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spk04: Hello, ladies and gentlemen. Thank you for standing by for the third quarter 2023 Earnings Conference Call for VNet Group, Inc. At this time, all participants are in listen-only mode. After management's prepared remarks, there will be a question and answer session. Participants from our management include Mr. Jeff Doe, Chief Executive Officer, Mr. T. Yu Wang, Chief Financial Officer, Mr. Tim Chen, Chief Strategy Officer, and Ms. Xin Yuan Liu, Investor Relations Director of the company. Please note that today's conference call is being recorded. I'd now like to turn the call over to the first speaker today, Ms. Xin Yuan Liu. Please go ahead.
spk00: Thank you, operator. Hello, everyone, and welcome to our third quarter 2023 earnings conference call. Our earnings release was distributed earlier today, and you can find a copy on our website as well as on Newswire services. Please note that today's call will contain forward-looking statements made under the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from our current expectations. For detailed discussions of these risks and uncertainties, please refer to our latest annual report and other documents filed with the SEC. VNAT does not undertake any obligations to update any forward-looking statements, except as required under applicable laws. Please also note that VNAT's earnings facilities and this conference call include the disclosure of an audited GAAP and non-GAAP financial matters. Earnings Press Release contains a reconciliation of the Unaudited Net Gap Matters to the Unaudited Gap Matters. As a reminder, this conference is being recorded. In addition, webcast of this conference call will also be available on our IR website, sir.vinet.com. I will now turn the call over to our CEO, Jeff.
spk02: Thank you, Hien-Yuen. Good morning and good evening, everyone. Thank you for joining our call today. I'd like to start with the overview of our third quarter performance. Our solid growth in the third quarter reflects our continued focus on high-quality business opportunities. Cabinet deliveries are progressing smoothly. By the end of the quarter, we had grown our total cabinets under management to approximately 88,900, compared with approximately 82,660 years ago. The number of utilized cabinets increased by 1,092 to 52,408. in the third quarter, turning our overall utilization rate to 59%. Furthermore, our retail MRR per capita during the quarter stayed high at RMB 9,495. We remain dedicated to ending high-quality revenues in both the wholesale and the retail EDC markets in the third quarter, generating solid year-over-year growth with our total net revenues increasing by 4% to RMB $1.89 billion and just EBITDA growing by 11.6% to RMB 507.9 million. With a rapid pace of large language model training and AI application deployments, computing power is becoming a new productive force to meet the growing need for computing power. China's governing authorities have recently unveiled an action plan for the high quality development of computing power infrastructure nationwide. As an industry leading player, we are seeing increasing demand for premium ITC services, and we remain a clear choice for customers to ride the wave of digital transformation. Now let's take a closer look at our third quarter business updates. First, AI is driving increasing demand for computing power and ITC services. Our wholesale data center continues to meet the increasing AI demand. driven by our customers' growing business. Equipped with high power density capabilities, we excel in powering large language model training and deployment for internet platforms. Our core competencies, spending resources, and execution capabilities enable us to support our customers' evolving and sustained business development needs. As we mentioned on our last call, in August, we won an extended order of 45 megawatt from the UCT Internet giant customer, which speaks to our superior wholesale service offerings appeal amid the competitive landscape. Moreover, our company deployment execution has been stellar. During the third quarter, we successfully delivered over 2,600 high-power density cabinets in the Yangtze River Delta region to one wholesale customer and approximately 800 high-power density cabinets in the northern region of China to another wholesale customer. Throughout the delivery process, we maintained strict quality standards while offering customization options tailored to customer requirements. This execution is a testament to our commitment to timely delivery and top-notch quality, which has earned us a reputation for reliability and customer satisfaction. Our retail customers' AI-driven demand continues to rise, particularly from existing customers in industries such as local services, healthcare, and VR. Building on this momentum, we expect to attract more retail customers from a wider range of industries. such as autonomous driving and AI solutions. I'd also like to highlight our distinctive proficiency in designing and implementing power and equipment upgrades for our cabinets to meet existing customers' high power density computing needs. This capability is well supported by our engineering experience and expertise, as well as our existing high power density cabinets. which allows us to promptly address growing diverse AI demands from retail customers. In addition, we further expanded and diversify our retail customer base in the third quarter, attracting new customers and securing extended contracts from an existing customer in various industries, including IoT, financial services, gaming, and mobility. It's also worth noting We recently won a new order of 1.5 megawatt from an existing