VNET Group, Inc.

Hello, ladies and gentlemen. Welcome and thank you for standing by for the fourth quarter and full year 2023 earnings conference call for VNet Group Inc. At this time, all participants are in the listen-only mode. After the speaker's presentation, we'll have answer and question session. At this time, all of the participants are in the listen-only mode. After the management's pre-mark, there will be a question and answer session Our participants from our management team includes Mr. Jeff Dong, Chief Executive Officer, Mr. Qi Yuan, Chief Financial Officer, Ms. Xinyuan Liu, Investor Relations Director of the company. Please note that today's conference call is being recorded and I will now turn the call over to the first speaker today, Ms. Xinyuan Liu. Please go ahead.

Thank you, operator. Hello, everyone, and welcome to our fourth quarter and full year 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 US 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 press release and this conference call include the disclosure of audited GAAP and non-GAAP financial matters. VNAT's earnings press release contains a reconciliation of the audited non-GAAP matters to the audited 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.vnat.com. I will now turn the call over to our CEO, Jeff.

thank you good morning and good evening everyone thank you for joining our call today i'd like to begin by providing an overview of our fourth quarter and full year 2023 performance we ended 2023 on a solid note and made the steady economic recovery demonstrating effective execution of our dual core growth strategy we meet our 2023 delivery target with 8,321 self-filled cabinets delivered during the year. As of year in 2023, we had grown our total cabinets under management to approximately 93,600 compared with approximately 87,300 years ago. The number of utilized cabinets increased by 2,827 to 55,235 in the fourth quarter. driving our overall utilization rate to 59% compared with 55% a year ago. Our retail IDC MRR per capita remains stable in the fourth quarter at RMB 9,477. In terms of our financial performance, we continue to focus on high-quality revenue during the quarter. Joining our net revenues to RMB 1.9 billion as well as 3.8% year-over-year increase in our adjusted EBITDA to RMB 440.2 million. Turning to our full-year performance, our net revenues increased by 4.9% year-over-year to RMB 7.41 billion and adjusted EBITDA grown by 8.9% year-over-year to RMB 2.04 billion. Our robust operational and financial performance reflects our effective strategy and strong execution, as well as our ability to grow our business by skillfully leveraging market trends and a supportive policy environment. According to this year's government work report, China is increasing its efforts to promote the innovative development of the digital economy Specifically, the report called for policy support for the digital economy's high-quality development. As stated, China will set up the development and application of big data and artificial intelligence, launch the AI-plus initiative, and build world-class digital industry clusters. We believe these initiatives and goals will further drive market demand for high-quality data centers and premium ITC services. As a leading ITC service provider, VNAN is strategically positioned to capitalize on these emerging opportunities through our comprehensive operational strengths across marketing and service, as well as operations and maintenance. I'd like to share our fourth quarter business updates. We are excited to see AI-driven demand from our customers continue to climb, especially computing power demand for training large language models. Among our wholesale customers, those in the short video industries are actively developing and integrating AI functions, requiring massive high-performance computing power to enhance their content creation capabilities and business operations. In our retail business, demand is also increasing steadily from customers in industries including autonomous driving, local services, and virtual reality, where large language models are widely deployed for business. Our high-performance data centers empower us to fulfill various AI-driven demands with innovative solutions. Moving on to our wholesale business, we extended our impressive delivery track record to our wholesale customers with timely, high-quality deliveries of approximately 109 megawatts for the full year. These deliveries have not only solidified our reliability, but also boosted customer satisfaction. Of particular note is the rapid ramp-up period we have delivered to leading wholesale customers. For several of our projects, moving periods were much faster than initially anticipated. Furthermore, we recently secured a new order from one of our existing customers, a leading cloud service provider in China. The new order is for approximately 15 megawatt in one of our projects in the Yangtze River Delta region and is scheduled for completion in 2024. Once again, this new order showcased our long-term customer loyalty and our industry-leading service capabilities. Our retail business remained resilient during the quarter, attracting new customers across mobility, cloud service, AI, and the IT service industry. We also extended contracts with loyal existing customers in finance, local services, autonomous driving, and gaming, where demand remains solid. On the value-added service front, our full-stack, one-stop innovative biometal-as-a-service solution based on AI technologies continues to win customers. including one of China's leading providers of energy-efficient computing solutions for smart mobility. This customer's demand for computing power is surging rapidly due to growing adoption of advanced driver assistance systems and autonomous driving technology in the mobility industry. Our innovative Biometer as a Service solution provides secure and flexible computing power resources to support the customer's intelligence driving simulation training and the LLM operation, empowering the customer's future growth. Turning now to our recent ESG performance, our commitment to sustainability once again won recognition from global leading ESG rating agencies in 2023. Earning a rating from MSCI for the second consecutive year, this represents the highest ranking awarded today in China's internet service and infrastructure industry, distinguishing us among our peers. In addition, our company scored 53 in the 2023 S&P Global Corporate Sustainability Assessment. ranking the highest among China's IT service industry and in the top 11% in the industry globally. Looking ahead, we will remain steadfast in our pursuit of ESG excellence, embracing and promoting a green future industry-wide. Before I conclude, I'd like to share some meaningful progress we made on our refinancing projects. In late December 2023, we completed the US$299 million strategic investment from Shandong High-Speed Holdings Group, who further strengthens our balance sheet. We have also established a partnership with Shandong High-Speed Holdings, who cooperatively explore new opportunities in renewable energies. Amid the booming computing power, Demand driven by AI development, we believe our core business will enjoy great synergies with Shandong high-speed holdings resources and expertise in traditional infrastructure fields. We look forward to collaborating with Shandong high-speed holdings on the rate of green energy initiatives to jointly advance towards our carbon neutrality targets while meeting society's surging demand for digital transformation. Also, on 1st February of this year, we successfully completed the repurchase payment relating to our convertible senior notes due in 2026 in aggregate principal amount of 600 million USD. Amid the tepid capital market, this stands as another testament to our resilient business fundamentals, as well as our commitment to long-term sustainable development. In conclusion, strong execution of our UCOR strategy for high-quality growth drove our solid performance in 2023, while laying a firm foundation for 2024. Having seen the booming AI trend, we are growing our business alongside the macro environment's steady recovery. We will continue to build on our core capabilities as we head into 2024, fulfilling market demand for secure and premium IDC services and facilitating digital transformation across a wider spectrum of verticals. Our unwavering commitment to our shareholders is to feel sustainable growth and generate long-term value. Before I share our delivery projection for 2024, I want to highlight that going forward, these projections will be expressed in terms of power capacity instead of number of cabinets. We believe power capacity will more meaningfully reflect our business development, giving our data centers increasing power density amid the growing AI trend. That said, we expect to deliver 100 to 120 megawatt during 2024. Thank you, everyone. I will now turn the call to Qi Yu to discuss our financial performance for the quarter.

