VNET Group, Inc.

Hello ladies and gentlemen. Thank you for standing by for the first quarter 2025 earnings conference call for VNet Group Inc. After the management's prepared remarks, there will be a question and answer session. Please note the Chinese line is in listen only mode. If you wish to ask questions, please dial in through the English line. Participants from our management include Mr. Zhu Ma, Rotating President, Mr. Qi Yuan, Chief Financial Officer, Ms. Jinwan Liu, Head of Investor Relations of the company. Please note that today's conference call is being recorded. I will now turn the call over to the first speaker today, Ms. Jinwan Liu. Please go ahead.

Thank you, Operator. Hello, everyone. and welcome to our first quarter 2025 earnings conference call. Our earnings release was disputed earlier today, and you can find a copy on our website as well as our 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. VNet does not undertake any obligations to update any forward-looking statements, except as required, under applicable laws. Please also note that VNet's earnings press release and this conference call include the disclosure of unaudited GAAP and non-GAAP financial matters. VNAT's earnings precedence contains reconciliation of the unaudited non-GAAP matters to the unaudited GAAP matters. A summary presentation, which we will refer to during this conference call, can be viewed and downloaded from our IR website at ir.vnat.com. Next, I'd like to alert you that we will be utilizing text-to-speech technology powered by Neolink.ai, to deliver this quarter's prepared remarks by Mr. Ju Ma, our rotating president, and Mr. Qi Yu Wang, our CFO. The management team will join the Q&A session in person. Additionally, this conference is being recorded. A webcast of this conference call will also be available on our IR website at ir.vna.com. Now let's get started with today's presentation. Mr. Ma, please go ahead.

