Q3 2021 VNET Group Inc Earnings Call

Good morning, and good evening, ladies and gentlemen, Thank you and welcome to Phoenix Group Inc's third quarter 2021 earnings conference call.

At this time all participants are in a listen only mode.

We will be hosting a question and answer session. After management's prepared remarks.

With us today are Mr. Samuel Chen Chief Executive Officer, and executive Chairman of retail I D C. Mr. Tim Chen Chief Financial Officer, and MS. Shang you on the Investor Relations director of the company.

I'll now turn the call over to the first speaker today, Ms. Li IR Director of Phoenix Group, Inc.

Please go ahead ma'am.

Hello, everyone welcome to our so called her 2021 earnings conference call.

The earnings release, we're sticky reputed earlier today and you can find a cookie.

As well as newswire services.

Please note that the discussion today will contain forward looking statements made under the safe Harbor provisions of the U S. Private Securities Litigation Reform Act of 1995.

Forward looking statements are subject to risks and uncertainties that may cause actual results to differ materially from our current expectations.

For detailed discussions of these risks and uncertainties. Please refer to our latest annual report and other documents filed with the SEC.

<unk> does not undertake any obligation to update any forward looking statement, except as required.

Okay cool.

As a reminder, this conference is being recorded.

In addition webcast of this conference call. We will it will be we will also be available.

Syed and there'll be no dotcom.

I will now turn the call over to CEO Samuel.

Thank you Sheila and good morning, and good evening everyone.

Thank you all for joining us on our earnings.

This call today.

Despite regulatory uncertainties.

We delivered a milestone in financial performance this quarter.

Achieving historical highs for both revenue and adjusted EBITDA.

With both figures exceeding the high end of our guidance.

Results demonstrate the strong momentum we have generated.

Through the execution of our core strategy.

By leveraging our integrated strengths in both wholesale and retail IDC services, we were able to unlock additional demand from the ongoing market migration towards digitalization and capitalize on more growth opportunities across diverse industry sectors.

2019, we have implemented our dual core gross agent strategy.

Utilizing our foresight on market trends and our competitive age.

I didn't care in neutral and cloud neutral IDC services.

By executing the strategy, we have continuously expanded our market reach and diversified our customer base to better position ourselves for managing the regulatory changes spanning across various industry sectors.

We successfully expanded capacity, while driving significant improvements in utilization rate, so our ramp up of newly built cabinets.

<unk> added 20, 388 cabinets on the net basis during the third quarter.

Utilization rate for our ramp up of newly built cabinets increased by five five percentage points to 34, 7%.

And it can probably utilization rate remains stable at around 60%.

With our track record of success over the last three quarters. We are confident in our ability to continue delivering strong operating results and expect to achieve our full year target of delivering 25000 standard cabinets and a compound utilization rate of 60% in 2021.

Now, let me provide a more detailed business update for the third quarter.

As companies across the nation continue their migration towards digitalization, we have seen growth in overall demand for it infrastructure from both existing and new customers across all of our business segments.

For our wholesale business, we achieved healthy momentum if some of our internet and cloud service customers ramp up cabinet utilization to serve their increasing data processing needs.

Meanwhile, we also saw some new add on orders from these customers for their business expansion.

In terms of our retail business, we continue to expand our client base.

Across diverse industry sectors, we forged several notable new customer relationship during the quarter Olga maintain their industry leadership and deepening their reach in their respective markets.

For instance, in the third quarter, we began providing IDC services for China Trenching credit rating group, a leading credit rating agency in China, and real AI, a leading enterprise level AI security platform in China.

At the same time, we continue to secure it on.

Orders from many of our existing customers.

This includes shiseido, the Japanese multinational cosmetic company.

<unk>, a leading <unk> service platform in China, and May Yo, the healthy and beauty information sharing platform.

Just to name a few.

Our customer base has become far more diverse.

Encompassing the cutting edge technology companies as well as companies from traditional industries, such as financial services consumer goods automotive manufacturing home decoration and many more.

As we further diversified our customer base and industry verticals, we serve we not only actualize continuous service improvements, but also better insulate ourselves from sector specific market fluctuations and macro risks.

Turning to our cloud business, we have started to generate additional interest beyond our cooperation with Microsoft.

A global unified Commerce and.

And post platform for specialty and luxury retailers.

Engaged us to assist which is cloud lending in China initiative.

Going forward, we will continue to expand our cloud operation service offerings to attract more customers.

Finally, I'd like to provide some updates on the progress, we're making with our ESG initiatives.

Sustainable development has always been at the core of what we do as a result, our plants generally aligned with the recent regulatory announcements.

Driving progress energy efficiency.

During the quarter, our portion data center in Beijing, and Nantong datacenter in Jiangsu Province were awarded the five eight grid datacenter rating.

In 2021 open datacenter summit hosted by open Datacenter Committee.

This is the highest rating for environmental sustainability performance of data centers in China.

At the summit ceremony.

Our <unk> data center, let's also recognize we're staying innovative datacenter for carbon emission reduction award.

We plan to remain at the forefront of Green development through our continued effort.

An investment in energy efficiency energy saving technology Green management and Green innovation.

In conclusion by persistently executing our dual core course agent strategy.

We were able to unlock additional demand from ongoing business Detroit station.

Capitalize on more growth opportunities across diverse industry sectors and achieve another quarter of solid financial performance.

Going forward, we will further deepen our market penetration diversify our sector coverage.

In our customer base and augment our tec technological prowess to capture the tremendous growth opportunity born out of the rising tide of digital transformation.

By maintaining precision focus on our core strategy execution, we should be able to further expand our market share in Oregon, and our leadership position in the carrier and cloud neutral IDC sector.

With that I will now turn the call over to Tim Chen our CFO.

Who will discuss our financial results for the quarter and his thoughts on our future growth.

Yeah.

<unk>.

Thank you Samuel good morning, and good evening everyone.

Before we start our detailed financial discussion.

Please note that we will present non-GAAP measures today.

Non-GAAP results exclude certain noncash expenses, which are not part of our core operations.

The details of these expenses maybe 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 third quarter of 2021 and.

And in Renminbi terms, while percentage changes are on a year over year basis.

We delivered stellar revenue growth and improving operating margins in the third quarter driven by our organic business development.

Core growth engine diversified customer base.

And the strong IDC market demand.

Our net revenues and adjusted EBITDA Rose by 25, 3% and 22, 2% respectively.

Exceeding the high end of our previously announced guidance range.

Net revenues in the third quarter of 2021 increased by 25, 3% to 1.56 billion from $1. Two 5 billion in the third quarter of 2020.

This increase was mainly due to increased customer demand for our highly scalable carrier and cloud neutral IDC solutions from both wholesale and retail IDC customers as well as the notable growth of our cloud business.

Gross profit in the third quarter of 2021.

$375 2 million, representing a year over year increase of $36.

4% from $275 1 million in the same period of 2020.

Gross margin in the third quarter of 2021 was 24% as compared to 22, 1% in the same period of 2020.

The year over year increase in gross margin was primarily attributable to our continued efforts in optimizing our operating efficiency.

Adjusted cash gross profit, which excludes depreciation amortization and share based compensation expenses was $674 5 million in the third quarter of 2021.

Compared to $526 2 million in the same period of 2020.

Adjusted cash gross margin in the third quarter of 2021 was 43, 2%.

242, 2% in the same period of 2020.

Adjusted operating expenses.

Exclude share based compensation expenses and compensation for post combination employment and an acquisition and impairment of loan receivables two potential MST were $244 million in the third quarter of 2021.

Care to $180 5 million in the same period of 2020.

As a percentage of net revenues adjusted operating expenses in the third quarter of 2021 were 15, 6% compared to 14, 5% in the same period of 2020.

Adjusted EBITDA in the third quarter of 2021 was 454 million representing.

An increase of 22, 2% from $368 5 million in the same period of 2020.

Adjusted EBITDA in the third quarter of 2021 excluded share based compensation expenses of $4 6 million.

And adjusted EBITDA margin in the third quarter of 2021 was 28, 9% as compared to 29.6% in the same period of 2020.

