VNET Group, Inc. (VNET) on Q1 2021 Results - Earnings Call Transcript
Operator: Good morning and good evening, ladies and gentlemen. Thank you, and welcome to 21Vianet Group's First Quarter 2021 Earnings Conference Call. With us today are Mr. Samuel Shen, Chief Executive Officer and Executive Chairman of Retail IDC; Mr. Tim Chen, Chief Financial Officer; and Ms. Rene Jiang, Investor Relations Director of the company. I'll now turn the call over to your first speaker today, Ms. Rene Jiang, IR Director of 21Vianet. Please go ahead, ma'am.
Rene Jiang: Thank you, operator. Hello, everyone. Welcome to our first quarter 2021 earnings call. Before we start, please note that this call may contain forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on management's current expectations and observations that involve known and unknown risks, uncertainties and other factors not under the company's control, which may cause actual results, performance or achievements of the company to be materially different from the results, performance or expectations implied by these forward-looking statements.
Samuel Shen: Thank you, Rene. Good morning and good evening, everyone. Thank you for joining us on our earnings call today. During the first quarter of 2021, we grew our net revenues by 27.1% to RMB1.39 billion from RMB1.09 billion a year ago. Additionally, we grew our adjusted EBITDA of RMB415.1 million from RMB259.4 million, reaching the high end of our previous guidance. Our adjusted EBITDA margin increased to a new high of 29.9% from 23.8% in the prior year period. We attribute this quarter's financial achievements to our ability to capitalize on shifting market demand, our dual-core growth engine strategy and our methodical execution of business expansion. As we transition into post-pandemic world, leading to an age of digital transformation, we foresee both a multitude of headwinds and tailwinds in the IDC space. Central government's regulation on the supply side of emission peak by 2030, carbon neutrality by 2060 will lead to near-term challenges, however, should resulting long-term sustainable value for industry leaders. Recent intensified competition in certain geolocations could force companies to better compete over operational efficiency, business innovation and customer satisfaction, all areas in which we've sell. Lastly, new market entrants in the IDC space might cause near-term market fragmentation, yet will create ample M&A opportunities for us in the mid to long-term. On the other hand, central government and financing institutions maintain favorable policies towards the new infrastructure space in support of the digitalizing trend, data sovereignty, data privacy and data security are ever increasing importance, leading to a shift in customer demand, towards major carrier neutral and cloud-neutral IDC providers. Furthermore, the trend of remote work in increased regulatory compliance, data driven decision making as well as mixed reality all lead to a sustained market demand for IDC. High growth areas such as industrial 5G, blockchain, Internet of Things, and small manufacturing are fueling a broader market demand for cloud computing, which will benefit leading IDC providers like VNET. As such, we have seen an expansion of potential customer base far beyond public cloud service providers and internet companies.
Tim Chen: Thank you very much for the kind introduction, Samuel. Good morning, and good evening, everyone. I'm very excited about our work here at VNET, and it’s my pleasure to speak with you all today. In my new capacity as CFO, I'm committed to provide shareholders and investors with increased transparency, frequent communications and more detailed discussions around our outlook. I'm also aiming to further enhance our team oriented culture, bolster our operating efficiency, advance our various ESG initiatives and more. As always, the teams here at VNET remain focused on strategically allocating our capital to meet our ROI goals and securing diverse and quality funding sources. Before we start our detailed financial discussions, please note that we will be presenting non-GAAP measures today. Our non-GAAP results exclude certain non-cash expenses, which are not part of our corporations. The details of these expenses may be found in the reconciliation tables included in our press release. Please also note that unless otherwise stated, all the financial numbers we present today are for the first quarter of 2021 and in renminbi terms, while percentage changes are on a year-over-year basis. We started off the year with a strong first quarter financial results, mainly attributable to our dual-core growth engine and methodical business transformation. Net revenue in the first quarter increased by 27.1% to RMB1.39 billion from RMB1.09 billion in the first quarter of 2020. This increase was attributable to both wholesale and retail IDC growth, as well as increased growth from cloud revenue. Gross profit in the first quarter was RMB323.3 million, representing an increase of 38.1% from RMB234.1 million of the same period in 2020. Gross margins in the first quarter of 2021 was 23.3% compared to 21.5% in the same period of 2020. This year-over-year increase in gross margin was mainly due to our ongoing efforts to improve operating efficiencies. Adjusted cash gross profit, which excludes depreciation, amortization and share-based compensation expenses was RMB605.3 million in the first quarter of 2021 compared to RMB417.1 million in the same period of 2020. The adjusted cash gross margin in the first quarter of 2021 was 43.6% compared to 38.2% in the same period. Adjusted operating expenses, which exclude share-based compensation expenses and impairment of long lived assets was RMB212.5 million in the first quarter of 2021 compared to RMB177.8 million in the same period of 2020. As a percentage of net revenues, adjusted operating expenses in the first quarter of 2021 were 15.3% and that is compared to 16.3% in the same period of 2020.
