VNET Group, Inc.

Hello, ladies and gentlemen. Thank you for standing by for the first quarter 2022 earnings conference call for VNet Group Inc. At this time, all participants are in a listen only mode. After the management's prepared remarks, there'll be a question and answer session. Participants from our management will include Mr. Samuel Shen, Chief Executive Officer and Executive Chairman of Retail IDC. Mr. Tim Chen, Chief Financial Officer, and Ms. Xinyuan Liu, Investor Relations Director of the company. Please note that today's conference call is being recorded. I'd now like to turn the conference over to the first speaker today, Ms. Xinyuan Liu. Please go ahead.

Thank you, operator. Hello, everyone, and welcome to our first quarter 2022 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 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. VNAT does not undertake an obligation to update any forward-looking statements except as required under applicable laws. Please also note that VNAT's earnings press release and this conference call include the disclosure of an audited GAAP financial matters as well as unaudited non-GAAP financial matters. VNet's earnings press release contains a reconciliation of the unaudited non-GAAP financial matters to the unaudited GAAP matters. As a reminder, this conference is being recorded. In addition, a webcast of this conference call will also be available on our IR website 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 first quarter 2022 earnings conference call. As we continue executing our dual core growth strategy to grow our reach in retail and wholesale IDC markets, we are pleased to report another solid quarter amid a complex macro environment. From a performance standpoint, we got off to a solid start in fiscal, 2022, delivering healthy operational and financial growth in the first quarter. Total cabinets under management increased to approximately 79,000 compared with approximately 56,000 at the end of first quarter of last year. Cabinets utilized by customers increased to approximately 43,000 compared with approximately 33,500 in a comparable period last year. Our retail MRR per cabinet grew to RMB 9,236 in the first quarter, compared with RMB 9,144 in the same period of 2021. For the first quarter, our revenue grew 18.6% year-over-year and adjusted EBITDA grew 21.9% year-over-year, both in line with our expectations. The phenomenal rise of the digital economy and a favorable policy landscape, as well as our proven ability to execute our strategy, have all continued to boost our business momentum across each of our business segments. First of all, more supportive policy developments are paving the way for continued progress, reinforcing the positive outlook for the IDC sector and its role in China's digital transformation and technology development. At the most recent meeting of the Central Financial and Economic Affairs Commission held last month, China's central government extended a national initiative to further modernize infrastructure across information technology, logistics, and other industries, aiming to deploy a considerable number of next-generation IT infrastructure facilities, which include supercomputers, cloud, AI platforms, and broadband backbone networks. As one of the service providers to support this major initiative, we are well positioned to benefit from the fast-growing demand in a more favorable and healthier regulatory environment. Additionally, as the significant National Infrastructure Advancement Initiative, Eastern Data, Western Computing was released earlier this year to boost data center computing power across the nation. We continue to see the great potential for the expansion of our core business with an even more efficient and effective approach. Before I discuss our business segments in more details, I'd like to speak about the COVID-19 resurgence in certain key locations and its impact on our operations. The lockdowns and related travel restrictions that were imposed in Shanghai, Beijing, and several cities in Hebei Province have impacted some of our customers' moving rates and our progress with respect to the construction of some of our new projects in these areas. Our data centers in the affected areas have continued to operate uninterruptedly throughout the lockdowns, and we truly appreciate each of our on-site employees' efforts to keep things running smoothly. We will continue to closely monitor pandemic developments, and together with our partners, adopt measures to mitigate risk for our operations. Now let's look at the first quarter performance and latest development of our wholesale business. As digitalization is taking place across sectors and geographies, more TMP customers, especially internet players, cloud service providers, inevitably expand their efforts to enhance their data processing and storage capacities to keep up with frontier technology trends and gain competitive edges. Our compelling value proposition, rooted in extensive industry know-how, in-depth resource capabilities, and well-seasoned operation teams continually enhance the appeal of our wholesale service offerings to leading technology players. During the first quarter, we signed four contracts generating a total of approximately 60 megawatts in capacity, including an extended pre-committed order of approximately 11 megawatts from a leading social platform operator, and three orders under multi-year contracts with two existing customers and one state-owned cloud service provider in China's