Thank you, Jeff. Good morning and good evening, everyone. Before we started 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 including our earnings price release. Please also note that, unless otherwise stated, all the financials we present today are for the fourth quarter and the full year of 2023 and in RMB terms. Let me walk you through our fourth quarter and the full year of 2023 financial results. Unless otherwise specified, the growth rates I will be reviewing are all on a year-over-year basis. We concluded 2023 with solid financial and operating performance, both in line with our guidance. More importantly, our wholesale business continues strong growth momentum. During the year of 2023, we added 109 megawatts of capacity to our wholesale business, growing a year-over-year increase of around 70% in our wholesale revenue. In the fourth quarter, our net revenues increased by 0.9% to $1.9 billion from the same period last year, mainly driven by the continued growth of our core business. Growth profit was $290.9 million in the fourth quarter of 2023, representing a decrease of 0.4% from the same period of 2022. Growth margin was 15.3% in the fourth quarter of 2023 compared to 17.5% in the same period of 2022. The year-over-year decrease was primarily attributable to an increase in depreciation and amortization expenses as additional data centers were put into service during the past quarters. Addressed cash growth profits, which exclude depreciation, amortization, and the share-based compensation expenses, was $741.7 million in the fourth quarter of 2023, an increase of 0.2% from the same period of 2022. Adjusted cash growth margin in the fourth quarter of 2023 was 39.1% compared to 39.4% in the same period of 2022. Adjusted operating expenses, which exclude share-based compensation expenses, compensations for post-coordination employment in the acquisition, allowance of law receivable impairment of long-life assets and impairment of goodwill were $334.2 million in the first quarter of 2023 compared to $355.4 million in the same period of 2022. As a percentage of net revenues Adjusted operating expenses in the fourth quarter of 2023 were 17.6% compared to 18.9% in the same period of 2022. Adjusted EBITDA in the fourth quarter of 2023 was $440.2 million representing an increase of 3.8% from the same period of 2022. Adjusted EBITDA margin was 23.2% in the fourth quarter of 2023 compared to 22.6% in the same period of 2022. Our next loss attributable to VNet Group Inc. in the fourth quarter of 2023 was $2.4 billion compared to the net loss of $64.2 million in the same period of 2022. Basic and diluted loss were both $2.65 per ordinary share and both $15.88 per ADS. Each ADS represents six Class A ordinary shares. Turning to our balance sheet as of December 31, 2020, The grade-gate amount of the company's cash and cash evidence restricted cash and short-term investments was $5.46 billion. Meanwhile, net cash generated from operating activities in the fourth quarter of 2023 was $730.3 billion. compared to $407.5 million in the same period of 2022. Our capital expenditure in the fourth quarter of 2023 was $1.6 billion, and the total capex for full year 2023 was $3.58 billion. Now moving to our outlook. We expect our net revenue from the full year of 2024 to be in the range of $7.8 billion to $8 billion representing a year-over-year increase of 5.2% to 7.9% and adjusted EBITDA to be the range of $2.22 billion to $2.28 billion representing a year-over-year increase of 8.9% to 11.8%. Focus reflects the company's current and the preliminary reviews on the market and its operational conditions and is subject to change. Looking into 2024, we will continue to excuse our effective due call strategy driving high-quality business growth. We believe our solid fundamentals and core strengths position us to capture market opportunities, especially AI-driven demand. As always, we remain dedicated to creating sustainable value for all our stakeholders. This concludes our prepared remarks for today. Operator, we are now ready to take questions.