Operator: Your first question comes from the line of Yang Liu from Morgan Stanley. Please ask your question.
Yang Liu: Thanks for the opportunity. Two questions from my side. The first one, we see some new entrants backed by some of Ps, and property firms et cetera, entering the wholesale and the hyperscale market in the Tier 1 city surrounding areas. But could you please update us in terms of the competition dynamics in the retail market? We see your MRR continue to go up, though the company previous comments as these numbers should be largely stable. And what should be the outlook for the retail pricing going forward? The second question is, in the presentation, I saw a new project called N-OR02 to be delivered in the second half of this year. Could you please give more color on where this kind of project is booked by anchoring customer? And is it included in the total 180 megawatts wholesale capacity? Thank you.
Samuel Shen: Okay, thank you, Yang Liu for the questions. I'll let team to take on the MRR and then I provide additional colors for your second questions. Tim?
Tim Chen: Sure. Thank you, Samuel. So Yang Liu with regards to the MRR question and the question also on how we look at the outlook for the retail portion of the business. We did make a comment in the past that we expect it to be stable. And we expect during the course of this year and next year, the figure will be flat and slightly rising trend. We do expect that customers will continue to take on some new digital services. And obviously, that will help sort of an overall trend. I would encourage though, that you don't look at this necessarily quarter-to-quarter, but perhaps, on an annual basis. And again, management does expect that trend to continue to rise. As we roll out more of our services. There's also in some ways links to the Neolink rollout logo. And this is really our view of the positive discipline in market, really focusing on retail enterprise customers and offering more of the services that they require. Hope that helps.
Samuel Shen: Yes. Additionally, a couple of things, first of all, it is true that we're seeing the competition the new entrants come into the IDC space. But we also got a lot of great feedback from the customers, that the IDC is not just pure, like a real estate business. It requires years of greater records, and also providing the customer peace of mind. It is a combination of the capital resources, and also technologies combined together. So we welcome the competition. And then from the way we see that by talking to the customers, assessing the market demand, and we're seeing the still very positive sign for VNET. And speaking of the new logos HB02, it is true that because the in the first quarter, we signed a contract with a leading e-commerce platform for services and not only that, we also secure a long-term contract with the leading internet company. And in addition to that, I think in the first quarter, we also have a great examples, basically transform and upgrade the retail customers into the wholesale customers. In the past that tend to choose in Tier 1 cities to color their servers and racks and networking services, by the growing demand, given us the great opportunities by leveraging our surrounding areas, providing the customization efforts to those customers. So we're seeing the positive trend, and we hope to continue to see more to come. Thank you.
Operator: Your next question comes from the line of Timothy Chau from Jefferies. Please ask your question.
Timothy Chau: Good morning, Tim and Samuel, thank you very much for taking my question. I have two. Number one is that on your mature cabinet utilization, it actually fell to 73% which is a pretty big drop. So can you maybe you elaborate a little bit on what's going on there? Number two, is that the recent government policies apply to your cities seem to suggest that they are extremely vigilant in terms of power allocation. And they also try to ask potential bidders to tell them exactly what customers they will get, what utilization rate they will get, what applications they're going to use in the data centers? Does it mean that it's almost becoming impossible to have new retail IDC capacity in Tier 1 cities? So how would that affect your retail business? Would it be positive? Would it be negative? How do you see that? Thanks.