customer award-leading consumer electronic tech brand. Now turning to our value-added services. During the third quarter, our full-stack one-stop biometal as a service solution continued to gain new customers, one of which is a pioneering unicorn in the VR industry. We won the contract based on our flexible computing power resources that can rapidly meet these customers' specific demands during peak business hours, underpinning the rapid growth of its metaverse business. Our diverse IDC services offerings include a solid IT infrastructure, premium operations, and maintenance services, and impressive cost-efficient solutions, making VNet an outstanding choice for potential customers looking for a trusted partner to support their current and future business development needs. We have also attracted a leading Chinese EV automaker for our interconnectivity services, throughout our robust data center and network resources nationwide. The customer can store their business data in adjacent data centers and transmit with low latency backhaul. This customer reaffirms our compelling value proposition and advanced interconnectivity services capabilities. In summary, our robust third quarter results showcase our ability to effectively address both wholesale and retail business IDC needs backed by timely and strong execution. Looking ahead, AI prevalence and adoption is emerging across industries and supportive government policies will accelerate the development of computing power infrastructure in China. As a dedicated industry leader, we look forward to meeting this newest wave of demand driven by AI applications and further unleashing our long-term growth potential. Thank you, everyone. I will now turn the call to Qi Yu to discuss our financial performance for this quarter.
spk06: Thank you, Jeff. Good morning and good evening, everyone. Before we start the detailed discussion of our financials, please note that we will present non-GAAP measures today. Our non-GAAP results include 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 earning press release. Please also note that unless otherwise stated, all the financials we present today are for the third quarter of 2023 and in RMB terms. Now, let me walk you through our third quarter financial results, and let's otherwise simplify the growth rates I will be reviewing on a year-over-year basis. In the third quarter, we continued to deliver solid results with our focus on high-quality revenues. Our net revenue increased by 4% to $1.89 billion from the same period last year. Mildly driven by the continued growth of our mine business, gross profit was $306.5 million in the third quarter of 2023, representing a decrease of 3.2% from the same period of 2022. Gross margin was 16.2% in the third quarter of 2023 compared to the 17.5% in the same period of 2022. Adjusted cash growth profit, which includes depreciation, amortization, and share-based compensation expenses, was $7.384 million in the third quarter of 2023, an increase of 4.3% from the same period of 2022. Adjusted cash gross margin in the third quarter of 2023 was 39.1% compared to 39% in the same period of 2022. Adjusted operating expenses, which includes share-based compensation expenses and the compensation for the post-combination employment and acquisition were $264.8 million in the third quarter of 2023 compared to $275.1 million in the same period of 2022. As a percentage of the net revenue, adjusted operating expenses in the third quarter of 2023 were 14% compared to 15.2% in the same period of 2022. Adjusted EBITDA in the third quarter of 2023 was $507.9 million, representing an increase of 11.6% from the same period of 2022. Adjusted EBITDA in the third quarter of 2023 excludes share-based composition expenses of $9.5 million. Adjusted EBITDA margin was 26.9% in the third quarter of 2023 compared to 25.1% in the same period of 2022. Our net loss attributable to VNet Group in the third quarter of 2023 was $50.5 million compared to a net loss of $425.2 million in the same period of 2022. Basic and diluted loss were both 0.06 per ordinary share and both 0.36 per ADS. Each ADS presents six class A ordinary shares. Turning to our balance sheet, As of September 30, 2023, the aggregate amount of the company's cash equivalents and restricted cash was $3.02 billion. Meanwhile, net cash generated from operating activities in the third quarter of 2023 was $454.3 million compared to $607.4 million in the same period of 2022. Our capital expenditure in the third quarter of 2023 was $964.7 million. Before I conclude, I'd like to provide an update on our financial outlook for full year 2023. For the full year of 2023, the company currently expects total net revenue to be between $7,400 million and $7,600 million, representing a year-over-year growth of 4.7% to 7.6%, and adjusted EBITDA to be in the range of $2,000 million to $2,060 million, representing a year-over-year growth of 0.8% to 10%. This compares with total net revenue expected between 7,600 million and 7,900 million and adjusted EBITDA between 2,025 million and 2,125 million as previously stated. The outlook update is mainly due to our continuous focus on high-quality revenues to maintain the long-term sustainability of our operations. The focus reflects the company's current and preliminary views on the market and its operational conditions and is subject to change. Moving forward, we will stay focused on our high-quality growth strategy, promoting our premier IDC services to empower digital transformation across a broader source of industries. As always, we remain committed to create sustainable growth for all our stakeholders. This concludes our prepared remarks for today. Operators, we are now ready to take questions.