Our net profit attributable to ordinary shareholders in the third quarter of 2021 was a $156 2 million compared to a net profit of $97 1 million in the same period of 2020.

Basic profit and diluted loss was 0.18, and 0.2 or three per ordinary share, respectively, and 1.8, and 0.18 pretty yes, respectively.

J D. S represents six class a ordinary shares.

As for our balance sheet, the aggregate amount of the company's cash and cash equivalents restricted cash and short term investments as of September 30th 2021 was $3 94 billion, increasing by 0.5 4 billion from December 31st 2020.

Meanwhile, net cash generated from operating activities in the third quarter of 2021 was $134 7 million compared to $210 million in the same period of 2020.

Looking forward, we will continue to execute our dual core growth strategy and further diversify our customer base to capitalize on growing IDC market demand. We are confident in our ability to build on our leading position in the IDC market to deliver continued growth for our shareholders.

For the fourth quarter of 2021, we expect net revenues to be in the range of $1 75 billion to $1 77 billion.

And adjusted EBITDA to be in the range of 450 million to $470 million.

For the full year of 2021, we anticipate net revenues to be in the range of $6. One 9 billion to six point to two 1 billion and adjusted EBITDA to be in a range of a $1 74 billion to 1.76 billion.

The midpoint of the company's updated estimates imply year over year increases of 28, 5% and 32, 2% in net revenues and adjusted EBITDA, respectively.

This forecast reflects the company's current and preliminary views on the market and its operational conditions, which do not factor any of the potential future impacts caused by the COVID-19 pandemic and are subject to change.

This concludes our prepared remarks for today so operator.

Now ready to take questions.

Thank you.

We'll now begin the question and answer session.

To ask a question. Please press star one on your telephone.

To withdraw your question please press the pound or hash key.

Our first question comes from young Li from Morgan Stanley. Please go ahead.

Thanks for the opportunity to ask a question.

First congratulation on the good results I have two questions here. The first one is regarding the customer demand.

Because with the quiet.

Oh favorable regulation towards most of your customers, especially on the wholesale side could you please share with us.

The demand outlook going into fourth quarter and next year.

Especially we see the overall wholesale under Mou or a service number if they are to 30 megawatts this quarter.

So I would like to hear what is your.

Expectation.

Wholesale sales momentum going into next quarter or the next year.

The second question is do you see any risk on margin from the utility costs because with your liberalization of the.

Our industrial electricity.

October.

Whether it will have some margin bring some margin pressure too.

Thank you.

Okay.

Okay. Okay. Thanks.

Thanks. So much this is Samuel I may just take the first question and then and see what a team you want to chime in to provide a.

The comments for the second question so first of all.

From the high level perspective, they are I would say several times.

For the investors and analysts to pay attention to number one I would say the datasets that dataset continued to be generated I would say doubling in 18 months period.

The same time I think they're called me 19 basically.

Accelerating the enterprise digital transformation.

So in short you know more and more businesses or even their business model are moving.

From the pure physical world to both physical and digital World. So that's number one number.

Number two the cloud adoption is going to be.

Standard in fraud practice for most enterprises.

I'd like to hear the rest of the world, which was predominantly by a three different cloud service providers, but in China, we have a more than a dozen.

Cloud service providers and providing the services and so on and so forth. So in China. What happened is we've seen a lot of a dedicated cloud adoption.

Both from the on ramp all training opportunities.

And then so so the trend.

You know basically is given the fact that the number the clouding China government's policies data sovereignty is concern even total cost of ownership. So a lot of the customers when they started to.

Adoption of public cloud services, they will consider it when they grow their business would consider about eradicate clubs.

And the third thing is about the regulatory impact ex U S.

Jan mentioned earlier.

First of all the China economy is highly regulated therefore, all the way from the government policy and regulations.

On the platform companies concern.

And and also some of the vertical impact or even the power tariff and those would because you know I would say general concern for most of the investors and analysts.

From our point of view again kudos to our do of course.

Because we already have a very long track records from operation point of view.

We also have a very comprehensive service offering.

Plus our diversified customer base.

So from our point of view, we are bullish about the demand.

Quarters to come.

That being said, we also want to be cautiously paying attention on the potential regulatory impact.

But the net net I would say we're bullish about it.

The quarters to come and then we'll be ready to meet our customers' needs.

For the second question Pierre do you want to chime in with your.

Your input.

Yeah sure Samuel Young thing. Thanks for the second question I think second question related to power our power tariffs.

To date there have been.

No increases in power tariffs are there have been some power control measures, but as you correctly pointed out there is our expectation that some tariffs will increase in 2022.

In terms of the impact to the overall business I think I would say you know impacted the wholesale side of the business will actually be rather limited.

These are mainly pass through or the utilities are paid directly.

Hmm by the customer.

And you know for our retail customers actually a number of our contracts there have automatic adjustment clauses are for the rest we expect during the normal course of business that will have those discussions and the adjustments are pass through upon renewal. These are shorter contracts.

And just like an increase in tax or any of the other sort of basic cost of providing a service.

These are things that are we fully expect will be less group. So again, we're expecting very limited impact to our margins.

In relation to potential sort of perfect you're sitting in China.

Thank you Sam and the second person care team.

Thank you.

Our next question comes from Charlie Pine at Jefferies. Please go ahead.

Ohio Edison.

Congratulations on the results I have two questions number one is on your Capex.

So youre guiding 2021, Capex up 118 billion roughly I think previously you were talking about potentially a $5 5 billion.

So can you explain why.

It has come down so much from your previous guidance.

And my second question is on.

Retail MLR could you explain why it hasn't been going up because I think the Q O.

<unk> growth in particular with what should be pretty big.

So if you can talk about the trend and what.

Investors should expect to see in <unk> and two thousands, but the truth of it would be great. Thank you.

Sure what what I'd take the first one and then maybe Samuel whoever you want to comment on on the I'm more apart.

So Edison a morning, too and in terms of the Capex.

The question about what is the sort of key drivers of the Capex and look for us really there's two parts there's the.

The delivery of the cabinets as we deliver them.

Our our data centers, there is a capex, where the expenses there and then Theres also another portion, which I would put in the securing resources for future years, whether that's 'twenty, two 'twenty three or even beyond that.

Atlanta, and the power resources related to those including the power infrastructure and the build out of that so.

So I would say for this year as the investors will know we.

We had a more concentrated delivery schedule in the second quarter and in the fourth quarter and so we expect obviously that those were the two areas, where there would be a more substantial increase in the capex.

We did guide a sort of a general soft guide in terms of overall capex, but frankly that at the end of day boils down to especially the second part which is on the you know future resources.

324 and beyond.

They're not it's not been as many of those that have popped up.

And also the other point that we tried to factor in is opportunistic M&A and again there has not been anything in the first three quarters of the year. So we'll keep the investor base closely informed but but again I think we would expect that we would end up somewhere close to where we were last year in terms of the total amount of capex for the year, but again some of this kind of slip into January.

And it would be kind of this first quarter of next year.

So hope that helps our Edison.

I'll pass the Samuel on the MLR question, but before that I'll, probably say that you know that.

No we've kind of had the related questions in our previous quarters. You know why did it go up what it come down quarter to quarter.

Some of it is product mix, but Simon will give you a little bit more but I would say you know trend wise.

That Oh, we would encourage our investors to really focus on rather than let's say a quarter to quarter fluctuation.

So I'll pass that to us I don't know.

Yes, Thank you Tim.

Thank you Charles for the question I think Thats, a very excellent question as Kim pointed out.

When when when investors and analysts look at look at our retail MLR.

Wouldn't we wouldn't recommend you look at that quarter by quarter, but.

Half year over half year over year, you're going to see that number continue training that's for sure a part of the reason because we're not just providing customers the.

Colocation services, we have a lot of the value added services on top of that including the networking bandwidth very added services bare metals.

Hybrid multi clouds.

Specialty today, I would say hybrid multi market cloud become a new norm. So a lot of our customers not just from the internet sectors, but also from a different vertical industry coming to us requiring a full stack services.

