VNET Group Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 23, 2023

There are 6 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by for the Second Quarter 2023 Earnings Conference Call from Vnet 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

Kyu Wang, Chief Financial Officer Mr. Tim Chen, Chief Strategy Officer and Ms. Xinyuan Liu, Investor Relations Director 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.

Operator

Xinhua Liu. Please go ahead.

Speaker 1

Thank you, operator. Hello, everyone, and welcome to our Q2 2023 earnings conference call. Our earnings release was distributed earlier today, and you can find a copy on our IRR site 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 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.

Speaker 1

Vnet's earnings press release contains a reconciliation of these audited non GAAP matters to the audited 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 atir.vnet.com. I will now turn the call over to our CEO, Jeff.

Speaker 2

Thank you, Xin Yuan. Good morning and good evening, everyone. Thank you for joining our call today. I will start with an overview of our Q2 results. After that, I will turn the call to Tim, our CFO and Qiyu, our CFO, who will discuss our financial results and outlook in more detail.

Speaker 2

We are pleased to report a solid second quarter with utilized cabinets growing by 2,000 and overall utilization rates further improving to 59%. Total cabinets under management reached approx $86,900 by the end of the quarter compared with approx RMB8800 a year ago. Our retail MRR per company continued climbing to reach a new high at 9,530 during the quarter. As we maintain our focus on high quality revenue business to drive higher margin and better profitability. We achieved 2nd quarter revenue of RMB1.82 billion, representing an increase of RMB5.6 year over year and adjusted EBITDA of RMB535 1,000,000, an increase of 9.9% year over year.

Speaker 2

Our solid operational and financial performance reaffirms Our ability to quickly capture incremental market demand for high quality, scalable IDC services amid a steady economic recovery. It's very clear the digital economy is becoming an increasingly important driver of China's overall economic development. To accelerate the post pandemic recovery and boost growth, China's policymakers are stepping up supportive policies to strengthen the digital economy and upgrade industries with cutting edge technologies such as big data, AI and 5 gs. Recently, new AI application scenarios are emerging across different industries in China, unlocking more demand for IDC services as training and optimized AI models require massive computing power. I'm proud to share the good news.

Speaker 2

VNET was selected as a computing power partner in a generative AI Innovation Partnership Program set up by the Beijing Municipal Government in this July. This government backed program aims to build synergies across Beijing's generative AI industry value chain, supporting AI GC companies with high performance and a highly scalable computing power and fueling the development of foundation models. Our inclusion in this program once again showcased our outstanding track record, strong computing power resources and service capabilities. We expect to tap into more AI driven demand in the near future. Now let's take a closer look at our Q2 business updates.

Speaker 2

First, I'd like to share some exciting early signs of growing demand from generative AI for our business. Dozens of large language models have already been launched across different sectors this year. Although many of them are still in the training stage, General models are dominated by Internet giants, while vertical models are being built by leading players in specific Industries as well as some tech start ups. Of the 3 fundamental elements for developing AI, that is computing power, Algorithms and Data. Computing power plays the most critical role for Chinese companies in effectively training their AI models As many companies have already developed advanced algorithms and advanced data sets, our wholesale data centers are able to offer high power density cabinets up to 40 kilowatt per cabinet, while capable of powering large language model trainings and deployments for Internet platform operators.

Speaker 2

Our retail cabinets also have a service in the capacity for high performance computing deployments, Offering over 30 kilowatt in a single cabinet, generative AI demand is already arising from our existing customers across a variety of industries, such as local services, healthcare and virtual reality, as demand expands Further for data processing and storage requirements stemming from the AI boom, we are confident Our expertise in high performance data center design, coupled with our extensive resources and execution capabilities, will enable us to rise the next wave of ITC service growth. Next, moving to our wholesale business, which continues to build robust sales momentum. Recently, we won an extended contract for 45 Megawatt of additional capacity from an existing Internet joint customer. Our compelling value proposition, broad industry expertise, In-depth resource capabilities and strong execution skills assure the appeal of our wholesale service offerings to internal giants. Turning to our retail business, where we continue to make meaningful progress expanding and diversifying our customer base.

Speaker 2

Our new customer wins were primarily attributable to digital demand from the IT services, manufacturing and financial services sectors. Also, our scalable high quality identity services continue to secure incremental demand from existing customers across various industries, including local services, financial services, online gaming, VR technology, manufacturing and mobility. Notably, in the Q2, we extended our contracts for 7 megawatt with an existing retail customer, which is a leading player in the local service sector. Our innovative value added services and customized solutions also continued to provide solid support to our retail business, especially in meeting the emerging demand for generative AI deployments. In the Q2, we unveiled a new full stack bare metal as a service solution to support the significant computing power required by Foundation Models in generative AI.

