VNET Group, Inc.

Good morning and good evening, ladies and gentlemen. Thank you and welcome to VNet Group Inc.' 's third quarter 2021 earnings conference call. At this time, all participants are in a listen-only mode. We'll be hosting a question and answer session after management's prepared remarks. With us today are Mr Samuel Shen, Chief Executive Officer and Executive Chairman of Retail IDC, Mr. Tim Chen, Chief Financial Officer, and Ms. Xin Yuan Liu, Investor Relations Director of the company. I now turn the call over to the first speaker today, Ms. Liu, IR Director of VNet Group, Inc. Please go ahead, ma'am.

Hello, everyone. Welcome to our third quarter 2021 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 the discussion today will contain forward-looking statements made under the SIPPAPA provisions of the U.S. Private Security Litigation Report 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. BNAT does not undertake an obligation to update any forward-looking statements except as required under applicable law. 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.vnet.com. I will now turn the call over to our CEO, Samuel.

Thank you, Xinyuan. Good morning and good evening, everyone. Thank you all for joining us on our earnest call today. Despite regulatory uncertainties, we delivered a milestone financial performance this quarter, achieving historical heights for both revenue and adjusted EBITDA, with both figures exceeding the high end of our guidance. Our results demonstrate the strong momentum we have generated through the execution of our dual core strategy. By leveraging our integrated strengths in both wholesale and retail IDC services, we were able to unlock additional demand from the ongoing market migration towards digitalization. and capitalize on more growth opportunities across diverse industry sectors. Since 2019, we have implemented our dual-core growth engine strategy, utilizing our foresight on market trends and our competitive edge in providing camera-neutral and cloud-neutral IDC services. By executing the strategy, we have continuously expanded our market reach and diversified our customer base to better position ourselves for managing the regulatory changes spanning across various industry sectors. We successfully expanded capacity while driving significant improvement in utilization rate for our ramp-up and newly built cabinets. We added 2,388 cabinets on a net basis during the third quarter. Utilization rate for our ramp-up and newly built cabinets increased by 5.5 percentage points to 34.7%, and the compound utilization rate remains stable at around 60%. With our track record of success over the last three quarters, we are confident in our ability to continue delivering strong operating results and expect to achieve our four-year target of delivering 25,000 standard cabinets and a compound utilization rate of 60% in 2021. Now let me provide more detailed business updates for the third quarter. As companies across the nation continue their migration towards digitalization, we have seen growth in overall demand for IT infrastructure from both existing and new customers across all of our business segments. For our wholesale business, we achieved healthy momentum as some of our internet and cloud service customers ramp up cabinet utilization to serve their increasing data processing needs. Meanwhile, we also saw some new add-on orders from these customers for their business expansion. In terms of our retail business, we continue to expand our client base across diverse industry sectors. We forged several notable new customer relationships during the quarter, augmenting their industry leadership and deepening their reach in their respective markets. For instance, in the third quarter, we began providing IDC services for China Chenshin Credit Rating Group, a leading credit rating agency in China, and Real AI, a leading enterprise-level AI security platform in China. At the same time, we continue to secure add-on orders from many of our existing customers. This includes Shiseido, the Japanese multinational cosmetic company, Liepin, a leading talent service platform in China, and Meiyou, a healthy and beauty information sharing platform, just to name a few. Our customer base has become far more diverse, encompassing the cutting-edge technology companies as well as companies from traditional industries, such as financial services, consumer goods, automotive manufacturing, home decoration, and many more. As we further diversify the customer base and industry verticals we serve, we not only actualize continuous service improvements, but also better insulate ourselves from sector-specific market fluctuations and macro risks. Turning to our cloud business, we have started to generate additional interest beyond our cooperation with Microsoft. a global unified commerce and post platform for specialty and luxury retailers, engaged us to assist with its cloud lending in China initiative. Going forward, we will continue to expand our cloud operations service offerings to attract more customers. Finally, I'd like to provide some updates on the progress we're making with our ESG initiatives. Sustainable development has always been at the core of what we do. As a result, our plans generally align with the recent regulatory announcements, driving progress in energy efficiency. During the quarter, our Boxin Data Center in Beijing and Nantong Data Center in Jiangsu Province were awarded the 5A Green Data Center rating at the 2021 Open Data Center Summit hosted by Open Data Center Committee. This is the highest rating for environmental sustainability performance of data centers in China. At the summit ceremony, our Foshan Data Center was also recognized with the Innovative Data Center for Carbon Emission Reduction Award. We plan to remain at the forefront of green development through our continued effort and investment in energy efficiency, energy saving technology, green management, and green innovation. In conclusion, by persistently executing our dual core growth engine strategy, we were able to unlock additional demand from ongoing business digitalization, capitalize on more growth opportunities across diverse industry sectors, and achieve another quarter of solid financial performance. Going forward, we will further deepen our market penetration diversify our sector coverage, broaden our customer base, and augment our technological powers to capture the tremendous growth opportunity born out of the rising tide of digital transformation. By maintaining precision focus on our dual-core strategy execution, we should be able to further expand our market share and augment our leadership position in the carrier and cloud-neutral IDC sector. With that, I will now turn the call over to Tim Chen, our CFO, who will discuss our financial results for the quarter and his thoughts on our future growth. Hi, Tim.

