VNET Group Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
May 29, 2024

There are 9 speakers on the call.

Operator

Hello, ladies and gentlemen. Thank you for standing by for the Q1 2024 Earnings Conference Call for VNet Group, Inc. 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.

Operator

Management from our management today include Mr. Gavin Shen, Rotating President Mr. Chi Yu Wang, Chief Financial Officer Ms. Xinyuan Liu, Investor Relations Director of the company. Please note that today's conference call is being recorded.

Operator

I'll now turn the call over to the 1st speaker today, Ms. Xinyuan Liu. Please go ahead.

Speaker 1

Thank you, operator. Hello, everyone, and welcome to our Q1 2024 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. VENAS does not undertake any obligations to update any forward looking statements, except as required under applicable laws. Please also note that VENAS earnings press release and this conference call include the disclosure of unaudited 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 website at ir.vnet.com. Before we start today's presentation, let me briefly introduce Mr. Gavin Shen.

Speaker 1

Beginning in May 2024, Gavin has undertaken this role of group's Rotating President, while also serving as the General Manager of the IDC Strategic Business Group. Gavin joined VNet as our Vice President in 2017, and in January 2020 became Senior Vice President, bringing nearly 20 years of business operations management experience in IT strategic planning, cloud computing and business centers. I will now turn the call over to Gavin. Please go ahead.

Speaker 2

Thank you, Xinyuan. Good morning and good evening, everyone. Thank you for joining our call today. Before diving into our Q1 performance, I'd like to remind you of the decline refinement that we mentioned in our last call. To enhance information transparency and help the public better understand our business.

Speaker 2

Starting from this quarter, we will report total revenues and operational metrics for our wholesale and retail business separately. Our CFO, Jiwi, will go over the details. Now let's move on to our Q1 initiatives and business progress. Solid Q1 results marked a good start for this year. We continued to execute our effective due cost strategies while pursuing high quantity development.

Speaker 2

Our robust operating and financial results once again demonstrate our ability to grow our business by leveraging our cost base to capture even enabling demand in the area of AI. MicroWise, supportive government policies and mayor decided to foster our favorable market environment are creating more treatments for us and IDC industry as a whole. Computing power is widely seen as a crucial components of China High Quality Development. Per the Government Work Report 2024, which calls for accelerating the formation of a nationwide computing power network. The telecom regulator, MIIT, has strengthened policy initiatives to further optimize computing power resource and infrastructure systems are cost relating.

Speaker 2

We believe those initiatives will empower us to allocate and manage other data center more efficiently and best meet the Xiuzhoujin market demand for high performance compute power. Additionally, interest in greener computing solutions is under rise. In April, we signed a strategic cooperating agreement with Wulan Tapers Local Government and Shandong High Speed Holdings to build a GUI AI Supercomputing Data center cluster. The 3 parties will work together to promote the digitalization and GUI development of WLAN Tap. We are confident our GUI data center business we are so led with customer and elevate our market competitiveness as those trade take hold.

Speaker 2

While IDC development remains our primary focus, we were keenly aware of how AI related demand for high performance computing is reshaping the data center landscape. Our quality data centers and high density power capabilities enable us to trail high performance computing solution to seamlessly to meet customers' rapidly growing AI needs. By the end of the Q4, over 90 percentage of our wholesale capacity in service is high power density. Meanwhile, we continue to see increased AI driven demand from industries like chip design, autonomous driving, financial service and logistics and education. As an industry pioneer, we are exploring AI data center, AIDC, development and actively upgrading our computing power infrastructure to capture market opportunities.

Speaker 2

AI workload requires massive computing power, enforcing our transition from CPU based to GPU based infrastructure. Apart from a few top internet enterprise and AI technology enterprise with established GPU resource of their own. Most small and mid sized enterprise were outsourcing this upgrade given the high cost, limited channels and other challenges in purchasing GPU infrastructure outright. AIDCs can meet enterprise computing power needs, while mini wise their capital investment, a significant advantage in the current environment. Now let me go through some updates on the IDC front.