Good morning and good evening, everyone. Thank you for joining our call today. I would like to begin by sharing our primary accomplishments during the first quarter of 2025. As we embarked on the new year journey, we achieved a strong set of results that set a positive tone for the year ahead. On the operational side, our wholesale IDC business recorded another impressive performance, supported by our robust deliveries and our customers' fast-moving pace. As of March 31, 2025, our wholesale capacity in service grew 18.1% quarter over quarter to 573 MW, an increase of 88 MW. All sale capacity utilized grew 23.9% quarter over quarter to 400 and 37 megawatts, a record high increase of 84 megawatts, while the utilization rate increased by 3.6 percentage points to 76.2%, indicating that newly delivered orders are being moved in faster than ever before. Meanwhile, our retail business continued to progress smoothly benefiting from the rapid deployment of DeepSeek. Furthermore, propelled by our dual core strategy, we consistently secured high quality orders from customers across various industries. I will elaborate on this in detail on the next slide. On the financial side, We maintained our solid growth trajectory across both total net revenues and adjusted EBITDA. Our total net revenues increased by 18.3% year-over-year to RMB 2.25 billion for the first quarter. Notably, wholesale revenues reached a new record high of RMB 673 million for the quarter, representing an impressive year-over-year growth rate of 86.5%. Thanks to the rapid growth of our wholesale IDC business, our adjusted EBITDA for the first quarter also increased by 26.4% year-over-year to RMB 682 million, with an adjusted EBITDA margin of 30.4% up 1.9 percentage point year-over-year. Excluding the one-off impact of asset disposals last quarter, adjusted EBITDA increased by 18.1% quarter-over-quarter. We also further strengthened our financing capabilities, diversifying our channels at a relatively low cost. In March, we issued 430 million US dollars of convertible senior notes due in 2030 at an interest rate of 2.5% per annum. We also secured our first sustainability-linked loan of RMB 500 million with a 3.7% interest rate per annum. Furthermore, our all-in cost for one of our new loan projects reached a record low at 3.05%, 55 basis points lower than the 5-year LPR. Next, let's delve into our first quarter accomplishments in more detail. Moving on to our new order wins on slide five, we continue to win quality wholesale and retail orders in the first quarter. In addition to the wholesale orders, we disclosed last quarter a 55 megawatt order from a leading cloud computing customer and a 64 megawatt order from an internet customer through our JV project. We won a six megawatt wholesale order from an intelligent driving customer for our data centers in the greater Beijing area. Furthermore, breakthroughs by DeepSeq are propelling growing demand among customers for our retail IDC services to deploy intelligent applications. During the quarter, we secured a combined capacity of around four megawatts in retail orders from customers in the internet, finance, local services, intelligent driving, and gaming sectors. These orders span multiple retail data centers in greater Beijing area, the Yangtze River Delta, the greater Bay Area, and other regions. At the beginning of 2025, China's AI development entered an explosive new phase of growth driven by deep-sea breakthrough technology. This created surging AI-related demand for premium IDC services, boosting the IDC industry's growth. As an industry leading player known for our high-performance data centers and reliable premium services, we quickly seized growth opportunities, winning quality, new orders, and driving progress. Notably fueled by the rising demand for private deployment triggered by DeepSeq, our retail IDC businesses revenues from customer private deployment of open source large language models increased by 309% in March compared to January. Looking ahead, we remain confident in the China market's growth potential. We believe that the increasing maturity of open-source model technology and the continuous expansion of intelligent application scenarios will continue to drive high demand for computing power and premium IDC services, further fueling our sustainable, high-quality growth. Now let's delve into our business update. Starting with our wholesale business on slide eight, our wholesale business maintained its robust growth momentum with capacity in service increasing to 573 megawatts and utilization rate rising to 76.2%. Thanks to our strong delivery capabilities at our NOR Campus 01 and EJS Campus 03 and faster than expected movings at our EJS Campus 02 and NHB Campus 01B, we also delivered a mature capacity utilization rate of 94.5%, a relatively high level and a ramp up capacity utilization rate of 32.1%. We have a clear growth path for our wholesale data center capacity. Let's move on to slide nine. Our overall wholesale data center capacity continued to grow. In the first quarter, our capacity under construction was 377 megawatts with a pre-commitment rate for capacity under construction stable at 81.6% as of the end of March. Additionally, capacity held for short-term future development remained relatively steady at 256 megawatts. Capacity held for long-term future development further expanded to 414 MW, as we remain confident in China's market growth potential as AI spurs greater demand for premium IDC services. We will maintain our robust expansion plan to ensure we are well prepared for further business growth. Moving to our retail IDC business on slide 10, our retail business continued to progress smoothly in the first quarter. Retail capacity in service was 51,960 cabinets, with the utilization rate increasing slightly to 63.7% as of the end of March. MRR per retail cabinet increased to RMB 8,898 this quarter. Turning to our delivery plan on slide 11, supported by our robust and efficient delivery capabilities, we successfully delivered a total of 88 megawatts in the first quarter. We currently have eight data centers under construction with six in the greater Beijing area and two in the Yangtze River Delta. We plan to deliver 377 megawatts of capacity over the next 12 months, or around 165 megawatts. during the second and third quarters of 2025, and around 212 megawatts during the fourth quarter of 2025 and the first quarter of 2026. This ambitious delivery plan reflects strong demand from our customers and our outstanding delivery capabilities. Now turning to our non-IDC business, a key component of our overall business, Di Xian continued to expand its customer base by acquiring new customers from several state-owned enterprises, as well as the financial services and home appliances sectors for their premium dedicated internet services and internet connection services. What's more, I am pleased to share that Di Xian recently received approval as a zero-outage supplier for a fifth consecutive year from T-Systems. which is part of Deutsche Telekom, in recognition of DEC's reliable, outstanding services. In conclusion, thanks to the strong execution of our effective dual core strategy, we delivered robust first quarter results, propelling progress across both our wholesale and retail businesses. Going forward, we will continue leveraging our high-performance data center network, reliable solutions, and outstanding delivery capabilities to meet our customers' growing demands, driving growth, and advancing the development of China's digital economy. Now I will turn the call over to our CFO, Qi Yu, for further discussion of our operating and financial performance. Thank you, everyone.