Speaker 2

This new solution encompasses data storage, Biometal and Direct Cloud Connect Services, facilitating private and secure connections between customers and multiple call providers. During the quarter, we signed a contract with a pioneering metaverse company in China for our 1 star Fullstack IDC service featuring this new solution. This comprehensive set of services will help the customer quickly acquire IDC Resources at business peaks to meet its on demand computing needs. We are supporting its large model training to better expand its metaverse business with a low latency, high fidelity and immersive user experience. Going forward, leveraging our extensive IDC resources, large customer base and high quality services, We will advance this solution to serve a broader range of industries, seeing new opportunities arising in the AI space.

Speaker 2

Next, I want to share an update on the Blue Claw business. During the Q2, we won a new multinational corporation or MNC customer, Mok, a worldwide designer, manufacturer and integrator of precision control components and system, will provide Mook with deployment and implementation services for its hybrid cloud infrastructure. Specifically, we will support the customer in building a new IT environment for its business development and operations in China, Deploy localized IT infrastructure and implementing data migration to China based cloud computing platforms to ensure its business continuity. We have built a wealth of experience and practical knowledge in this field by helping many MNCs land their business alongside IT infrastructure in China. The successful implementation of Mark's project will further strengthen our ability to tap into the increasing demand from multinational customers for IT environments, localization and the call migrations to merge with Chinese Business Systems.

Speaker 2

On the ESG performance front, We are honored to be selected for inclusion in S&P Global's 1st China edition of the Sustainability Yearbook 2023. Published in late June. S&P Global evaluated nearly 1600 Chinese companies across 60 Industries Through Its 20 22 Corporate Sustainability Assessment and Automately Recognized 88 Companies from its yearbook, VNET earned the highest ESG score among Chinese IT Service Companies participating in the assessment, a clear reflection of our industry leading practice and achievements in ESG As we forge ahead with our sustainability action plans, we will continue to innovate and implement strategies and initiatives that make a real difference, positioning VNET as a sustainability leader in the IDC service industry. To summarize our ongoing progress across each of our business lines, the increasingly unfavorable policy landscape and AI's growing prevalence are reinforcing our confidence in the mid- and long term growth prospects of China's IDC service industry. With our reliable and scalable ITC services, high power density deployment capabilities and a loyal and expanding customer base, We are well positioned to maximize our dual core strategy to serve digital demand driven by well spread digital transformation and the AI boom.

Speaker 2

Thank you, everyone. I will now turn the call to Tim Anjie Yu to discuss our financial performance for this quarter.

Speaker 3

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 measure 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 Q2 of 2023 and in renminbi terms. Now let me walk you through our Q2 financial results. Unless otherwise specified, The growth rates I will be reviewing are all on a year over year basis. We remain dedicated to advancing high quality revenue business to drive margin and profitability improvements. In the second quarter, our net revenues increased by 5.6% to $1,820,000,000 from the same period last year, mainly driven by the continued growth of our IDC business as well as our cloud and VPN services.

Speaker 3

Gross profit was $342,700,000 in the Q2 of 2023, representing a decrease of 4.2% from the same period of 2022. Gross margin was 18.8% in the Q2 of 2023 compared to 20.7% in the same period of 2022. Adjusted cash gross profit, which excludes depreciation, amortization and share based compensation expenses was $742,900,000 in the Q2 of 2023, an increase of 4.1% from the same period of 2022. Adjusted cash gross margin in the Q2 of 2023 was 40.8% compared to 41.4% 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 $241,500,000 in the Q2 of 2023 compared to $250,700,000 in the same period of 2022.

Speaker 3

As a percentage of net revenues, adjusted operating expenses in the Q2 of 2023 were 13.3% compared to 14.5% in the same period of 2022. Adjusted EBITDA in the Q2 of 2023 was $535,000,000 representing an increase of 9.9% from the same period of 2022. Adjusted EBITDA in the Q2 of 2023 excluded share based composition expenses of $8,000,000 Adjusted EBITDA margin was 29.4% in the Q2 of 2023 compared to 28 0.2% in the same period of 2022. Our net loss attributable to Vnet Group Inc. In the Q2 of 2023 was $232,900,000 compared to a net loss of dollars 377,200,000 in the same period of 2022.