Thank you. We will now conduct the Q&A session. As a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by as we compile the Q&A roster. Our first question comes from Yang Lu of Morgan Stanley. Please go ahead.

Thanks for the opportunity. I have two questions.

The first one, can management update us in terms of cooperation with the strategic shareholder Shandong High Speed? What kind of pipeline are you talking about? What should be the timeline that we can see the two parties will do something together with either revenue synergy or cost synergy in the coming year? And the second question is, can management update us in terms of the 2024 CAPEX guidance? And what will be the key investment area? customers or what kind of region the company is investing in. Thank you.

Thank you, Yang Liu. Let me answer the two questions. For the Shandong High Speed Synergy, as a strategic investor, Shandong High Speed Holding will play a positive role in providing support and guidance to the executive team of our company at the board level, we remain committed to operating in accordance with market standards with existing executive team responsible for the day-to-day operations. Being a Fortune 500 enterprise, Shandong has been holding has the rich financial resources. They bring variable support to our onshore financing efforts. Also, just like Jeff said, the strong synergy between their green energy business and our IDC wholesale business in the new infrastructure projects present significant opportunities. Also recently, the company signed a strategic collaboration agreements with Inner Mongolia Ulaan Chabu governments and with Shanghai High Speed Holding to construct green computer projects together. I hope the two parts, one is the cost efficiency in the onshore financing efforts will show some number in this year balance sheet. Also, I think the green energy opportunity cooperation also will start from this year. For the CAPEX and the site, our full year CAPEX should be around RMB 3.7 billion to 4.2 billion for this year, driven by the strong demand from our wholesale customer. around 70% the CapEx on the wholesale business. Compare about RMB 3.6 billion CapEx in 2023, the estimate CapEx for this year expect to increase about around 10%. For the financial side, after the company repaid the 6 hundred million US dollar convertible bonds in early this year, the company's credit status remains solid. Considered a more favorable domestic financing element in terms of cost efficiency, we plan to primarily fulfill this year's CapEx demand through the onshore financing. Shandong High-Speed Holding supports, we will be able to obtain onshore financing approval more efficiently. Excluding the series and the asset disposal, we plan to raise funds through credit-based, project-based, and existing asset-based financing in onshore financing market with the financing cost expected to around the LPR. We plan to raise uh around five billion renminbi in financing in this year uh this uh amount of financing with six percent of uh already secured and about four uh four forty percent under negotiation uh also yeah thank you oh yeah sure uh it's uh