Speaker 2

We continue to win new orders for both wholesale and retail business during the quarter. On the wholesale side, as we mentioned on our last call, we secured a new order from 1 of extreme exciting clients for approximately 15 Megawatt scheduled to be complete within 2024. We also won an order of approximately 2.5 Megawatt in our data center in the Yangtze River Delta region for a new customer, one of China's largest restaurant companies. On the retail side, we continued to attract new customers in financial service, local service and manufacturing and deepen exciting relationships. Notably, we won a new order of a positive 1.5 Megawatt in our data center in the Greater Beijing area for an exciting customer, a leading player in local service sector.

Speaker 2

Moving to our long IDC business, we also made progress with our VPN service, Our wholly owned subsidiary, DYXLAN has successfully expanded its global network coverage with a new point of presence established in Dubai in the 4th quarter and in South Korea and Mexico more recently. The new PoPs broadened our VPN service, global network coverage of our VPN service and the new PoPs will provide enterprise customers with comprehensive and integrated network, cloud, security service, enable them to capitalize on emerging markets and the global expansion opportunities. Turning now to our ECG performance. In April, we issued our 4th annual ESD report detailing in company 2020 3 adverse and progress turnability, include verified table inventory results. During 2023, we continued to execute our shared sustainability system and achieved various performance across employee diversity and equating it, green power engagement and efficient energy consumption.

Speaker 2

We also highlighted achievements such as our average annual power usage efficiency of 1.2 lakh, a total grid power per charge of about 50 6,900,000 kilowatt hours during the year and an increase in our percentage of female employees in our managed position to 31 percentage. Moving forward, we will remain dedicated to integrating ESG based parties company wide, advising the coordinated development of green economy and the digital economy, driving sustainability and creating value for our stakeholders and our associates. To conclude, our solid first quarter performance underscores our cost trends abroad and growing array of innovative IDC service, outstanding high power density development capabilities and our low year and expanding customer base looking ahead, We will continue to drive our dual core business strategy and pursue high quantity goals while advising the development of China's economy. Thank you, everyone. I will now turn the call over to JV to discuss more about our operating and financial performance.

Speaker 3

Thank you, Gavin. Good morning and good evening everyone. Before we start the detailed discussion of our Q4 performance, please note that as Gavin just mentioned, we have enhanced our disclosures with more detailed operational and financial metrics starting this quarter. We believe this new metric will provide shareholders with greater insight into our business. Specifically, beginning in the Q1 of 2024, our IDC business was subdivided into wholesale IDC business and retail IDC business based on the nature and scale of our data center projects.

Speaker 3

Prior to 2024, the subdivision was based on the types of customer contracts. You may find a detailed list of all wholesale projects in our IR presentation for this quarter. Accordingly, for operating metrics, we have presented them by retail and wholesale separately. For the wholesale business, the metrics are mirrored in terms of power capacity instead of cabinets, which we believe will more meaningfully reflect our business development. In addition, our wholesale capacity is present across 3 different stage including in service, under construction and health of future development, which we believe will provide a clear and more comprehensive picture of our wholesale capacity, boosting the high growth potential of our wholesale business.

Speaker 3

For financial metrics, we have subdivided our net revenue into revenues from IDC business, which include retail revenues and wholesale revenues and revenue from non IDC business, which consist our cloud and VPN business. Now let's move on our Q4 results. Please also note that unless otherwise stated, all the financials we present today are for the Q4 of 2024 and are in renminbi terms. Furthermore, all the growth rates I'm reviewing are on a year over year basis. We kicked off 2024 with solid operating and financial results.

Speaker 3

Our wholesale IDC business continued gain momentum driven by rapid customer movements. Capacity in SERPs was 332 megawatts as of the end of Q1. Capacity utilized by customers increased by 17 Megawatts to 2 36 Megawatts in the 4th quarter, primarily driven by increased demand for the customer in N has an OR6, N has an HB03 and E has an GS03 data center. As a result, the utilization rate of wholesale capacity improved to the seventy 1% with the utilization rates for mature capacity reaching around 90 5% and ramp up capacity reaching around 34%. In addition, the capacity around 75% and the capacity held for future development was 557 Megawatts.