Good morning and good evening, everyone. Before we start the detailed discussion of our first quarter performance, please note that, unless otherwise stated, all the financials we present today are for the first quarter of 2025 and are in renminbi terms. Furthermore, unless otherwise specified, all the growth rates I am reviewing are on a year-over-year basis. Let's turn to slide 13. In the first quarter, we continued to pursue high-quality, high-margin business. Our total net revenues increased by 18.3% to RMB 2.25 billion, mainly driven by rapid growth of wholesale business. our adjusted cash gross profit rose by 26.4% to RMB 967.8 million, while our adjusted EBITDA also grew year-over-year by 26.4% to RMB 682.4 million. Meanwhile, excluding the one-off impact of asset disposals last quarter, our adjusted cash gross profit and adjusted EBITDA increased by 11.5% and 18.1%, respectively, quarter-over-quarter. Let's look more closely at our top line. As you can see on slide 14, in the first quarter, wholesale revenues, our key revenue growth driver, increased significantly by 86.5% to RMB 673.2 million, mainly attributable to sales at the EGS Campus 02 and NSBE Campus 01B. Also, excluding the one-off impact of asset disposals last quarter, wholesale revenues increased by 14.1% quart over quarter, Retail revenues continued to account for the largest part of our total net revenues and increased by 4.8% to RMB 968.3 million. Our non-IDC business remained stable. During the first quarter, we maintained solid margins thanks to our continuous efforts to enhance overall efficiency. As shown on slide 15, our adjusted cash gross margins improved to 43.1% from 40.3% in the same period last year. Our adjusted EBITDA margin rose to 30.4% compared with 28.4% in the same period last year. Moving on to liquidity on slide 16, we maintain robust and healthy liquidity bolstered by net operating cash inflow of RMB 195.7 million during the first quarter. our cash positions remain solid. With total cash and cash equivalents, restricted cash and short-term investments reaching RMB 5.79 billion as of March 31st, 2025. Next, let's take a look at our debt structure on slide 17. We maintained our prudent approach to debt management. With our net debt to the trailing 12 months adjusted EBITDA ratio at 5 and total debt to the trailing 12 months adjusted EBITDA ratio at 6.5, both remaining at a healthy level. Our trailing 12 months adjusted EBITDA to interest coverage ratio improved to 7.5 as of March 31, 2025. We prioritize long-term debt maturity planning in our debt and strategic management to ensure the security of debt repayment. Additionally, the company's short and medium-term debt maturing in 2025 to 2027 comprises 45.6% of our total debt, turning now to CAPEX spending. As you can see on slide 18, for the first quarter, our CAPEX was RMB 1.82 billion, with the majority allocated to the expansion of our wholesale IDC business. As disclosed last quarter, we expect our CAPEX for full year 2025 to be in the range of RMB 10 billion and RMB 12 billion. The increase is mainly to support our planned delivery of 400 to 450 megawatts in 2025, or approximately three times 2024's total deliveries and surpassing our total deliveries in the past three years combined. Now moving to our full year guidance for 2025 on slide 19. We are reiterating our previous guidance for the full year of 2025 with anticipated total net revenues to be between RMB 9.1 billion to RMB 9.3 billion, representing year-over-year growth of 10% to 13%. Adjusted EBITDA is expected to be in the range of RMB 2.7 billion to RMB 2.76 billion, representing year-over-year growth of 15% to 18%. Based on our new orders and the delivery plan, Our capital expenditure for 2025 is still expected to be in the range of RMB $10 billion to RMB $12 billion, representing year-over-year growth of 101% to 141%. Before I conclude, I'd like to briefly update you on our ESG initiatives. In April, we issued our fifth annual ESG report. detailing the company's 2024 endeavors and progress in sustainability, including our verified carbon inventory results. During 2024, we upgraded our Shield sustainability system to broaden stakeholder coverage, and amplified our impact. We achieved encouraging progress across green power engagement, efficient energy consumption, and employee diversity and equality. Notably, our total energy usage from renewable sources reached about 360,880 megawatt-hour during the year, marking a five-fold increase year-over-year and accounting for 18% of total resources utilized by VNet. Also, our average annual power usage efficiency reached 1.27, and the percentage of female employees in our management positions increased to 33%. These efforts continue to garner recognition from top ESG rating authorities. This year, we ranked first among Chinese enterprises in the IT services industry in the China edition of the S&P Global Sustainability Yearbook for the third consecutive year and won the 2025 Top 1% and Industry Mover Awards. Moving forward, we will remain committed to integrating ESG best practices across our business, facilitating the development of China's green digital economy. In summary, we got off to a strong start for 2025, highlighted by robust business growth and enhanced growth and ability. We will remain dedicated to our sustainable, high-quality growth strategy and continue to invest in future developments. capturing market opportunities and creating sustainable long-term value for our stakeholders. This concludes our prepared remarks for today. We are now ready to take questions.

Thank you. We will now begin the question and answer session. If you wish to ask a question, please press star 1 on your telephone and wait for your name to be announced. If you wish to cancel your request, please press star 2. If you're on a speakerphone, please pick up the handset to ask your question. We will now pause a moment to allow to order our queue. Your first question comes from Tom Tang from Morgan Stanley. Please go ahead.

Okay, thanks for answering for the opportunity to ask questions and congratulate on the very robust result for the first quarter. So I have one question on the demand side. So we know that H20 has been banned by the United States. So just wanted to have an update on the customer demand and all the procurement processes after the chip has been banned. Just wondering if there's any changes and if we have any outlooks in the future. Thank you.

Thank you. Thank you for your question.

Let me answer your question. As you mentioned, in the first quarter, there were some cases of sales of chips and garlic cards. This has had a very short impact on the demand of our customers. But our customers are very quickly adapted to this situation. At present, their orders have been supported enough Thank you for your question.