management can provide more color that will be better. Thank you.

Operator, next one.

No problem. Our next question comes from Edison Li of Jefferies Hong Kong Limited. Please go ahead.

Hi, good morning. Hi, good morning. I have three questions. Number one is, I'm looking at your debt breakdown on page 20 of your PT, and it seems that by the end of this year, you have 4.2 billion, 4.25 billion RMB of convertible promissory notes that will come to you. So is that, how much of that is US dollar? And yeah, how are you going to cover that? So that's question number one. Number two is that, can you talk about the write-down on your long-lived assets that you took in the fourth quarter of this year? Because in your earnings announcement, you said that this is related to some plan to consolidate your data centers or certain data centers. So I wonder if you can elaborate on that. And then number three, on the CapEx, Guidance that you just gave, 3.7 to 4.2 billion RMB. So with that, totally support the 119 MW projects under construction. And also maybe a little side follow-up on that. How much of that 119 MW is wholesale and how much is retail? Because you said 70% of the capex will go to wholesale. Thank you.

Okay. Let me first ask the second and third question for the loss. In the fourth quarter of 2023, the company conducts impairment testing on goodwill and long-lived assets in crowding with the US GAAP. The results show that the fair value of the reporting unit and certain asset groups were lower than their carrying amounts. As a result, a one-off impairment of goodwill and long-lived assets was recognized. Excluding the one-off impact, the net loss is the same as 2022. The increasing number of data centers put into operation in recent years as a result of the significant increase in the company's depreciation and amortization expense which has negatively impact gross profit and net profit. Due to change in both internal and external environments, the company recently conduct a reassessment of the useful leaves and its fixed assets. Excellent export will also conduct and will be found the actual useful life of certain machinery and equipment exist to provide estimate of 10 to As a result, the company plans to make accounting estimates change in 2024 and extend the depreciation period for certain machinery and equipment. After the adjustment, the average useful life of the company's fixed assets will be extended to about 14 years, allying with the industry average. This adjustment is expected to have a positive impact on gross profit and net profit in this year. We're including uncertainty factors such as foreign exchange gain or loss and fair value change. The company expects achieving break-even by this year. Also, the third question for the CapEx, most of the CapEx are from the wholesale business. around 80% from the wholesale business. Sorry, what is the first question?

Could you please... Sorry, just on the CapEx, can I clarify that if 80% of the CapEx is going to wholesale, does it mean that 80% of that 119 megawatt project is wholesale?

Yeah, yes.

Okay, okay, thank you. My first question is about the debt breakdown by maturity on page 20 of your PPT, right? So you show that in 2024 you have 4.25 billion RMB of convertible debt due. So I want to know how much of that is US dollar and what is your plan to cover that?

It's the 600 million USD CB which we already have completely repayment in February.

All right. Okay. Okay. So that has been taken care of. Okay.

Thank you.

Thank you. Our next question comes from Timothy Zhao of Goldman Sachs. Please go ahead.

Great. Thank you, management, for taking my question. Also, two questions here. One is regarding your guidance for 2004 regarding the top line as well as EBITDAF. could management share what is the underlying assumption for the high-end and low-end and any color on the, for example, the MRR, the utilization rate, and also the revenue growth between your IDC and non-IDC B&As, wholesale versus retail. I think any color on that will be quite helpful. And secondly, I think back to your capex plan for 2024, just wondering, I think in your remarks, you mentioned something about the AI-related demand. Just wondering, Any color on what percentage or what proportion of the fact that a wholesale campus is related to the campus on? to meet a demand for the higher power density cabinets And how do you think about the overall environment in China for the IDC market?