And then so that gave us great opportunities because we have a large customer base and we have a full stack services and then we have a very strong ecosystem and most of the ecosystem when they provide the hardware solutions software solutions, Oh, Ethan amazement type of services are mature.

Majority.

Happened to be a resides in the data center.

And then so we can basically kind of group them together and provide to the customers of course with the operation and maintenance on top of that and making sure our customers would have a peace of mind.

They can just forget about the infrastructure pieces and focus on their business innovation. So it becomes a great win win win.

Situations so.

So part of our value added services adopted by the customers are contributing quite a bit two hour retail MLR this quarter.

So hopefully that addressed your question Charlie.

Okay, Yeah, that's good yeah okay.

Okay.

Thanks Edison.

Our next question comes from Tina here at Goldman Sachs. Please go ahead.

Hi management. Thanks for the time, so I have two questions. The first one is that actually are in the third quarter of last year, our earnings call management laid out a plan to add 25000 cabinets each year in 2021 'twenty two and 'twenty three.

So wondering if we are at this point still maintaining that guidance and if yes, maybe because we're at the end of this year now. So I think we have probably already have some insight into the type of resources that we have secured and next year. So I'm wondering if you could share some.

With that information with US and then the second question is a follow up to a previous analyst question. So if looking at your <unk> guidance implied EBITDA margin is around 26%, which is lower by about two percentage points Y O Y and Q O Q. So wondering a why is that.

Sure. Thank you. Thanks for the question Tito Let me take these two questions first would be in terms of your question on the 25000 Center cabinet our guidance I would say that you know we provided that number and I would say going forward that number would change a little bit.

But that's really a matter of projects being finalized and then you look at our mix of wholesale and retail customer they're different power density requirements. So you'll end up with different numbers of cabinets.

However, I would say that we maintain the 25000 for next year as well and for 'twenty to your question around kind of how much of the resources were secured as of now we secured about 80% of the resources towards the 25000 cabinet target for next year.

In terms of our margin.

And the reason for the reduction in margin in fourth quarter.

Frankly, that's really with the company's deliveries.

That we have in fourth quarter.

So you will have a naturally the scale up of cost to support the delivery of the cabinets and then that would then be mitigated over time as those cabinets ramp up.

So we do have a lot of cabinets as you can sort of reverse calculate delivering in fourth quarter. So that's the main reason.

Thank you Tim So does that mean that our utilization rate in fourth Q would likely trend down as well.

I would say that we would still keep to the around 60%, but there may be a small trend down you're correct.

Okay. Thanks.

Yeah.

Our next question comes from Eastern sang at Nomura. Please go ahead.

Thanks for the opportunity.

For me to ask a question. My question is also around the utility costs.

So I just wonder what's the impact of the power of restriction to dollar margin.

During the third quarter.

During the third quarter and what's our outlook for the power supply situations.

Fourth quarter and next year and also just one can management give us more view on our.

Our outlook for migrating to green power and our current penetration rate of liquid empowered.

Thank you.

Hi, you said, let me let me take the first question and then I'll take a stab at the second and see if Simon has I think of that as well in terms of the power control. The those are the some of the power control measures throughout parts of China.

And the impact actually to our I D CS or Itc's in general is that the Edison had to burn diesel.

In the areas that were impacted.

<unk> V net impact was actually rather limited and as of now.

Long lasting impacts to us.

The second I guess in terms of looking forward what do we expect.

Similar to the general market, we actually expect that these power control measures to be largely eased as the government actually has been actively tackling these issues around thermal coal supply and around thermal coal pricing.

So again, we don't expect this to be sort of a continuing trend or a problem in terms of power control.

As I mentioned before yes, overall market doesn't expect that there'll be some power tariff increases in 'twenty two.

As I mentioned earlier on the impact in terms of margins there should be a rather limited.

Given how the IDC business and run it in our contracts with our customers.

A green power or maybe I'll open with the fact that you know as of today the ability to increase the proportion of green power.

Is constrained by the fact that we purchase power from the grid and so that's that's one sort of a constraining factor.

We are actively addressing obviously of the overall countries goals 2000 32016.

And again you know at this point, we have not gone down the road of necessarily building our own power generation.

We do not believe that that is a core competency for V that are to be builders and developers of power generation.

But it is something that we look to find our partners, where we can actually then be able to help towards the overall goals.

If the country 70, I don't know if you if there's anything else you want to add to that.

Oh, Oh, yeah. So it's a couple of things again, the eastern Thanks for the question I think everybody knows China will strive to peak carbon dioxide emissions before since before 2030 and achieve carbon neutrality before 2016, so from the renewed.

Renewable energy usage point of view, Tim I think it pretty well.

Generally.

Increase the usage of our renewable energy and <unk>.

Sure to comply with the local requirements, but as of now because he operators are limited to purchasing.

Electricity from the grid therefore, the percentage of renewable energy were very big.

Upon the province, and agreed on sourcing renewable energy for example.

Flowers Shanghai data centers now, we have 30% renewable energy usage again.

Was basically due to the Shanghai.

<unk> energy mix, having said that we do have our own efforts from a P E improvement point of view.

Because of the energy consumption in data Sandra is on the rise so no doubt of that so due to the fact that.

Spread of cloud computing and society is paying a lot of the great rotation to the environmental performance of data centers. So so that being said, we will continue to optimize our power.

Akamai datacenter space optimize data center cooling, eliminating the data center power and cooling inefficiency utilizing the D. C. I N tools, which is data center infrastructure management tools and also use India.

The AI control the air conditioning.

To control the coding.

And we can be more efficient so.

So while we work.

It was the degree to adopt.

Renewable energy, but we will continue.

Emphasizing on our appeal efforts.

So hopefully that addresses your question Ethan.

Okay. Thank you very much.

Our next question comes from Arthur Lai from Citi. Please go ahead.

Hi, good morning.

Great.

And the whole team to deliver the strong result.

In the.

We know the quality has been a lot of pickup from the Polish right. So.

I have two questions first question I want to quantify that impact.

I found the policy so.

So we are seeing it will compare because meeting and they told us not to.

Maybe around the 19 million vehicle, usually pick up power and I Wonder if all we also have a one.

One of course, that's my first question. Thank you.

Hi, Hi, Arthur Yes, you know I would say that the power control.

Did have a.

The impact in terms of data centers, having to burn diesel, but it actually was extremely varied a region to region and even data center to data center. So it's not something that I would say it was a one off but.

But not enough to move the sort of EBITDA margin needle.

And again thankfully, we do not expect that these power control measures.

We will be continued as the government.

It seems to have tackled the underlying problem around thermal coal.

So.

Yes, I did see the similar remarks from some of our peers are.

But it was not something that impacted us.

That doesn't have to move the needle on our site.

Third quarter.

Okay cool.

And secondly, you mentioned that Oh, we should.

Interesting.

Controle AC and check if we can pull there.

Can you also let us know how.

How much or how big the scale of these.

Okay. Thanks.

Oh, Okay, so we need to invest in.

How are you.

We consider yourself. Thank you.

Okay.

Can I can probably tackled the question out there so.

So basically.

As I said earlier because energy consumption.

In data center is on the rise it is a big topics and then today with more than 32 data center.

You know around the countries and then the.

The beauty of the AI control it is about.

You know.

The more data driven.

Learning type of technologies because in the past we tend to rely on the labor.

Managing.

I would say Eric.

Air cooling, our air conditioning control it and so on and so forth, but now we.

We have to use the tools and the systems.

And then so the same for example is something that we invest it.

Yeah.

Do you see me is something of which as you know our.

Industry referred to a data center infrastructure management.

It is basically hum combining the operational needs of the physical equipment and also the physical facilities, namely building environment environment controls combine them together. So we would be able to use a data driven to control the air conditioning Debbie.

That being said, we started with tier four data center.

Our pilot and we have a 32 so.

Awfully, we can go through a few iterations to see the improvements and then we picked and we started to roll it out to all the data centers country y.

We're seeing some promising impact I wish I could share with you more.

