VNET Group, Inc.

Hello, ladies and gentlemen. Thank you for standing by for the first quarter 2024 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 will be a question and answer session. Managements from our management today include Mr. Gavin Shen, Rotating President, Mr. Chi-Yu Wang, Chief Financial Officer, Ms. Xinyuan Liu, Investor Relations Director of the company. Please note that today's conference call is being recorded. I'll now turn the call over to first speaker today, Ms. Xingyuan Liu. Please go ahead.

Thank you, operator. Hello, everyone, and welcome to our first quarter 2024 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 maturely 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. VNAS does not undertake any obligations to update any forward-looking statements except as required under applicable laws. Please also note that VNAS earnings press release and this conference call include the disclosure of unaudited GAAP and non-GAAP financial matters. VNAS earnings press release contains a reconciliation of the unaudited non-GAAP 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.vinet.com. Before we start today's presentation, let me briefly introduce Mr. Gavin Shen. Beginning in May 2024, Gavin has undertaken this role of Group's Rotating President while also serving as the General Manager of the IDC Strategic Business Group. Gavin joined VNet as our vice president in 2017, and in January 2020 became senior vice president, bringing nearly 20 years of business operations management experience in IT strategic planning, cloud computing, and data centers. I will now turn the call over to Gavin. Please go ahead.

Thank you, Xinyuan. Good morning and good evening, everyone. Thank you for joining our call today. Before diving into our first quarter performance, I'd like to remind you of the decoding refinement that we mentioned in our last call. To enhance information transparency and help the public better understand our business, starting from this quarter, we will report total revenues and operational metrics for our wholesale and retail business separately. Our CFO, Chi-Yi, will go over the details. Now, let's move on to our first quarter initiatives and business progress. Solid first quarter results marked a good start for this year. We continued to execute our effective dual-cost strategies while pursuing high-quantity development. Our robust Operating and financial results once again demonstrate our ability to grow our business by leveraging our core space to capture even involving demand in the area of AI. Michael Wise, supportive government policies and mayor decide to foster our favorable market environment, acquitting more treatment for us and IDC industry as a whole. Computing power is widely seen as a crucial component of China's high-quality development. Per the Government Work Report 2024, which calls for accelerating the formation of a nationwide computing power network, the Telecom Regulator has strengthened policy initiatives to further optimize computing power resource and infrastructure systems across the region. We believe those initiatives will empower us to allocate and manage other data centers more efficiently and best meet the huge market demand for high-performance computer power. Additionally, interest in greener computing solutions is on the rise. In April, we signed a strategic cooperation agreement with Wollantyper's local government and Shandong High Speed Holdings to build a green AI supercomputing data center cluster. The three parties will work together to promote the digitalization and GUI development of Woodland Hub. We are confident our GUI data center business will resonate with customers and evaluate our market competitiveness as those traits take hold. While IDC development remains our primary focus, we were keenly aware of how AI-related demand for high-performance computing is resharping the data center landscape. Our quality data centers and high-density power capabilities enable us to trail high-performance computing solutions seamlessly to meet customers' rapidly growing AI needs. By the end of the fourth quarter, over 90% of our wholesale capacity in service is high-power density. Meanwhile, we continue to see increased AI-driven demand from industries like chief design, autonomous-driven financial service, and logistics, and education. As an industry pioneer, we are exploring AI data center, AIDC, development, and actively upgrading our computing power infrastructure to capture market opportunities. AI workload require massive computing power, enforcing our transition from CPU-based to GPU-based infrastructure, apart from a few top internet enterprise and AI technology enterprise with GPU resource of their own. Most small and mid-sized enterprises will outsource this upgrade given the high cost, limited channels, and other challenges in purchasing GPU infrastructure outright. AIDCs can meet enterprises' computing power needs while minimizing their capital investment, a significant advantage in the current environment. Now let me go through some updates on the IDC fund. We continued to win new orders for both wholesale and retail business during the quarter. On the wholesale side, as we mentioned on our last call, we secured a new order from one of our extreme exciting clients for approximately 15 megawatts. scheduled to be completed within 2024. We also want an order of approximately 2.5 megawatt in our data center in the Yangtze River Delta region for a new customer, one of China's largest restaurant companies. On the retail side, we continue to attract new customers in financial service, local service, and manufacturing and deepen exciting relationships. Notably, we won a new order of a policy meting 1.5 megawatt in our data center in the greater Beijing area for an exciting customer, a leading player in local service sector. Moving to our long IDC business, we also made progress with our VPN service. Our wholly owned subsidiary, DYXlet, has successfully expanded its global network coverage with a new point of prevalence established in Dubai in the fourth quarter and in South Korea and Mexico more recently. The new POPs broaden our VPN service global network coverage over our VPN service, and the new POPs will provide enterprise customers with comprehensive and integrated network cloud security service, enabling them to capitalize on emerging markets and global expansion opportunities. Turning now to our ECG performance. In April, we issued our fourth annual ESG report detailing in compliance with 2023 AdWords and progress sustainability, including verified carbon inventory results. During 2023, we continued to execute our shared sustainability system and achieved various performance across employees. diversity and equity needs, grid power engagement, and efficient energy consumption. We also highlighted achievements such as our average annual power usage efficiency of 1.2 line, a total grid power purchase of about 56.9 million kilowatt hours during the year, and an increase in our percentage of female employees in our management position to 31%. Moving forward, we will remain dedicated to integrating ESG-based properties company-wide. Advising the coordinated development of the green economy and the digital economy, driving sustainability and creating value for our stakeholders and our associates. To conclude, our solid first quarter performance underscores our core strengths, a broad and growing array of innovative ITC services. outstanding high power density development capabilities, and our low-year and expanding customer base looking ahead. We will continue to drive our dual core business strategy and pursue high-quantity goals while advising the development of China's digital economy. Thank you, everyone. I will now turn the call over to Qiwei to discuss more about our operating and financial performance.