Thank you, Samuel. Good morning and good evening, everyone. Before we start our detailed financial discussion, 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 press release. Please also note that unless otherwise stated, all of the financial numbers we present today are for the third quarter of 2021 and in renminbi terms, while percentage changes are on a year-over-year basis. We delivered stellar revenue growth and improving operating margins in the third quarter, driven by our organic business development, dual core growth engine, diversified customer base, and a strong IDC market demand. Our net revenues and adjusted EBITDA rose by 25.3% and 22.2% respectively, both exceeding the high end of our previously announced guidance range. Net revenues in the third quarter of 2021 increased by 25.3% to $1.56 billion from $1.25 billion in the third quarter of 2020. This increase was mainly due to increased customer demand for our highly scalable carrier and cloud-neutral IDC solutions from both wholesale and retail IDC customers, as well as the notable growth of our cloud business. Gross profit in the third quarter of 2021 was 375.2 million, representing a year-over-year increase of 36.4% from 275.1 million in the same period of 2020. Gross margin in the third quarter of 2021 was 24% as compared to 22.1% in the same period of 2020. The year-over-year increase in gross margin was primarily attributable to our continued efforts in optimizing our operating efficiency. Adjusted cash gross profit, which excludes depreciation, amortization, and share-based compensation expenses, was $674.5 million in the third quarter of 2021 compared to $526.2 million in the same period of 2020. Adjusted cash gross margin in the third quarter of 2021 was 43.2% compared to 42.2% in the same period of 2020. Adjusted operating expenses, which exclude share-based compensation expenses and compensation for post-combination employment in an acquisition and impairment of loan receivables to potential investee, were $244 million in the third quarter of 2021 compared to $180.5 million in the same period of 2020. As a percentage of net revenues, adjusted operating expenses in the third quarter of 2021 were 15.6% compared to 14.5% in the same period of 2020. Adjusted EBITDA in the third quarter of 2021 was $450.4 million, representing an increase of 22.2% from $368.5 million in the same period of 2020. Adjusted EBITDA in the third quarter of 2021 excluded share-based compensation expenses of $4.6 million, and adjusted EBITDA margin in the third quarter of 2021 was 28.9% as compared to 29.6% in the same period of 2020. Our net profit attributable to ordinary shareholders in the third quarter of 2021 was $156.2 million, compared to a net profit of $97.1 million in the same period of 2020. Basic profit and diluted loss was 0.18 and 0.03 per ordinary share, respectively, and 1.08 and 0.18 per ADS, respectively. Each ADS represents six Class A ordinary shares. As for our balance sheet, the aggregate amount of the company's cash and cash equivalents, restricted cash and short-term investments, as of September 30, 2021, was $3.94 billion, increasing by $0.54 billion from December 31, 2020. Meanwhile, net cash generated from operating activities in the third quarter of 2021 was $134.7 million, compared to $210 million in the same period of 2020. Looking forward, we will continue to execute our dual-core growth strategy and further diversify our customer base to capitalize on growing IDC market demand. We are confident in our ability to build on our leading position in the IDC market to deliver continued growth for our shareholders. For the fourth quarter of 2021, we expect net revenues to be in the range of $1.75 billion to $1.77 billion and adjusted EBITDA to be in the range of $450 million to $470 million. For the full year of 2021, we anticipate net revenues to be in the range of $6.19 billion to $6.21 billion and adjusted EBITDA to be in the range of $1.74 billion to $1.76 billion. The midpoints of the company's updated estimates imply year-over-year increases of 28.5% and 32.2% in net revenues and adjusted EBITDA, respectively. This forecast reflects the company's current and preliminary views on the market and its operational conditions, which do not factor any of the potential future impacts caused by the COVID-19 pandemic and are subject to change. This concludes our prepared remarks for today. So, operator, we're now ready to take questions.

