VNET Group Q4 2023 Earnings Call Transcript

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Provided by Quartr
March 27, 2024

There are 9 speakers on the call.

Operator

Hello, ladies and gentlemen. Welcome and thank you for standing by. For the Fourth Quarter and Full Year 2023 Earnings Conference Call for Vnet Group Inc. At this time, all participants are in a listen only mode. After the speakers' presentation, we will have answer and question session.

Operator

At this time, all of the participants are in a listen only mode. After the management's remarks, there will be a question and answer session. Our participants from our management team includes Mr. Jeff Dong, Chief Executive Officer Mr. Chi Yu Wan, Chief Financial Officer Ms.

Operator

Xinyuan Liu, Investor Relations Director of the company. Please note that today's conference call is being recorded. And I will now turn the call over to the 1st speaker today, Ms. Xinyuan Lu. Please go ahead.

Speaker 1

Thank you, operator. Hello, everyone, and welcome to our Q4 and full year 2023 earnings conference call. Our earnings release was distributed earlier today, and you can find a copy on our 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 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 include the disclosure of audited GAAP and 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 atir.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 begin by providing an overview of our Q4 and full year 2023 performance. We ended 2023 on a solid note that made the steady economic recovery, demonstrating effective execution of our dual core growth strategy.

Speaker 2

We meet our 2023 delivery target with 8,321 self built cabinets delivered during the year. As of year end 2023, we had grown our total cabinets under management to approx 93,600 compared with approx 87,300 years ago. The number of utilized companies increased by 2827 to 55235 in the 4th quarter, driving our overall utilization rate to 59% compared with 55% year ago. Our retail IDC MLR per company remained stable in the 4th quarter at RMB9477. In terms of our financial performance, we continue to focus on high quality revenue during the quarter, Turning our net revenues to RMB1.9 billion as well as a 3.8% year over year increase in our adjusted EBITDA to RMB440.2 million.

Speaker 2

Turning to our full year performance, our net revenues increased by 4.9% year over year to RMB7.41 billion and adjusted EBITDA grew by 8.9% year over year to RMB2.04 RMB2.04 billion. Our robust operational and financial performance reflects our effective strategy and strong execution, as well as our ability to grow our business by skillfully leveraging market trends and a supportive policy environment. According to this year's government work report, China is increasing its efforts to promote the innovative development of the digital economy. Specifically, the report called for policy support for the digital economy's high quality development and stated China will set up the development and application of big data and artificial intelligence, launched the AI plus initiative and built world class digital industry clusters. We believe these initiatives and goals will further drive market demand for high quality data centers and premium ITC services.

Speaker 2

As a leading ITC service provider, Vina is strategically positioned to capitalize on this emerging opportunities through our comprehensive operational strength, across marketing and the service as well as operations and maintenance. Next, I'd like to share our 4th quarter business updates. We are excited to see AI's huge demand from our customer continue to climb, especially computing power demand for training large language models. Among our wholesale customers, those in the short video industries are actively developing and integrating AI function, require massive high performance computing power to enhance their content creation capabilities and business operations. In our retail business, demand is also increasing steadily from customers in industries including autonomous driving, local services and virtual reality, where large language models are widely deployed for business.

Speaker 2

Our high performance data centers empower us to fulfill various AI driven demands with innovative solutions. Moving on to our wholesale business, we extended our impressive delivery track record to our wholesale customers with timely high quality deliveries of approx 109 Megawatt for the full year. These deliveries have not only solidified our reliability, but also boosted customer satisfaction. Of particular note, is the rapid ramp up period we have delivered to leading wholesale customers. For several of our projects, moving periods were much faster than initially anticipated.

Speaker 2

Furthermore, we recently secured a new order from one of our existing customers, a leading cloud service provider in China. The new order is for approx 15 Megawatt in one of our projects in the Yangtze River Delta region and is scheduled for completion in 2024. Once again, this new order showcased our long term customer loyalty and our industry leading service capabilities. Our retail business remained resilient during the quarter, attracting new customer across mobility, cloud service, AI and the IT service industry. We also extended contracts with existing customers in finance, local services, autonomous driving and gaming where demand remains solid.