Thank you, Gavin. Good morning and good evening, everyone. Before we start the detailed discussion of our fourth quarter performance, please note that, as Gavin just mentioned, we have enhanced our disclosures with more detailed operational and financial metrics starting this quarter. we believe these new metrics will provide shareholders with greater insight into our business. Specifically, beginning in the first quarter of 2024, our IDC business was subdivided into wholesale IDC business and retail IDC business based on the nature and scale of our data center projects. Prior to 2024, The subdivision was based on the types of customer contracts. You may find a detailed list of all wholesale projects in our IR presentation for this quarter. Accordingly, for operating metrics, we have presented them by retail and wholesale separately. For the wholesale business, the metrics are mirrored in terms of power capacity instead of cabinets, which we believe will more meaningfully reflect our business development. In addition, our wholesale capacity is present across three different stages, including in-service, under construction, and held for future development, which we believe will provide a clearer and more comprehensive picture of our wholesale capacity boosting the high growth potential of our wholesale business. For financial metrics, we have subdivided our net revenue into revenues from IDC business, which include retail revenues and wholesale revenues, and the revenue from non-IDC business, which consists our cloud and VPN business. Now let's move on our first quarter results. Please also note that Unless otherwise stated, all the financials we present today are for the first quarter of 2024 and are in Renminbi terms. Furthermore, all the growth rates and revenue are on a year-over-year basis. We kick off 2024 with solid operating and financial results. Our wholesale IDC business continues to gain momentum driven by rapid customer movements. Capacity in SERPs was 332 megawatts as of the end of first quarter. Capacity utilized by customers increased by 17 megawatts to 236 megawatts in the fourth quarter, primarily driven by increased demand for the customer in N-hasen OR06, N-hasen HB03, and E-hasen GS03 data center. As a result, the utilization rate of wholesale capacity improved to the 71%, with the utilization rates for mature capacity reaching around 95%, and the run-pop capacity reaching around 34%. In addition, the capacity under construction was 139 megawatts, with a pre-commitment rate of around 75%, and the capacity held for future development was 557 megawatts. For our retail business, capacity in service was around 52,000 cabinets, remaining flat compared to last quarter, with utilization rate stable at 64%, with the utilization rate for material capacity reaching around 73%. MRR per retail cabinets was 8,742 in the fourth quarter compared to 8,759 for last quarter and 8,874 for the same period last year. Moving on our financial performance, We remain the focus on high-quality revenue business, and our efforts continue to generate positive outcomes. Our net revenue increased by 5.1% to $1.9 billion, mainly driven by the continued growth of our core business. To highlight, our wholesale revenue increased by $59 0.1% to $361 million, mainly contributed by eHassen GS Compass 01 Phase 1, eHassen GS Compass 02A, eHassen GS Compass 02B, nHansen HB03, and eHassen GS03 data centers. On the other hand, Retail revenue decreased by 7.1% to $923.7 million, mainly due to our consolidation and redevelopment of several data centers since the second quarter of 2023. Adjusted EBITDA was $539.8 million, with adjusted EBITDA margin of $28.2 million. Net loss attributable of VNet was $187 million. Turning to our balance sheet, at the end of first quarter, the total amount of the company's cash and cash evidence restricted cash was $2.1 billion. Meanwhile, net cash generated from operating achieve was $267.6 million. Our capex was $971.3 million. For updates on our financing, as we mentioned last quarter, on February 1, 2024, we completed the repurchase payment relating our convertible series notes due 2026 in a total principal amount of $600 million. In the current capital market environment, this strategic move reflects our resilient business fundamentals and our commitment to long-term sustainable development. Now, moving to our full-year guidance for 2024, we expect net revenue to be in the range $7.8 billion to $8 billion, representing a year-over-year increase of 5.2% to 7.9%, and adjusted EBITDA to be in the range of $2.22 billion to $2.28 billion, representing a year-over-year increase of 8.9% to 11.8%. This unchanged from our previous guidance. Given the last market conditions, we have increased our delivery plan to 100 to 140 megawatts from previously stated 100 to 120 megawatts. CapEx is expected to be in the range of 3.7 billion to 4.2 billion. This is entrenched from our previous guidance and may further increase according to market conditions. Looking ahead, our focus will remain on high-quality growth. We will continue to excuse our effective dual-call strategy and further enhance our call capabilities to capture market opportunities driven by the AI boom. This concludes our prepared remark for today. Operator, we are now ready for questions.

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 questions, please press star 11 again. For the benefit of all participants on today's call, please ask your questions to management in English and then repeat in Chinese. One moment for the first question. The first question comes from Edison Lee from Jefferies. Please go ahead.

Thank you, management, for the presentation and very good disclosure. I have three questions. Number one is about the definition of retail and wholesale. I think a lot of investors would like to know what exactly the definition is because the retail MRR that you are presenting today for historical numbers are actually lower than previously disclosed. So that's why I would like to get a clarification on the definition. Number two is on operating cash flow. Can you comment why 1Q24 operating cash flow is so much lower than 1Q23? And number three is on your retail cabinets redevelopment. Can you tell us how many cabinets are actually being affected by the redevelopment and what what will be the outcome of the redevelopment doesn't mean that these companies will actually become wholesale or they will also be still for retail and with much higher power uh so can you explain that uh so let me repeat in chinese uh uh You can explain the definition of wholesale and retail in more detail, because the number of MRRs for retail is actually lower than the previous disclosure, so I believe this is a question of approach, so I want you to talk about it. The second question is about the cash flow. The cash flow of the first quarter of this year is actually only two and a half. The first quarter of last year was four and a half. So why is this going down? The third one is that President Xi said just now that some of these retail offices may have to re-open, so it will basically affect the growth of retail sales. I want to know how many re-development opportunities there are. OK, thank you, Edison. I speak after the question in Mandarin and let the translator help me to translate to English. The first question, I will answer first. Thank you very much for your attention.

We have indeed increased the scope of our disclosure from this quarter. In order to further enhance the transparency of the company's disclosure information, we also hope that the capital market can understand more about the development of the company's business. From this quarter, we mainly divided the income into three parts to record. One is wholesale, one is retail, and one is non-IDC.