Thank you. We will now begin the question and answer session. To ask a question, please press star 1 on your telephone. To withdraw your question, please press the pound or hash key. Our first question comes from Yang Lu from Morgan Stanley. Please go ahead.

Thanks for the opportunity to ask a question. First, congratulations on the good result. I have two questions here. The first one is regarding the customer demand, because we see quite unfair role regulation towards most of your customers, especially on the wholesale side. Could you please share with us the demand outlook going into fourth quarter and next year? Especially we see the Overall wholesale under MOU or service number stay at 230 megawatts this quarter. So I would like to hear what is your expectation in the wholesale sales momentum going to next quarter and the next year. The second question is, do you see any risk on margin utility cost because with the liberalization of the industrial electricity in October whether it will bring some margin pressure to Vnet. Thank you.

Okay, Jan. Thanks so much. This is Samuel. I may just take the first question and then and see whether, Tim, you want to chime in to provide the comments for the second question. So first of all, from the high-level perspective, there are, I would say, several trends for the investors and analysts to pay attention to. Number one, I would say the data sets. The data sets continue to be generated, I would say doubling, in 18 months period. At the same time, I think the COVID-19 basically accelerated the enterprise digital transformation. So in short, more and more businesses or even their business model are moving from the pure physical world to both physical and digital world. So that's number one. Number two, the cloud adoption is getting to be a very standard infra practice for most enterprises. Unlike the rest of the world, which was predominantly by three different cloud service providers, but in China we have more than a dozen cloud service providers providing the services and so on and so forth. So in China what happened is we're seeing a lot of dedicated cloud adoption, both from the on-ramp, off-ramp opportunities. And then so the trend, you know, basically is, you know, given the fact of the number of clouds in China, government policies, data sovereignty is concerned, and even total cost of ownership. So a lot of the customers, when they started to adopt the public cloud services, they will consider, when they grow their business, will consider about the dedicated cloud. And the third thing is about the regulatory impact. As Yang mentioned earlier, first of all, China's economy is highly regulated. Therefore, all the way from the government policy regulations on the platform company's concern and also some of the vertical impact or even a power tariff. And those will become, you know, I would say general concern for most of the investors and analysts. From our point of view, again, kudos to our dual core because we already have very long track records from operation point of view. We also have a very comprehensive service offering and plus our diversified customer base. So from our point of view, we are bullish about the demand in the quarters to come. That being said, we also want to be cautiously paying attention on the potential regulatory impact. But the net-net, I would say we're bullish about the quarters to come, and we'll be ready to meet the customer's needs. For the second question, Tim, do you want to Charmaine, with your input.

Yeah, sure, Samuel. Yang, thanks for the second question. I think second question related to power, power tariffs. To date, you know, there have been no increases in power tariffs. There have been some power control measures. But as you correctly point out, there is expectation that some tariffs will increase in 2022. In terms of the impact to the overall business, I think I would say impact to the wholesale side of the business will actually be rather limited. These are mainly pass-through or the utilities are paid directly by the customer. And for our retail customers, actually a number of our contracts there have automatic adjustment clauses. For the rest, we expect during the normal course of business that we'll have those discussions and the adjustments pass through upon renewal. These are shorter contracts, and just like an increase in tax or any of the other sort of basic costs of providing a service, these are things that we fully expect will be passed through. So again, we're expecting very limited impact to our margins in relation to potential sort of tariff increases in China.