southwestern region. We continue to see the increasing demand from our wholesale business, and we're quite optimistic about our future prospects in this segment. Moving on to our retail business in the first quarter, our ongoing efforts to advance our value added service offerings fueled steady growth in orders from both existing and new customers, reaffirming the effectiveness of our strategy and the increasing efficiency of our execution. New customer expansion was primarily driven by growing demand from the financial services, e-commerce, automotive, and energy sectors. Also, as we continually enhance our service capabilities and enrich our one-stop service offerings, a large number of existing customers, including internet player, cloud service provider, cross-border e-commerce player, financial service providers, and local service online marketplaces, continue to expand or upgrade their contracts to procure additional, very added services. spanning a wide spectrum of areas, from interconnectivity, bare metal services, and hybrid multi-cloud solutions, in addition to co-location services. Technological innovation is a crucial driver for the business development of our digital services. We just launched a new in-house developed interconnectivity solution that aims to provide all-in-one enterprise connection services built on our innovative SD-WAN technology and backbone network. It also includes an array of cutting-edge features catering to different platforms and hybrid access networks to enable application-aware intelligent routing and network-wide visualization. In addition, we just rolled out NeoStack, a customer-oriented, full-stack cloud-native services to empower corporate developers to build and run galvarification in public, private, and hybrid clouds, facilitating digital transformation initiatives. These new product launches also represent our powerful engineering capabilities to enrich our service portfolios, deliver additional values to customers, and diversify our revenue streams. In addition to serving corporate customers across various verticals, we continue to explore opportunities to partner with more state-owned enterprises by leveraging our aptitude for technology and healthy government relationship. Recently, we signed an exclusive partnership agreement with PeopleData, a subsidiary of People's Daily Online, an authoritative media platform in China. Under the agreement, as the exclusive partner, VNet will jointly build and operate PeopleCloud, the cloud platform of PeopleData, to uphold its role in serving local government and SOE customers' needs for cloud computing. In this regard, we will provide all-around services, including co-location, interconnectivity, cloud platform, cloud native workloads, and industry-specific cloud solutions. On the blue cloud business front, we have been actively exploring business opportunities in different vertical industries, leveraging our seasoned cloud service operation expertise, and through a decade-long exclusive partnership with Microsoft. More encouragingly, in Q1 2022, we began to offer operations and maintenance services to support a digital business system of Huanen Power, one of China's largest electric power companies. we will deliver first-class 24x7 ONM services across a wide array of core business systems, as well as secure a high-availability architecture for relevant business continuity. The initial feedback we have received from our customers has been remarkable. Our solutions and services not only enable customer systems to run trouble-free, but also optimize their efficiency and performance to better meet business needs. while effectively reducing their operating costs. As this system performance enhancement improves the overall operating efficiency, our customers' overall business management capabilities also grow stronger, which in turn, summits their competitive advantages. We expect to further expand our industry-specific solution for other sectors. Last but not least, I'd like to reiterate that in a highly dynamic market in which we operate, upholding long-term commitments and responsibilities to our industry, environment, and society is central to our ongoing success. As our industry shifts toward green data center operations and the world becomes, the world comes to embrace sustainable enterprise management, we are committed to building VNet as a positive force for the betterment of society. For more than two decades, we have been committed to advancing a wide range of ESG initiatives within the stakeholder communities we serve. Our 2021 ESG report published in April showcases these initiatives and demonstrates our commitment to integrating sustainability into every aspect of our operations Some highlights include our carbon neutrality targets by 2030, lower than industry average PUE, and the fact that we are the first data center service providers in China to disclose the third party verification of our carbon inventory results. As a prominent domestic enterprise and a global industry player, we will continue to lead by example in this aspect. Looking ahead, We will remain dedicated to utilizing our core strengths while continuing to focus on our dual core growth strategy. We expect to capture greater opportunities and fulfill more growing digital demand across wide-ranging verticals as the digital transformation progresses. Thank you, everyone. With that, I will now turn the call over to our CFO, Tim, to discuss our financial performance for the quarter and our business all look. Hi, Tim.