Thank you for the question a lot and I want to share with you more information to boost up the information transparency of the company as well as for the purpose of let the capital market better understanding our business development starting from Quarter 1 of 2024, we began to add a new disclosure matrix as well as new indicators. For instance, according to the revenue, we have classified them into three major classes, including wholesale, retail, and non-IDC. At the same time, we've also added new business indicators for the wholesale, including the operational with in-service as a hashtag, We also put under construction as help for the future development of Megawatts for your better understanding.

You just mentioned that we have indeed redefined the traditional meaning of wholesale and retail. In the past, the general understanding of wholesale and retail was to be divided according to the customer it serves. But in order to better to display our information and keep our internal management and external information disclosure consistent. Our current definition of wholesale is called a base data center in Chinese. This refers to a size of at least 40 megawatts and has the ability to continuously expand land power. Most of this data center is provided to our major customers. In other words, most of it is the same as the previous wholesale definition, but there is also a small part that will be sold to medium-sized customers. The retail we define now is called a city data center in Chinese. It is mainly located in the core city and surrounding areas. Its size is generally less than 20 megawatts, and it generally does not have a large-scale expansion capability. Most of these projects are provided to small and medium-sized customers. But there is also a small part to meet the requirements of large customers. We have re-selected about 10% of the chicken houses in these two types. At the same time, we have also traced these data to 2023. Because some urban data centers are also provided to large customers, and large customers generally do not use network increased services, so the MR of these large customers will For the first question of the definition of the wholesale and retail, I want to give you a re-explanation. As you have already noticed that we have already redefined the two terms of wholesale and retail as we did before.

Before, we put the major clients, the big customers, into the wholesale, while the small clients into the retail, but now we made a small change to better serve the capital market as well as to boost up the information transparency, as I did say. Right now, in terms of the wholesale, we make them into the size of more than 40 megawatts, and in Chinese, literally translated into the base type project. For those projects, they have the potential to expand their capacities in the long run in terms of the land, the buildings, as well as the power supply. In most of the cases, those wholesale projects are targeting the major clients and customers. However, we are also selling part of them, a small proportion of them, to the middle-sized enterprises and clients. And on the other side, the retail projects, which will be literally translated into the city-type projects, located many in the core cities including Beijing, Shanghai, Guangdong, and Shenzhen, etc. Generally speaking, the total size usually is smaller than 20 megawatts without any potential to stand the capacity of expanding its stacks and cabinets. And for most of the cases, those projects are targeting the small and medium-sized enterprises. But please be noted, We are also offering the retail projects to the major and the big clients as well to satisfy the needs, to provide, to ensure the low latency. As you have already noted in our numbers that due to the fact that 10% of the committed cabinets have been redeveloped, and a small proportion of the retail projects are offering to the larger clients. The MRR is not included. That is why you are seeing the data discrepancy in the disclosed numbers and records.

Okay. The second question you asked is about the cash flow. In the first quarter, we had a lot of problems And for the question,

Two, you raised the question of why in 2024 Q1, the operational capital was smaller than that of in 2023. Generally speaking, in Q1 of 2024, the company observed a stable and normal cash flow. However, back in 2023 Q1, they were some one-off projects, such as the projects incentivized by the government grants, as well as certain payback from the VAT. Those two items did not happen in Q1, 2024.

Regarding the low-cost data center, let me ask Gavin to answer. Currently, the business of our retail data center is relatively stable.

Due to the market, especially in the city data center, So we are aware of such a change in demand. So we actively transform some low-power cabinets into high-power cabinets. So from the number of cabinets, we will have some reduction in quantity. In fact, the core purpose is still to be able to use these resources to better meet the needs of our market. For the third question, the question was answered by the CFO. In Q1, 2024, the retail database operating on the stably and normally manner

and you have already observed certain changes. Generally speaking, we were redeveloping those cabinets from the low density power cabinets into the high density power cabinets. In that sense, the total numbers are on the decline. This is due to the purpose of better utilizing these sources to maximizing our capacity to meet the market demands. And in the upcoming months, we will also make a constant adjustment to better meet the market requirements. For instance, according to the demand of a certain market, we will increase the number and redevelop the new cabinets to better serve the local market.

Thank you for the questions.

One moment for the next question.

Our next question comes from Yang Liu from Morgan Stanley.

Please go ahead.

Thanks for the opportunity and a great thanks for the more disclosure, which is very helpful to us. I have two questions. The first one is regarding the three business growth outlook. I think clearly the wholesale will be a key driver and the retail looks like a dragger. But the management quantifies the growth rate of the three business or what is behind the current guidance of around five to eight percent of four-year growth in the three business lines. That's my first question. The second question is We saw it's a pretty big increase year over year. What is behind that and whether that is one-off or sustainable? Then can you ask the management to evaluate the growth of these three businesses? Or how do you expect these three businesses to perform behind the increase in revenue of five to eight per year? This is the first question. The second question is about a relatively large growth of GNA this quarter. Is the reason behind it sustainable or is it more of a one-time thing? Can the management team comment on it? Thank you. Okay. Thank you for your question.

Regarding the income, as you said, the main source of income growth is from wholesale. The growth rate of our wholesale business this year is about 45%. Thank you for the question, and I will give you more information about different lines on the revenue side. In light of the wholesale, we maintained a 55% growth, and for the retail, as you have observed, it has remained very flat.

For the non-IDC, 5%.

I want to give you more information about the EBITDA.

It is compared to the revenue, it did a better job. For instance, despite the fact that the retail revenue remains very flat, but the EBITDA is providing us a better figure due to our strategies on the cost operation and cost control.

Your second question is about the increase in G&A costs. The first quarter was mainly caused by two things. You also know that we repaid a relatively large debt at the beginning of this year. In the process, there were also some intermediary expenses. This is the first reason. The second reason is that we have some one-off revenue plans in the first quarter. So these two plans, these two things affected our GNA in the first quarter.

And for the GM, in Q1, I have the explanations as follows. In the beginning of this year, in 2024, the company paid out a large amount of the debt. And out of that, the agency service fee was due to the reasons why you are seeing the final outcome on the GA. The other event was the stock expenditures for the employees.