spk04: Thank you. We will now begin the question and answer session. To ask a question, please press star 11 on your telephone. To withdraw your question, please press star 11 again. The management welcomes questions to be asked in Chinese. For the benefit of all participants on today's call, if you wish to ask your question in Chinese, please immediately repeat your question in English. For the sake of clarity and order, please ask one question at a time. Management will respond and then feel free to follow up with your next question. Once again, that's star 114 question. Our first question comes from the line of Yang Liu from Morgan Stanley. Please ask your question, Yang.
spk08: Thanks for the opportunity to ask questions. I would like to have an update in terms of the company's upcoming convertible bond repayment in February next year. What has been done or what is the current progress of the asset magnetization to prepare for the repayment, both for the potential rates issuance and also the setting down minority stakes of existing projects, et cetera. whatever you can share now.
spk06: Thank you. Thank you. I know this is the most important question for us. Taking the liability management issue has been my top priority task since I took the CEFO position. We are busy working on two major ways to resolve the issue. One is to raise new funding from new equity and that investment. Because we need to follow the NASDAQ rules, so we have been dedicated to pursuing new investors. it's the right time we will make the public announcement if there's any concrete progress. Also continue to actively engage with our CB creditors to find the best way forward. Also, we also try our best to present OPEX management and all positive progress in other funding rising, just you say including the SS cell minority share and also the CREITs. They both have some significant progress but also need some time to closing this deal. So we will try our best to leverage this incoming CB. So we are firm plan to to the put and the leveraging on both internal and external resources. Yeah, thank you.
spk08: Thank you. May I follow up with another question on the business update? For the downward revision of the revenue and EBITDA guidance, where do you see more weakness come from? It is from the traditional retail business or more from the wholesale business?
spk06: Thank you. Yes, we do some change to our guidance. What I want to share is with close to 13 years of IDC industry experience and market insight, we will be navigating our business towards areas where we focus greater profit margins business in short or mid-terms. For example, this year we have allocated more of the DC resources to areas such the AI mode driven wholesale business line. Very clearly, the booming market and promote our profit margin. So we focus this high profit business and then we try to close some low profit business. So you can see if you compare the revenue and the EBITDA guidance, the EBITDA guidance will only decrease a very minor around 2%. So in additional, we're planning to certain dual core value allurance practice within this year. So as our ongoing financial statement could better reflect the nature and transmission of our business. And then we continue to focus the high profit business, for example, the wholesale and the the AI-driven demand business.
spk08: Thank you. I don't have any other questions.
spk04: Thank you, Yang. Our next question comes from the line of Charlie Bai from Jefferies. Please ask your question, Charlie.
spk07: Hi. This is Charlie Bai from Jefferies. My first question is about third-quarter MRR. I saw a quarter-on-quarter decline on both the utilization rate and the retail MRR. May I know what's the reason behind it? Thank you.