Thank you very much, Samuel. Good morning and good evening, everyone. Before we start the detailed discussion of our financials, please note that we will present non-GAAP measures today. Our non-GAAP results exclude certain non-cash expenses which are not part of our core operations. The details of these expenses may be found in the reconciliation tables included in our earnings press release. Please also note that, unless otherwise stated, All the financials we present today are for the first quarter of 2022 in renminbi terms. First, we're pleased to have achieved solid results on our top line and adjusted EBITDA in the first quarter, in line with our expectations. The sequential decrease in revenue was mainly due to seasonality, given that the first quarter is typically not a strong period for our business because of Chinese New Year. In addition, our move-in rate was also impacted by lockdowns. A robust financial performance against backdrop of macro fluctuation reflects our continued efforts to further expand our service offerings, diversify our customer base, and invest in our core capabilities. Next, let me walk you through our first quarter financial results. Unless otherwise specified, the growth rates I will be reviewing are all on a year-over-year basis. In the first quarter, Our net revenue increased by 18.6% to 1.65 billion from the same period last year, mainly due to the increased customer demand for our highly scalable carrier and cloud-neutral IDC solutions from both wholesale and retail IDC customers, as well as the continued growth of our cloud business. Gross profit was $355.5 million in the first quarter of 2022, representing an increase of 10% from the same period of 2021. Gross margin was 21.6 in the first quarter of 2022, compared to 23.3 in the same period of 2021. Adjusted cash gross profit, which excludes depreciation, amortization, and share-based compensation expenses, was $684.8 million in the first quarter of 2022, an increase of 13.1% from the same period of 2021. Adjusted cash gross margin in the first quarter of 2022 was 41.6%, as compared to 43.6% in the same period of 2021. Adjusted operating expenses, which exclude share-based compensation expenses and compensation for post-compensation employment in an acquisition, was $200.8 million in the first quarter of 2022, representing a decrease of 5.5% from the same period of 2021. As a percentage of net revenues, adjusted operating expenses in the first quarter of 2022 was 12.2%, compared to 15.3% in the same period of 2021. Adjusted EBITDA in the first quarter of 2022 was $506.2 million, representing an increase of 21.9% from the same period of 2021, Adjusted EBITDA in the first quarter of 2022 excluded share-based compensation expenses of $43.2 million. Adjusted EBITDA margin in the first quarter of 2022 was 30.8% compared to 29.9% in the same period of 2021. Our net profit attributable to ordinary shareholders in the first quarter of 2022 was $90.7 million. compared to a net loss of 84.7 million the same period of 2021. Basic and diluted profit was 0.1 and 0.03 per ordinary share, respectively, and 0.6 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 March 31, 2022, was $3.36 billion. Meanwhile, net cash generated from operating activities in the first quarter of 2022 was $482.6 million compared to $274.5 million in the same period of 2021. Our CapEx in the first quarter of 2022 was $1 billion. Looking ahead, we remain committed to investing in our core capabilities to advance our dual core growth strategy, broaden the spectrum of our services, increase customer diversification, and further tap into the long-term potential of digital economy development in China. Moving to Outlook, for the full year of 2022, our outlook remains unchanged from the previously provided estimates. 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. This forecast reflects the company's current and preliminary views on the market and its operational conditions, which do not factor any potential future impacts caused by COVID-19 pandemic and are subject to change. This concludes our prepared remarks for today. Operator, we are now ready to take questions. Thank you.

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 will come from Yang Liu at Morgan Stanley. Please go ahead.

Thanks for the opportunity to ask questions. Two major questions here. The first one is on the COVID impact. Could management update us in terms of what percentage of your data centers are undergoing the lockdown issue? And in terms of the second quarter moving, Should we expect even lower than first quarter, given both Shanghai and Beijing have some issues, and maybe also Longfeng as well? And also, for the new capacity construction, whether the lockdown will delay the new capacity delivery, and of course, whether that will bring some capex savings this year. So that is the overall COVID impact question. And the second one is on the demand. We saw a new line in the disclosure that is a utilized cabinet. And I think that is a pretty important metric market is monitoring. Could management disclose what is the number at the end of last year and what is the expected growth or expected increase for the full year 2022 based on current demand profile? Thank you.

