker 3

the question? The indication that they've given us Yes. Yes, correct.

Speaker 2

Tim, let me put this way, Edison. We will be fully delivered within the 3 years For the MOU with the customer.

Speaker 5

Okay. And in the same location, right? All these capacities are the same location?

Speaker 2

Yes, yes, same location.

Speaker 5

Yes. Okay. Thank you. Sorry, Jeff, please go ahead.

Speaker 2

Okay. Let me answer your questions in terms of the JV with Changzhou. We have actually we recently we signed that SPA in Lanfang area with one project, which is the largest one From the identified portfolio, the JV has already committed over RMB500 1,000,000 and as a Proportion, we also committed the capital and this long form project We'll achieve IT scale of about 140 megawatts and also we'll be delivering the cabinets more More than 17,000 companies in total. So that's what we have done so far. And some other projects, We are also closely in discussion with Changzhou.

Speaker 2

We will be ramp up soon probably by the end of this year, Including Shenzhen, Dongguan and also in Central Beijing areas.

Speaker 5

Thank you. Just a follow-up. So will this long term project be contributing profitability to VNET this year?

Speaker 2

I wouldn't see it's a contributor to Vimp Financials, but It's also divided into the different phase. The Phase 1 and Phase 2 already has customers And we are signing the SPA on the Phase 3 and Phase 4, which is a greenfield project with full regulatory license. Hopefully, we'll be delivered by the end of this year and the ramping maybe next year.

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