Thank you. Thank you for the questions. One moment for the next question. Our next question comes from Delilah Daly Lee of Bank of America Securities. Please go ahead.

Hi, Mason. Thanks for taking my question.

Firstly, it's great to see more disclosure about the settlement breakdown. I have two questions. First one is about the overall demand for China data center market. How do management see the overall demand outlook for this year compared to last? And what kinds of clients we have seen could have better demand? And how management could give more color? My first question is about the wholesale business. Management earlier discussed the expansion plan for this year and the management updated us the moving progress from the clients in the following quarters and for the total expansion target we have. Maybe let me have a quick translation. 感谢管理层接受提问。 我这边有两个问题。 第一个问题是关于中国整个市场的 IDC需求情况。 想问一下管理层看到今年的需求 整体跟去年比是怎么样一个 比如增速能看到哪些变化。 然后具体看客户端的话 是哪些可能是比较强劲的需求。 这个需求是来自哪里。 Thank you.

Thank you for your question. Let me answer it. Currently, the market situation of our entire IDC is that for some of the traditional business of our past and current customers, we can clearly see that there is a trend of some obvious rise in stability, which has gradually released some needs into the market. More importantly,

For the first question, you raised the trend of the IDC development, and we are collecting the business requirements from our clients, especially from the conventional business. We can say that it was growing stably, and we are now translating our capacity to meet the market demands. For most of them, there was strong demand to increase their AI capacities.

Let me add to the first question. We are now at the end of the first quarter, and 90% of the data center capacity of our services are high-tech devices. This also confirms what I just mentioned. We can clearly see that our customers' demand, especially in terms of AI, At the end of the first call of 2024, in the wholesale side,

Almost 90% of the requirements are on the high-density power cabinet demand, which is relating to the AI-related needs. In light of the industries and sectors, this strong demand comes from the chip manufacturing side, the autonomous driving companies, the financial service agencies, the logistics companies, as well as the educational firms. They have high demands on developing and using the AI-related services.

The second question is about our expansion method. With the current customer order, we currently see that the customer's interaction target may have higher requirements. Some potential projects are also in the process of delaying with customers. Maybe we will further improve the interaction target of our wholesale business this year. Currently, our expansion plan for the whole year is mainly based on the base-based projects we just talked about. Currently, our entire CAPEX project is unchanged, but as I mentioned earlier, due to the fact that we still have some potential projects in the process of promotion, the subsequent customer orders may further expand our CAPEX investment.

And now you also raised the questions and comments on our potential expanded capacities in 2024 and our plans to do that. According to our understanding now we will follow the CapEx plan and targets made before targeting the 2024. However, we are still negotiating new projects with potential clients and that might improve our targets to deliver And we are also targeting our clients, mainly on the wholesale clients, as we have already determined.

Yes, regarding the third question you just mentioned, which is the price of the wholesale business. As you know, according to the market rules, the contract of our wholesale customers is that they will receive a mortgage fee for two to three years. But for our new clients, the fastest way

And you also asked questions about the wholesale clients for the company. As a business, as usual models, the contract will also last two to three years before we are going to calculate the total fees. However, we are also signing up new clients, which under that new contract, the installment of cabinets could be finished within half a year.

Thank you, Benjamin.

Thank you for the questions. One moment for the next question. Our next question comes from the line of Timothy Chao from Goldman Sachs. Please go ahead.

Great. Thank you, Benjamin, for taking my question, and also thank you for the more transparent disclosure, which is quite helpful. I have two questions here. One is on the, I think, on your four-year guidance. I think compared to the first quarter results, just wondering, I think especially on the top line, I think we are assuming an acceleration in terms of revenue growth for the rest of this year. Just wondering if Benjamin can elaborate on what is the key driver and just the breakdown between wholesale retail IDC and also the IDC segment, which line could be growing faster in the upcoming quarters. And secondly, I think given the more transparent disclosure, I think a follow-up question is just wondering if Benjamin has any target or like a goal in terms of the wholesale versus retail capacity or revenue breakdown by year-end or in the mid-term. And that will be very helpful. Let me quickly translate myself. 感谢关于曾接受我的提问, 也感谢公司更加透明的一个disclosure. 我这边有两条问题。 第一个是关于我们全年的一个guidance, 相对于一季度的我们现在拿到的这个收入和利弊大的一个情况, 想请教一下特别是在收入端, In the next few weeks, we may have a case of continued acceleration. I would like to ask what are the drivers for the increase in revenue in the next few weeks? How do we look at the increase in revenue in the next few weeks in different business lines? The second reason is that the company now has a more transparent Thank you. I will answer your question. Our wholesale business is the main source of our income increase. In the second half of this year,

The increase in revenue is mainly due to the increase in wholesale business. It is worth noting that if you look at the same ratio, our sales business in this quarter has decreased from the same level as last year, but according to our forecast, with the completion of our high-tech machine cabinet, because we started some high-tech machine cabinet modifications from the third quarter last year, The answer is as follows. The wholesale business is a main source of our revenues. As you have already seen in the plan,

And we also see that the retail business and the retail projects are declining on the year-over-year base. However, as we all see that starting from last year, Q3, we began the ratification on the retail side to deploy more high-dense power cabinets. And by the end of this Q2 and Q3, this retrophication may be completed, which will pick up over retail project revenue as well.

From the storage of the business, the income of the retail business is still a huge proportion. At the end of this year, we expect the income ratio of retail and wholesale to be about 2 to 1, which means that wholesale can reach half of retail. In light of the ratio of the revenues, the retail against the wholesale is standing at 2 to 1. Still, the revenue from the retail is taking the major proportion from the ratio and the figures.

In light of the capacity ratio, the retail and wholesale is approximately standing at 5 to 3 in light of using the numbers of cabinets to make these calculations.

Thank you for the questions. Seeing no more questions, ladies and gentlemen, that concludes our conference for today. Thank you for participating. You may now disconnect your lines. Thank you. you Thank you. Thank you. Thank you. Hello, ladies and gentlemen. Thank you for standing by for the first quarter 2024 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 will be a question and answer session. Managements from our management today include Mr. Gavin Shen, Rotating President, Mr. Chi-Yu Wang, Chief Financial Officer, Ms. Xinyuan Liu, Investor Relations Director of the company. Please note that today's conference call is being recorded. I'll now turn the call over to first speaker today, Ms. Xingyuan Liu. Please go ahead.