Thank you, Jan. This is Samuel. Let me take the first crack of the questions that you have with regard to the lockdown impact. I think, first of all, the lockdowns and also related travel restrictions that were imposed in Shanghai and recently in Beijing and also several cities in Hebei Province definitely impact some of our customers' moving rates and our progress with respect to the construction of some of the new projects. Separately, we're also seeing some of the industry. like auto. Basically, they are slowing down their plant expansion due to their supply chain issues. That being said, we'll continue monitoring the situation, working with the customers and partners, and figure out a way, appropriate measures, to mitigate potential risk for the business operation. And also, based upon what we have seen so far and our assumption, in a way, to see different stages for cities to incrementally loosen restriction on business and individuals. You know, like what we have seen in Shanghai, we hope to see in the coming months is going to getting better. And so we expect our Q2 revenue probably going to grow meeting year over year. and EBITDA, and also, you know, to grow low single-digit, maybe over a year. But having said that, we're going to do every single thing possible to accelerate once the situation is getting better. Tim, do you want to add on any comments you have?

Yeah, sure. Let me also tackle the point about the whole capacity delivery. Actually, in our original plans, The deliveries were in the back end of the year, so I think that once the control measures are eased, we will do our very best to have the construction side catch up. And again, the original plan was to have it in the second half of the year, back ended, so I think there is at least a greater chance for that to then take place for that. The second, I guess, part of the question, Yangyi had questions about the number of cabinets. And so at the end of 2021, so fourth quarter, we were around just over 41,000 cabinets, actually 41,700 cabinets. And so you can sort of calculate, obviously, the quarter-on-quarter increase in number of cabinets. As to the full year, we can sort of speak a little bit more, but at this point, as you can appreciate, we are still in the middle of the slow ramp up due to the COVID measures that Samuel was just talking about. So at this moment, you know, there are probably three or four different scenarios that are going through our heads in terms of when it eases. Obviously, there is going to be pent up ramp up demand, but there's also then the physical constraint. of how quickly people can ramp up. So I would say we remain sort of optimistic in terms of the full year ramp up just on the basis that we've seen that when customers need to ramp up quickly, we're able to accommodate those requests and make sure that it can happen. So I think that it really now is a matter of a call on how long some of these measures will be in place in the Shanghai, Beijing area.

Thank you.

Our next question will come from Edison Lee at Jefferies. Please go ahead.

Hi, thank you. And hi, Samuel and Tim. I have two questions. Number one is more on the financial side. So why did the 1Q22 revenue lower than 4Q21? Because I imagine that it may have to do with the cloud business or the VPN business. Can you elaborate a little bit more on that? And then on 2Q, because we are already at the end of May, right? So for 2Q, I think you commented that maybe it will be worse than 1Q. So it doesn't mean that you remain very confident that second half you guys will be able to catch up. and whether that catch-up is realistic based on your assessment right now. And the last question is on the Hina Group's privatization offer. Because the company has not made any official comments on it, so is it possible for you to share some of the color and maybe what the board has been thinking about in terms of that privatization offer? Thank you.

Sure, thanks. Let me take a quick break at this, and I'll have Samuel add additional color as well. With regards to the revenue side, we do have a situation in fourth quarter compared to first quarter where there is one-off events in the fourth quarter, and typically you have a lot of annual events on the e-commerce side that lead to and increased revenues from those customers and their requirements. And that doesn't repeat in first quarter. And so that is sort of the primary driver of that difference. In terms of looking at second quarter and the ability for the customers to ramp up, I would say that the headwinds remain, but if you look at not just second quarter, where we're two-thirds through second quarter right now, you do see that their customers are ramping up still. And so we now also have a much better gauge, obviously, as we go through the year, similar to what I was answering Yang earlier on, which is that, you know, first half, you know, we have good visibility. It really is going to be second half on how quickly the measures are eased so that this pent-up demand can take place. Last question in terms of the offer. At the moment, again, we've told the market we would have updates as and when it's appropriate, and right now there has not been any decisions taken by the board that we are able to disclose to the market. So, again, we will provide updates as and when appropriate, but nothing further from what we've already released to the market. Samuel, anything else to add to that?