Thank you, Sam, and thank you, Tim. Thank you, Yam.

Our next question comes from Charlie Bai at Jefferies. Please go ahead.

Oh, hi. Actually, it's Edison. Hi. Congratulations on the results. I have two questions. Number one is on your capex. So you're guiding 2021 capex of $1.8 billion, roughly. I think previously you were talking about potentially $5.5 billion. So can you explain why it has come down so much from your previous soft guidance? And my second question is, on your retail MRR, can you explain why it has been going up? Because I think the year-on-year and Q&Q growth in 3Q was actually pretty big. So if you can talk about the trend and what investors should expect to see in 4Q in 2022, that would be great. Thank you.

Sure. Why don't I take the first one, and then maybe Samuel, if you want to comment on the MMR part. So, Edison, morning to you. And in terms of the CapEx, you know, the question about what is the sort of key drivers of the CapEx, and look, for us, really, there's two parts. There's the delivery of the cabinets, and as we deliver our data centers, there is CapEx-related expenses there. And then there's also another portion which I would put in the securing resources for future years, whether that's 22, 23, or even beyond that, the land and the power resources related to those, including the power infrastructure and the build-out of that. So I would say for this year, as the investors well know, we had a more consecrated delivery schedule in the second quarter and in the fourth quarter. And so we expect, obviously, that those were the two areas where there would be a more substantial increase in the capex. We did guide sort of a general soft guide in terms of overall capex, but frankly that at the end of the day boils down to especially the second part, which is on the future resources, 23, 24 and beyond. There has not been as many of those that have popped up. And also the other point that we try to factor in is opportunistic M&A. And again, there has not been anything in the first three quarters of the year. So we'll keep the investor base closely informed. But again, I think we would expect that we would end up somewhere close to where we were last year in terms of a total amount of CapEx for the year. But again, some of this could slip into January and then be counted as first quarter of next year. So I hope that helps, Edison. I'll pass to Samuel on the MR question. But before I do, I'll probably say that You know, we've kind of had the related questions in the previous quarters, you know, why did it go up, why did it come down quarter to quarter? I think some of it is product mix, but Samuel will give you a little bit more. But I would say, you know, trend-wise is something that we would encourage investors to really focus on rather than, let's say, quarter to quarter fluctuation. So I'll pass that to Samuel now.

Yeah, thank you, Tim. Yeah, thank you, Charlie, for the question. I think that's a very excellent question. As Tim pointed out, when investors and analysts look at our retail MRR, we wouldn't recommend to look at that quarter by quarter, but over a half year or year over year, you're going to see that number continue trending up for sure. Part of the reason is because we're not just providing customers the co-location services. we have a lot of the very added services on top of that, including the networking bandwidth, very added services, bare metals, hybrid multi-clouds. Especially today, I would say hybrid multi-clouds become a new norm. So a lot of the customers, not just from the Internet sectors, but also from a different vertical industry coming to us, requiring full-stack services. So that gives us great opportunities because we have a large customer base, And then we have a full stack service. And then we have a very strong ecosystem. And most of the ecosystem, when they provide the hardware solutions, software solutions, or even management type of services, majority happen to reside in the data center. And then so we can basically kind of glue them together and provide it to the customers. Of course, with the operation and maintenance on top of that and making sure customers would have a peace of mind they can just forget about the infrastructure pieces and focus on their business innovation, so become a great win-win-win situation. So part of the value-added services adopted by the customers contribute quite a bit to our retail MR this quarter. So hopefully that addresses your question, Charlie. Okay. Yeah, that's good. Yeah, thanks, Samuel and Tim.

Thanks, Edison.

Our next question comes from Tina Hu at Goldman Sachs.

Please go ahead. Hi, management. Thanks for the time. So I have two questions. The first one is that actually in the third quarter of last year's earnings call, management laid out the plan to add 25,000 cabinets each year in 2021, 22, and 23. So wondering if we are at this point still maintaining that guidance, and if yes, maybe because we're at the end of this year now. So I think we have probably already have some insight into the type of resources that we have secured next year. So wondering if you could share some of that information with us. And then the second question is a follow-up to a previous analyst question. So if looking at your 4Q, a guidance implied EBITDA margin is around 26 percent, which is lower by about two percentage points, YOY and QOQ. So wondering why is that? Thanks.