Tim Chen: Okay. I'll take the first question. Thank you very much for the question. And I think the first one on the mature data center cabinet. I think that perhaps looking at it purely from a quarter-on-quarter actually would be misleading. Because what we do is, on January 1, we shift all the data centers delivered in a certain year to the next category. So for example, if you look at the mature data center cabinets now, these now include all of the ones that are delivered in 2019, including the ones that are delivered at the end of 2019, which means that they actually have less than 18 months RAM. So if you want to compare the figures actually, without this annual January effect, is actually probably better for you to compare year-on-year. So you should actually be looking at first quarter 2020 versus first quarter 2021. And actually, at the end of the day, probably the better measure to focus on will be on the compound realization, because that then eliminates any of the categorization impacts and rather look at the overall cabinets that we have available and the percentage of that utilized. Samuel, can you answer the second question?
Samuel Shen: Yes. For the second question, yes, because – as of today, we have a lot of the data center in the Tier 1 cities. It is true that the Tier 1 actually governments are taking the 30-60 policies very seriously. As a matter of fact, they have the policies for existing data center to meet a certain POV bar, and also for newly built data center to meet the additional and strict the POV bar. And then because we have been industry for quite some time. And that's a matter of fact, some of our data center happened to be the role model for the industry, way better than the benchmark – industry benchmark. So in the first quarter, I think three of our data centers have been shortlisted to get the national green data centers. And also one of the – we are – in Beijing, we have one of the first to receive the prestigious honor for that kind of things. And then so we will continue to maintain our high standard. And hopefully, that not only to meet the government's requirements for Tier 1 city, but we can take the – all the traditions and great traditions in our great efforts in those surrounding areas as well.
Operator: Your next question comes from the line of James Wang from UBS. Please ask your question.
James Wang: Good morning management. Thank you very much for your time, and congratulations on the good result, particularly on the EBITDA line. And so I've got two questions. And the first one is on competition. So one of your peers mentioned that being intense competition was isolated in the Jiangsu Province borough relatively stable across the rest of the country, so I just wanted to check whether that's your observation or whether more provinces are the intense competition and whether across the board pricing or rental rates remain broadly stable or on a downward trend that's on the competition? And the second question is on customer demand. So last year, it was a pretty strong year in terms of customer demand, partly maybe due to COVID. So if you want to check whether you've seen any moderation in demand from maybe some of the cloud customers so far this year, and I think similar nation pickup in demand from financial institution customers. So overall, are you seeing any acceleration demand from your retail customers? Thank you.
Samuel Shen: Okay. Let me take on these two questions and welcome Tim to chime in with additional inputs. So first of all, I think Jiangsu Province is, yes, we do have our data center located there. And from the conversation that we have with the customers, we have a high confidence that Jiangsu Province data center would be the ideal location, not just for the cloud – public cloud service provider, but also for some additional internet companies. So we remain pretty confident on that one. And for the second one, I think last year COVID-19 hit the world pretty hard. And China is probably one of the countries. In the world, we're living in the post pandemic era, and then that post – that pandemic basically accelerate a lot of these transformation, not just for Internet companies, but also for traditional enterprises. You mentioned about the financial services, industry, new energy, vehicles and manufacturing – smart manufacturing, particularly, we're seeing a strong demand on those one as well. And so I would say the first quarter gave us pretty good confidence, things are going to be on track for the year, I would say guidance. And so we were going to continue to head down, execute on our strategy, and hopefully, continue to drive up the Monthly Recurring Revenue for our retail segment. And meanwhile, satisfy the hyperscaler internet giants’ customization needs.
James Wang: Sorry, can I just follow up on the first question, Samuel, just on overall pricing or rental rates? Are you seeing broadly stable trend or any downward pressure on rates or returns? Thank you.