Let me take your very first question. Yes, as we are aware that the H20 cheat embargo was in place starting from this year. And because of that, it has caused a short-term impact on our client's demand, particularly for those hyperscalers. However, there was a quick adjustment. Now everything is back on track. So our current order on hand is sufficient to fill all the capacities to be delivered this year as well as the first half of next year.

经过非常非常短暂的调整, 大客户的需求现在趋于平稳。 同时,从招标的节奏来看,目前已经恢复到常态。 有客户对我们的要求,还会要求我们的交付还会要比原计划要进行, Like I said, the hyperscalers quickly adjusted their demand after the short-lived

impact because of the chip embargo. Now everything is back on track and we expect that there is going to be sustained demand from these hyperscalers and they are also asking us to scale up the capacity to be delivered to them. We expect that there is going to be still a lot of demand for GPUs used for large language model training as well as scaled up data centers. So therefore, there's going to be continued and sustained demand from these hyperscalers. Thank you.

Next question, please.

Thank you. As a reminder, for the benefit of all participants on today's call, please ask your question to management in English and then repeat in Chinese. Your next question comes from Edison Lee from Jefferies. Please go ahead.

Thank you for taking my questions. I have two quick questions. Number one is on your retail demand. I think that right now you disclosed that four megawatt of new retail contracts. I want to know if these are AI-driven applications and whether you are charging based on power rather than cabinets. And number two question is that your MRR has gone up materially in the first quarter of this year and maybe you can There are some colors on the drivers behind that increase in MR. 我有兩個簡單的問題都是關於零售的。 第一個就是你們現在披露了第一季度贏了這個Java的一個零售的訂單。 其實你們現在這些訂單是不是都是AI應用為主, 然後你們以Java單位來 The second question is also related to your MRR. In the first quarter, your MRR actually increased a lot. What is the driving factor behind this?

As you have already observed, in the Q1 of 2025, we are in the retail side. We have received a new order of about 4 trillion. These orders are exactly like your analysis. Most of them are orders brought in by AI. These include Internet companies, financial technology companies, Internet life, local life, and smart driving. Thank you for the question.

As you rightly mentioned that we did win a four megawatt order for our retail IDC business in the first quarter. And as you correctly mentioned that most of the demand are from AI driven. And that covers the demand for fintech, local services, internet companies, as well as intelligent driving. So these are all AI-driven demand for these retail IDC services. And very little of that demand is for cloud-based gaming.

Let me answer the reason for the rise in the MR of the retail market. I would like to make a quick add to what Mr. Ma has mentioned that

On the drivers behind the MMR, most of the recent orders that we win for the retail IDC business is indeed from AI-driven, and that requires high-voltage cabinets. Therefore, the company has been continuously repurposing some of the cabinets to accommodate such needs. For that, we do charge a higher price, so the bill is higher. That explains the up-growing MMR. Thank you.

Next question, please.

Thank you. Your next question comes from Timothy Xiao from Goldman Sachs. Please go ahead. Pardon me, Timothy. Your line may be muted. Your next question comes from Dailey Lee from Bank of America Securities. Please go ahead.

Hi, thanks for taking my question. First, I congratulate on the strong 1Q results. I have two questions here. Number one is regarding our gross profit margin in 1Q. We see a strong quote-on-quote improvement and could the management give some color what's key drivers for the gross profit margin improvement? and what should be our future target or normalized or gross profit margin. And the same question is about our rates progress. If you look at our peer company, they also submit the application. And how do we see our rates plan for private rates or public rates is set up this year. The first question is about our company's interest rate situation. In the first quarter, we saw a relatively obvious improvement in the exchange rate. I would like to ask how the management can share the reasons behind it and what level our interest rate will reach in the future. The second question is about the progress of our REITs. We see that some companies have also submitted some applications. I would like to ask about our company's future plan for SEMU REITs and GUMU REITs. Thank you. These two questions are for me to answer.

There are two main reasons for the increase in interest rates. The first is that the base-based business of the company is getting higher and higher. The base-based business itself has a higher interest rate than the city-based business, so it will gradually increase the interest rate of the entire group. We are also improving the efficiency of urban-type businesses. The core is that we continue to improve our higher-quality income through the transformation of these high-tech industries. Previously, we gave the corresponding space to these high-tech industries for relatively low-efficiency income. Therefore, the overall company's efficiency will continue to improve.

This is Chu Yuan. I will take your questions. First, on the drivers of the improved gross profit margin, reason number one, the share or proportion of our wholesale IDC service is gradually improving. This is a business that has a higher gross profit margin. Therefore, overall, it is contributing to a higher gross profit margin on a corporate level. Reason number two, we are repurposing some of the cabinets to accommodate the demand for retail IDC services and because that brings a higher MMR and with that going in progress we are automatically closing or gradually phasing out some of those low margin services so these two reasons combined have pushed up the overall a gross profit margin, and we expected that to continue in the future.