Sure. Thank you. Thanks for the question, Tina. Let me take these two questions. First would be in terms of your question on the 25,000 standard cabinet guidance. I would say that we provided that number, and I would say going forward that number would change a little bit, but that's really a matter of projects being finalized. And then you look at our mix of wholesale and retail customer, there are different power density requirements, so you'll end up with different numbers of cabinets. However, I would say that we maintain the $25,000 for next year as well. And for 22, your question around kind of how much of the resources we've secured, as of now, we've secured about 80% of the resources towards the 25,000 cabinet target for next year. In terms of margin and the reason for the reduction in margin in fourth quarter, frankly, that's really with the cabinet deliveries that we have in fourth quarter. So you will have naturally the scale-up of costs to support the delivery of the cabinets, and then that will then be mitigated over time as those cabinets wrap up. So we do have a lot of cabinets, as you can sort of reverse calculate, delivering in fourth quarter. So that's the main reason.

Thank you, Tim. So does that mean that our utilization rate in 4Q would likely trend down as well?

I would say that we would still keep to the around 60 percent, but there may be a small trend down, you're correct.

Okay, thanks.

Yeah.

Our next question comes from Ethan Zhang at Nomura. Please go ahead.

Thanks for the opportunity for me to ask a question. My question is also around the utility cost. So I just wonder what's the impact of the power restriction to our margin during the third quarter and what's our outlook for the power supply situation for the fourth quarter and next year? He wants management to give us more view on our outlook for migrating to green power and our current penetration rate of the green power utilization. Thank you.

Hi, Ethan. Let me take the first question and then I'll take a stab at the second and see if Samuel has anything to add as well. In terms of the power control, those were some of the power control measures throughout parts of China. And the impact actually to our IDCs or IDCs in general is that the IDCs had to burn diesel in the areas that were impacted. To VNet, impact was actually rather limited. And as of now, you know, no long-lasting impacts to us. The second, I guess, in terms of looking forward, what do we expect? Similar to the general market, we actually expect that these power control measures will to be largely eased as the government actually has been actively tackling these issues around thermal coal supply and around thermal coal pricing. So again, we don't expect this to be sort of a continuing trend or problem in terms of power control. As I mentioned before, yes, overall market does expect that there will be some power tariff increases in 2022. But as I mentioned earlier on, the impact in terms of margins should be rather limited, just given how the IDC business is run and our contracts with our customers. Green power, maybe I'll open with the fact that as of today, the ability to increase the proportion of green power is constrained by the fact that we purchase power from the grid. And so that's one sort of constraining factor. We are actively addressing Obviously, the overall country's goals, 2030, 2060, and again, at this point, we have not gone down the road of necessarily building our own power generation. We do not believe that that is a core competency for VNet to be builders and developers of power generation, but it is something that we look to find partners where we can actually then be able to help towards the overall goals of the country. Samuel, I don't know if there's anything else you want to add to that.

Oh, yeah. So a couple of things. Again, Ethan, thanks for the questions. I think everybody knows that China will strive to peak carbon dioxide emissions before 2030 and achieve carbon neutrality before 2060. So from the renewable energy usage point of view, I think it can do well. We will generally increase the usage of renewable energy and ensure to comply with the local requirements. But as of now, because the operators are limited to purchasing electricity from the grid, therefore the percentage of renewable energy will vary based upon the province and the grid's own sourcing of renewable energy. For example, for our Shanghai data centers, now we have 30 percent renewable energy usage. Again, that was basically due to the Shanghai grid energy mix. Having said that, we do have our own efforts from a PUE improvement point of view because the energy consumption in data center is on the rise. So no doubt of that. So due to the fact that the spread of cloud computing and society is paying a lot of great attention to the environmental performance of data centers. So that being said, we will continue to optimize our IT power optimize the data center space, optimize the data center cooling, eliminating the data center power and cooling inefficiency, utilizing the DCIM tools, which is data center infrastructure management tools, and also using the AI-controlled air conditioning to control the cooling and make it to be more efficient. So while we were partnered with the degree, to adopt the renewable energy, but we will continue emphasizing on our PUE efforts. So hopefully that addresses your question, Ethan.