Updates.

In the coming quarters.

Okay. Thank you.

Some shrink question, but I will stand by the Q maybe later thank you.

Thank you Arthur Thank you Arthur.

Our next question comes from Meng Grindley from say I say see.

Please go ahead.

Hi, Nathan.

For taking my question. My question is regarding the acquisition of cloud So how does it evolve.

Cloud service business.

Can you share the revenue and gross breakdown, yet crowds and IDC business. Thank you.

I can probably take the questions and definitely well contained to chime in.

With additional input yes, I think the early July we announced that we acquired one of the leading cloud native companies in China. The 10th call and then the 10th cloud move in and and also you know working with <unk>.

<unk>.

The customers are better solutions from the cloud native point of view the day, they look at the whole industry.

As I said earlier cloud adoption is now become a standard.

Procedures for every single enterprise when do you when do you want to go through the digital transformation.

And then based upon.

The the foster.

Train analysis.

It shows 30% of the enterprises when they go through the digital transformation there'll be applying.

And adopt a cloud native technology, namely container based micro services or even less.

We're seeing the trend you know pumping up as well.

And then ever since tests cloud joining us we're seeing a great synergy.

In between because what happened to Pat we have a very good call. My question solutions, which is primarily virtual machine.

And then but now we have a tastes clubs are coming in basically you know provide additional puzzle.

To resolve that issue for a cloud native I'd.

I'd like to cloud migration, which is more lift and shift not much architecture or re architecture efforts.

Have to be done by the customer site, but a cloud native would be a different animals, meaning the customer has to go through a re architecture of their solutions in order to.

The beauty of the cloud native.

And then so we've seen a great synergy in between are based upon the latest.

Internal reduce.

The revenues.

Pretty much on target to achieve by the end of the year, but because we don't provide.

The breakdown numbers, so I don't have the detailed numbers.

Could you share with you.

Sure Tim do you have additional employee you want to say.

Oh, Yeah, no Samuel I'd say you know your your last point you know, we don't provide the breakdown of each of the value added services within the retail enterprise piece, but what I can sort of add to Samuel says that you know obviously this is a relatively recent acquisition.

It is additive to our overall business and we expect that it will become an increasing part of the value added service solutions to our customers. So again it will be a driver of our growth.

And and helping to make our business, even stickier for our end customers.

Thank you.

Yeah.

Okay.

Our next question comes from Clive Cheung from Credit Suisse. Please go ahead.

Okay.

Hi, Thank you management for taking my question.

Mike My question is also.

On the power Kim mentioned that.

We have a portion of.

The future utility costs that can be passed through.

The customers I kind of get a sense that hey, you know what portion of current existing contracts have these kind of pass through clauses. That's number one number to put those that does not have these pass through clauses are what is our strategy.

Obviously, the price hike uncertainty for next year are we looking to renegotiate with these customers.

At what certain point, we evaluate you know kind of resigning.

We are negotiating with them. Thank you.

Sure Let me take the first part and then and I know that Samuel has some sort of live examples in terms of the customer strategy as well I think look overall you can safely assume that all of the of the wholesale contracts have either a pass through mechanism or they're paying the utilities' director.

As I mentioned earlier on.

For our retail enterprise customers.

As I mentioned it does vary quite a bit.

But again I would say in general the longer contracts will have adjustment mechanism clauses built into those contracts.

Whereas our shorter contracts.

Those are the ones, where they don't have an automatic adjustment, but those are things that also where.

Upon renewal, we would fully expect it will be part of the discussions ultimately just like tax just like power tariff I mean, these are non discretionary and it's it's a cost that we face and providing the service and it's a cost that must be borne by by the customer.

In terms of how that discussion is in terms of the what would be called a renegotiation or the renewal I guess I'll leave Samuel to give you some color on that part.

Yes.

I think as Tim pointed out because if we breakdown by customer economy.

For the wholesale that's a pass through.

So the scale retail because tend to be a one to three years contract that we already have the building the causes so negotiate with customers zero problem and therefore, the I would say for the long tail retail even within the.

The contract for the for year, one we still are putting put down some classes basically for some unforeseeable.

We will be able to sit down with the customer to do a negotiated so that I think the net net is because we were going to balance Theres. A part you know on one hand, we have a customer experience on the other hand, we also have the.

The margin rate and if so if that's kind of a.

On marginal you know and we're probably going to you know sandy.

Satisfied the customer experience and we opened the door.

When the countries do.

Or is that becomes a material, we're going to sit down with the customers and the conversation would be fairly easy because as Tim pointed out the cost element in a sense, it's not discretionary so it is fairly fairly transparent.

So for US, we haven't seen any impact to sit down with customers and ultimate dialogue.

Yeah.

Okay. Thank you very much that's very clear thank you.

Thank you I think it quiet.

Our next question comes from Albert Hung from J P. Morgan. Please go ahead.

Sure.

Yeah, Hi management team. Thank you for taking my question My first.

First question is your appears to come in that it is getting more difficult to get a quote for new das in the field I'm wondering whether you see the thing they're chain, if yes, or no I think the way to grow the top line the future.

And my second question is follow up on the quantified K cabinet with eastern commentary next year.

I wonder if there's any slowdown a moving rate how fast the book have been that changed the expansion playing and need to get the marketing pack.

Thank you.

Yes.

Okay I might take the apart hotel, one and then.

Having I'll take the second one.

Alright, okay. It sounds good.

For the fourth.

Part of quarter one.

It is true.

I think the overarching statement.

It keeps saying that Chinese economy is highly regulated and then and given the fact that you know the government has to be a national policy.

Describe the peak of carbon dioxide emissions before 2030 and achieve carbon neutrality before 2016.

Therefore, the part a quicker I would say a case by case.

Location by location would be different.

The good thing is I think.

Because we have in the industry.

For so long.

Literally literally over 25 years and within our data centers, we have a very credible customers with a very serious workloads and because you know again kudos to our decoy so other than the Internet giants or cost service providers.

We actually have a lot of very serious enterprise customers in our data centers, and then and government policy.

On one hand.

It's to drive a very healthy <unk>.

Industry ecosystem harness the ecosystem and so and so forth, but on the other hand, they also want to reward.

Long term players like us.

So, albeit I would say.

Getting power quota is going to be challenge.

But we're confident.

In a way.

To continue moving down the row.

To get what we need so again, we have our high hope and we're going to continue working.

Our butts off to get the power quota on the location there.

That we have a.

Our resources, so that would be my answer to you excellent question.

Tim do you want to take on the the part two.

Sure sure.

In terms of part two and and 25000 cabinets for next year and I guess the ability of the question is around the ability to.

Slow down is it just.

To sort of match, if there's any slowdown in customer ramp up and how to how do we sort of slow down and I would say, yes look the.

The ability is there to the extent that we have the visibility from the customers.

Where their demand needs a change and I would say, that's both speeding up and slowing down.

Within sort of physical possibilities.

Tells us look we needed a month or two months earlier, absolutely. We can factor that in and if the customer says look I I needed a quarter later or two quarters later, they were fully that capability.

Two two shift and so that will again, we really look to our guiding kind of overall, 60%.

Utilization rate.

And we monitor that to make sure that we're not just building cabinets.

We're also making sure that those are those itc's are then filled.

And so that's something we keep a close eye on and we manage to that.

So we're not just stuck on one variable I think theres a number of different operational variables should we manage to and making sure that what we built and the money that we spend does.

Does that generate the correct returns to us and our stakeholders.

That answers that question.

Thank you that's helpful.

Our next question comes from Kuo handling at Tyler. Please go ahead.

Oh, Thanks, Benjamin for opportunity to ask a question Hum from Daiwa capital.

We know if that's a.

Oh, South, Florida, and expect the ramp up of four more toward atrophy, compared hey, So Joe before 2019 on 2019, so want to know the reason for it.

So don't expect to run pumps and also.

We know that gave me a touch under supply of called a.

Paul called out you basically have in Guangdong and from regimens have views do.

Do we have any additional aggravation.

For high quality ice house are in.

