VNET Group, Inc.

Good morning and good evening, ladies and gentlemen. Thank you and welcome to VNet Group Inc. 4th Quarter 2021 Earnings Conference Call. At this time, all participants are in listen-only mode. We will be hosting a question and answer session after the management prepare 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. Xingyuan Liu, Investor Relations Director of the company. I will now turn the call over to the first speaker today, Ms. Liu, IR Director of Vinet Group Inc. Please go ahead, ma'am.

Hello, everyone. Welcome to our fourth quarter 2021 earnings conference call. Our earnings release was distributed earlier today, and you can find a copy on our IR website as well as on Newswire Services. Please note that the discussion today will contain forward-looking statements made under the safe harbor provisions of the U.S. Private Securities 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. VNet does not undertake any obligations to update any forward-looking statements except as required under applicable laws. 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.

All right. Thank you, Xin Yuan. Good morning and good evening, everyone. Thank you for joining our fourth quarter 2021 earnings conference call. We concluded 2021 with strong operating and financial results. Operationally, we successfully achieved this year's delivery target by adding approximately 25,000 cabinets in the full year of 2021, including 13,276 cabinets that were delivered in the fourth quarter. Financially, for the full year of 2021, we grew our revenue by 28% and our adjusted EBITDA by 32%. We attribute our achievements to favorable government policies, robust market demand, persistent strategy execution, and methodical service expansion. First, we are pleased to see the favorable government policies continue to provide a strong tailwind to our industry development. Last month, The Eastern Data Western Computing Plan was joined and released by China's National Development and Reform Commission, together with three other central regulatory departments. Of the eight national computing hubs, we have already deployed our data centers in the Beijing-Tianjin-Hebei region, Yangtze River Delta, Greater Bay Area, Chengdu-Chongqing Economic Circle, and Inner Mongolia Autonomous Region. In addition, this January, the State Council of China unveiled the first five-year growth plan for the digital economy, highlighting the sector's role in reshaping global economic structure and rolling out developed targets through 2025. The plan laid out measures for upgrading national infrastructure, fostering the role of data as a production element, and promoting digital transformation. The plan also gives priority to the development of digital infrastructure, a pillar of achieving digital economic prosperity that will also spur investment and drive overall economic growth. During the fourth quarter, we received orders not only from bare weather technology companies in the internet sectors, but also traditional companies in brick and mortar industries that are transforming through digitalization. In addition, we're seeing growing demand in both the wholesale and retail segments. In order to seize this burgeoning market demand, we maintain a laser sharp focus on executing our dual core strategy to offer both wholesale and retail IDC services, enabling us to achieve solid operating results. On a cabinet delivery front, we added 13,276 cabinets on a net basis in the fourth quarter. to 78,540 cabinets as of December 31, 2021, despite a myriad of challenges, including equipment delivery delays caused by the COVID resurgence in certain regions of China, global chip shortages, and construction difficulties due to excessively cold weather. To meet our annual delivery targets against all odds is a strong testament to our solid execution capabilities. developed on the foundation of our extensive experience in the IDC sectors. This achievement demonstrates our superior capabilities in project management, logistics, as well as suppliers and government relations. In addition, successfully leverage our extensive technological expertise to explore extension resources. Turning to our monthly recurring revenue, our retail IDC MRR reached a new high of 9,301 in the fourth quarter, representing 2% year-over-year growth. Our continued growth in MRR is a manifestation of the increasing endorsement from our existing customers. As we continue to improve our service capabilities and enrich our one-stop solution offerings, our existing customers expanded their contract scope accordingly to include more varied added services, such as interconnectivity bare-matter services, hybrid cloud services, O&M, and more. We're also making good progress on our utilization rate. Our compound utilization rate increased to 61.6% in the fourth quarter compared to 59.8% in the previous one. This increase was mainly driven by consistently strong demand from the internet sectors and the digitalization trend in the traditional industries. such as financial services, automobile manufacturing, and local services. The utilization rate for mature cabinets, which consisted of cabinet deliveries prior to and during 2019, was 76.7%, compared to 75.5% in the previous quarter. The utilization rate for ramp-up and newly built cabinets, which consisted of cabinet deliveries in 2020 and 2021 was 39.6% compared to 34.7% in the previous quarter. That being said, we do expect to see some seasonal fluctuations in the utilization rates in the first quarter. This is because each year we reclassify mature, red pop, and newly built cabinets in the first quarter, and we delivered a large amount of newly built