Speaker 3

For our retail business, capacity in service was around 52,000 cabinets, remaining flat compared to last quarter, with utilization rates stable at 64%, with the utilization rate for mature capacity reaching around 73%. MRR per retail cabinets was 8,742 in the 4th quarter compared to 8,000 759 for last quarter and 8,874 for the same period last year. Moving on our financial performance, we remain focused on high quality revenue business and our effort continue to generate positive outcomes. Our net revenue increased by 5.1% to RMB1.9 billion mainly driven by the continued growth of our core business. To highlight, our wholesale revenue increased by 59 0.1% to $361,000,000 mainly contributed by Ehesen GS Compass 1 Phase 1, eHansen GS Compass 2a, eHansen GS Compass 2B,enhansen HB03 and eHansenGS03 Data Centers.

Speaker 3

On the other hand, retail revenue decreased by 7.1 percent to RMB 923,700,000 mainly due to our consolidation and redevelopment of several data centers since the Q2 of 20 23. Adjusted EBITDA was RMB 539,800,000 with adjusted EBITDA margin of 28.4%. Net loss attributable of VNET was RMB187 1,000,000. Turning to our balance sheet. At the end of Q1, the total amount of the company's cash and cash equivalents restricted cash was RMB2.1 billion.

Speaker 3

Meanwhile, net cash generated from operating achieved was RMB267 point $6,000,000 Our CapEx was 971,300,000 dollars For updates on our financing, as we mentioned last quarter, on February 1, 2024, we completed the repurchase payment relating our convertible series notes due 2026 in the total principal amount of US600 $1,000,000 In the current capital market environment, this strategic move reflects our resilient business fundamentals and our commitment to long term sustainable development. Now moving to our full year guidance for 2024, we expect net revenue 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% and adjusted EBITDA to be in the range of RMB2.22 billion to RMB2.28 billion, representing a year over year increase of 8.9 percent to 11.8 percent. This unchanged from our previous guidance. Given the last market conditions, we have increased our delivery plan to 100 to 140 Megawatts from previously stated 100 to 120 Megawatts. CapEx is expected to be in the range of RMB3.7 billion to RMB4.2 billion.

Speaker 3

This is unchanged from our previous guidance and may further increase according to market conditions. Looking ahead, our focus remains on high quality growth. We will continue to excuse our effective dual core strategy and further enhance our core capabilities to capture market opportunities driven by the AI boom. This concludes our prepared remarks for today. Operator, we are now ready for questions.

Operator

Thank you. We will now begin the question and answer session. The first question comes from Edison Li from Jefferies. Please go ahead.

Speaker 4

Thank you management for the presentation and very good disclosure. I have three questions. Number 1 is about the definition of retail and wholesale. I think a lot of investors would like to know what exactly the definition is because the retail MRR that you are presenting today for historical numbers are actually lower than previously disclosed. So that's why I would like to get a clarification on the definition.

Speaker 4

Number 2 is on operating cash flow. Can you comment why 1Q 2024 operating cash flow is so much lower than 1Q 2023? And number 3 is on your retail cabinets redevelopment. Can you tell us how many cabinets are actually being affected by the redevelopment? And what will be the outcome of the redevelopment?

Speaker 4

Does it mean that these cabinets will actually become wholesale or they will also be still for retail and with much higher power. So can you explain that? So let me repeat in Chinese.

Speaker 3

Okay. Thank you, Alison.

Speaker 5

I speak answer the question in Mandarin and let the

Speaker 6

Thank you for the question a lot. And I want to share with you more information. So it boosts up the information transparency of the company as well as best for the purpose of the capital market, better understanding our business development starting from quarter 1 of 2024, we began to add new disclosure metrics as well as new indicators. For instance, according to the revenue, we have classified them into 3 major classes, including wholesale, retail and non IDC. At the same time, we've also added new business indicators for the wholesale, including the operational with in service as a hashtag and we also put under construction as how to further future development of megawatts for your better understanding.