Probably only a few things to add on top of what Tim just mentioned about. Because last year, we acquired a company called Tense Cloud, which is a cloud-native type of company providing the solution and platforms to the enterprise customers. Their business also has the seasonality. The second half is more heavier to deliver. And so besides the one-off, you know, the projects due to, you know, the retail type of the online retail type of business driven, we also have some of the business tend to be more bottom-heavy. So that's an additional comment.

Okay. Can I quickly follow up on the privatization offer? So I understand the board wants is still discussing that. So can you share a little bit more color as to whether the board is waiting for more information from the bidder or the board is considering other alternatives or the board is actually discussing with the bidder? Is there any more color that you can share?

There's no additional color we can offer at this moment, Edison. But again, when there is something that we can disclose, we will do so to the market promptly.

Okay, that's great. Thank you.

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

Hi, management. I have two questions. The first one is about the PeopleCloud because recently the PeopleCloud launch has also participated. So I'm curious about what was drastically the company think on such business. And the second question is on the R&D expense ratio because in the first quarter, it slightly increased to like around 4%. So could you share, could management share your current R&D service? Thank you.

Tim, how about I take the first one and then you can cover the second question that Hongjie has. Sure. No problems at all. Yeah. In terms of the partnership with the PeopleCloud, it is true that we just signed an exclusive strategic partnership agreement with PeopleData. For those of you who probably know the PeopleDaily better than the PeopleData, PeopleData is actually a subsidiary. of People Daily Online. People Daily Online is an authoritative media platform in China. They're one of the leading authoritative media platforms. So under the agreement, as an exclusive partner, VNet will jointly build and operate People Cloud. People Data is trying to target into People Cloud as the cloud platform to uphold its role in serving local government and SOE customers' needs for their specific cloud computing. So in that regard, as I said earlier, we will provide a full stack all-around services, all the way from the co-location, interconnectivity, bare-metal services, cloud platforms, cloud-native workloads, and some other industry-specific solutions on top of that. Because what happened is most of you probably know that China is one of the latest countries to pass a new omnibus privacy law. Effectively, from November 1st last year, the Personal Information Protection Law, aka PIPL, is China's first comprehensive law designed to regulate online data and protect personal information. And PeopleData has the agenda in a way to making sure they can provide a dedicated cloud platform in a way that to honor the PIPL and to serve the state-owned enterprise customers and so on and so forth. The partnership is still in the very early stage. So two parties are working together. figuring out the product roadmap, and so on and so forth. That being said, I think it's a good indicator to demonstrate or to showcase our government relationship and our ability to partner with one of the leading state-owned enterprises. So hopefully that gives some of the colors. I'm happy to report the progress when the time comes.

Okay, thank you, Samuel. Let me take the question on the R&D costs. So I think you had sort of a question around what is the investment focused on or around? And this links back to what was in our press release, but also what Samuel mentioned in his part of the presentation earlier on, which is about new products and new solutions. So the new SD-WAN interconnectivity solution would be one of them. And these are the products that we offer mainly to our retail enterprise customers. Whether or not the R&D will stay at these levels, I would say yes, but part of it is actually a recategorization. Some of the costs were in other departments, which we've now recategorized as R&D. So overall costs are not going up, but rather a categorization in terms of what we are now looking at as R&D. So I think hopefully that answers the question she had.

Thank you. Our next question comes from Albert Hung at J.P. Morgan. Please go ahead.

Yeah, thank you, Benjamin. My first question is still about second half outlook. If I heard you right, your second quarter commentary suggests only 5% sequential growth, and if you want to achieve the four-year guidance, you probably need more than 25% half-growth in the second half. I understand there should be some sustainability in the second half, but if I look at the historical trend, it's just like mid-to-high teens. So with all the macro headwinds, and enterprise spending slowdown. May I ask why we are so bullish in the second half demand outlook? Is there any leading indicator such as new booking or could you share any feedback on your discussion with the new customer? And my second question is you mentioned a lot of new wholesale customer wins in last quarter. And may I know how it's moving rate outlook for the new customer? And is there any pricing difference between the new orders and the existing one? Thank you.