cabinets in the fourth quarter of last year. On the resource front, we have recently secured new resources exceeding 20 megawatts in capacity at a premium location in Beijing, and we expect to deliver the cabinets over the next two years in multiple phases. Additionally, we continue to secure more resources in other Tier 1 cities and surrounding areas. On the wholesale business side, while maintaining our ramp-up speed, we continue to secure more orders from existing and new customers. Our customers in the internet sectors and cloud computing industry maintain a healthy pace of development and ramp up fast to meet their increasing data processing needs. In the fourth quarter, we won a pre-committed order of approximately 7 megawatts in capacity from an existing internet customer. Recently, the same customer awarded us a further pre-committed order of approximately 11 megawatts in capacity. And we also secured three other orders, totaling approximately 5 megawatts in capacity. Two of them were multi-year contracts from our existing customers in the internet and technology sectors, respectively. While the third one was a multi-year contract with a state-owned cloud enterprise in the southern western region of China. We continue to see the increasing demands in our wholesale business and are confident about our future prospects in this segment. Turning to our retail business, the digital transformation trend further fueled our business growth across multiple verticals. We continue to see trans demand from several industries, including financial services, automobile manufacturing, local services, and IT services. In addition, we also saw increased demand from traditional industries such as logistics, manufacturing, and construction. For example, several globally renowned companies partnered with us to expand their business in China during the quarter, demonstrating our strong customer recognition, exceptional operating track record, and superior ITC technologies. These customers include a leading global investment bank, the world-leading credit rating service provider, and a global leader in the premium and luxury car industry. We have now reached over 1,400 IDC customers in total, and they operate in a wide variety of industries. This growth and diversification of our customer base will help us to mitigate any potential adverse regulatory changes and also serves as a secure foundation for the future development of our dual-core strategy. For our Blue Cloud business, we continue to grow the business by providing industry-specific solutions to help our customers improve their operational efficiency and reduce cost. Within seeing the unprecedented supply chain disruption caused by the COVID-19 pandemic, we decided to proactively develop a solution to help our clients resolve acute pains in their logistics management and shorten their product to market time. We recently initiated a logistics execution system, one of our key SaaS offerings to IDC customers in the automotive industry. This SaaS offering improves support for lean manufacturing with the aim of minimizing lead time and increasing customer satisfaction by fulfilling tailored requirements. The system also provides better warehouse management by synchronizing online and offline orders. Enabling direct ordering from manufacturers eliminates the need for intermediate distributors, allowing manufacturers to produce goods based on the actual needs of customers. During the quarter, Neutron, a new local EV manufacturer, began using our logistics execution system and provided excellent initial feedback. Utilizing our successful execution experience and product development capabilities, we expect to expand our product reach to serve more upstream and downstream industry participants in the automotive industry and expand into various other sectors going forward. Beyond the execution of our strategy, we further explore options. to diversify our financing solutions and enhancing the resilience of our business. In January, we reached an agreement with Blackstone, the world's largest alternative investment firm, pursuant to which Blackstone made an additional investment in VNet by purchasing US $250 million of our convertible notes. Last December, we signed a master joint venture investment agreement with a sovereign wealth fund Together, we will form joint ventures to pursue development and investment opportunities in multiple built-to-suit hyperscale data center projects in China. As the leading data center service providers in the industry, we have always considered sustainable development as a core part of our mission since inception, and ESG strategy is an integral part of our long-term business success. We aim to achieve both carbon neutrality and 100% renewable energy by 2030. And we have also committed to a number of ESG initiatives. First of all, we strive to contribute to a sustainable future. We became a signatory of the UN Global Compact in November 2021 and now pledge to consider all 17 UN Sustainable Development Goals in our comprehensive business development. In the pursuit of increasing renewable energy ratio in our energy consumption, we successfully signed strategic cooperation agreements with China Huadian Corporation, Shanghai Electric Wind Power Group, and China Southern Power Grid Energy Efficiency and Clean Energy Co. In addition, as a response to the international initiatives and domestic callings against climate change, we're now examining climate-related risks and opportunities concerning the industry, and have recently committed to supporting the Task Force on Climate-Related Financial Disclosures, aka TCFD. Last but not least, we continue striving to