Some tier one cities, maybe I've been Chinese Honeywell or maybe 10 of them too because we don't give guidance or are you a reduced capacity.

Capex for.

For this years significantly.

So we want to have a better understanding all our competition strategy.

Maybe.

I made it a fierce competition and also the weaker demand from the banks.

Okay.

Let me I guess, let me take the first part I guess the question was around a ramp up.

Of the mature cabinets our utilization rate.

Yeah, I mean, I would say look we continue to deliver cabinets and obviously as I D. CS click past into these are two years and older you will see some small fluctuation.

But no we have not seen necessarily a very large difference in terms of the ramp up of our customers.

These are mature datacenters.

Sorry, what was the second part of that question.

Thing about.

Beijing, Guangdong power quota.

Oh, Yeah, I, just thought about all our our location of our Oh kind of Capex.

So we have reduced our capex a few years ago, because they so we want to reserve for the maybe a future development maybe in the second half of next year, all Aten history do choose a fierce competition and maybe some overlie oversupply in some regions do you do a more intense interest.

Of nuclear so in one country and one country or one yeah. So that's my question Okay. Okay.

If I understand correctly sort of impact or relationship between Capex and then competition is that correct.

Yes.

Okay, well I would say I mean, we we had a I guess a short discussion earlier on on the Capex side for US again Theres two parts of that Capex. One is actually the building of the data center and a large part of that actually is the power infrastructure.

Connected data centers to the power source.

So that part of it is related to our overall rollout.

Our plan to.

To that second part is going to be related to the acquisition of land and power resources.

For the future and like I said, you know what we're what we're building out and developing today largely was acquired years ago and so.

If you're saying that have we sort of slow down or have we not spend as much in relation to 'twenty three 'twenty four landed resources.

I'd say that it is not necessary related to our competition, but rather actually making sure that we're acquiring the land and other resources in the right places to meet our customers' demands and the customer demand does change. So what we don't want to do is actually go out and buy a bunch of land that we want to deal up building.

For another three or four years in the wrong places.

Because that would just be idle land and trapped capital.

So I think that's the kind of the main point I would make there.

Thank you.

Was there a third part or was that also linked to that gets overall competition.

Okay.

Oh, Yeah, yeah yeah.

Thank you. So yeah, yeah, yeah, sorry, I was asking was there a third part of the question I I I'm I'm I wasn't sure. If that was linked to also then to the overall competition.

A point that I was making earlier on.

Oh, Yeah, Yeah, Yeah, Yeah, just I'll have understanding all our longer term yeah, yeah competition.

The development strategy. So yeah, you just mentioned the point, yes, okay.

Okay.

Yes.

Yeah.

Thank you so much ladies and gentlemen, this will conclude our conference for today.

Also participating you may now disconnect.

[music].

Okay.

[music].

Yeah.

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[music].

[music].

Good morning, and good evening, ladies and gentlemen.

Thank you and welcome to Phoenix Group Inc's third quarter 2021 earnings conference call.

At this time all participants are in a listen only mode.

We'll be hosting a question and answer session after management's prepared remarks.

With us today are Mr. Samuel Chen Chief Executive Officer, and executive Chairman of retail I D C. Mr. Timmy Chen Chief Financial Officer, and Jim you on the Investor Relations director of the company.

I'll now turn the call over to the first speaker today, Ms. Li IR Director of Phoenix Group, Inc.

Please go ahead ma'am.

Hello, everyone welcome to our so called her 2021 earnings conference call.

The earnings release was distributed earlier today and you can kind of final Kobe.

Site as well as newswire services.

Please note that the discussion today will contain forward looking statements made under the safe Harbor provisions of the U S. Private Security 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.

<unk> does not undertake any obligation to update any forward looking statements, except as required and they're okay for la.

As a reminder, this conference is being recorded.

Innovation webcast of today's conference call. It will be we will also be available on our IR website at IR there'll be no dotcom.

I will now turn the call over to our CEO Samuel.

Thank you Sheila and good morning, and good evening everyone.

You all for joining us on our earnings.

Our call today.

Despite regulatory uncertainties.

We delivered a milestone financial performance this quarter.

<unk> historical highs.

For both revenue and adjusted EBITDA.

With both figures exceeding the high end of our guidance.

Our results demonstrate the strong momentum we have generated.

Through the execution of our core strategy by.

By leveraging our integrated strengths in both wholesale and retail IDC services, we were able to unlock additional demand from the ongoing market migration towards digitalization and capitalize on more growth opportunities across diverse industry sectors.

She was 2019, we have implemented our dual core gross agent strategy.

Utilizing our four side of market trends and our competitive age in providing carrier neutral and cloud neutral IDC services.

By executing this strategy, we have continuously expanded our market reach and diversified our customer base to better position ourselves for managing the regulatory changes spanning across various industry sectors.

We successfully expanded capacity, while driving significant improvements in utilization rate, so our ramp up of newly built cabinets.

We added 20 388 cabinets on a net basis during the third quarter.

Additional rate for our ramp up of newly built cabinets increased by five five percentage points to 34, 7%.

And it kind of power utilization rate remains stable at around 60%.

With our track record of success over the last three quarters. We are confident in our ability to continue delivering strong operating results and expect to achieve our full year target of delivering 25000 standard cabinets and a compound utilization rate of 60% in 2021.

Now, let me provide a more detailed business update for the third quarter.

As companies across the nation.

He knew their migration towards digitalization, we have seen growth in overall demand for it infrastructure from both existing and new customers across all of our business segments.

For our wholesale business, we achieved healthy momentum in some of our Internet and cloud service customers ramp up cabinet utilization to serve their increasing data processing needs.

Meanwhile, we also saw some new add on orders from these customers for their business expansion.

In terms of our retail business, we continue to expand our client base.

Across diverse industry sectors, we forged several notable new customer relationship during the quarter.

<unk> maintained their industry leadership and deepening their reach in their respective markets.

For instance, in the third quarter, we began providing IDC services for China, changing credit rating group, a leading credit rating agency in China, and real AI, a leading enterprise level AI security platform in China.

At the same time, we continue to secure orders from many of our existing customers.

This includes shiseido, the Japanese multinational cosmetic company.

<unk>, a leading <unk> service platform in China, and Mayo, the healthy and beauty information sharing platform.

Just to name a few.

Our customer base has become far more diverse.

In compensating the cutting edge technology companies as well as companies from traditional industries, such as financial services consumer goods automotive manufacturing home decoration and many more.

As we further diversified our customer base and industry verticals, we serve with not only actualize continuous service improvements, but also better insulate ourselves from sector specific market fluctuations and macro risks.

Turning to our cloud business, we have started to generate additional interest beyond our cooperation with Microsoft.

<unk>, a global unified Commerce and.

And post platform for specialty and luxury retailers.

Engaged us to assist which is cloud lending in China initiative.

Going forward, we will continue to expand our cloud operation service offerings to attract more customers.

Finally, I'd like to provide some updates on the progress, we're making with our ESG initiatives.

Sustainable development has always been at the core of what we do as a result, our plants generally align with the recent regulatory announcements.

Driving progress energy efficiency.

During the quarter, our portion data center in Beijing, and non PON datacenter in Jiangsu Province were awarded the 5% to a grid datacenter ratings.

In 2021 opened datacenter summit hosted by open Datacenter Committee.

This is the highest rating for environmental sustainability performance of data centers in China.

At our summit ceremony.

Our <unk> data center was also recognized with the innovated datacenter for carbon emission reduction award.

We plan to remain at the forefront of Green development through our continued effort.

And the investment in energy efficiency energy saving technology Green management and Green innovation.

In conclusion by persistently executing our dual core course agent strategy.

We were able to unlock additional demand from ongoing business Detroit vision.

Capitalized are more growth opportunities across diverse industry sectors and achieve another quarter of solid financial performance.

Going forward, we will further deepen our market penetration diversify our sector coverage.

And our customer base and augment our tec technological prowess to capture the tremendous growth opportunity born out of the rising tide of digital transformation.