Thank you, operator. Hello, everyone, and welcome to our first quarter 2024 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 maturely 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. VNAS does not undertake any obligations to update any forward-looking statements except as required under applicable laws. Please also note that VNAS earnings press release and this conference call include the disclosure of unaudited GAAP and non-GAAP financial matters. VNAS earnings press release contains a reconciliation of the unaudited non-GAAP 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 website at ir.vinet.com. Before we start today's presentation, let me briefly introduce Mr. Gavin Shen. Beginning in May 2024, Gavin has undertaken this role of Group's Rotating President while also serving as the General Manager of the IDC Strategic Business Group. Gavin joined VNet as our vice president in 2017, and in January 2020 became senior vice president, bringing nearly 20 years of business operations management experience in IT strategic planning, cloud computing, and data centers. I will now turn the call over to Gavin. Please go ahead.

Thank you, Xinyuan. Good morning and good evening, everyone. Thank you for joining our call today. Before diving into our first quarter performance, I'd like to remind you of the decoding refinement that we mentioned in our last call. To enhance information transparency and help the public better understand our business, starting from this quarter, we will report total revenues and operational metrics for our wholesale and retail business separately. Our CFO, Chi-Yi, will go over the details. Now let's move on to our first quarter initiatives and business progress. Solid first quarter results marked a good start for this year. We continued to execute our effective dual-cost strategies while pursuing high-quantity development. Our robust Operating and financial results once again demonstrate our ability to grow our business by leveraging our core space to capture even involving demand in the area of AI. Michael Wise, supportive government policies and mayor decide to foster our favorable market environment, acquitting more treatment for us and IDC industry as a whole. Computing power is widely seen as a crucial component of China's high-quality development. Per the Government Work Report 2024, which calls for accelerating the formation of a nationwide computing power network, the Telecom Regulator has strengthened policy initiatives to further optimize computing power resource and infrastructure systems across the region. We believe those initiatives will empower us to allocate and manage other data centers more efficiently and best meet the huge market demand for high-performance computer power. Additionally, interest in greener computing solutions is on the rise. In April, we signed a strategic cooperation agreement with Wollantyper's local government and Shandong High Speed Holdings to build a green AI supercomputing data center cluster. The three parties will work together to promote the digitalization and GUI development of Wunantab. We are confident our GUI data center business will resonate with customers and evaluate our market competitiveness as those traits take hold. While IDC development remains our primary focus, we were keenly aware of how AI-related demand for high-performance computing is resharping the data center landscape. Our quality data centers and the high-density power capabilities enable us to trail high-performance computing solutions to meet customers' rapidly growing AI needs. By the end of the fourth quarter, over 90% of our wholesale capacity in service is high-power density. Meanwhile, we continue to see increased AI-driven demand from industries like chief design, autonomous-driven financial service, and logistics, and education. As an industry pioneer, we are exploring AI data center, AIDC, development, and actively upgrading our computing power infrastructure to capture market opportunities. AI workload require massive computing power, enforcing our transition from CPU-based to GPU-based infrastructure, apart from a few top internet enterprise and AI technology enterprise with GPU resource of their own. Most small and mid-sized enterprises will outsource this upgrade given the high cost, limited channels, and other challenges in purchasing GPU infrastructure outright. AIDCs can meet enterprises' computing power needs while minimizing their capital investment, a significant advantage in the current environment. Now let me go through some updates on the IDC fund. We continued to win new orders for both wholesale and retail business during the quarter. On the wholesale side, as we mentioned on our last call, we secured a new order from one of our extreme exciting clients for approximately 15 megawatts. scheduled to be completed within 2024. We also want an order of approximately 2.5 megawatt in our data center in the Yangtze River Delta region for a new customer, one of China's largest restaurant companies. On the retail side, we continue to attract new customers in financial service, local service, and manufacturers and deepen exciting relationships. Notably, we won a new order of a policy metu 1.5 megawatt in our data center in the greater Beijing area for an exciting customer, a leading player in local service sector. Moving to our long IDC business, we also made progress with our VPN service. Our wholly owned subsidiary, DYXLit, has successfully expanded its global network coverage with a new point of prevalence established in Dubai in the fourth quarter and in South Korea and Mexico more recently. The new POPs broaden our VPN service global network coverage over our VPN service, and the new POPs will provide enterprise customers with comprehensive and integrated network cloud security service, enable them to capitalize on emerging markets and global expansion opportunities. Turning now to our ECG performance, in April, we issued our fourth annual ESG report detailing in compliance with 2023 AdWords and the progress turnability, include verified carbon inventory results. During 2023, we continued to execute our shared sustainability system and achieved various performance across employee diversity and equity needs, grid power engagement, and efficient energy consumption. We also highlighted achievements such as our average annual power usage efficiency of 1.2 line, a total grid power per charge of about 56.9 million kilowatt hours during the year, and an increase in our percentage of female employees in our management position to 31%. Moving forward, we will remain dedicated to integrating ESG-based properties company-wide. Advising the coordinated development of green economy and the digital economy, driving sustainability and creating value for our stakeholders and our associates. To conclude, our solid first quarter performance underscores our core strengths abroad and the growing array of innovative IDC service. outstanding high power density development capabilities, and our low-year and expanding customer base looking ahead. We will continue to drive our dual core business strategy and pursue high-quantity goals while advising the development of China's digital economy. Thank you, everyone. I will now turn the call over to Qiwei to discuss more about our operating and financial performance.