Speaker 6

For the first question of the definition of the wholesale and retail, I want to give you a re explanation. As you have already noticed that we have already redefined the two terms of wholesale and retail as we did before. In the in before, we put the major clients, the big customers into the wholesale, while the small clients into the retail. But now, we've made a small change to better serve the capital market as well as to boost up information transparency, as I did say. Right now, in terms of the wholesale, we make them into the size of more than 40 megawatts and in Chinese literally translated into the base type project.

Speaker 6

For those projects, they have the potential to expand their capacities in the long run-in terms of the land, the buildings as well as the power supply. In most of the cases, those wholesale projects are targeting the major clients and customers. However, we are also selling part of them, a small proportion of them to the middle size enterprises and clients. And on the other side, the retail projects, which will be literally translated into the city type projects located many in the core cities, including Beijing, Shanghai, Guangdong and Shenzhen, etcetera. Generally speaking, the total size usually is smaller than 20 megawatts without any potential to spend the capacity of expanding its stacks and cabinets.

Speaker 6

And for most of the cases, those projects are targeting the small and medium sized enterprises. But please be noted, we are also offering the retail projects to the major and the big clients as well to satisfy the needs to provide to ensure the loan latency. As you have already noted in our numbers that due to the fact that 10% of the committed cabinets have been redeveloped and a small proportion of the retail projects are offering to the larger clients, the MRR is not included. That is why you are seeing the daily discrepancy in the disclosed numbers and records. And for the question 2, you raised a question of why in 2024 Q1, the operational capital was smaller than that of in 2023.

Speaker 6

Generally speaking, in Q1 of 2024, the company observed a stable and normal cash flow. However, back in 2023 Q1, there were some one off projects such as the projects incentivized by the government grants as well as certain payback from the VAT. Those two items did not happen in Q1 2024. For the third question, the question was answered by the CFO. In Q1 2024, the retail database are operating on a stably and normally manner, and you have already observed certain changes.

Speaker 6

Generally speaking, we were redeveloping those cabinets from the low density power cabinets into the high density power cabinets. In that sense, the total numbers are on the decline. This is due to the purpose of better utilizing these sources to maximizing the our capacity to meet the market demands. And in the upcoming months, we will also make constant adjustment to better meet the market requirements. For instance, according to demand of a 3rd market, we will increase the number and redevelop the new cabinet to better serve the local market.

Speaker 1

Operator, next question.

Operator

Thank you for the questions.

Speaker 3

One moment

Operator

for the next question. Our next question comes from Yang Liu from Morgan Stanley. Please go ahead.

Speaker 7

Thanks for the opportunity. And great thanks for the more disclosure, which is very helpful to us. I have two questions. The first one is regarding the 3 business growth outlook. I think clearly the wholesale will be a key driver and the retail looks like a dragger.

Speaker 7

But the management quantify the growth rate of the 3 business? What is behind the current guidance of around 5% to 8% full year growth in the three business lines? That's my first question. The second question is G and A expense, we saw is a pretty big increase year over year. What is behind that and whether that is one off or sustainable?

Speaker 6

Thank you for the question. And I will give you more information about different lines on the revenue side. In light of the wholesale, we maintained a 55% growth. And for the retail, as you have observed, it has remained very flat for the non IDC 5%. And I want to give you more information about the EBITDA.

Speaker 6

It is compared to the revenue, it did a better job. For instance, despite the fact that the retail revenue remains very flat, but the EBITDA is growing is providing us a better figure due to our strategies on the cost operations and cost controls. And for the GM, in Q1, I have the explanations as follows. In the beginning of this year, in 2024, the company paid out a large amount of the debt. And out of that, the agency service fee was due to the reasons why you are seeing the final outcome on the GA.

Speaker 6

The other event was the stock expenditures for the employees.

Speaker 7

Thank you.

Operator

Thank you for the questions. One moment for the next question. Our next question comes from the line of Daley Li of Bank of America Securities. Please go ahead.

Speaker 5

Hi, Mason. Thanks for taking my question. Firstly, it's great to see a more disclosure about the segments breakdown. I have two questions. First one is about the overall demand for China data center market.

Speaker 5

How do management see the overall demand outlook for this year compared to last? And what kinds of clients we have seen could have better demand and hope management could give more color. My second question about the wholesale business. Management earlier discussed the expansion plan for this year and management update us the moving progress for the from the clients and for in the following quarters and for the total expansion target that we have. Maybe let me have a quick translation.