decrease the PUE of our data centers. The average PUE of our stabilized data center was 1.37 in 2021, notably lower than the industry average. Turning to our capital market initiatives, I would like to take the opportunity to share with you that we are planning a secondary listing on the Hong Kong Stock Exchange. We believe a secondary listing in Hong Kong will provide our shareholders with an additional trading value while offering them greater protection amid an evolving regulatory environment. The timing of our contemplated secondary listing is subject to market conditions and regulatory approvals, however. In summary, 2021 was a rewarding year. We maintained consistent execution of our dual core strategy to achieve sustained growth, and we also succeeded in meeting our annual target for 2021 by delivering approximately 25,000 cabinets. In consideration of the uncertainties in the macroeconomic environment, we would like to revise our annual cabinet delivery target from 25,000 cabinets to a range of 14,400 to 17,400 cabinets for the year of 2022. With that, I would now turn the call over to Tim. He 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 the financial numbers we present today are for the fourth quarter of 2021, and in renminbi terms, while percentage changes are on a year-over-year basis. As Samuel mentioned, our performance in 2021 was characterized by healthy revenue growth and margin expansion, improved operational efficiency, augmented utilization rates, and consistent cabinet capacity deliveries which proceeded according to schedule despite macro uncertainties. Net revenue in the fourth quarter of 2021 increased to 1.75 billion, a 29.4% year-over-year increase from the fourth 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 in our cloud business. Gross profit in the fourth quarter of 2021 was $380 million, representing a year-over-year increase of 29.1% and a sequential increase of 1.3%. Gross margin in the fourth quarter of 2021 was 21.8% compared to 21.8% in the fourth quarter of 2020 and 24% in the third quarter of 2021. The year-over-year decrease in gross margin or small decrease in gross margin was primarily attributable to the massive delivery of new cabinets, which usually have a ramp-up phase to reach the expected profit level. Adjusted cash gross profit, which excludes depreciation, amortization, and share-based composition expenses, was $713.8 million in the fourth quarter of 2021, an increase of 22.7% from the fourth quarter of 2020, and 5.8% from the third quarter of 2021. Adjusted cash gross margin in the fourth quarter of 2021 was 40.9% compared to 43.2% in both the fourth quarter of 2020 and third quarter of 2021. Adjusted operating expenses, which exclude share-based compensation expenses, compensation for post-combination employment and acquisition, impairment of loan receivable to potential investee and impairment of long-lived assets were $273.7 million in the fourth quarter of 2021, representing an increase of 27% from the fourth quarter of 2020 and 12.2% from the third quarter of 2021. As a percentage of net revenues, adjusted operating expenses in the fourth quarter of 2021 were 15.7% compared to 16% in the same period of 2020, and 15.6% in the third quarter of 2021. Adjusted EBITDA in the fourth quarter of 2021 was $463 million, representing an increase of 18.8% year-over-year from the fourth quarter of 2020 and an increase of 2.8% sequentially from the third quarter of 2021. Adjusted EBITDA in the fourth quarter of 2021 excluded share-based compensation expenses of $253 million Just the EBITDA margin in the fourth quarter of 2021 was 26.5% compared to 28.9% in both the fourth quarter of 2020 and the third quarter of 2021. Our net loss attributable to ordinary shareholders in the fourth quarter of 2021 was $27.3 million compared to our net loss of $1.02 billion in the fourth quarter of 2020 and a net profit of $156.2 million in the third quarter of 2021. Basic and diluted loss were 0.03 and 0.28 per ordinary share, respectively, and 0.18 and 1.68 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 December 31, 2021 was $1.71 billion, a decrease of 49.8% from December 31, 2020. Meanwhile, net cash generated from operating activities in the fourth quarter of 2021 was $664 million compared to $283.8 million in the fourth quarter of 2020, and $134.7 million in the third quarter of 2021. Our capex in the fourth quarter of 2021 was $2.2 billion and the total capex for the full year 2021 was $4 billion. We expect to invest $4 to $5 billion in capex for both our data center constructions and M&A considerations for the full year of 2022. Looking forward, We will continue to explore various financing solutions, execute diligently on our dual core growth strategy, increase our customer diversification to cultivate resilience, and further consolidate our position as a leading data center services provider in China. Now, moving to Outlook, for the full year of 2022, we anticipate net revenues to be in the range of $7,450 million to $7,750 million, and adjusted EBITDA to be in the range of $1,975 million to $2,125 million. The midpoints of the company's updated estimates imply year-over-year increases of 22.8% and 16.9% in net revenues and adjusted EBITDA, respectively. This forecast reflects the company's current and preliminary views on the market and its operational conditions and does not factor in any potential future impacts caused by the COVID pandemic and is subject to change. This concludes our prepared remarks for today. 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 pound or hash key. First question comes from the line of Yang Liu from Morgan Stanley. Please go ahead.