Thank you, Gavin. Good morning and good evening, everyone. Before we start the detailed discussion of our first quarter performance, please note that, as Gavin just mentioned, we have enhanced our disclosures with more detailed operational and financial metrics starting this quarter. we believe this new metric will provide shareholders with greater insight into our business. Specifically, beginning in the first quarter of 2024, our IDC business was subdivided into wholesale IDC business and retail IDC business based on the nature and the scale of our data center projects. Prior to 2024, The subdivision was based on the types of customer contracts. You may find a detailed list of all wholesale projects in our IR presentation for this quarter. Accordingly, for operating metrics, we have presented them by retail and wholesale separately. For the wholesale business, the metrics are mirrored in terms of power capacity instead of cabinets, which we believe will more meaningfully reflect our business development. In addition, our wholesale capacity is present across three different stages, including in-service, under construction, and held for future development, which we believe will provide a clearer and more comprehensive picture of our wholesale capacity boosting the high growth potential of our wholesale business. For financial metrics, we have subdivided our net revenue into revenues from IDC business, which include retail revenues and wholesale revenues, and the revenue from non-IDC business, which consists our cloud and VPN business. Now let's move on our first quarter results. Please also note that Unless otherwise stated, all the financials we present today are for the first quarter of 2024 and are in Renminbi terms. Furthermore, all the growth rates and revenue are on a year-over-year basis. We kick off 2024 with solid operating and financial results. Our wholesale IDC business continues to gain momentum driven by rapid customer movements. Capacity in serves was 332 megawatts as of the end of first quarter. Capacity utilized by customers increased by 17 megawatts to 236 megawatts in the fourth quarter, primarily driven by increased demand for the customer in N has an OR06, N has an HB03, and E has an GS03 data center. As a result, the utilization rate of wholesale capacity improved to the 71%, with the utilization rates for mature capacity reaching around 95%, and the run path capacity reaching around 34%. In addition, the capacity under construction was 139 megawatts, with a pre-commitment rate of around 75% and the capacity held for future development was 557 megawatts. For our retail business capacity in service was around 52,000 cabinets remaining flat compared to last quarter with utilization rates stable at 64% with the utilization rate for mature capacity reaching around 73%. MRR per retail cabinets was 8,742 in the fourth quarter compared to 8,759 for last quarter and 8,874 for the same period last year. Moving on our financial performance, We remain the focus on high-quality revenue business, and our efforts continue to generate positive outcomes. Our net revenue increased by 5.1% to $1.9 billion, mainly driven by the continued growth of our core business. To highlight, our wholesale revenue increased by $59 0.1% to $361 million, mainly contributed by eHassen GS Compass 01 Phase 1, eHassen GS Compass 02A, eHassen GS Compass 02B, nHansen HB03, and eHassen GS03 data centers. On the other hand, Retail revenue decreased by 7.1% to $923.7 million, mainly due to our consolidation and redevelopment of several data centers since the second quarter of 2023. Adjusted EBITDA was $539.8 million, with adjusted EBITDA margin of 28%. Net loss attributable of VNet was $187 million. Turning to our balance sheet, at the end of first quarter, the total amount of the company's cash and cash evidence restricted cash was $2.1 billion. Meanwhile, net cash generated from operating achieve was $267.6 million. Our capex was $971.3 million. For updates on our financing, as we mentioned last quarter, on February 1st, 2024, we completed the repurchase payments relating our convertible series notes due 2026 in a total principal amount of $600 million. In the current capital market environment, this strategic move reflects our resilient business fundamentals and our commitment to long-term sustainable development. Now, moving to our full-year guidance for 2024, we expect next revenue 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 in the range of 2.22 billion to 2.28 billion, representing a year-over-year increase of 8.9% to 11.8%. This unchanged from our previous guidance. Given the last market conditions, we have increased our delivery plan to 100 to 140 megawatts from previously stated 100 to 120 megawatts. CapEx is expected to be in the range of 3.7 billion to 4.2 billion. This is entrenched from our previous guidance and may further increase according to market conditions. Looking ahead, our focus will remain on high-quality growth. We will continue to excuse our effective dual-call strategy and further enhance our call capabilities to capture market opportunities driven by the AI boom. This concludes our prepared remark for today. Operator, we are now ready for questions.

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 questions, please press star 11 again. For the benefit of all participants on today's call, please ask your questions to management in English and then repeat in Chinese. One moment for the first question. The first question comes from Edison Lee from Jefferies. Please go ahead.

Thank you, management, for the presentation and very good disclosure. I have three questions. Number one is about the definition of retail and wholesale. I think a lot of investors would like to know what exactly the definition is because the retail MRR that you are presenting today for historical numbers are actually lower than previously disclosed. So that's why I would like to get a clarification on the definition. Number two is on operating cash flow. Can you comment why 1Q24 operating cash flow is so much lower than 1Q23? And number three is on your retail cabinets redevelopment. Can you tell us how many cabinets are actually being affected by the redevelopment and what will be the outcome of the redevelopment? Does it mean that these companies will actually become wholesale or they will also be still for retail and with much higher power? So can you explain that? So let me repeat in Chinese. I have three questions. The first question is about You have a definition of this wholesale and this retail. Can you explain it in more detail? Because the number of your retail MRR is actually lower than the previous disclosure. So I believe this is a question of approach. So I want you to talk about it. The second question is about your cash flow. Because I see The cash flow in the first quarter of this year is actually two and a half billion, and the first quarter of last year was four and a half billion. So why is this going down? The third one is that President Xi said just now that some of these retail offices may have to re-open, so it will basically affect the growth of retail businesses. I want to know how much this re-development of these offices is. Okay, thank you, Edison. I speak after the question in Mandarin and let the translator help me to translate to English. The first question, I will answer first.

Thank you very much for your attention.

We have indeed increased the scope of our disclosure from this quarter. In order to further enhance the transparency of company disclosure information, we also hope that the capital market can understand more about the development of the company's business. From this quarter, we mainly divided income into three parts to record. One is wholesale, one is retail, and one is non-IDC.

Thank you for the question a lot and I want to share with you more information to boost up the information transparency of the company as well as for the purpose of let the capital market better understanding our business development starting from Quarter 1 of 2024, we began to add a new disclosure matrix as well as new indicators. For instance, according to the revenue, we have classified them into three major classes, including wholesale, retail, and non-IDC. At the same time, we've also added new business indicators for the wholesale, including the operational with in-service as a hashtag, and we also put under construction as help for the future development of Megawatts for your better understanding.