Speaker 2

On the value added service front, our full stack one stop innovative Biometal as a service solution based on AI technologies continue to win customers, including one of China's leading providers of energy efficient computing solutions for smart mobility. This customer's demand for computing power is surging rapidly due to growing adoption of advanced driver assistance systems and the autonomous driving technology in the mobility industry. Our innovative biomethail as a service solution provides secure and flexible computing power resources to support the customer's intelligence, driving simulation training and the LLM operation, empowering the customer's future growth. Turning now to our recent ESG performance, our commitment to sustain ability once again won recognition from global leading ESG rating agencies in 2023, Earnings winner a Nae rating from MSCI for the 2nd consecutive year, this represents the highest ranking awarded today in China's Internet Service and Infrastructure Industry, distinguishing us among our peers. In addition, our company scored 53 in the 2023 S&P Global Corporate Sustainability Assessment, ranking the highest among China's IT service industry and in the top 11% in the industry globally.

Speaker 2

Looking ahead, we will remain steadfast in our pursuit of ESG excellence, embracing and promoting a green future industry wide. Before I conclude, I'd like to share some meaningful progress we made on our refinancing projects. In late December 2023, we completed the US299 $1,000,000 strategic investment from Shandong High Speed Holdings Group to further strengthen our balance sheet. We have also established a partnership with Shandong High Speed Holdings who cooperatively explore new opportunities in renewable energies. Amid the booming computing power, demand driven by AI development, we believe our core business will enjoy great synergies with Shandong High Speed Holdings, resources and expertise in traditional infrastructure fields.

Speaker 2

We look forward to collaborating with Shandong High Speed Holdings on array of green energy initiatives to jointly advance towards our carbon neutrality targets while meeting society's surging demand for digital transformation. Also, on 1st February of this year, we successfully completed the repurchase payment relating to our convertible senior notes due in 2026, in aggregate principal amount of US600 million dollars Amid the tepid capital market, this stands as another testament to our receiving business fundamentals as well as our commitment to long term sustainable development. In conclusion, strong execution of our UCOR strategy for high quality growth drove our solid performance in 2023, while laying a firm foundation for 2024. Underseeing the booming AI trend, we are growing our business alongside the macro environment study recovery. We will continue to build on our core capabilities as we head into 2024, fulfilling market demand for secure and premium IDC services and facilitating digital transformation across a wider spectrum of verticals.

Speaker 2

Our unwavering commitment to our shareholders is to fulfill sustainable growth and generate long term value. Before I share our delivery projection for 2024, I want to highlight that going forward these projections will be expressed in terms of power capacity instead of number of cabinets. We believe power capacity will more meaningfully reflect our business development given our data centers increasing power density amid the growing AI trend. That said, we expect to deliver 100 megawatts to 120 megawatts during 2024. Thank you, everyone.

Speaker 2

I will now turn the call over to Qiu to discuss our financial performance for the 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 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 and the full year of 2023 and in renminbi terms. Now, let me walk you through our 4th quarter and full year of 2023 financial results. Unless otherwise specified, the gross rates I will be reviewing are all on a year over year basis. We concluded 2023 with solid financial and operating performance, both in line with our guidance. More importantly, our wholesale business continues strong growth momentum.

Speaker 3

During the year of 2023, we added 109 megawatts of capacity to our wholesale business, driven a year over year increase of around 70% in our wholesale revenue. In the 4th quarter, our net revenues increased by 0.9% to $1,900,000,000 from the same period last year, mainly driven by the continued growth of our core business. Gross profit was $290,900,000 in the Q4 of 2023, representing a decrease of 11.4 percent from the same period of 2022. Gross margin was 15.3% in the Q4 of 2023 compared to 17.5% in the same period of 2022. The year over year decrease was primarily attributable to an increase in depreciation and amortization expenses as additional data center were put into service during the past quarters.

Speaker 3

Adjusted cash gross profit, which exclude depreciation, amortization and the share based compensation expenses was $741,700,000 in the Q4 of 2023, an increase of 0.2% from the same period of 2022. Adjusted cash gross margin in the Q4 of 2023 was 39 0.1% compared to 39.4% in the same period of 2022. Adjusted operating expenses, which exclude share based compensation expenses, compensation for post combination employment in the acquisition, allowance of law, receivable, impairment of long life assets and impairment of goodwill were $334,200,000 in the 4th quarter of 2023 compared to $355,400,000 in the same period of 2022. $4,000,000 in the same period of 2022. As a percentage of net revenues, adjusted operating expenses in the Q4 of 2023 were 17.6% compared to 18.9% in the same period of 2022.