Thanks for the opportunity to ask questions. Two questions from my side. The first one is on the demand. We see a downward revision of the three-year new capacity delivery plan for 2022. Could you please update us in terms of the wholesale and retail split? And if I remember correctly, previously $25,000 actually is 80% for wholesale and scale retail and 20% for traditional retail business. So what is the new split and where do we see the downward revision of the demand? And the second is for the 2022 margins. We see the new change to guidance revenue growth, which is pretty strong, but the EBITDA undergrowth revenue. What is the reason for that? Is this mainly because of the higher utility cost, or is there any other reason behind that? Thank you.

Okay, Tim, do you want to take the question first, and then I can chime in later?

Absolutely. So in terms of the demand outlook, we are looking at a roughly 60-40 split, wholesale versus retail. And so the retail does comprise a component of the scale retail. So actually, the downward guide on the cabinets was actually a pro rata approach. So we're not necessarily saying that there's one segment versus the other segment. And then I guess in terms of the question on the EBITDA versus the revenue growth, we are, as you know, steadily ramping up the wholesale side of the engine, but we also have other business segments. And so some of the other business segments are not EBITDA types of businesses or they have lower margins. And so that actually is... increasing the sort of cost related to those. More importantly is we also in our guidance have factored in the increase in utility costs and that accounts for let's say around just under 1% of the decline in margins as well. So I think that's the main drivers, Young, to your question. I guess in terms of the overall demand outlook, in terms of the details, Samuel, I don't know if you wanted to add some color for Yang on the wholesale and retail demand that we've been seeing.

Yes, definitely. Again, thanks, Yan, for the questions. I think overall, given the favorable government policy and also the rise of data sovereignty and plus the digital transformation momentum, So overall, we're still very bullish about our loan range outlook in general. But we also have to understand that there is a macro issues that we have to be careful about. Industry-wise and market-wise, there's also kind of different, I would say, different climate compared to about the last year. And therefore, company-wise, we want to be a little bit cautious. You know, one thing, on one hand, there's a business priority. On the other hand, there's a resource need. We want to balance. So that's the reason. Overall, business outlook, fantastic, and we're very bullish. But we're taking a cautious approach step by step. So I think that's the additional color which I want to add on top of what Tim mentioned earlier. Thank you, Jan.

Jan? Young, sorry, one more point on the question you had on EBITDA. I think one of the other factors that you want to take into consideration as well is the fact that we added, you know, 13,000 cabinets at the end of 2021. And so we are also factoring a drag on the EBITDA when it will take then for these cabinets to slowly ramp up during the course of 22. So there will be more costs obviously in the first part of the year. until they start ramping up and these are fixed costs with the delivered cabinets.

Thank you. May I follow up in terms of other low margin business? Is it the cloud service for Microsoft and also the VPN growing faster and also other IT service business or something else? have some dragging effect on the margin?

I can probably comment on that one. So first of all, again, precisely, it is not a low margin business. I would say it's not like pure IDC wholesale play, which is EBITDA type of business. You know, cloud business or very added services, they're not much related to EBITDA. but it is a very healthy business, again, from the gross margin point of view. But assuming you're also interested to know about Microsoft Cloud growth and also VPN growth, I think from a market perspective, the Microsoft Cloud, which basically includes Azure, Office 365, Dynamics 365, and Power Platform, is highly welcome in the enterprise space. And then, of course, we're benefiting from their growth by being the Microsoft's closest operating partners in China. From a number of perspectives, I would say we continue enjoying the very healthy double-digit growth year-over-year. And then switch to the VPN that you mentioned about, which is the MPLC VPN. It is still highly regarded as one of the highest quality options for enterprise connection. We're seeing some of the customers having the needs to balance their price performance. Some of them will continue to go for MPLS VPN, and then some of them will try to go with the SD-WAN. Luckily, because we do provide both routes and options for customers to choose, we're seeing the SD-WAN business pick up very, very fast, high double-digit scores year over year. So I think combined together, it is still very... healthy and great business for us. Hopefully that addresses your question, Jan.

Thank you, Sandy.

Once again, if you would like to ask a question, please press star 1 and refer a name to be announced. To cancel your request, please press the pound or hash key. Next question will come from the line of Edison Lee of Jefferies. Please go ahead.

Well, hi, Samuel and Tim. Thank you very much for the presentation. I want to focus on your target for 2022. You gave a range of 14,400 to 17,400 cabinets. I want to know how comparable this number is versus the previous guidance of 25,000 cabinets, because obviously wholesale build-out is not based on cabinets, but based on lack of one, right? So could you maybe help us understand how we should actually look at this new guidance range versus the previous 25,000? And number two is that at the moment, do you have any thoughts about 2023? Because previously it was a three-year target. And how should investors think about the 2023 situation based on your understanding of demand right now?

Okay, let me take a crack at this, Edison. Thanks for the questions. In terms of the comparability between the cabinets provided, I would say it's on a similar basis. So we've not changed the basis in terms of disclosing the number of cabinets. You're absolutely correct that the projects which are wholesale-based, these are higher density cabinets, and so naturally there are less cabinets. Now, in terms of 2023 and looking beyond, I would sort of go back to 2020, end of 2020, when we provided the three-year forward look in terms of cabinets. It was at the completion of what was an extremely successful year for the industry and for us and our peers in 2020. And clearly, with a lot of the regulatory changes Headwinds that we saw in 2021, that changed dramatically and has not fully turned around yet here as we start 2022. So I would say and echo Samuel's earlier comments, we are extremely bullish on the sector. We're extremely bullish on the customer's requirements. And if you look at it, there is no reduction in terms of the end users like ourselves, you know, using data, storing data, analyzing data. And so the demand is there. But again, we've taken a more cautious approach for 2022, just given the large number of uncertainties in the macroeconomic environment. We also look to the market and do see slower than expected move-in rates. And so for 2022, we've guided down All of these projects, to a certain extent, some of these projects could be accelerated, so moved from a 23 timetable and moved up into 22. And similarly, if we see the pickup during the course of this year, then we would start the 23 projects. Therefore, that would lead to a higher number for 23. But frankly, sort of March of 22, Again, based on the outlook, I would say that 23 should be higher than 22. But whether we're going back to a 25,000, again, I would take 25,000 as an end of 2020, what the market condition was at that time. And we're taking a more cautious approach given the current market conditions and probably don't want to push out a number out this early in the year for something that there is enough visibility on. But again, we can turn on and off the CapEx, and therefore we do expect that we can be quite nimble with regards to 23. Thank you.