Samuel Shen: Yes, from the pricing point of view, I would say so far from all the conversation that we have discussed with the customers. I would say that probably that was like one off thing. And then we don’t see any broader impact, not just from Jiangsu provinces, but also the other part of the as well. Having said that, I will say the competition is there. But that competition will give us a great opportunity for industry consolidation. And we’re here to play for the long-term. And then we have more to add, not just – it is not the apple to apple comparison. One of the great advantages for our dual-core growth engine is, we’re not just providing the collocation. We’re providing additional networking services and bare metal services, and also hybrid cloud. And that gets reflected on our monthly recurring revenue, continue climbing up, even though gradually, but that’s a great indication. So, hopefully that answers your question.
James Wang: Right, thank you very much.
Operator: Your next question comes from the line of Arthur Lai from Citi. Please ask your question.
Arthur Lai: Hi, I really appreciate the management time. So, first congrats on the Q1 continuous margin picks, and also congrats team to new role. So, I have a two question. Number one is on the margin site and number two is on the new sites up. On the margin side, we saw the gross margin grew 1.5% year-over-year was driven by mix. So, if we compare the dual-core growth engine, which business leave up the gross margin more. And can we expect the similar margin expansion into the 2022 or 2023? That’s my first question.
Tim Chen: Okay. I’ll take this, Arthur, thank you for your question. I would say that both the wholesale and retail do have strong gross margins. The contribution from the wholesale, as you can sort of see overtime will increase and that’s just because, relatively speaking, the retail is operating off a much larger original base as compared to the wholesale business. So, I think as we go forward in time, we would expect that there will be continued improvements. As you know, our overall results do have other business units in place. So, I think that as the cabinets are delivered as the utilization rates go up, we will see continued general improvement in terms of the gross margins. Hope that helps Arthur?
Arthur Lai: Thank you very good. And the second one is on the E-JS Campus 02, we understand that your time for renting, so can management give us an update on which type of – and what kind of timing, and I’ve been some extra solid pricing. But can our company add more value after service and to stand out from the competition? Thank you.
Samuel Shen: So, I probably take this one, and see whether Tim has additional comments. So, Arthur your question is about the E-JS Campus 02, right? For that specific one the E-JS Campus 01, that for our hyper scalar customers totally taken on that and for E-JS Campus 02 make no mistake, it is a great data center location and also because it very close to Shanghai. So from a network latency point of view, and also from a bandwidth supplying point of view, it’s a high quality. And then, so, at this current moment, we do have both wholesale customer and also retail customers are showing the great interest about that specific data center. And so we’re in the – I would say, in the middle of the discussion to see which one will plays out longer term. I think these are related to the previous question about the price, competition, and so on, so forth. I think, because, data center location, that’s one key element. The second thing is, specific Campus 02 that we have great expansion possibilities, and plus that we have additional services that can offer to the internet companies. So from the management team point of view, we’re not worried at all about the price negotiation, things like that, we remain to be very healthy, I would say IRR gauge from the wholesale perspective, still maintained to be, 10% to 15%, kind of range discussion. So, I will say we’re pretty cautiously optimistic on that one, and hopefully that we can provide additional information in the quarters to come.
Arthur Lai: Thank you.
Operator: Your next question comes from the line of Kyna Wong from Credit Suisse. Please ask your question.
Kyna Wong: Yes, thanks management for taking my questions. I have two questions. The first one is actually related to the capacity expansion and if your roadmap, I mean, on those Jiangsu and others that area expansion and from the target this year or 25,000. So, we should expect by 72,000 to X thousand every quarter like in the coming years to fulfill and that will increase additional capacity in a certain – in the period and that will also somehow drive certain kind of like expansion in order to fill up these. So like in your customer pipeline and complete the schedule I think it does still on track and to fulfill our target with manageable price competition, along with the new covenants? That’s the first question. And the second one, wanted to check the ESG roadmap, because we do see from an ESG report, the company has achieved some kind of like, what I would say like PUE reduced certain percentage like 2% last year, and some of the I will say 33% of the – if China data center is a driven green power. But do we expect some more concrete roadmap in the coming few years in 2021 in your ESG roadmap? Thanks.