Thank you Thank you. Let me ask the first question and Jeff will after the second I For the year 2023, our retail IDC business and non-IDC business is quite stable. With the wholesale business is a growth rapidly. By the end of 2023, our wholesale companies represent over 30% of our total companies and the contribution contributed around 20% of our total IDC revenue. Our wholesale revenue growth 70% year-to-year in 2023. The assumption of our 2024 guidance range in mainly based on our available retail IDC business and the non-IDC business. The range is mainly reason is utilization rate of our wholesale IDC business. We expect to provide more color on wholesale, retail, and non-IDC starting from the fourth quarter of this year. So maybe in next quarter earning we will show more number from about our wholesale and the retail and the non-IDC business. So Jeff.

In terms of AIGC demand, we have seen rapid growth in China, and AI-driven demand from our customer side continues to climb, especially computing power demand for training LLM. Those models are dominated by the internet giants, which the vertical models are led by the leading players in specific industries. as I mentioned, and some tech startups, aside from the internet giants. For our business, for the wholesale, AI-driven demands are mainly searched by internet giants' customers, especially like short video and e-commerce business. As I mentioned on the call, we can see short video customers are ramping up very, very fast than we expect, which is which is highly contributed by their strong AI-driven demand. In terms of retail sites, we are receiving actually interesting demand from retail customers across various industries, like the autonomous driving, local services, and the virtual reality, and so on. In 2024, we will explore into further demand from that side. And also, we have the value as service parts can also provide solid support to the AI demand. As you mentioned, in terms of the CapEx side, to category into the AI-driven, as of 2023, around 20% of our stored CapEx are high power density, and especially for the companies new delivered during 2023. I would say the large majority is hard power density cabinets, which are all for wholesale customers. For cabinets to be delivered during 2024, I would say it would be 100% is high power density cabinets. which are all for wholesale customers. So, come back to the CAPEX side, I would say the majority of the CAPEX will go to the high-power density wholesale customers.

Thank you. Our next question comes from Daily Lee of Bank of America Securities. Please go ahead.

Daily Lee of Bank of America Securities. Please go ahead. Daily Lee of Bank of America Securities. Please go ahead. Daily Lee of Bank of America Securities. Please go ahead. Daily Lee of Bank of America Securities. Please go ahead. Daily Lee of Bank of America Securities. Please go ahead. Daily Lee of Bank of America Securities. Please go ahead. Daily Lee of Bank of America Securities. Please go ahead. Daily Lee of Bank of America Securities. Please go ahead. Daily Lee of Bank of America Securities. Please go ahead. Daily Lee of Bank of America Securities. Please go ahead. For the same question about the new capacity expansion and for the 100 to 120 megawatts, this capacity, what's the delivery timetable for this year? We'll be majority in second half of like 4Q or some will be in first half this year. Thank you.

Thank you. Let me ask the first question about guidance. The main reason for the company's EBITDA growth higher than the revenue growth in this year guidance follows. There are three reasons. The first one, the expected growth in this year is primarily driven by the wholesale business. Considering the nature of the wholesale business, we does not include effectually revenue. in income. The wholesale business, the EBITDA margin is higher than the retail, so the growth of the wholesale business in this year contributes more EBITDA for the company. The second is we plan to update and improve certain retail data centers that lower EBITDA for this initial arms to enhance our operating efficiency and increase their contribution to the EBITDA. Three, further cost control measure will be implemented to improve the company's operating efficiency, will positively impact EBITDA growth.

Jeff. OK, in terms of the 100 to 120 megawatt will deliver in 2024, I would say the pace will be similar to our previous years. So the majority of our deliveries will happen in the second half of this year.

Thank you very much. Thank you.

Thank you. This concludes today's conference call. Thank you all for participating. You may now disconnect. Have a great day, everyone. Thank you very much.