Thank you, Tim. Can I follow up on two other issues? Number one is that I think you disclosed that 16 megawatt of new wholesale projects that you signed in 1Q this year and 11 megawatt you signed in 4Q last year. Is it true that These are all from existing wholesale customers, and you did not sign up any brand new customers in 4Q and 1Q.

Sam, you want to take a first crack at that?

Yes. Again, thank you, Madison, for the questions. For the 4Q, from a wholesale perspective, we share about 7 megawatts. That was indeed from the existing customers. But something we haven't really, you know, say out loud is our scale retail. We also have big wins from scale retail customers in Q4 that was actually four megawatts in addition to their previous, you know, kind of allocation and contract. For the 1Q, because some of the orders come in from the existing customer, but we do have the orders coming from the new customers. public cloud providers and also the e-commerce platform companies and also state-owned dedicated cloud and so on and so forth. Again, we still have, you know, a few more, I would say, a few more discussions going on. So hopefully, probably in May timeframe, when we talk about our Q1 early release, we could share additional color for our Q1 performance.

Okay. Thank you, Samuel. So the state-owned company, state-owned enterprise cloud service provider is a brand-new customer. Is that right?

Yes.

Okay. Thank you. Sorry, just one follow-up for Tim on the power cost. You said that there will be one percentage point impact But my understanding is that for all the wholesale contracts, you do not include power costs. So that's why there's a pass-through. So is that one percentage point impact coming from retail customers because you have a one- to three-year contract, so that's why you have a time lag in terms of passing on power costs?

Yeah, so as of the end of 21, Edison, the large majority – of our billable capacity was actually bundled with power. And a big portion of that is, yes, the wholesale business was still ramping up, so it's a very small percentage. We do expect that by the end of this year, the sort of unbundled or pass-through proportion will probably increase to, let's say, circa around 30%. And it is the ramp-up of the wholesale, which is one portion, but the second one is the extra power costs are being included in the quotation of the renewals as well as the new retail contracts that we're signing. So I think the answer to your question is actually yes to both. It is a rollover of new contracts, but also a ramp up of the wholesale.

So for power costs, are you assuming a 20% increase year-on-year on renewals? Just on the unit power cost. Okay, I'm not talking about total power cost.

Yeah, so overall, depending on the region, we're expecting between 10% to 20%. So full year 2021 compared to 2022. And again, that sort of impact that we're expecting is under 1% to our margins.

Okay, thank you very much. Yeah, that's it for me. No, thank you.

Thank you for the question. Our next question comes from the line of Hongjie Li of CICC. Please go ahead.

Good morning, management. My question is about the MA plan. And you mentioned that 2022 Quebec plans between $4 billion and $5 billion. So how much proportion is expected to be used in MA opportunities? And do you see the price of IDC projects in the primary market showing a cooling trend? this year compared to 2020 and 2021. Thank you.

Okay, thank you very much. Let me take this question and Samuel, you can add if there's anything else. For the question in terms of the percentage of M&A, I would sort of look back at 21 and say that roughly 30% of 2021 related to acquisitions of land power, acquisitions of service companies and acquisitions of actual data center assets. So as I then look at what we've been planning out for 2022 in providing the $4 billion to $5 billion guidance, we're expecting probably in the range of 15% to 30%. It is a wider range, but that's because some of the M&A projects tend to be larger in size, and so a swing of doing it or not doing it could actually result in a larger percentage change. Now, in answer to your question about where do we see pricing of IDC projects, I would say, you know, we're still using a guidepost in terms of what we see in the market of around 10 times EVIPTA pricing. Obviously, when we do evaluate the projects, it's not purely based on the price. but also on the locations in terms of proximity to our existing data centers as well as where the customer demands are in making that evaluation. The other point I would make is that, you know, obviously the best projects that, you know, or the vast majority of our projects are self-built projects. So you'll see a lot more greenfield, brownfield that we've done in the past to build those into our self-built projects. rather than acquiring EBITDA. So I think on an opportunistic basis, there will be some acquisitions of operating data centers. But again, we feel that it is a better use of our capital to not just focus on buying EBITDA, but rather focusing on both, again, where our customers' requirements are and making sure that we can put together a product that is very attractive to our customers as well. Thank you.