Tim Chen: Hi, Kyna, it’s Tim here. I’ll take your first question in terms of the pipeline and the rollout of the cabinets as we’ve told the market. Yes, we are more back ended this year. So more of the deliveries are expected to be in the second half of 2021, but with regards to, I guess, increased pressure or increased competition, I would say there really is not that case, because we’re not talking to our customers, a couple of months in advance, but actually well done events, and in many of the cases, for the second half deliveries, these are locations that have already secured commitments from the customers. So I think this is much more of a timing issue first half versus second half. And so I think that’s something that, we have great confidence in. And overall, I would say, beyond 2021, we’ve already secured about 60% of the resources. So we do have sufficient ways to handle going forward is the demand of our customers as well. So we’re already talking to customers, obviously, about 2022 and beyond.
Samuel Shen: Yes, I can probably provide additional colors from the customer, commitments point of view. So internally Tim and I, have a chance to review our wholesale segment, also retail segments, from a customer demand point of view. For the wholesale customer point of view, it is the way ahead of time, before we sit down, before the tender, and also having a detailed discussion with the customers, it is a way ahead of time. And so from the conversation that we have, with the customers, I have less worry about whether we can, deliver the 25,000 racks. As a matter of fact that we probably have more opportunity that we can consume based upon the resources that we have. It is the, I would say bittersweet fact. That’s one thing. The second thing is, this is the very first year for VNET to publish our ESG report. Even though we have been working on ESG efforts, including the environment, social and governance in the past, but we never had a chance to really systematically organize our commitments and an efforts and share out. And so this year, I would say, mark the very first year for us to share and to be more transparent for all of our efforts and commitments around the ESG side, and specifically on the even though the impurity from the MSCI, ESG point of view, E only contributes to 5% of the total rating schema, if I were taking the E, especially environment portion very seriously. So continue using our tech driven, data driven approach to reduce the PUE. And meanwhile, we’re partnering with the local governments making sure that we can, participate in the green energy efforts, as well. So hopefully, that we can share the results on a quarterly basis to the external world. And thanks for the question, Kyna.
Operator: Your next question comes from the line of Tina Hou from Goldman Sachs. Please ask your question.
Tina Hou: Hi, management. Thank you very much for taking my questions. I have two questions. The first one is, recently we’ve heard specifically for PDD projects, there were some intense pricing competition going on. So my question is that for VNET, what is our actually customer acquisition strategy in terms of what are the measures we follow towards each tender that we that we try to bet? And then what are the customers we may be able to sacrifice a little bit of margin or a little bit of pricing in order to get that customer or we are very firm on pricing and our overall IR return? So that’s my first question. The second one is regarding the Shanghai power quota allocation, which was announced in April this year. Wondering what is our strategy there and what’s the progress so far? Thanks.
Samuel Shen: Okay, let me take all the questions and welcome Tim to comment and add additional inputs. I think for the PDD deal. In my opinion, I would say that’s more like a one off things. Because if you trill down and double-click on the vacation, it is not really apple-to-apple comparison. And because a lot of the details happened to be the, business confidential, not much I can talk about it. But from a very high level point of view, each of the tender, if you breakdown and double-click on that, there’s a CapEx portion. And there’s the OpEx portion and really depends on what you want, and you get a different kind of a pricing schema. And so that you can really compare that was the previous order, or the following orders or tenders, to certain degree. And so that’s one thing. The second thing is most of us know Kindle is the one of the largest e-commerce providers. And then so when they having the project like that, all of a sudden, a lot of the IDC providers, including VNET, were showing interest to win such a local customers. But again, each of the, partners, including VNET, we do have our internal gauge system, to see whether it makes sense and make no sense, and so forth. Sometime you might just give some of the favorable discount to win the local customer is the very first deal; kind of sweeten the deal to win the first one in order to get in. But again, we have to weigh in all the factors. For us, it is not a strategic, deal that we have to win. But again, the question is, will that trigger the price well movie forward? And I would say, I will be very, very honest to say from all the customer calls and customer discussions, it is not, it is more confined into a one-off thing. We have Jiangsu projects, we have other projects in Shanghai, in Beijing in Guangzhou, and also even Northern China. We're not seeing that get with a spread out. That's the answer to your questions. Tim, do you want to take on the second one?