Speaker 3

Basic and diluted loss were both 0.26 per ordinary share and both 1.56 per ADS. Each ADS represents 6 Class A ordinary shares. Turning to our balance sheet. As of June 30, 2023, the aggregate amount of the company's cash and cash equivalents, Restricted cash and short term investments was $2,760,000,000 Meanwhile, Net cash generated from operating activities in the Q2 of 2023 was $423,500,000 compared to $942,700,000 in the same period of 2022. Our CapEx in the Q2 of 2023 was $405,000,000 Finally, I want to thank you all and our team for all the support and partnership over the past couple of years.

Speaker 3

I'm thrilled to continue working with the company's executive team on strategic initiatives and I'd like to now turn it over to QiYun. Thanks, Jeff. It's an honor to

Speaker 4

be part of VNET's leadership team. I look forward to leveraging my 20 years of industry experience and working with our team to drive our dual core strategy and unlock more growth potentials. In terms of our outlook, we currently maintain our full year 2023 guidance and expect net revenues to be in the range of RMB7600 1,000,000 to RMB7900 1,000,000, We are addressing a year over year increase of 7.6% to 11.8% and adjusted EBITDA to be in the range of RMB2025 1,000,000 to RMB2125 1,000,000, representing a year over year increase of 8.1% to 13.5%. Looking forward, we will continue to focus on high quality revenue business to drive margin and profitability improvements. In addition, we will explore new opportunities arising from robust digital demand, especially AI driven demand and further strengthened our position as a leading IDC player.

Speaker 4

Our proven dual core growth synergy, highly scalable service offering and solid financial and operational results give us confidence in our prospects to deliver sustainable value to 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. Our first question comes from the line of Yang Liu from Morgan Stanley. Your line is open.

Speaker 1

Hello. Good morning, management. This is Pamela from Yixin. Thank you for the question Opportunity to ask questions. So I think recently the most asked question is regarding companies' points to

Speaker 3

Thanks a lot Pamela. This is Tim here. As we've mentioned to the market before, We've been actively reaching out to multiple financing channels to the markets. I think you're aware of our efforts in terms of the CREITs, Asset disposals, both public bonds and private placements. Also, I'd like to point out, we have healthy cash balance of over RMB2 1,000,000,000 of unrestricted cash.

Speaker 3

Obviously, with the Shifts to the management team, we're able to bring a larger focus also on to some of our onshore and our renminbi financing channels with the addition of VICI to the senior team. So all of that is part of our efforts. At the moment, we are still closely monitoring the bond markets in the U. S. Obviously, they are volatile.

Speaker 3

But all of our preparation work is completed. So we will wait for the next market window on that side, but to continue

Operator

One moment for our next question. And our next question will come from the line of Edison Li from Jefferies. Your line is open.

Speaker 5

Hey, thank you for taking my questions. And first of all, congratulations on having one another wholesale order. So maybe the first question is about that wholesale order. Can we talk a little bit about the timeline of the delivery? And then also the terms, are they somewhat similar to the previous order?

Speaker 5

And then can you remind me For the 3,000 cabinets that you are building on that site, what megawatt that is equivalent to? So The first question is about that. Number 2 is on your operating cost. It seems that second quarter It's a lot lower on a year on year basis. It's about 22% lower on a year on year basis.

Speaker 5

Can you share your outlook on upgrading costs for the second half of this year.

Speaker 2

I'll take the first question on our contracts. We Actually, I've mentioned in the call, we recently actually we won extended contracts for 45 Megawatt As additional capacity from existing Internet joint customer, the contract has already signed actually To attach with previous, we announced in total 160 Megawatts together to be fulfilled in different phases. Let me elaborate a little bit more in details on this contract. We divide into a different phase. And the first phase, a couple of buildings will be delivered highly profitable by the end of The year and the second will be the half of next year.

Speaker 2

So the move in will be very fast. So that's something we can share with you.

Speaker 5

Sorry, can I just follow-up by asking, You indicated that this year you will deliver 3,000 cabinets on that site? So what is the equivalent back award for that 3,000 cabinets?

Speaker 2

Yes, correct. So we'll deliver 3,000 by the end of the year.

Speaker 5

And what is the back of what equivalent with that 3,000 capital?

Speaker 2

It's about less than 100 megawatts.

Operator

And our next question will come from the line of Sarah Wang from UBS. Your line is open. Sarah, your line is open.