Thank you for the questions. Our next question will come from Sarah Wang from UBS. Please ask your question.

I have two questions. First is still regarding client demand. So under the government's new East Data West Computing Initiative, do we see more intentions from our clients moving into the West, no matter it's retail or wholesale clients? And second question is that I think we have mentioned that 2023 sales target should be higher than 2022. May I ask what are the key assumptions here? What do you think is the key moving factor? So meaning for the 2022 sales target, are we assuming either macro, weak macro or internet regulation or supply chain disruption? So what are the key factor you think we're moving our sales target. Thank you.

Okay. I might want to take the questions first and then welcome Tim to provide additional color associated with that. I think both Tim and I, we mentioned about, first of all, when we look at the whole market, we're truly bullish. We're bullish for reasons. Number one, the government is providing a lot of great federal policies, even further providing a direction of guidance for Eastern data, Western computing. On the other hand, government also mentioned about the data is going to be a key element for future production, and so the data sovereignty all of a sudden it becomes like, you know, higher order bits for every single enterprise to consider about for their cloud optimization. And number three, because, you know, I think the COVID basically accelerated digital transformation. And so nowadays, a lot of enterprises, for them to accelerate their digital transformation is to go through either CapEx to OpEx, reduce the pet packs, and focus on the old packs in order to resonate with their business growth. On the other hand, they are continuing driving the cloud optimization. But in the past, they're probably one single public cloud, but the hybrid multi-cloud is going to become a new norm. And then the third one is to adopt every single thing as a service. And then because the VNet were well-positioned, that we have a dual-core gross engine, industry-leading ones. And so for that one, we're very bullish about the future. The way we see that every single day, we'll see a great momentum. But on the other hand, we also have to be very cautious because the macro environment is beyond our control. We're talking about the China-U.S. frenemy situation. It's a new norm. Industry-wise, there's going to be a power quota, power tariff, And also, you know, market-wise, you know, the customers, they're paying more attention on the cost. And there's also possibly a premium that we have to pay from a merchant acquisition point of view in a short period of time. And so while we're bullish about the long term, but we're cautious in every single step that we're taking. So that's, you know, I would say the overall perspective. And then probably Tim can chime in with some of the additional input that we're seeing every single day and the cautious steps that were taken. Tim, do you want to add additional color?

Yeah, absolutely. And I would add to Samuel, if you sort of dig one layer deeper in terms of both what we've provided to the market in terms of guidance on cabinets what Samuel's talking about in terms of the sort of sales, and I will link that then further to your questions around, you know, kind of how things look like in terms of, let's say, utilization rate assumptions. And, you know, with the delivery that we've made at the end of last year, you know, obviously we do expect there to be a dip in terms of utilization rates, both due to a large number of deliveries, but also each year we then reset, you know, the what cabinets are included under mature data centers, ramp up, and so on and so forth. But the desire is also to make sure that we are finding a healthy balance between adding capacity, meeting our customers' requirements, but also looking at the now and today and seeing where the customers are in terms of ramping up and also where their demands are. And so I think there is the desire to find that balance. And so I think with the reduction in the total number of cabinets, we're also still targeting utilization rates of around 60%. And obviously, to the extent that we see customers ramping up faster, then we would speed up the deliveries. And in this case right now, we are taking a more cautious approach because 2022 is not, as I said earlier on one of the earlier questions, it's not 2020. And so I think that we do need to find that balance then of making sure we deliver the right number of cabinets to match up with the ramp-up and the demands of our end customers.

Thank you for the questions. Next question comes from the line of Clive Cheung of Credit Suisse. Please go ahead.

Hi. Good morning, management. Thank you for taking my question. Congratulations on the results. My first question is on margin. We mentioned for certain existing customers, there's an increasing trend of taking up more value-added services. So my question is, assuming this is a long-term trend, how is this going to impact our margin, if any?

Okay.

Go ahead, Samuel. Why don't you start, and then I'll add to that.