Okay, thank you very much.

Our next question comes from Arthur Lai from Citi. Please go ahead.

Hi, good morning, Samuel and Tim. Congrats, D-Net and the whole team to deliver the strong result, even in the quarter three. We know the quarter three has a lot of hiccup from the power side. So I have two questions. And first question, I want to quantify the impact from the power supply. So we are seeing your competitors meeting and they told us that there is around 19 million RMB to use the backup power. And I wonder if we also have a similar one, of course. That's my first question. Thank you.

Hi, Arthur. Yes, you know, I would say that the power control did have, you know, in terms of data centers having to burn diesel. But it actually was extremely varied region to region and even data center to data center. So it's not something that I would say it was a one-off, but not enough to move the sort of EBITDA margin needle. And again, thankfully, we do not expect that these power control measures will be continued as the government seems to have tackled the underlying problem around thermal coal. So, you know, yes, I did see the similar remarks from some of our peers, but it was not something that impacted us enough to move the needle on our side in third quarter.

Okay, cool. And secondly, you mentioned that we should, you know, invest in the AI control, ACE, and try to improve the PUE. Can you also let us know how much or how big a scale of this, you know, or we need to invest and how we can see the results, you know, when we can see the results? Thank you.

Okay. I can probably tackle the question after. So basically, as I said earlier, because energy consumption, in data center is on the rise. It is a big topic. And then today we have more than 32 data center, you know, around the countries. And then the beauty of the AI control, it is about the, you know, more like data-driven machine learning type of technologies because in the past we tend to rely on the labor to managing, you know, I would say, air conditioning control, and so on and so forth. But now, we have to use the tools and the systems. You know, so DSIM, for example, is something that we invested. DSIM is something which is, you know, industry referred to a data center, infrastructure management. It is basically combining the operational needs of the physical IT equipment and also the physical facilities, namely building environment controls. Combining together, so we would be able to use the data-driven to control the air conditioning. That being said, we started with the four data centers in our pilot, and we have 32. So hopefully we can go through a few iterations to see the improvements, and we started to roll it out to all the data centers countrywide. We're seeing some promising impact. Wish I could share with you more updates in the coming quarters.

Okay, thank you. I do have some chain questions, but I will stand by the queue, maybe ask later. Thank you.

Thank you, Arthur. Thank you, Arthur.

Our next question comes from Mingren Li from CICC. Please go ahead.

Hi, management. Thank you for taking my questions. My question is regarding the acquisition of TanksCloud. So how is the development of cloud service business? And can you share the revenue and growth breakdown of cloud and IDC business? Thank you.

I can probably take the questions and definitely welcome Tim to chime in with additional input. Yes, I think early July, we announced that we acquired one of the leading cloud native companies in China, the Tense Cloud. And then the Tense Cloud moved in and also, you know, working with the usage team, providing the customers better solutions from the cloud native point of view. Today, if you look at the whole industry, as I said earlier, cloud adoption has now become a standard procedure. for every single enterprise when they want to go through the digital transformation. And then based upon the faster trend analysis, it shows 30% of the enterprises, when they go through the digital transformation, they will be applying and adopt cloud-native technology, namely container-based microservices or even serverless We're seeing the trend, you know, pumping up as well. And then ever since Tense Cloud joining us, we're seeing a great synergy in between because what happened in the past, we have a very good cloud migration solutions, which is primarily virtual machine based. But now we have a Tense Cloud coming in, basically, you know, provide additional puzzle to resolve the issue for a cloud native. Unlike the cloud migration, which is more lift and shift, not much architecture or re-architecture efforts have to be done by the customer side. But a cloud native would be a different animal, meaning the customer has to go through re-architecture of their solutions in order to embrace the beauty of the cloud native. And then so we're seeing a great synergy in between. Based upon the latest internal reviews, The revenue is pretty much on the target to achieve by the end of the year. But because we don't provide the breakdown numbers, so I don't have the detailed numbers that I could share with you. I'm not sure, Tim, you have additional input you want to say?