Speaker 1

Yes. Thank you for the opportunity to ask questions. So may I ask if there is any change to the CapEx guidance for this year? Thank you.

Speaker 3

Hi, Sarah. Thanks for the question.

Speaker 5

In terms of CapEx guidance,

Speaker 3

at the moment, there are no further adjustments in terms of the CapEx guidance. Obviously, we are very much focused on the CapEx for delivery of this year's cabinets. And where we can cut back, we actually have been scaling some of that activity back just given the fact that we want to build up a healthy cash reserve also for our upcoming CD refinancing. And the good news on the CapEx front also is that Although we are focused on the delivery of this year's cabinets, we also have a number of very, very strong project financing associated with those projects. And so overall, we expect that the cash impact should be more Manageable from the activity that we have in terms of completing those cabinets for 2023 deliveries.

Operator

And our next question will come from the line of Timothy Zhao from Goldman Sachs. Your line is open.

Speaker 3

Sure. Thank you, management for taking my question. My question is regarding the EBITDA. Just wondering as in compared to your full year guidance, The low end and high end, just wondering what are the key variables that you are thinking for the second half of this year in order for the company to achieve, say, midpoint or the high end? And also any color into the EBITDA margin into the second half, including any like trend that you see from the power tariff power cost, etcetera, that will be very Hi, Timothy.

Speaker 3

Let me take this question here. Look, good question on the EBITDA margins. Obviously, For both first and second quarter, we've been working very hard on the cost control side. And so that's actually helped. There are a few, I would say, one offs on the positive side, both in 1st and second quarter, which We've shared with the market that will not be repeated in 3rd and 4th quarters.

Speaker 3

So we do expect there to be, I guess, a reversion in terms of Q3. Some of the bigger factors that have impacted in Q2 and expected to continue to impact in Q3 relates to power and tariff costs. The average unit cost actually has been relatively stable in the Q2. However, and this is not unlike our peers in China right now, there is now a seasonality In terms of the summer months, where we do expect the utility cost to be higher. Also, As you can see from our figures in the PPT, we've had some substantial ramp up in terms of customers moving into our data centers and obviously that Increases our overall utility costs.

Speaker 3

Last but not least, in terms of an outlook, I would say that at the moment, our guidance for the full year EBITDA remains unchanged. There is, I guess, an element of uncertainty around, let's say, second half power cost. There is an NDRC notification about provincial electricity transmission distribution prices during the 3rd regulatory period. So we That will inject another layer of uncertainty, I would say, around power. And I think for Q3 at the moment, We're probably expecting that EBITDA margins will contract a bit as compared to Q2 as some of these one offs will disappear from the Q2.

Speaker 3

But if the power cost remains stable, then we expect that 3rd into Q4, Q4 will then have an improvement in margins, Obviously given the cooler weather of the winter months. Thanks, Timothy. Thank you. That's helpful.

Operator

Thank you. That's all the time we have for Q and A today. And with that, ladies and gentlemen, that concludes our conference for today. Thank you for participating. You may now disconnect.

Operator

Everyone, have a good day.

Powered by Quartr

Key Takeaways

  • VNET’s Q2 operational performance: utilized cabinets grew by 2,000, utilization rate improved to 59%, retail MRR per cabinet reached a record RMB9,530, driving 5.6% revenue growth to RMB1.82 billion and 9.9% adjusted EBITDA growth to RMB535 million.
  • Strong AI-driven demand: selected as a computing partner in Beijing’s generative AI Innovation Partnership Program, offering high‐power‐density cabinets up to 40 kW and launching a full‐stack bare‐metal service for foundation model training and deployment.
  • Wholesale and retail momentum: secured an additional 45 MW contract from an existing internet customer (part of a 160 MW rollout), delivering 3,000 cabinets by year‐end, and extended 7 MW retail contracts while diversifying new clients across IT services, manufacturing, financial services, gaming and VR.
  • Expansion in hybrid cloud and MNC services: through its Blue Claw business, VNET won Mook, a global precision control manufacturer, to build its localized IT infrastructure and manage cloud migration for Chinese operations.
  • Sustainability and guidance: included in S&P Global’s 2023 Sustainability Yearbook with the industry’s highest ESG score, and maintaining full‐year 2023 guidance of RMB7.6–7.9 billion in revenue (+7.6%–11.8%) and RMB2.025–2.125 billion in adjusted EBITDA (+8.1%–13.5%).
AI Generated. May Contain Errors.
Earnings Conference Call
VNET Group Q2 2023
00:00 / 00:00