Albert, let me take the first part of that, and I guess Samuel, if you want to jump in as well. In terms of the second half, or actually second quarter, and then leading into the second half, again, I think if you're looking for the leading indicators, I mean, we do have feedback from our customers, a desire to ramp up, and really the constraint right now are the measures that have been put in place by the government, which don't allow them to actually ramp up and move into the data centers. So I think that pent-up demand, again, we've seen a number of our customers in a very, very short period of time ramp up to very high numbers. And so we are quite confident that if and when these measures are eased, that these customers will be able to ramp up quite quickly and perhaps even ahead of what we had sort of predicted. This happened last year as well. But again, it will depend on these measures. Now look, if these measures continue on indefinitely, then obviously we'll look to see what that means in terms of third quarter, fourth quarter, and obviously then the full year. Your second question, I guess, was on the new MOUs.

Sorry, you're asking what was the progress or... Is there any pricing difference or moving rate difference between the new orders and the existing ones?

No, they are actually more mirrored to our existing contracts with these customers. So no slower... and then pricing is generally the same.

Understood. And another follow-up question on the moving rate. I understand there are probably some constraints in Shanghai, Beijing area, but did you see any acceleration in moving rate in other regions because customers may be afraid of potential lockdown?

Samuel, do you have any color on that?

Yeah, if I look back, I would say the Shanghai region lockdown, it does impact the customers' moving rates. That being said, as I stated earlier, the lockdown and travel restrictions do create some of the impact. I would say negative impact. But that's not going to be long term. Today, when we look at the West region, the data center that we have, for example, Chongqing and Xi'an areas, we're not seeing that type of impact. As a matter of fact, while the COVID-19 created a lot of headwinds, from a customer point of view, their digital transformation has been accelerated. And so that's a reason. We are cautiously, I would say, optimistic. If we, I mean the whole country, having the dynamic COVID zero policy, and then want to make sure the major city to keep a societal zero COVID. I think the situation will be getting better. Probably going to be impact about a month and two months, but right after that, it's going to be accelerated. And then we have, you know, even though, you know, people in Beijing are working from home, but I do have a regular conversation with the customers, the key customers. And based upon the conversation I have with the customers and also the impact coming from our sales channel, customers do want to accelerate, you know, once the lockdown is over. So I would say, you know, first of all, keep the – the country's agenda at a top priority, but nothing's going to change after that. So it's going to be an impact that's going to be like a hiccup for a given period of time, but overall still pretty positive in my opinion.

Thank you.

Our next question comes from Clive Chung at Credit Suisse. Please go ahead.

Hi, management. Thank you for taking my question. My first question is on wholesale demand. I guess a follow-up question. We are seeing some slowdown in the cloud business in traditional wholesale customers, say BAT, one who recently reported. So my question is how should we expect this to impact our kind of wholesale outlook, particularly in the second half post the COVID impact? That's my number one question. My second one question is on the potential pricing or margin impact. As we have seen over the last two quarters, we have seen SOE orders or government-related customers as new take-ons. And so would this impact any of our margin profiles at all? Thank you.

Okay. This is Samuel. I'm happy to take on your questions and welcome Finn to chime in with additional colors. I think from a wholesale segment point of view, in the past we tend to focus on called service providers, big name internet companies, especially for those video type of internet giants, requires the data center to store the data and so on and so forth. So a lot of times, the analysts might be worried about, is government really support of the internet sectors? So let me kind of do a very quick spin on that one. I think in general, the Chinese government is very supportive. of the internet sectors. Given the fact that the sector's innovation that has contributed to the growth of countries' economy in the past 20 years, yet it is equally important to know the regulatory risk does step up. Recently, probably in the past 12 months, for some of the internet verticals, as you can see, some of the antitrust law online gaming impact, live streaming impact, social media services, or even for the profit-making in off-campus tutoring. Therefore, we have to stay agile to cope with the government policy while partnering with our customers to plan for their business growth accordingly. There are definitely some headwinds but also tailwinds. In terms of the pricing or pricing pressure, pricing competition that you asked about. We're not seeing a material difference from what we have seen in the past quarter. That being said, because the COVID-19 or the pandemic outbreak does impact to most of the verticals, local life entertainment, or even for the online retail. Therefore, it is prudent to assume customers would be more cost-sensitive moving forward given the market conditions. So that being said, in short, we're not seeing a material impact, but we have the empathy to understand that customers could be cost-sensitive. So hopefully that addresses your question. Not sure whether, Tim, you have additional comments you want to add?