瑞士的情况,正如你说的,今年是中国瑞士的关键的一年, 那两个友商的公募瑞士我们看到也都进展很顺利, 我们也看到其中一些数据估值也是比较理想, 那我们的公募瑞士也在积极推进中, 希望下半年能有一些好消息。 私募瑞士这边呢,

As you readily mentioned that this year marks a critical year for the Chinese rates sector and the two peers in the IDC business have also seen fairly smooth progress in terms of their public risk. And as we see it, the valuation of these rates is reasonable and our public risk project is also progressing well. As the current situation stands, the current valuation of these private rates is reasonable and it is progressing as we have expected. As you have noticed that our private REITs project has been formally accepted and approved by the Shanghai Stock Exchange. So hopefully we will hear some good results in the second half of the year.

We are actively promoting all kinds of REITs, including the pre-REITs project. This year, we plan to pay back nearly 20 billion RMB in REITs. This goal has not changed. We are confident in its completion.

With our successful pre-REITs project, we are actively advancing all types of asset securitization projects, and we will maintain our annual target of recovering 2 billion RMB target unchanged, and we are confident in achieving that goal for this year. Thank you.

Next question, please.

Thank you. Your next question comes from Louis Tsang from Citi. Please go ahead.

Okay. Thank you. Thank you, Ms. Tsang, for taking my question. Congratulations on a strong result. So I have two quick questions. So first of all, like, wondering if we have any plans for the HCR IPO in Hong Kong. And then if you do, like, wondering if we can, like, share more, like, details. That's my first question. And then my second question is, About the electricity tablet, because we spoke that there is some downswing for some electricity tablets. So wondering if you see there's any positive impact that the EBITDA margin has had, or there's no impact. 这些关于程度给我提问的机会了。 我这边公司有很好的业绩,那我这边有两个小的问题。 Thank you.

Let me answer the question. The first one is about the Hong Kong stock market. Indeed, Hong Kong is now clearly welcoming the US stock market company to return to the Hong Kong stock market. We have also had a very in-depth communication with the Hong Kong Stock Exchange. And we have also had some formal written communication. It is in progress, but we do not have a timetable yet.

Thank you for your question. Yes, looking at the potential Hong Kong listing, we know that the Hong Kong Stock Exchange extends its hands wide open to welcome those U.S. listed companies to do dual listing in Hong Kong. And we have held in-depth conversation with the Hong Kong Stock Exchange, and we have also had formal engagement in written form It's progressing. However, at this moment, I cannot give you a specific timeline on that.

关于电费,其实目前我们没有看到各个数据中心电费有明显下降的趋势。 整体电费还是一个比较平稳的状态,所以这块应该没有太大的变化。

With regard to your question on the electricity bills, we at the moment do not see a declining trend for the utility bills across our IDCs. It's fairly stable, so no change whatsoever on that front. Thank you.

Next question, please.

Thank you. Your next question comes from Sarah Wong from UBS. Please go ahead.

Thank you for the opportunity to ask a question and congratulations on a solid result. I only have one question on the wholesale business. So I noticed that our delivery plan is actually rolling forward by a quarter to cover the first quarter of next year. So does that mean we also have visibility of utilization ramp up into next year? In other words, given our solid delivery plan, how shall we think about utilization rate for the next three to four quarters. 感谢管理层,也恭喜取得了非常强劲的业绩。 我有一个关于批发型业务的一个问题, 可以看到我们的一个交付计划, 其实比起上一个季度往前滚动了三个月, 有覆盖到二六年一季度的一个交付计划, 想请问一下是否我们的对于客户的上架的一个可见度, 也可以是往前滚动的一个状态。 Or in other words, based on our very positive delivery plan, what should we look at in the next few seasons? Thank you. Thank you for your question.

As you can see, in the first season of this year, the customer's demand for us and the demand for the business is very high. Thank you. I'll take your question.

As you really mentioned and have observed from our financials, that our clients do have a lot of demand for the capacity And to accommodate their capacity need, we have actually responded actively and delivered the capacity needed, and they have been moving in fairly quickly. And actually, we have just hit a record high in terms of the capacity that's utilized. That's what we just added for the past quarter.

所以从目前我们跟客户的沟通以及客户手工订单的确定性来看, And according to the communications with these clients, as well as assessing their willingness and also how firm they are about moving in scheduling,

So we are confident to that for the upcoming three quarters plus another quarter next year. We are going to see very pleasant move-in rhythm from these clients. Thank you.

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