By maintaining precision focus on our dual card strategy execution, we should be able to further expand our market share in Oregon, and our leadership position in the carrier and cloud neutral IDC sector.

With that I will now turn the call over to Tim Chen our CFO, who will discuss our financial results for the quarter and his thoughts on our future growth.

Ann.

<unk>.

Thank you Samuel good morning, and good evening everyone.

Before we start our detailed financial discussion.

Please note that we will present non-GAAP measures today are non-GAAP results exclude certain noncash expenses, which are not part of our core operations the.

The details of these expenses maybe 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 third quarter of 2021 and.

And in Renminbi terms, while percentage changes are on a year over year basis.

We delivered stellar revenue growth and improving operating margins in the third quarter driven by our organic business development.

Core growth engine diversified customer base.

And a strong IDC market demand.

Our net revenues and adjusted EBITDA Rose by 25, 3% and 22, 2% respectively.

Exceeding the high end of our previously announced guidance range.

Net revenues in the third quarter of 2021 increased by 25, 3% to 156 billion from $1. Two 5 billion in the third quarter of 2020.

This increase was mainly due to increased customer demand for our highly scalable carrier and cloud neutral IDC solutions from both wholesale and retail IDC customers as well as the notable growth of our cloud business.

Gross profit in the third quarter of 2021.

$375 2 million, representing a year over year increase of 36, 4% from $275 1 million in the same period of 2020.

Gross margin in the third quarter of 2021 was 24% as compared to 22, 1% in the same period of 2020.

The year over year increase in gross margin was primarily attributable to our continued efforts in optimizing our operating efficiency.

Adjusted cash gross profit, which excludes depreciation amortization and share based compensation expenses was $674 5 million in the third quarter of 2021.

Compared to $526 2 million in the same period of 2020.

Adjusted cash gross margin in the third quarter of 2021 was 43, 2% compared to 42, 2% in the same period of 2020.

Adjusted operating expenses, which exclude share based compensation expenses and compensation for post combination of employment and an acquisition and impairment of loan receivables to potential investors.

Were 244 million in the third quarter of 2021 compared to $180 5 million in the same period of 2020.

As a percentage of net revenues adjusted operating expenses in the third quarter of 2021 were 15, 6% compared to 14, 5% in the same period of 2020.

Adjusted EBITDA in the third quarter of 2021 was 454 million representing.

An increase of 22, 2% from $368 5 million in the same period of 2020.

Adjusted EBITDA in the third quarter of 2021 excluded share based compensation expenses of $4 6 million.

And adjusted EBITDA margin in the third quarter of 2021 was 28, 9% as compared to 29.6% in the same period of 2020.

Our net profit.

Attributable to ordinary shareholders in the third quarter of 2021 was $156 2 million compared to a net profit of $97 1 million in the same period of 2020.

Basic profit and diluted loss was 0.18 and zero points here are three per ordinary share, respectively, and 1.8 and 0.18 per <unk> respectively.

J D. S represents six class a ordinary shares.

As for our balance sheet, the aggregate amount of the company's cash and cash equivalents restricted cash and short term investments as of September 30th 2021 was $3 94 billion, increasing by 0.5 4 billion from December 31st 2020.

Meanwhile, net cash generated from operating activities in the third quarter of 2021 was $134 7 million compared to $210 million in the same period of 2020.

Looking forward, we will continue to execute our dual core growth strategy and further diversify our customer base to capitalize on growing IDC market demand. We are confident in our ability to build on our leading position in the IDC market to deliver continued growth for our shareholders.

For the fourth quarter of 2021, we expect net revenues to be in the range of $1 75 billion to $1 77 billion.

And adjusted EBITDA to be in the range of 450 million to $470 million.

For the full year of 2021, we anticipate net revenues to be in the range of $6 $1 9 billion to six point to two 1 billion and adjusted EBITDA to be in the range of a $1 74 billion to $1 76 billion.

The midpoint of the company's updated estimates imply year over year increases of 28, 5% and 32, 2% in net revenues and adjusted EBITDA, respectively.

This forecast reflects the company's current and preliminary views on the market and its operational conditions, which do not factor any of the potential future impacts caused by the COVID-19 pandemic and are subject to change.

This concludes our prepared remarks for today so operator.

Now ready to take questions.

Thank you.

We'll now begin the question and answer session.

To ask a question. Please press star one on your telephone.

To withdraw your question please press the pound or hash key.

Our first question comes from young Li from Morgan Stanley. Please go ahead.

Thanks for the opportunity to ask a question.

First congratulation on the good results.

Two questions here the first one.

Guarding the customer demand.

Because we see quite unfavorable regulation towards most of your customers, especially on the wholesale side could you please share with us.

The demand outlook going into fourth quarter and next year.

Especially we see the overall hotel under Mou or a service number stay at 230 megawatts this quarter.

So I would like to hear what is your expectation.

The expectation.

Wholesale sales momentum going into next quarter into next year.

The second question is do you see any risk on margin from the utility costs, because with Libra nation of the.

Our industrial our electricity in October.

Whether it will have some margin bring some margin pressure too.

Thank you.

Okay. Okay.

Thanks. So much this is Samuel I may just take the first question and then and see where the team you want to chime in to provide.

The comments for the second question so first of all.

From the high level perspective, they are I would say similar trends.

For the investors and analysts to pay attention to number one I would say the datasets. The dataset continued to be generated I would say doubling in 18 months period.

The same time I think the of COVID-19 basically.

Accelerating the enterprise digital transformation.

So in short you know more and more businesses or even their business model are moving.

From the pure physical world to both physical and digital World. So that's number one number.

Number two the cloud adoption is it getting to be.

Standard in fraud practice for most enterprises.

Alexia the rest of the world, which was predominantly by a three different cloud service providers, but in China, we have a more than a dozen.

Cloud service providers, providing the services and so on and so forth. So in China. What happened is we've seen a lot of a dedicated cloud adoption.

Both from the Onramp all train opportunities.

So so the trend.

Basically is given the fact that the number the clouding China government policies data sovereignty is concern even total cost of ownership. So a lot of the customers when they started to.

Adapt via public health services, they will consider when they grow their business, we will consider about you dedicate clubs.

And the third thing is about the regulatory impact.

Jan mentioned earlier.

First of all the China economy is highly regulated.

For all the way from the government policy regulations.

On the platform companies concern.

And and also some of the vertical impact or even the power tariff and those would be comps.

I would say general concern for most of the investors and analysts.

From our point of view again kudos to our U a court because we already have a very long track records from operation point of view.

We also have a very comprehensive service offering.

And plus our diversified customer base.

So from our point of view, we are bullish about the demand.

In the quarters to come.

That being said, we also want to be cautiously.

Notation on the potential regulatory impact, but the net net I would say we're bullish about.

The quarters to come and then we'll be ready to meet our customers' needs.

For the second question Pierre do you want to chime in with your.

Your input.

Yeah sure Samuel Young thing. Thanks for the second question I think second question related to power our power tariffs.

To date There've been no increases in power tariffs are there have been some power control measures, but as you correctly pointed out there is expectation that some tariffs will increase in 2022.

In terms of the impact to the overall business I think I would say no impact on the wholesale side of the business will actually be rather limited.

These are mainly pass through or the utilities are paid directly.

Hmm by the customer.

And you know for our retail customers actually a number of our contracts there have automatic adjustment clauses.

For the rest we expect during the normal course of business that will have those discussions and the adjustments.

Pass through upon renewal.

Our shorter contracts and just like an increase in tax or any of the other sort of basic cost of providing a service. These are things that we fully expect will be first group. So again, we're expecting very limited impact to our margins as in relation to potential sort of perfect juices in China.

Thank you Sam and thank you Tim.

Thank you.

Our next question comes from Charlie by at Jefferies. Please go ahead.

Yeah.

Ohio, I'm curious Edison Hi.

Congratulations on the results.

I have two questions number one is on your Capex.

So youre guiding 2021 capex of one eight.

Roughly I think previously you were talking about potentially a $5 5 billion.

So can you explain why.

It has come down so much from your previous guidance.

And my second question is on.