spk01: Hi. In terms of MRR, I would say for the Q3, still stay at a high level, and I see in line with our expectation. There might be some fluctuations from quarter to quarter, which is quite normal. So, we believe at the end of the year, it will come up again. And also, in terms of the utilization rates, our estimate of EUR by the end of 2023 will be on par with the Q3 2023 level, with a faster growth, especially for our wholesale customers. particularly those in the short video sectors, we expect a higher utilization rate in 2024. Thank you.
spk07: May I follow up with another question? May I have some color on the outlook of the CAPEX plan this year and in 2024? Thank you.
spk06: This year, the full-year CAPEX is expected to be around $3.8 billion, which is about 10% more than our guidance. The main reason is that the demand for wholesale data center business is growing faster. And next year, there will be a significant increase in the full-year CapEx, mainly due to the increased growth rate of a wholesale business and the high and AI-driven the demand. So we will specific figure the CapEx announced in the full year guidance early next year.
spk07: Okay, thank you. I have no more questions.
spk04: Thank you, Charlie. Our next question comes from the line of Timothy Chow from Goldman Sachs. Please ask your question, Timothy.
spk03: Sure. Thank you, management, for taking my question. I want to understand more about your updated guidance for this year. Just wondering, could you share a little bit more in terms of the revenue breakdown for the four-year guidance for your wholesale IDC, retail IDC, and also the non-IDC BNS? And you mentioned that you are going to churn down or reduce the exposure to those low-margin BNNs. Could you elaborate more on what exactly are those lower-margin BNNs? I believe those include the retail BNNs, and how much more do you expect to reduce the exposure, I think, in this segment? Thank you.
spk06: Yeah. Because now... Because the wholesale and the AI-driven demand is increased faster. We try to find more resources, for example, in some retail data center. we shut down and we closed some business for traditional retail customer and then move the space and the power supply to the AI customer. So this is my reason I will reduce the revenue guidance. And on the same way, you see the EBITDA impacts This impact of EBITDA is very minor. I think this is not our business. The speed of our business is low down. On the other way, this is the signal that EBITDA margin and then the EBITDA is more positive than before.
spk08: Got it. That's helpful. Thank you.
spk04: Thank you, Timothy. Our next question comes from the line of Dele Lee from Bank of America Security. You can ask your question, Dele.
spk05: Hi, management. Thanks for taking my question. Here I just have one on the AI space. You mentioned more high-power density deployment for your data center. Could you please share the demand trend driven by AI? Do we have any breakdown how much demand from AI for the retail or for the wholesale business? And looking into next year, how do we view the AI demand for our data center business? Thank you.
spk01: In terms of AI, which is very popular since this year, we have seen actually the rapid growth of AIGC in China. Dozens of large language modeling across different sectors has already been launched since the earliest year. Many of them are still being trained and the generic models are dominated by actually the internet giants, whether the verticals are led by the leading players in specific industries and some tech startups as well, aside from the internet giants. Back to the impact on our IDC demands, I would say from a wholesale side, the AI-driven demand from wholesale customers are mainly searched by internet giant customers, especially their short video and e-commerce business. Notably, we deliver, as announced this quarter, around 3,500 cabinets during the quarter to two wholesale customers, all of which actually are high-power density cabinets. In terms of retail sites, we are still receiving increasing AI demands from retail customers across various industries, such as local services, healthcare, and VR, And also we are further exploring into the demand from some new economy industries such as Fantech. We are in the dialogue with them. And in terms of high power density cabinets, actually those cabinets from VNet located in the Great Beijing Area, Yangtze River Delta, and also Great Bay Area. In terms of their size, we obviously see about from up to 40 kilowatt and over 30 kilowatt for the wholesale and the retail. And so far, we have from all the delivered, we received these quotas about over 90%. I would say it's coming from a high power density area.
spk05: Okay, quickly, thank you, management, for your introduction. Thank you.
spk01: Thank you.
spk04: Thank you. We have reached the end of the question and answer session. And with that, ladies and gentlemen, that concludes our conference for today. Thank you for participating. You may now disconnect your lines. Have a good day.
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