Speaker 3

Adjusted EBITDA in the Q4 of 2023 was $440,200,000 representing an increase of 3.8% from the same period of 2022. Adjusted EBITDA margin was 23.2% in the Q4 of 20 23 compared to 22.6% in the same period of 2022. Our net loss attributable to Vnet Group Inc. In the Q4 of 2023 was RMB2.4 billion compared to the net loss of $64,200,000 in the same period of 2022. Basic and diluted loss were both $2.65 per ordinary share and both $15.88 per ADS.

Speaker 3

Each ADS represents 6 Class 8 ordinary shares. Turning to our balance sheet. As of December 31, 2023, the aggregate amount of the company's cash and cash equivalents, restricted cash and short term investments were RMB5.4 billion. Meanwhile, net cash generated from operating activities in the Q4 of 2023 was 730 point 7,000,000 compared to CAD407,500,000 in the same period of 2022. Our capital expenditure in the Q4 of 2023 was RMB1.6 billion and the total CapEx for full year 2023 was RMB3.58 billion.

Speaker 3

Now moving to our outlook. We expect our net revenue from the full year of 2024 to be in the range of RMB7.8 billion to RMB8 1,000,000,000 representing a year over year increase of 5.2% to 7.9 percent and adjusted EBITDA to be in the range of

Operator

RMB 2

Speaker 3

point $22,000,000,000 to $2,280,000,000 representing a year over year increase of 8.9% to 11.8%. Forecast reflects the company's current and preliminary reviews on the market and its operational conditions and is subject to change. Looking into 2024, we will continue to execute our effective due course strategy, driving high quality business growth. We believe our solid fundamentals and core strengths position us to capture market opportunities, especially AI driven demand. And always, we remain dedicated to creating sustainable value for all our stakeholders.

Speaker 3

This concludes our prepared remarks for today. Operator, we are now ready to take questions.

Operator

Thank you. We will now conduct the Q and A session. Our first question comes from Yang Liu of Morgan Stanley. Please go ahead.

Speaker 4

Thanks for the opportunity. I have two questions. First one, can management update us in terms of the cooperation with the strategic shareholder Shandong High Speed? What kind of pipeline are you talking about or what should be the timeline that we can see the 2 parties will do something together with either revenue synergy or cost synergy in the coming year? And the second question is, can management update us in terms of the 2024 CapEx guidance and what will be the key investment area?

Speaker 4

What type of customers or what type of or what type of region the company is investing? Thank you.

Speaker 3

Thank you, Yang Liu. Let me answer the 2 questions. For the Shandong High Speed synergy, as strategic investor, Shanno Hasid Holdings will play a positive role in providing support and guidance to the executive team of our company at the Board level, we remain committed to operating in accordance with market standards with existing executive team responsible for the day to day operations. Being a Fortune 500 enterprise, Shandong High Speed Holdings has reached financial resources. They bring valuable support to our onshore financing effort.

Speaker 3

Also just like Jeff said, the strong synergy between their green energy business and our IDC wholesale business in the new infrastructure projects present a significant opportunities. Also recently, the company signed a strategic collaboration agreement with Inner Mongolia Ulan Chabu government and with Shanghai High Speed Holding to construct green computer projects together. So this is the I hope the 2 parts. 1 is the cost efficiency in the onshore financing efforts. Will show some number in this year balance sheet.

Speaker 3

Also, I think the Green Energy Opportunity Corporation also will start from this year. For the CapEx and the site, our full year CapEx should be around RMB3.7 billion to RMB4.2 billion for this year, driven by the strong demand from our wholesale customer, around 70% CapEx on the wholesale business compared about RMB3.6 billion CapEx in 2023, The estimate CapEx for this year expect to increase about around 10%. For the financial side, after the company repaid the US600 million dollars convertible bonds in early this year, the company's credit status remains solid. Considered a more favorable domestic financing elements in terms of cost efficiency. We plan to primarily fulfill the 2020 this year CapEx demand through the onshore financing.

Speaker 2

Thanks for

Speaker 3

Shandong High Speed Holding the support, we will be able to obtain onshore financing approval more efficiency. Excluding the series and the assets disposals, we plan to raise fund through credit based, project based and existing asset based financing in onshore financing market with the financing cost expected to around the LPR. We plan to rise around RMB5 1,000,000,000 in financing in this year. This amount of financing with 6 percent already secured and about 40% under negotiation. Thank you.

Speaker 4

Yes. Sure. If management can provide more color, that will be more that will be better. Thank you.