On your retail MLR could you explain why it has been going up because I think the year on year in Q O.

<unk> growth in particular was actually pretty big.

So if you can talk about the trend and what what investors should expect to see in <unk> in 2022 that would be great. Thank you.

Sure what what I'd take the first one and then maybe Samuel and whether you want to comment on on the EMR apart.

So Edison a morning too and in terms of the Capex are you know the the question about what is the sort of.

Key drivers of the Capex and look for us really there's two parts there's the.

The delivery of the cabinets as we deliver them.

Our our data centers there is a capex with it expenses there and then Theres also another portion, which I would put in the securing resources for future years, whether that's 'twenty, two 'twenty three or even beyond that.

Land and the power resources related to those.

The power infrastructure and the build out of that so I would say for this year. It is as the investors will know.

We had a more concentrated delivery schedule in the second quarter and in the fourth quarter.

And so we expect obviously that those were the two areas, where there would be a more substantial increase in the capex.

Did guide a sort of a general soft guide in terms of overall capex, but frankly that at the end of day, it boils down to especially the second part which is on the future of resources 'twenty three 'twenty four and beyond.

They're not has not been as many of those that have popped up.

And also the other point that we tried to factor in is opportunistic M&A and again there has not been anything in the first three quarters of the year. So we'll keep the investor base closely informed but but again I think we would expect that we would end up somewhere close to where we were last year in terms of a total amount of capex for the year, but against some of this could slip into January.

And it'd be kind of this first quarter of next year.

So hope that helps our Edison I'll pass the Samuel on the MLR question, but before that I'll, probably say that.

That now we've kind of had the related questions in our previous quarters, you know what did it go up when it come down quarter to quarter.

I think some of it is product mix, but Simon will give you a little bit more but I would say trend wise, it's something that we would encourage investors should really focus on rather than let's say quarter to quarter fluctuation.

I'll pass that to us that right now.

Yeah. Thank you Tim.

Yeah. Thank you Charles for the question I think Thats, a very excellent question as Tim pointed out.

We win when investors and analysts look at look at our retail MLR I wouldn't we wouldn't recommend you look at that quarter by quarter, but you.

Half year over half year over year, you're going to see that number continue training up for sure.

Part of the reason because we're not just providing customers.

Colocation services, we have a lot of the value added services on top of that including the networking bandwidth very added services bare metals.

Hybrid multi clouds.

Specialty today, I'll say hybrid multi multi cloud become a new norm. So a lot of our customers not just from the internet sectors, but also from a different vertical industry coming to us requiring a full stack services.

And then so that give us great opportunities because we have a large customer base and we have a full stack service and then we have a very strong ecosystem and most of the ecosystem when they provide the hardware solutions software solutions, Oh, Ethan management type of services are mature.

Majority.

Happened to be a resides in the data center.

And then so we can basically kind of group them together and provide to the customers of course with the operation and maintenance on top of that and making sure our customers would have a peace of mind.

They can just forget about the infrastructure pieces and focus on their business innovation. So it becomes a great win win win situation.

Situations so so.

So part of our value added services adopted by the customers are contributing quite a bit two hour retail MLR this quarter.

So hopefully that is you're asking a question Charlie.

Okay, Yeah, yeah, Thanks, Cameron and team.

Thanks Edison.

Our next question comes from Tina Hu <unk> Goldman Sachs. Please go ahead.

Hi management. Thanks for the time, so I have two questions. The first one is that actually are in the third quarter of last year as our earnings call management laid out a plan to add 25000 cabinets each year in 2021 'twenty two and 'twenty three.

So wondering if we are at this point still maintaining that guidance and if yes, maybe because we're at the end of this year now. So I think we have probably already have some insight into other type of resources that we have secured and next year. So I'm wondering if you could share some.

With that information with US and then the second question is a follow up to a previous analyst question. So if looking at your <unk> guidance implied EBITDA margin is around 26%, which is lower by about two percentage points Y O Y and Q O Q. So wondering why is that.

Sure. Thank you. Thanks for the question Tito Let me take these two questions first would be in terms of your question on the 25000 Center cabinet our guidance I would say that you know we provided that number and Oh I would say going forward that number would change a little bit.

But that's really a matter of projects being finalized and then you look at our mix of wholesale and retail customer there are different power density requirements. So you'll end up with different numbers of cabinets.

However, I would say that we maintain the 25000 for next year as well and for 'twenty to your question around kind of how much of the resources. We've secured as of now we secured about 80% of the resources towards the 25000 cabinet target for next year.

In terms of our margin.

And the reason for the reduction in margin in fourth quarter.

Frankly, that's really with the company of deliveries.

That we have in fourth quarter.

So you will have a naturally the scale up of cost to support the delivery of the cabinets and then that will then be mitigated over time as those kind of in its ramp up.

So we do have a lot of cabinets as you can sort of reverse calculate delivering in fourth quarter. So that's the main reason.

Thank you Tim So does that mean that our utilization rate in for Q would likely trend down as well.

Oh, I would say that we would still keep to the around 60%, but there may be a small trend down you're correct.

Okay. Thanks.

Yeah.

Our next question comes from Eastern Zhang at Nomura. Please go ahead.

A sense for the opportunities.

For me to ask a question. My question is also around the utility costs.

So I just wonder what's the impact of the power of restriction to dollar margin.

During the third quarter.

During the third quarter and what's our outlook for the power supply situations.

Fourth quarter and next year and also just wanted management to give us more view on our.

Our outlook for migrating to green power and our current penetration rates of liquid empowered.

Thank you.

How are you. So let me let me take the first question and then I'll take a stab at the second and see if Simon has I think of that as well.

In terms of the power control. The those are the some of the power control measures throughout parts of China.

And the impact actually to our I D C or D. C. In general is that the Edison had to burn diesel.

In the areas that were impacted.

<unk> V net impact was actually rather limited and as of now.

Long lasting impacts to us.

<unk>.

The second I guess in terms of looking forward what do we expect.

Similar to the general market, we actually expect that these power control measures to be largely eased as the government actually has been actively tackling these issues around thermal coal supply and around thermal coal pricing.

So again, we don't expect this to be sort of a continuing trend or a problem in terms of power control as I mentioned before yes overall market does it I expect that there will be some power tariff increases in 'twenty two.

As I mentioned earlier on the impact in terms of margins there should be a rather limited.

Given how the IDC business and run it in our contracts with our customers.

Yeah.

A green power I'll, maybe I'll open with the fact that you know as of today the ability to increase the proportion of Green power is.

He is constrained by the fact that we purchase power from the grid and so that's that's one sort of a constraining factor.

We are actively addressing obviously of the overall.

Countries goals 2000 32060.

And again you know at this point, we have not gone down the road of necessarily building our own power generation.

We do not believe that that is a core competency for <unk> to be a builders and developers of power generation.

But it is something that we look to find our partners, where we can actually then be able to help towards the overall of course the gun.

Country 70, I don't know if you if there's anything else you want to add to that.

Oh, yeah. So a couple of gains again in eastern Thanks for the question I think everybody knows China will strive to peak carbon dioxide emissions before before 2030 and achieve carbon neutrality before 2016, so from the.

Renewable energy usage point of view I think it typically well would generally.

Increase the usage of our renewable energy and <unk>.

Sure to comply with the local requirements, but as of now because the operators are limited to purchasing.

Electricity from the grid therefore, the percentage of renewable energy will vary based upon the province and agrees on sourcing renewable energy for example.

Flowers Shanghai data centers now, we have 30% renewable energy usage again.

Was basically due to the Shanghai.

<unk> energy mix, having said that we do have our own efforts from a P E improvement point of view.

Because of the energy consumption in data center is on the rise so no doubt of that so due to the fact that.

Yes.

Spread of cloud computing and society is paying a lot of the great rotation to the environmental performance of data centers. So so that being said, we will continue to optimize our.

Power.

Akamai datacenter space optimize data center cooling, eliminating the data center power and cooling and efficiency utilizing the D. C. I N tools, which is data center infrastructure management tools and also using the.

The AI control the air conditioning.