You just mentioned that we have indeed redefined the traditional meaning of wholesale and retail. In the past, the general understanding of wholesale and retail was to be divided according to the customer it serves. But in order to better to display our information and maintain our internal management and external information disclosure. Our current definition of wholesale is called a base data center in Chinese. This refers to a size of at least 40 megawatts and has the ability to continuously expand land power. Most of this data center is provided to our major customers. That is to say, most of it is the same as the previous wholesale definition, but it also sells a small part to medium-sized customers. The retail we define now is called a city data center in Chinese. It is mainly located in the core city and surrounding areas. Its size is generally less than 20 megawatts, and it generally does not have a large-scale expansion capability. Most of these projects are provided to small and medium-sized customers. but there is also a small part of it to meet the requirements of large customers. We have re-selected about 10% of the chicken houses in these two types. At the same time, we have also traced these data to 2023, because some urban data centers are also provided to large customers, and large customers generally do not use network increased services, so the MR of these large customers will For the first question of the definition of the wholesale and retail, I want to give you a re-explanation. As you have already noticed that we have already redefined the two terms of wholesale and retail as we did before.

Before, we put the major clients, the big customers, into the wholesale, while the small clients into the retail, but now we made a small change to better serve the capital market as well as to boost up the information transparency, as I did say. Right now, in terms of the wholesale, we make them into the size of more than 40 megawatts, and in Chinese, literally translated into the base type project. For those projects, they have the potential to expand their capacities in the long run in terms of the land, the buildings, as well as the power supply. In most of the cases, those wholesale projects are targeting the major clients and customers. However, we are also selling part of them, a small proportion of them, to the middle-sized enterprises and clients. And on the other side, the retail projects, which will be literally translated into the city-type projects, located many in the core cities including Beijing, Shanghai, Guangdong, and Shenzhen, etc. Generally speaking, the total size usually is smaller than 20 megawatts without any potential to stand the capacity of expanding its stacks and cabinets. And for most of the cases, those projects are targeting the small and medium-sized enterprises. But please be noted, We are also offering the retail projects to the major and the big clients as well to satisfy the needs, to provide, to ensure the low latency. As you have already noted in our numbers that due to the fact that 10% of the committed cabinets have been redeveloped, and a small proportion of the retail projects are offering to the larger clients. The MRR is not included. That is why you are seeing the data discrepancy in the disclosed numbers and records.

Okay. The second question you asked is about the cash flow. In the first quarter, we had a lot of problems And for the question,

Two, you raised the question of why in 2024 Q1 the operational capital was smaller than that of in 2023. Generally speaking, in Q1 of 2024, the company observed a stable and normal cash flow. However, back in 2023 Q1, they were some one-off projects, such as the projects incentivized by the government grants, as well as certain payback from the VAT. Those two items did not happen in Q1, 2024.

I would like to ask Gavin to answer the question about the low-cost data center. Currently, the business of our retail data center is relatively stable.

Due to the market, especially in the city data center, So we also realized such a change in demand. So we actively transformed some of the low-power cabinets into high-power cabinets. So from the number of cabinets, we will have some reduction in quantity. In fact, the core purpose is still to be able to use these resources to better meet the needs of our market. For the third question, the question was answered by the CFO. In Q1, 2024, the retail database operating on the stably and normally manner

and you have already observed certain changes. Generally speaking, we were redeveloping those cabinets from the low density power cabinets into the high density power cabinets. In that sense, the total numbers are on the decline. This is due to the purpose of better utilizing these sources to maximizing our capacity to meet the market demands. And in the upcoming months, we will also make a constant adjustment to better meet the market requirements. For instance, according to the demand of a certain market, we will increase the number and redevelop the new cabinets to better serve the local market.

Thank you for the questions. One moment for the next question.

Our next question comes from Yang Liu from Morgan Stanley.

Please go ahead.

Thanks for the opportunity and a great thanks for the more disclosure, which is very helpful to us. I have two questions. The first one is regarding the three business growth outlook. I think clearly the wholesale will be a key driver and the retail looks like a dragger. The management quantifies the growth rate of the three business or what is behind the current guidance of around five to eight percent of four-year growth in the three business lines. That's my first question. The second question is G&A expense, we saw is a pretty big increase year over year. What is behind that and whether that is one-off or sustainable? Let me translate my question. There are two questions here. One is about the company's current three-way income. For the whole-year business, our understanding is that wholesale business will be an important source of growth contribution, while retail business may be a little bit delayed. Can you ask the management to evaluate the growth of these three businesses? Or how do you expect these three businesses to perform behind the increase in revenue of five to eight per year? This is the first question. The second question is about the significant growth of G&A this quarter. Is the reason behind it sustainable or is it more of a one-time thing? Can the management team comment on it? Thank you.

Okay. Thank you for your question.

Regarding the driven income, as you said, the main source of income growth is from wholesale. The growth rate of our wholesale business this year is about 45%. Thank you for the question, and I will give you more information about different lines on the revenue side. In light of the wholesale, we maintained a 55% growth, and for the retail, as you have observed, it has remained very flat. For the non-IDC, 5%. I want to give you more information about the EBITDA.

It is compared to the revenue, it did a better job. For instance, despite the fact that the retail revenue remains very flat, but the EBITDA is providing us a better figure due to our strategies on the cost operation and cost control.

Your second question is about the increase in G&A costs. The first quarter was mainly caused by two things. As you know, we returned a relatively large amount of debt at the beginning of this year, and there were also some intermediary expenses in the process. This is the first reason. The second reason is that we have some employee stock market share plans in the first quarter. So these two plans, these two things affected our GNA in the first quarter.

And for the GM, in Q1, I have the explanations as follows. In the beginning of this year, in 2024, the company paid out a large amount of the debt. And out of that, the agency service fee was due to the reasons why you are seeing the final outcome on the GA. The other event was the stock expenditures for the employees.

Thank you. Thank you for the questions. One moment for the next question. Our next question comes from Delisle Daly Lee of Bank of America Securities. Please go ahead.