Speaker 6

For the first question, you raised the trend of the IDC development, and we are collecting the business requirements from our clients, especially from the conventional business, we can say that it was growing stably and we are now translating our capacities to meet the market demands. For most of them, there was strong demand to increase their AI capacities. At the end of the first call of 2024, in the wholesale side, almost 9% of the requirements are on the high density power cabinets demand, which is relating to the AI related needs. In light of the industries and sectors, the strong demand comes from the chip manufacturing side, the autonomous driving companies, the financial service agencies, the logistic companies as well as educational firms. They have a high demand on developing and using the AI related services.

Speaker 6

And now you also raised the questions and comments on our potential expanded capacities in 2024 and our plans to do that. According to our understanding now, we will follow the CapEx plan and targets made before targeting 2024. However, we are still negotiating new projects with potential clients and that might improve our targets to deliver. And we are also targeting our plans mainly on the wholesale clients as we have already determined. And you also asked questions about the wholesale clients for the company.

Speaker 6

As a business as usual models, The contract will also last 2 to 3 years before we are going to calculate the total fees. However, we are also signing up new clients, which under that new contract, the installment of cabinets could be finished within half a year.

Speaker 5

Thank you, management.

Operator

Thank you for the questions. One moment for the next question. Our next question comes from the line of Timothy Zhao from Goldman Sachs. Please go ahead.

Speaker 8

Great. Thank you, management, for taking my question. And also thank you for the more transparent disclosure, which is quite helpful. I have two questions here. One is on the I think on your full year guidance.

Speaker 8

I think compared to the Q1 results, just wondering, I think especially on the top line, I think we are assuming an acceleration in terms of revenue growth for the rest of this year. Just wondering if Madhuang can elaborate on what is the key driver and just the breakdown between wholesale retail IDC and also the non IDC segment? Which line could be like growing faster in the upcoming quarters? And secondly, I think given the more transparent this quarter, I think a follow-up question is on like a I'm just wondering if management has any target or like a goal in terms of the wholesale versus retail capacity or revenue breakdown by year end or in the midterm? And that will be very helpful.

Speaker 8

Let me quickly translate myself.

Speaker 6

The answer is as follows. The wholesale business is a main source of our revenues as you have already seen in the plan. And we also see that the retail business and the retail projects are declining on a year over year basis. However, as we all see that starting from last year Q3, we began the retroification from retrofication on the retail side to deploy more high dense power cabinets. And by the end of this Q2 and Q3, this retrofication may be completed, which will pick up our retail projects revenue as

Speaker 3

well.

Speaker 6

In light of the ratio of the revenues, the retail against the wholesale is standing at 2:one. Still, the revenue from the

Speaker 3

retail is taking the major

Speaker 6

proportion from the ratio and the figures. In light of the capacity ratio, the retail and wholesale is approximately standing at 5:3 in light of using the numbers of cabinet to make these calculations.

Operator

Thank you for the questions. Seeing no more questions, ladies and gentlemen, that concludes our conference for today. Thank you for participating. You may now disconnect your lines.

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Key Takeaways

  • In Q1, VNet reported net revenues of RMB 1.9 billion, up 5.1% year-over-year, and achieved an adjusted EBITDA margin of 28.4%, underscoring improved profitability.
  • Wholesale IDC capacity in service reached 332 MW with utilization rising to 71%, and management raised its 2024 wholesale delivery plan to 100–140 MW to capture strong demand.
  • Retail IDC revenue fell 7.1% to RMB 924 million due to consolidation and redevelopment of lower-density cabinets, keeping cabinet utilization at a stable 64%.
  • VNet is pivoting to AI-driven high-density computing, signing a GPU supercomputing cluster agreement and converting over 90% of its wholesale capacity to support AI workloads.
  • Full-year guidance was reaffirmed, with net revenue expected to grow 5.2%–7.9% to RMB 7.8–8.1 billion and adjusted EBITDA up 8.9%–11.8%, backed by stable CapEx plans.
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