Yeah, no, Samuel, I'd say your last point, we don't provide the breakdowns of each of the evaluated services within the retail industry. enterprise piece. But what I can sort of add to Samuel's is that obviously this is a relatively recent acquisition. It is additive to our overall business, and we expect that it will become an increasing part of the value-added service solution set to our customers. So again, it will be a driver of MRR growth, and helping to make our business even stickier for our end customers. Thank you.

Okay, thank you. Our next question comes from Clive Cheng from Credit Suisse. Please go ahead.

Hi, thank you, management, for taking my question. My question is also... on the power. Tim mentioned that earlier we have a portion of the future utility costs that can be passed through to the customers. Can I get a sense that, you know, what portion of current existing contracts have these kind of pass-through clauses? That's number one. And number two, for those that does not have these pass-through clauses, what is our strategy Obviously, the price hike uncertainty for next year. Are we looking to renegotiate with these customers? Or at what certain point will we evaluate resigning and renegotiating with them? Thank you.

Sure. Let me take the first part. And I know that Samuel has some live examples in terms of the customer strategy as well. I think overall, you can safely assume that all of the wholesale contracts have either a pass-through mechanism or they're paying the utilities directly, as I mentioned earlier on. For our retail enterprise customers, as I mentioned, it does vary quite a bit. But again, I would say in general, the longer contracts will have adjustment mechanism clauses built into those contracts, whereas our shorter contracts Those are the ones where they don't have an automatic adjustment, but those are things that also where upon renewal, we would fully expect it will be part of the discussions. Ultimately, just like tax, just like power tariff, I mean, these are non-discretionary. And it's a cost that we face in providing the service, and it's a cost that must be borne by the customer. In terms of how that discussion is, in terms of the, if you call it a renegotiation or the renewal, I guess I'll leave Samuel to give you some color on that part.

Yeah, I think as Tim pointed out, because if we break down by the customer taxonomy, for the wholesale, that's a pass-through. For the scale retail, because it tends to be a one to three years contract, we already have to build in the costs. So negotiating with customers is a zero problem. And then I would say for the long-tail retail, even within the contract for the year one, we still put down some, you know, clauses. Basically, for some unforeseeable reasons, we would be able to sit down with the customer to negotiate. So I think the net is because we're going to balance. There's a part, you know, on one hand, we have a customer experience. On the other hand, we also have the margin, right? And then so if that's kind of a... marginal, and we're probably going to satisfy the customer experience and reopen the door when the contract's due. Or if that becomes a material, we're going to sit down with the customers. And the conversation will be fairly easy because, as Tim pointed out, the cost element, in a sense, is non-discretionary. So it is fairly, fairly transparent. So for us, we haven't seen any impact to sit down with customers and open the dialogue.

Okay, thank you very much. That's very clear. Thank you. Thank you.

Thank you, Clyde.

Our next question comes from Albert Hung from JP Morgan. Please go ahead.

Yeah, hi, management team. Thank you for taking my question. My first question is your peers comment that it is getting more difficult to get power codes for new data in the field. I'm wondering whether you see the similar trend. If yes, what would be the alternative way to grow the pipeline in the future? My second question is a follow-up on the 25K Cabinet Addition Commentary next year. I wonder if there's any slowdown in moving rate. How flexible could VNAT change the expansion plan and mitigate the market impact? Thank you.

Okay. I might take the APARIC Quartet one. I'll take the second one, Daniel. All right. Okay, sounds good. For the power quota one, I think it is true. I think the overarching statement keeps saying that China's economy is highly regulated. And given the fact that the government has the national policy to strive to peak carbon dioxide emissions before 2030 and achieve carbon neutrality before 2060, Therefore, the part quota, I would say case by case, location by location would be different. The good thing is, I think, because we have been in the industry for so long, literally over 25 years, and within our data centers, we have very credible customers with very serious workloads. And because, you know, again, kudos to our dual core. So other than the internet giants, or call service providers. We actually have a lot of very serious enterprise customers in our data centers. And then in government policy, on one hand, it's to drive a very healthy industry ecosystem, harness the ecosystem, and so on and so forth. But on the other hand, they also want to reward long-term players like us. So I would say getting power quota is going to be a challenge, but we're confident in a way to continue moving down the road to get what we need. So again, we have our high hope, and we're going to continue working our butts off to get the power of quota on the location that we have resources. So that will be my answer to you. Excellent question. Tim, do you want to take on the part two?