Hi, Madison. Thanks for taking my question.

Firstly, it's great to see more disclosure about the settlement breakdown. I have two questions. First one is about the overall demand for China data center market. How do management see the overall demand outlook for this year compared to last? And what kinds of clients we have seen could have better demand and how management could give more color? My first question is about the wholesale business. Management has already discussed the expansion plan for this year, and could management update us on the moving progress from the clients in the following quarters for the total expansion target that we have? Maybe let me have a quick translation. 感谢管理层接受提问。 我这边有两个问题。 第一个问题是关于中国整个市场的 IDC需求情况。 想问一下管理层看到今年的需求 整体跟去年比是怎么样一个 比如增速能看到哪些变化。 然后具体看客户端的话 是哪些可能是比较强劲的需求。 这个需求是来自哪里。 Thank you.

Thank you for your question. Let me answer it. At present, the market situation of our entire IDC, for the traditional business of our past and present customers, we can clearly see that there is a trend of some obvious rise in stability, and some needs are gradually released to the market. More importantly,

For the first question, you raised the trend of the IDC development, and we are collecting the business requirements from our clients, especially from the conventional business. We can say that it was growing stably, and we are now translating our capacities to meet the market demands. For most of them, they have a strong demand to increase their AI capacities.

Let me add to the first question. We are now at the end of the first quarter, and 90% of the data center capacity of our service is high-tech devices. This also confirms what I just mentioned. We can clearly see that our customers' demand, especially in terms of AI, At the end of the first call of 2024, in the wholesale side,

Almost 90% of the requirements are on the high-density power cabinet demand, which is relating to the AI-related needs. In light of the industries and sectors, this strong demand comes from the chip manufacturing side, the autonomous driving companies, the financial service agencies, the logistics companies, as well as the educational firms. They have high demands on developing and using the AI-related services.

Regarding the second question of your channel, it is about our expansion method. With the current customer order, we currently see that the customer's interaction target may have higher requirements. Then there are some potential projects that are also in the process of decoupling with customers. Maybe we will further improve our wholesale business interaction target this year. Currently, our year-round expansion plan is mainly reflected in the base-based projects we just mentioned. Currently, our entire CAPEX project is unchanged, but as I mentioned earlier, because we still have some potential projects in the process of promotion, the subsequent customer orders may further enhance our CAPEX investment.

And now you also raised the questions and comments on our potential expanded capacities in 2024 and our plans to do that. According to our understanding now we will follow the CapEx plan and targets made before targeting the 2024. However, we are still negotiating new projects with potential clients and that might improve our targets to deliver And we are also targeting our clients, mainly on the wholesale clients, as we have already determined.

Yes, regarding the third question you just mentioned, which is the price of the wholesale business. As you know, according to the market rules, the contract of our wholesale customers is that they will receive a mortgage fee for two to three years. But currently, our new contract customers are the fastest

And you also asked questions about the wholesale clients for the company. As a business, as usual models, the contract will also last two to three years before we are going to calculate the total fees. However, we are also signing up new clients, which under that new contract, the installment of cabinets could be finished within half a year.

Thank you, Benjamin.

Thank you for the questions. One moment for the next question. Our next question comes from the line of Timothy Chao from Goldman Sachs. Please go ahead.

Great. Thank you, Benjamin, for taking my question, and also thank you for the more transparent disclosure, which was quite helpful. I have two questions here. One is on the, I think, on your four-year guidance. I think compared to the first quarter results, just wondering, I think, especially on the top line, I think we are assuming an acceleration in terms of revenue growth for the rest of this year. Just wondering if Madeline can elaborate on what is the key driver and just the breakdown between wholesale retail IDC and also the IDC segment, which line could be growing faster in the upcoming quarters? And secondly, I think given the more transparent disclosure, I think a follow-up question is on, like, I'm just wondering if management has any target or, like, a goal in terms of the wholesale versus retail capacity or revenue breakdown by year-end or in the midterm, and that would be very helpful. Let me quickly translate myself. 感谢关于曾接受我的提问, 也感谢公司更加透明的一个disclosure. 我这边有两条问题。 The first one is about our guidance for the whole year. For the first quarter, we want to ask about the situation of our income and EBITDA, especially at the end of the income. In the next few quarters, we may have a situation of continued acceleration. We want to ask about the drivers of the increase in income in the next few quarters. What are the different business lines? How do we look at the situation of income acceleration in the next few quarters? Secondly, because the company now has a more transparent disclosure, I would like to ask, if we see the end of this year or the mid-term, how will our wholesale and retail capacity or income scale be planned? Thank you. Thank you.

Let me answer your question.

Our wholesale business is indeed our main source Our revenue growth in the second half of this year is mainly due to the growth of wholesale business. It is worth noting that if you look at the same ratio, our sales business in this quarter has decreased from the same level as last year, but according to our forecast, with the completion of our high-tech machines, because we started from In the 3rd quarter, we started to modify some of the high-tech cabinets. We see that from the 2nd quarter, these high-tech cabinets have been modified and gradually completed sales. In the 3rd quarter of the 2nd quarter, our retail business will return to a state of parallel growth.

The answer is as follows. The wholesale business is a main source of our revenues, as you have already seen in the plan. And we also see that the retail business and the retail projects are declining on the year-over-year base. However, as we all see that starting from last year, Q3, we began the ratification on the retail side to deploy more high-dense power cabinets. And by the end of this Q2 and Q3, this retrophication may be completed, which will pick up over retail project revenue as well.

From the stock of the business, the income of the retail business is still a huge proportion. At the end of this year, we expect the income ratio of retail and wholesale to be about 2 to 1, which means that wholesale can reach half of retail. In light of the ratio of the revenues, the retail against the wholesale is standing at 2 to 1. Still, the revenue from the retail is taking the major proportion from the ratio and the figures.

In light of the capacity ratio, the retail and wholesale is approximately standing at 5 to 3 in light of using the numbers of cabinets to make these calculations.

Thank you for the questions. Seeing no more questions, ladies and gentlemen, that concludes our conference for today. Thank you for participating. You may now disconnect your lines.