Tim Chen: Yes. So on the second one Tina is on power, right?
Tina Hou: It’s Shanghai power quota location this year?
Tim Chen: Okay. Yes. So I think, look, overall, we continue to secure power quotas throughout the different regions. Our strategy and what we've communicated in the past quarters remains the same, is that, we will continue to obtain the necessary quotas for our various projects, some slower, some faster. So I think at the moment, there are a few projects that we have put in applications for and when we have updates to give to the market and to the investors, we’ll do so in due course.
Tina Hou: Thanks. Just a very quick follow-up on that, just in terms of the competition within the power quota allocation this year, have we seen like more like newcomers into the space, because last year, there were like out of the 18 allocations, six were allocated to newcomers. But then this year, the government has tightened and raised the requirements for the new project allocations. So have we already seen like less, fewer newcomers coming and doing the bid?
Tim Chen: I can't comment for the others that have actually put in bids. But I think generally, I think what you wrote in your report as well is accurate. The tightened regulations and requirements does mean less of the pure money, or people looking for a quick flip, and really more people that are qualified on paper qualified. So this does put the advantage to existing experienced operators like ourselves.
Tina Hou: Got it. Thank you.
Operator: Your next question comes from the line of Chris Ko from DBS. Please ask your question.
Chris Ko: Good morning management team and congratulations on a strong results; and thanks for taking my questions. My first one is about our second quarter adjust EBITDA guidance. Management team please help us understand why the midpoint of the second quarter, just to EBITDA guidance is flat Q-on-Q? Could it be due to some timing issue of the moving schedule? And my second question is on the cloud market, there is news reporting that there could be some market share changes, and also a new entrant into it. What are the opportunities and threats to us in management point – the teams point of view?
Tim Chen: Hi there. I’ll take the first question. So with regards to the margin and the guidance – EBITDA margins and the guidance EBITDA – sorry and the guidance that we've given for 2Q, you're absolutely correct. This is, as we've explained to the market, our deliveries at this moment are more in second quarter and in fourth quarter. So we do expect that with deliveries of the cabinets and the additional costs that are being incurred, that there will be some impact to the EBITDA. And so that's why we've guided to something that is flat to first quarter. I'll pass the second question to Samuel, I guess you had question about cloud marketing and the new entrant.
Samuel Shen: Yes. For the second question, so first of all, I would like to give you a broader view. First of all, as I said earlier, the COVID-19 basically accelerate the additional information. And to sort of agree not just about the cloud service providers still maintain the very healthy double-digit growth year-over-year, we're seeing the hybrid cloud as a new norm, because China is unlike the rest of the world, and we have a more than a dozen cloud service providers. And now most of customers understand the importance of the cloud transformation to be live and die DNA, but then to kind of thrive in the digital era. But on the other hand, they also pay a lot of attention on the data sovereignty and privacy and things like that. So hybrid cloud has become a new norm. So having said that, for most of the public cloud service provider, because their base revenues now a great portion of that. So to maintain the year-over-year growth, it’s going to be a little bit challenging for them. But on the other hand, the carrier-neutral IDC, it's a very, I would say a unique segment in China, because we provide a whole bunch of neutralities, cloud neutralities and in also carrier-neutralities in driving a multiple deliverables to meet a customer demand. So I will say from the overall perspective, the IDC segment, especially for carrier-neutral IDC segments, it’s not just a pure wholesale hyperscaler play, it is a huge combination of just resources and capitals and also the tax receivables. And then, so that's something that we're pretty confident. From the overall market share point of view, we don't have the latest numbers, but we believe we're still at the 11%, 10% of that kind of range, and we're putting competence, we’ll continue to grab more market share moving forward.
Chris Ko: Okay. Thank you.
Operator: I would now like to hand the conference back to the management for any closing remarks. Please continue.
Rene Jiang: Thank you once again for joining the call today. If you have further questions, feel free to contact the company's IR. Bye-bye.
Operator: This concludes today's conference call. Thank you for participating, you may now disconnect.