Sure. Okay. Again, thank you, Clyde, for the question. Yes, we do see a big trend for customers to take on the barrier-added services. As I said, from the high-level perspective, some of the uniqueness for China compared to the rest of the world, as I said before... is why the rest of the world, when enterprise is talking about the cloud transformation, they're basically three big players, which is AWS, Microsoft, and Google. But in China, we have more than a dozen cloud service providers. So that's one thing. The second thing is why the data, I would say privacy, transparency, computing, data sovereignty becomes the higher order bits for enterprise to think about, then they will probably develop a new strategy. Other than one single public cloud, they might choose to go with a hybrid multi-cloud in a way that they want to make sure the data will be stored at their discretion. And then, so that's the second thing. The third one, because the COVID-19 really impact whole industry. So most of the companies, at least in China, they were so willing to go with the OPEX-driven approach instead of a CAPEX-driven approach. Therefore, other than finding a partner to go with the co-location support, they want to have the partner, especially neutral partners, and they don't take sides, but providing them the full-stack services, all the way from co-location support the networking capabilities, and plus the networking securities, and also the bare metal, because they want to have a single tenant. They also want to have the O and N. They even want to have the hybrid cloud, multi-cloud management services to support, and so on and so forth. And so that gave VNet a great opportunity. We saw that, and we grabbed that as well. The question is whether those very added services are like data center wholesale play, which is pure EBITDA-driven. And my answer to that is probably not, because those are the software capabilities and service capabilities may not have enough or a lot of the amortization, depreciation elements. And so that's the reason it may not be a pure apple-to-apple comparison for VNet versus our I would say IDC peer companies. But luckily, as you probably heard from some of our peer companies, they are seeing a huge retail tailwind. They want to switch their focus to the retail engine. And so I think to a certain degree, that specific comments or statements endorse our growth strategy. So I would say We're happy to have the strategy for the dual core course engine, and we're very proud to continue to execute on that strategy. Tim, do you have any additional input you want to make?

No, no. I think, Samuel, you gave a good overview of the types of businesses and the value-added services and how it works. So, again, I think we can dive into some of the modeling side on the callbacks then.

Yeah, sure. Thank you. And my second question is in terms of the security of resources for our 2022 kind of expansion plans. How much of those are now secured? And, yeah, actually, just that.

Yeah, thank you. Yep. So, no, I mean, we've obviously given out the list of the actual pipeline projects, and those are secure projects. We have included a range this year, and that's because in terms of an overall timing, and I think people were asking about overall timing, we expect that a large portion of these will be actually at the end of the year. And so we've included from our experience already the possibility that projects either get shifted into 23 or are pulled up. And so we have included sort of others. And those are ones where, you know, I think there's uncertainty around the overall timetable from the customer point of view. So overall, yes, these have been secured. It really is a matter of timing in terms of whether it comes in this side of 22 or the other side of 22 into 23. Hope that answers your question. Okay.

Yeah. Thank you. Thank you.

Thank you for the questions. Next question comes from Yifeng Zhang from Nomura. Please go ahead.

YIFENG ZHANG First one is I noticed that you mentioned that we see the customers seeing more value added service for our retail ITC business. So just wonder what's the outlook for our retail MRR in FY22 as going forward. And second question is regarding the New IDC projects, I note that we have some wholesale projects under construction in Chengdu and Chongqing Economic Circle, so just want to see your view on the IDC demand in that region, because I think this was some new market we are heading into. Thanks.

Okay. Maybe, Samuel, I'll take the MRR question, and then you want to take the second question?

Sure.

So, look, in terms of MRR, and I'm happy you sort of asked, you know, what the view of MRR for 22 is, you know, it will move around quarter to quarter, as you've seen last year as well. But we do expect that the MRR to stay in the sort of, you know, 9,000-plus range and then trending upwards as there are more and more value-added services moving that we sell to our customers. Obviously, some of the volatility comes around the fact that not all the customers when they first sign on is picking on the full package of services. And so that's something which the more cabinets we add, if they're more for what I'll call basic service or basic plus one versus a bundled solution of multiple services, I think that's going to affect the MR. But I think overall MR trend, again, we expect to be in a very positive trend going forward. Let me pass to you, Samuel, in terms of questions around the Chongqing region.

Yes. So thank you, Ethan, for the questions. I think earlier this year, government has new direction of guidance in terms of eastern data and also the western computing. So if you look at the eastern data, western computing, in Chengdu and Chongqing area has been identified one of the eight regions. And then that specific region together with Beijing, Shanghai, Guangzhou, and Shenzhen, we say the tier one cities, the four of them are actually defined as the eastern data. So even though Sichuan, Chongqing are so like, you know, I would say a little bit kind of west compared to Beijing, Shanghai, and Shenzhen from a geo perspective, but that specific area, you know, does have a strong niche from a business perspective. and also market perspective, a lot of the scenarios around, I would say, low latency, high bandwidth, and also no packet loss. So ideally for a region specialized to provide the Eastern data per se. So that's also one of the areas that we're going to continue to invest. As a matter of fact, one of the projects in our 2022 is to talk about that specific areas. And we're seeing, I would say, great momentum picked up. If I look back at 2021 versus 2020, that's also one of the areas, start with small, but growing fast. So we're very optimistic about the Chengdu and Chongqing areas. So hopefully that addresses your question, Ethan.

Thank you for the question. Next question comes from Albert Hong of J.B. Morgan. Please go ahead.