Speaker 2

Operator,

Speaker 1

next one.

Operator

No problem. Our next question comes from Edison Li of Jefferies Hong Kong Limited. Please go ahead.

Speaker 5

Hi, good morning. Hi, good morning. I have three questions. Number 1 is, I'm looking at your debt breakdown on Page 20 of your PBT and it seems that by the end of this year, you have RMB4.25 billion of convertible promissory drugs that will come due. So is that how much of that is U.

Speaker 5

S. Dollar? And yes, how are you going to cover that? So that's question number 1. Number 2 is that, can you talk about the write down on your long lived assets that you took in the Q4 of this year because in your earnings announcement, you said that this is related to some plan to consolidate your data centers or certain data centers.

Speaker 5

So I wonder if you can elaborate on that. And then number 3, on the CapEx guidance that you just gave, RMB 3,700,000,000 to RMB 4,200,000,000. So with that, totally support the 119 megawatt projects under construction? And also maybe a little bit a side follow-up on that, how much of that 119 megawatt is wholesale and how much is retail because you said 70% of the CapEx will go to wholesale? Thank you.

Speaker 3

Okay. Let me first ask the second and third question for the loss in the Q4 of 2023, the company conducts impairment testing on goodwill and long lived assets in crawling with the U. S. GAAP. The results show that the fair value of the reporting unit and certain asset group were lower than their carrying amounts.

Speaker 3

As a result, a one off impairment of goodwill and the long lived assets was recognized. Excluding the one off impact, the net loss is same as 2022. The increasing number of data center put into operation in recent years has a result in the significant increase in the company's depreciation and amortization expense, which has negatively impacted gross profit and net profit. Due to change in both internal and external environments, the company recently conduct a reassessment of the useful lease and its fixed assets. Exelon export will also conduct and will be found actual useful life of certain machinery and equipment exists to provide estimate of 10 to 8 to 10 years.

Speaker 3

As a result, company plans to make accounting estimate change in 2024 and extend the depreciation period for certain machinery and equipment. After the adjustment, the average useful life of the company's fixed assets will be extended to about 14 years, aligning with the industry average. This adjustment is expected to have a positive impact on gross profit and net profit in this year. We excluding uncertainty factors such as foreign exchange gain or loss and the fair value change, the company expects achieving breakeven by this year? Also, the second the third question for the CapEx, most of the CapEx from the wholesale business are around 80% from the wholesale business.

Speaker 3

Sorry, what is the first question? Could you please

Speaker 5

Sorry, Jeff. Sorry, just on the CapEx, can I clarify that if 80% of the CapEx is going to wholesale, does it mean that 80% of that 119 megawatts project is wholesale?

Speaker 3

Yes. Yes.

Speaker 5

Okay. Okay. Thank you. My first question is about the debt breakdown by maturity on Page 20 of your PPT, right? So you show that in 2024, you have RMB 4,250,000,000 of convertible debt due.

Speaker 5

So I want to know how much of that is U. S. Dollar and how and what is your plan to cover that?

Speaker 3

It's the USD600 1,000,000 CB, which we already have completely repayments in February.

Speaker 5

All right. Okay. Okay. So that has been taken care of, right? Okay.

Speaker 3

Thank you.

Operator

Thank you. Our next question comes from Timothy Zhao of Goldman Sachs. Please go ahead.

Speaker 6

Great.

Speaker 7

Thank you management for taking my question. Also two questions here. One is regarding your guidance for 2024 regarding top line as well as EBITDA. Could management share what is the underlying assumption for the high end and low end? And any color on, for example, the MR, the US addition rate and also the revenue growth between your IDC and non IDC business wholesale versus retail?

Speaker 7

I think any color on that will be quite helpful. And secondly, I think back to your CapEx plan for 2024, just wondering, I think in your prepared remarks, you mentioned something about the AI related demand. Just wondering any color on what percentage or what proportion of the fact that the wholesale CapEx is related to the CapEx to meet the demand for the higher power density cabinets? And how do you think about the overall development in China for the IDC market? Thank you.

Speaker 3

Thank you. Let me ask the first question and then Jeff will ask the second. For the year 2023, our retail IDC business and non IDC business is quite stable with the wholesale business is a growth rapidly. By the end of 2023, our wholesale cabinets represent over 30% of our total cabinets and the contribution contributed around 20% of our total IDC revenue. Our wholesale revenue grew 70% year to year in 2023.