Sure, sure. In terms of part two and 25,000 cabinets for next year, and I guess the ability, the question is around the ability to slow down, is it? To sort of match, if there's any slowdown in customer ramp up, then how do we sort of slow down? And I would say yes. Look, the ability is there to the extent that we have the visibility from the customers where their demand needs a change. And I would say that's both speeding up and slowing down. Within sort of fiscal possibilities, if a customer tells us, look, we need it a month or two months earlier, absolutely, we can factor that in. And if the customer says, look, I need it a quarter later or two quarters later, there is fully that capability to shift. And so that will – Again, we look to our guiding overall 60% utilization rate, and we monitor that to make sure that we're not just building cabinets. We're also making sure that those IDCs are then filled. That's something we keep a close eye on, and we manage to that. We're not just stuck on one variable. I think there's a number of different operational variables that we manage to and making sure that what we build and the money that we spend does then generate the correct returns to us and our stakeholders. So I hope that answers that question. Thank you. That's helpful.

Our next question comes from Guo Han Wang at Daiwa. Please go ahead.

Thanks, Benjamin, for the opportunity to ask a question. I'm Guohan Wang from Daiwa Capital. We noticed that there are some of the expected ramp-ups for mature IDC capabilities before 2019 and 2019. So we want to know the reason for those unexpected ramp-ups. We know that given the supply of Polkata in Beijing and Guangdong, and from management's views, do we have any additional acquisition for high-quality assets in some tier-one cities in 2021 or maybe 2022? Because we know that you reduce the capacity, the capacity plan for these gears significantly. We also want to have a better understanding of our competition strategy, maybe in a major fears competition and also the weak demand. Thanks.

Let me, I guess, Samuel, let me take the first part. I guess the question was around ramp up of the mature cabinets utilization rate. I would say we continue to deliver cabinets and obviously as IDCs click past into these two years and older, you will see some small fluctuation. But no, we have not seen necessarily a very large difference in terms of the ramp-up of our customers for these mature data centers. Sorry, what was the second part of that question? Something about Beijing-Guangdong power quota?

Yeah, just about our allocation of our CapEx results is because we have reduced our CapEx this year significantly. So do we want to reserve for the maybe future development maybe in the second half of next year or 2023 due to the fierce competition and maybe some over supply in some regions? due to more interest of new players in 2020 and 2021. Yeah, so that's my question.

Okay, okay. If I understand correctly, sort of impact or relationship between CapEx and then competition. Is that correct?

Yes.

Okay. Well, look, I would say we had, I guess, a short discussion earlier on the CapEx side. You know, for us, again, there's two parts of that CapEx. One is actually the building of the data center, and a large part of that actually is the power infrastructure to connect the data center to the power source. So that part of it is related to our overall rollout of our plan. Two, that second part is going to be related to the acquisition of land and power resources for the future. And like I said, what we're building out and developing today largely was acquired years ago. If you're saying that have we sort of slowed down or have we not spent as much in relation to 23, 24 land and resources, I would say that it is not necessarily related to competition, but rather actually making sure that we're acquiring the land and other resources in the right places to meet our customers' demands. And the customer demand does change. So what we don't want to do is actually go out and buy a bunch of land that we won't be developing for another three, four years in the wrong place because that would just be idle land and trapped capital. So I think that's kind of the main point I would make there.

Thank you.

Was there a third part or was that also linked to, I guess, overall competition?

Okay? Oh, yeah, yeah.

Thank you.

Sorry, I was asking, was there a third part of the question? I wasn't sure if that was linked also then to the overall competition point that I was making earlier on.

Oh, yeah, yeah, yeah. I just have a balance on our longer-term competition and the development strategy. So, yeah, you just mentioned the points. Yeah, thanks.

Okay. No worries.

Thank you so much. Ladies and gentlemen, this will conclude our conference for today. Thank you all for participating. You may now disconnect.