Not for that part, but the second question, you had a question about margin impact on, was it state-owned cloud?

Yeah, that's correct. Just wondering if, you know, in terms of contract terms compared to, say, private wholesale kind of orders, would that be, you know, minimally different and how would that, you know, potentially impact our long-term?

I think it's probably still early. We're just getting our first orders now to sort of see if there's an overall trend. But as Samuel was explaining earlier on about the partnership that we have with People's Cloud, these customers are likely going to engage us across a range of the services that we offer or the products. So I don't expect at the moment for there to be a sort of material margin impact I think they are like other customers. They have requirements, and those requirements will be priced accordingly. I hope that helps.

Okay, thank you. Yeah, yeah, that's very clear. Thank you, Tim. Thanks.

Our next question will come from Sarah Wang at UBS. Please go ahead.

Hi. Thank you for the opportunity to ask questions. So I have two questions. First, it's still on demand. Just a quick follow-up on the previous questions on demand. So is it right to say that on the wholesale side, we are still seeing orders from the internet sector? And then how about the retail side? Do we see any change in the verticals of our customer mix? Say certain industries might grow faster than the others, et cetera, when we talk about new orders. And then second question is on the people cloud. So why people data choose VNet over other third-party IDC providers or SOE telco IDC services? Thank you.

Okay. Thank you, Sarah, for the questions. So first of all, from the retail momentum, If you look at the first quarter this year, our top five verticals remain the same. Still going to be IT services, financial services, carriers, local life, entertainment, and so on and so forth. So nothing particularly changed. And also from the momentum point of view, we're seeing a pretty strong year-over-year double digits, that's for sure. Whether or not we have the appropriate resources to meet the customer's demand, that's one question. The second thing is we're seeing more and more customers looking for the full-stack services. So other than the co-location, that's a very typical enterprise, I would say, mentality. They want to find a single throat to choke, so making sure they can partner with a credible partner who is a long-term player, has the credential, and be able to support their needs. I think the recent lockdown is a very good showcase, because even though we were impacted by the city lockdown in Shanghai area, we're talking about two months. Our engineers, for example, O&M services, are pretty much locked in the data center for a little over two months. And we're making sure nothing stops our services and support. And from a customer point of view, we even receive customers' feedback and appreciation and so on and so forth. So I think that's... a great testimonial, a reason for that. So from a retail point of view, I think that's a very good thing, a good momentum. We're supposed to kind of keep it up. Your second question is about the people's data. We've been telling the industry that in China, probably unlike the rest of the world, Well, dedicated cloud is probably going to be the mainstream. The reasons being because from a public cloud point of view or from a private cloud point of view, they have their advantages but also disadvantages. Public cloud players, the typical disadvantages would be the dynamic cost. Customers have less technical control. The customers can only have limited customizations. From a private call point of view, the customer tend to have very obvious disadvantages, such as higher cost, limited access for their mobile users. They can't keep up with the unpredictable demands, and so on and so forth. In China, what happened is, because it's a highly regulated economy, and so there's new policy, new regulation. And today, people even pay actual attention on the data sovereignty and data privacy. Therefore, that's what we believe because given the track records, given the full stack services capabilities, people's data, you know, they went through their study, due diligence, and finally pick up, you know, VNet as their exclusive partners. So for that, we're pretty honored to have the opportunity to partner with them. But that being said, it is still early stage. And then so hopefully we'll see some great progress. And then at that point in time, happy to share with all the public.

Got it. Thank you.

Thank you.

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

Good morning, Tim and Samuel. I have two questions. The first one is regarding the margin trend. I saw that the first quarter adjusted EBITDA margin was improved by around 4% compared to 4Q. I just wonder what's the main driver behind this and what's the margin trend in second quarter and second half considering the current COVID-19 lockdown in China. And second one, the following question on the PeopleCloud. So just to wonder, I understand that what we provide could be the private or hybrid cloud to the SOE customers. So what's the comparison between the PeopleCloud and our previous retail and hotel customers? For example, the contract size, the prices level, as well as the budget. Thank you.