Speaker 3

The assumption of our 2024 guidance range in mainly based on our stateable retail IDC business and the non IDC business. And the rent is mainly the reason is utilization rate of our wholesale IDC business. So we expect to provide more color on wholesale, retail and non IDC starting from the Q4 of this year. So maybe in next quarter earnings, we will show more number from about our wholesale and the retail and the non IDC business.

Speaker 8

So Jeff? Yes. In terms of AI, AIGC demand, I will say we have seen actually rapid growth in China and AI driven demand from our customer side continue to climb, especially computing power demand for training LMM. And those models are dominated by the Internet giants, which the vertical models are led by the leading players in specific industries, as I mentioned, and some tech startups aside from the Internet giants. For our business, for the wholesale, AI driven demands are mainly searched by Internet giants' customers, especially like short video and e commerce business.

Speaker 8

As I mentioned on the call, we have seen short video customers are ramping up very, very fast than we expect, which is highly contributed by the strong AI driven demand. In terms of retail side, we are receiving actually interesting demand from retail customers across various industries like autonomous driving, local services and the virtual reality and so on. We will in 2024, we will explore into further demand from that side. And also, we have the value added service part can also provide solid support to the AI demand. And as you mentioned, in terms of the CapEx side to I mean to categorize into the AI driven, we as of 2023, around 20% of our stores' cabins are high power density and especially for the companies that delivered new delivered during 2023, I would say the large majority is power density cabinets, which are all for wholesale customers.

Speaker 8

For cabinets be delivered during 2024, I would say it will be 100% is high power density companies, which are all for wholesale customers. So come back to the client CapEx side, I would say, like majority of the CapEx will go to the high power density wholesale customers.

Operator

Thank you. Our next question comes from Daley Li of Bank of America Securities. Please go ahead.

Speaker 6

Hi management. Thanks for taking my question. I also have two questions. Firstly, regarding our guidance. Regarding like adjusted EBITDA growth for this year is have higher growth for the top line.

Speaker 6

So what will be the key drivers for the margin expansion? For Sam's question about the new capacity expansion and for the 100 megawatts to 120 megawatts of this capacity, what's the delivery timetable for this year? Will it be majority in second half or like 4Q or some will be in first

Speaker 7

half this year? Thank you.

Speaker 3

Thank you. Let me ask the first question about guidance. The main reason for the company's EBITDA grows higher than the revenue growth in this year guidance as follows. There are three reasons. The first one, the expected growth in this year is primarily driven by the wholesale business.

Speaker 3

Considering the nature of the wholesale business, we does not include the factory revenue in income, the wholesale business tend to have the wholesale business, the EBITDA margin is higher than the retail. So the growth of the wholesale business in this year is to contribute more EBITDA for this for the company. The second is, we plan to update and improve certain retail data center that's lower EBITDA margin for this initial arms to enhance our operating efficiency and increase their contribution to the EBITDA. 3, further cost control measure will be implemented to improve the company's operating efficiency, very positive impact EBITDA growth.

Speaker 8

Jeff? Okay. In terms of the 100 to 120 megawatt we'll deliver in 2024, I would say the pace will be similar to our previous years. So the majority of our deliveries will be happen in the second half of this year.

Speaker 4

Thank you, management. Thank you.

Operator

Thank you. This concludes today's conference call. Thank you all for participating. You may now disconnect. Have a great day everyone.

Operator

Thank you very much.

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Key Takeaways

  • Solid 2023 results: Q4 net revenue reached RMB 1.9 billion and FY2023 net revenue rose 4.9% to RMB 7.41 billion, while adjusted EBITDA grew 8.9% to RMB 2.04 billion.
  • Wholesale expansion: Delivered ~109 MW of capacity in 2023, driving a 70% year-over-year increase in wholesale revenue and securing a new 15 MW order from a leading cloud provider.
  • Surging AI demand: Customers in short video, autonomous driving and VR are ramping up high-performance computing needs, and VNET’s data centers are positioned to capture this growth.
  • One-off impairment charge: Q4 recorded a significant goodwill and long-lived asset impairment, contributing to a RMB 2.4 billion net loss, though management plans to extend asset depreciation periods to boost future margins.
  • Balance sheet strengthening: Completed a US $299 million strategic investment from Shandong High Speed and repurchased US $600 million in convertible notes to enhance liquidity and financing flexibility.
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Earnings Conference Call
VNET Group Q4 2023
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