Yeah, thank you for taking my question. I want to ask, how should we think about the competitive landscape going forward? Because I see two major factors. One, the government's new policy is data-based computing is driving the customer to the remote areas, while VNet has a circular edge. in tier 1 cities. Second, one of your competitors wants to focus more on retail business, so I wonder how these two factors will affect your competitive landscape in the future. My second question is, could you comment on the latest pricing in wholesale customers? Many of the large internet service provider are doing cost reduction and you're also coming down a bit the future demand outlook. How should we read it as an implication for pricing? Thank you.

Let me start, thanks for the questions by the way Albert. Let me start with a question around sort of the retail side of the business in terms of I guess you've mentioned one of our peers. wants to focus on the retail business. This is something which I think VNet has the history but also has built up the infrastructure to be able to service the customers, more complicated actually, customer needs of the retail customers. It's not as simple as saying it's a retail customer but using a COLO model to service them. And so we're very confident of the fact that we have a distinct competitive advantage in that, and we show in each of the quarters the ability to not only keep but also then continue to add the retail customers to our base. But secondly, I think more importantly, and this is what Samuel was referring to earlier on, is the value-added services. Again, it's not just to sell a retail customer a colo service. And the whole reason why it is a very attractive proposition for them to come to VNet in the first place is the ability for them to come and do a one-stop shop, a full stack of services, not having to deal with three, four, five different vendors of the service. And I think that's a distinct advantage which also then adds to the stickiness of the customer once they've come into our data centers. The second part of the question in terms of the, I guess, customer demand pricing side, maybe Samuel, if you want to give a little bit of color to Albert.

Yes. So first of all, I would say first and foremost, it is great to have a dual core course engine basically to help us, the IDC service providers to balance our, I would say, resources and priorities. Resources are finite. while the opportunities are infinite. And so, when our peer companies and, you know, focuses switch to the retail, to a certain degree, endorse our strategy. It is true that we're seeing a great market opportunities and momentum in the retail front. You know, IDC business overall, the wholesale and retails are sort of like, you know, you know, kind of, you know, different kind of a way to look at it from a spectrum perspective. One, focus on the quantity, while the other focus on the qualities. The wholesale business give us a greater predictability and also give us the scale, while the retail probably give us a very healthy margin and also the stickiness of the customers. And to sort of agree, it is easier for retail business to go wholesale, while it is super hard for the wholesale to enter into the retail, because you have to have the relationship with the customers. You have to have the track records. You have to have the great networking capabilities and coverage. You have to have a whole bunch of very added services. And your sales structure, compensation package, skill set is going to be so different. And so it's not just about one company want to go to retail. Actually, every single IDC service providers want to have the dual core growth engine, from my opinion. But it is hard. But again, I would say in a given period of time, you know, everybody want to do a wholesale business. But on the other hand, you know, when there's a storm coming to the wholesale front, and then a lot of companies want to go to retail as well, so I would say, We're very fortunate to have a balanced strategy, and of course, as I mentioned earlier, we're super bullish about the future, but we're cautious about every single step we're taking because resources are finite, so we want to make sure that we can optimize for the better business return. So hopefully that gives Albert some of the additional color for the questions. Thank you.

Thank you. In the interest of time, we'll now take the last questions from Guohan of Daiwa. Please go ahead.

Hello. Thanks, management, for the opportunity. My first question is regarding the delivery schedule. So as we are being more cautious about the near-term outlook, so as our capacity addition is more back in the loaded in 2022, And what's our view on the utilization ramp up in the second half of 2022? And my second question is about the recent, the kind of moving progress. And we see a surging case in Shanghai region and also the other changing regions. And we have, what's our view on the impact of capacity delivery in these regions? And we are extending our account to be a more diversified customer mix. It's better if we provide more revenue mix in Shanghai and the Beijing region. Thanks.

Okay. Let me take the first question, Guohan. Thank you very much for the question itself. In terms of the capacity, yes, I am expecting that more of the range of cabinets we're aiming to deliver will be in the latter part of the year. Next quarter, we'll be able to give you or give the market, as in previous quarters, a clear guidance on how much of it we're expecting within first half versus how much of it will be in the second half of the year. But it is very much in line with what was the case last year in that things will be more back-ended as we are taking a more cautious approach in terms of how quickly we deliver new capacity while we actually have our main focus is making sure that we ramp up the existing capacity. That leads to the second question, which is kind of what we're expecting in terms of the ramp and utilization rate trend. I would say that you should see a dip, as I mentioned before, in the early part of the year, and that that will slowly then increase during the course of the year to the end part of the year as the ramp-up continues across all of our different data centers. Samuel, do you want to take, I guess, the question around, I think there were some questions around sort of customers' move-in rates, ramp-up progress?

No, I think you covered that pretty well. So no additional comment from me.

Okay. Thanks, Juan.

Thank you very much. Ladies and gentlemen, that concludes our conference for today. Thank you for participating. You may now disconnect your lines.