Let me take the first question and see if Sam has any follow-on answers to the People's Cloud question. In terms of the first quarter margins, if you look at the breakdowns that we provided in the press release or earnings release, mainly it's driven by cost control as well as obviously the top line was not as high. And so those two things combined resulted in a higher margin. Going forward or looking at the full year, I would say that we're still looking at the full year margins that we had expected. There will be some costs, as you've sort of pointed out, in relation to the lockdown. There are some incremental costs that were unexpected to be factored in, but also we would expect, again, the top line, the revenues, to also then start to ramp up once the customers are actually into the data centers. So it will be a combination of both. But, yes, I would say that the margins are probably a little bit higher, just driven by those two factors that we talked about earlier on. Sam, do you want to see if there's any other color you want to give Anumara in terms of the People's Cloud?

Sure. So, Ethan, other than what I stated earlier, I think two other key points I could possibly reiterate. Number one is think about Hybrid multi-cloud is a new norm in China, unlike the rest of the world. I think that's one of the key messages. The second one would be it's a great endorsement for dedicated cloud. I just mentioned earlier, addressed the previous question regarding the advantages and disadvantages for if you have to compare among the public cloud, private cloud, and also dedicated cloud. The partnership that we have with People with Data is a great endorsement for the dedicated cloud's importance here in China. Thank you.

Thank you.

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

Thanks for the management. It's Guohan from Daiwa Capital Markets. My first question is regarding your pipeline. I think there is no material change in our current pipeline compared to last quarter. So just a wonder, sorry, but we also create a low end of the rent, which is approximately $13,000. So depending on your current market demand dynamics, do we have any KPI such as pre-commitment rates in deciding what's the capacity we need to inject depending on the real situation in the second half. So that's my first question. And the second point is our customer diversification. So you are talking about two questions regarding the people data, which is a subsidiary of people data. So I think we have achieved a certain progress in non-internet and finance sector. We are talking a lot about the new energy and other sectors. Could you share with us more color about further penetration strategy into SOEs and other non-sectors in the future to offset the negative impact from internet sectors in the near term? Thanks so much.

Samuel, let me take a crack at the pipeline question and then leave the second customer one to you, Samuel. Go ahead. In terms of the first question on pipeline, I guess you're looking at the pipeline saying there's been no changes. Again, we've talked about the construction progress of these projects. They are back-ended in our original plan. There are delays, so we'll have to see how much the engineering teams can catch up. But as of now, we're still being told that they will be able to complete as per plan within this year, and so that's the reason for the number. There is a range that we've provided, and that range is really twofold. One is dependent on the construction progress, but also there are projects where, given customer feedback on when they can ramp up and on the demand side, those are some of the projects where we may actually push into 2023. And so that's why you have that range in the first place. So we will continue to closely monitor, and as we progress into each quarter, we will update when we have more visibility on whether or not things will, from a construction point of view or from a customer demand point of view, shift into 2023 or not.

Okay. This takes a question from... Gohan, you asked about the people's data, and you also talked about the state-owned enterprise. So if I understand your question correctly, what happened in the past, I would say 80-20, 80% of VNAT's revenue coming from the key sectors like IT services, financial services, carrier, local life, entertainment, you know, this type of industry, of course, including traditional enterprises as well. What happened in the past, the government, institutions, SOE was not on top of our list. That being said, last year we acquired Tencent Cloud, one of the leading cloud-native platforms here in China, and then we created a lot of synergies because Tencent Cloud's major customers happen to be in the financial services industry. They also provide technical support for some of the state-owned enterprises. So the partnership that we have with People's Data, which is one of the subsidiaries of People's Daily Online, their major customers happen to be the state-owned enterprise. And so it's a great leverage over there. I mean, from a customer point of view, and also a good synergy from a technical stack point of view because what happened in the past, if you look at all the public cloud services providers, their offerings tend to be generic, but for certain verticals, their services and workloads and scenarios tend to be laser beam focused, which is a great workload on top of the cloud-native platforms So I think from a customer touch point and also from a technical synergy point of view, it is a great partnership. We're definitely looking forward to having some of the positive impact moving down the road. Like I said before, I'm happy to update once we have good progress and hitting the milestones.

Okay, got it. Thanks, Emmett.

Thank you, ladies and gentlemen. That does conclude our conference for today. Thank you for participating. You may now disconnect your lines.