To control the coding.

They are making to be more efficient so.

So while we will partner with the degree to adopt the renewable energy, but we will continue.

Emphasizing on all of our <unk> efforts.

So hopefully that addressed your question Ethan.

Okay. Thank you very much.

Our next question comes from Arthur Lai from Citi. Please go ahead.

Hi, good morning, Neil and team congrats on the United and the whole team delivered a strong result.

Uh huh.

Quarter, three we know the quality has been a lot of.

Got.

Following Paul's right. So.

I have two question and first question I want to quantify that impact.

On the policy.

So we are seeing.

Competitors meeting in April was flat.

Maybe around the 19 median or mean vehicle usually pick up power and I Wonder if all we also have the thing up a one off cost.

My first question. Thank you.

Hi, Hi, Arthur Yes, you know I would say that the power control.

It did have a.

Impact in terms of data centers, having to burn diesel, but it actually was extremely varied a region to region and even data center to data centers. So it's not something that you know I would say it was a one off but not enough to move the sort of EBITDA margin needle.

And again thankfully, we do not expect that these power control measures.

It will be continued as the government.

It seems to have tackled the underlying problem around thermal coal.

So.

Yes, I I didn't see the similar remarks from some of our peers.

But it was not something that impacted us.

That doesn't have to move the needle on our site.

Good quarter.

Okay cool and it's the kind of thing.

Mention that Oh, we should.

You are asking.

Controle AC and tried to we can pull there.

Can you also made us know how.

How much or how big the scale.

Okay.

Oh, Okay, so we need to invest and how we can see.

Yeah, we can hear you Kyle thank you.

Okay.

Can I can probably tackle the question Arthur.

So basically.

As I said earlier because energy consumption.

In data center is on the rise it is a big topics and then today, we have more than 32 data center.

You know around the countries and then the.

The beauty of the AI control it is about.

You know.

The more data driven.

Learning type of technologies because in the past we tend to rely on the labor.

Managing.

I would say Eric.

Air cooling, our air conditioning control and so on and so forth, but now we.

We have to use the tools and the systems.

Hum.

And so this is for example is something that we invest it.

Okay.

The same is something which as you know our.

Industry referred to a data center infrastructure management.

It is basically hum combining the operational needs of the physical equipment and also the physical facilities, namely building environment in fact environment controls combining together, so we would be able to use a data driven to control the air conditioning.

We said, we started with tier four data center in our pilot.

And we have a 32 so.

Hopefully we can go through a few.

Iteration to see the improvements and then we and we started to roll it out to all the data centers countrywide.

We're seeing some promising impact I wish I could share with you more.

Updates.

In the coming quarters.

Okay. Thank you I do have some shrink question, but I would stand by the Pew maybe later thank you.

Thank you Arthur Thank you Arthur.

Our next question comes from Meng Grin Lee from CLSA. Please go ahead.

Hi, Matt.

Thanks for taking my question.

Regarding the acquisition of cloud so how's it dissolve.

Cloud service business.

And can you share the revenue.

The crowd in IDC business. Thank you.

I can probably take the questions and definitely it will contain to chime in.

With additional input.

Yes.

I think the early July.

We announced that we acquired one of their leading cloud native companies in China, the 10th call.

And then the test cloud move in and and and also you know.

Working with <unk>.

Providing our.

Customers are better solutions from the cloud native point of view the day, we look at the whole industry.

As I've said earlier cloud adoption is now become a standard.

Procedures for every single enterprise when they when they want to go through the digital transformation.

And then based upon.

The the foster.

Train analysis.

It showed 30% of the enterprises when they go through the digital transformation they will.

Fine.

And adopt a cloud native technology.

Container based micro services or even server less.

We're seeing the trend.

Pumping up as well.

And then ever since tens cloud joining us working a great synergy.

In between because of what happened to Pat we have a very good call. My question solutions, which is primarily virtual machine.

And then but now we have a tense clouds are coming in basically you know provide additional puzzle.

To resolve that issue for a cloud native I'd.

I'd like to cloud migration, which is more lift and shift not much architecture or re architecture efforts.

We have to be done by the customer site, but a cloud native would be a different animals, meaning the customer has to go through a re architecture of their solutions in order to raise the beauty of the cloud native.

So we're seeing a great synergy in between.

Based upon the latest.

The internal reviews.

The revenues are pretty much on target to achieve by the end of the year, but because we we don't provide.

The breakdown numbers. So I don't have the detailed numbers that could share with you.

Sure Tim do you have additional employee you want to say.

Oh, Yeah, no Samuel I'd say you know your your last point you know, we don't provide the breakdown of each of the value added services within the retail enterprise piece, but what I can sort of add to Samuel says that you know obviously this is a relatively recent acquisition.

It is additive to our overall business and we expect that it will become an increasing part of the value added service solution set to our customers. So again it will be a driver of our growth.

And and helping to make our business, even stickier for our end customers.

Thank you.

Okay.

Our next question comes from Clive Cheng from Credit Suisse. Please go ahead.

Yeah.

Hi, Thank you management for taking my question. My question was also.

On the power Kim mentioned that Oh, yeah, we.

We have a portion of.

The future utility costs that can't be pass through.

Customers can get a sense that you know what portion of current existing contracts have these kind of pass through clauses. That's number one and number two for those that does not have these pass through clauses are what is our strategy.

Obviously, the price hike uncertainty for next year are we looking to renegotiate with these customers or at what certain point, we evaluate you know kind of resigning.

We are negotiating with them. Thank you.

Sure Let me take the first part and then and I know that Samuel has some sort of live examples in terms of the customer strategy as well I think look overall you can safely assume that all of the of the wholesale contracts.

Have a either a pass through mechanism or they're paying their utility as directly as I mentioned earlier on.

For our retail enterprise customers are.

As I mentioned it does vary quite a bit.

But again I would say in general the longer contracts will have adjustment.

Mechanism clauses built into those contracts, whereas our shorter contracts.

Those are the ones, where they don't have an automatic adjustment, but those are things that also where.

Upon renewal, we would fully expect it will be part of the discussions ultimately just like tax just like power tariff I mean, these are non discretionary and it's a cost that we face and providing the service and it's a cost that must be borne by the customer.

In terms of how that discussion is in terms of the what would be called it a renegotiation or renewal I guess I'll leave Samuel to give you some color on that part.

Yes.

I think as Tim pointed out because if we.

Take down by customer taxonomy.

For the wholesale that's a pass through.

So the scale retail because tend to be a one to three years contract that we already have the building the <unk>.

So negotiate with customers with zero problem and therefore, the I would say for the long tail retail even within them.

The contract for the for year, one we still are putting put down some classes basically for some unforeseeable.

Readers.

We will be able to sit down with the customer to negotiate it.

I think the net net is because we were going to balance theres a part.

One hand, we have a customer experience on the other hand, we also have the.

The margin rate and then so if that's kind of a.

Marginal.

We're probably going to you know.

I'm satisfied a customer experience and we opened the door.

When the countries do or if that becomes a material, we're going to sit down with the customers and the conversation would be fairly easy because as Tim pointed out the cost element in a sense is non discretionary so it is fairly fairly transparent.

So for us we.

Haven't seen any impact to sit down with customers and open the dialogue.

Okay.

Okay. Thank you very much that's very clear thank you.

Thank you and thank you Clive.

Our next question comes from Albert Hung from J P. Morgan. Please go ahead.

Yeah, Hi management team. Thank you for taking my question.

The first question, Yes, you are.

Here's a comment that it is getting more difficult to get par quotes for new das in the field I'm wondering whether you see the similar trend. If he has all of the auto now I think the way to grow the top line in the future.

My second question is follow up on the quantified K cabinet with eastern commentary next year.

I wonder if there's any slowdown a moving rate how fast the bulk of being that changed expansion, playing and need to get the marketing pack.

Thank you.

Yeah.

Okay I might take the apart hotel one.

And then.

Having I'll take the second one.

Alright, okay. It sounds good.

For the year, but the power of quarter, one I think it is too.

I think the overarching statement.

I keep saying that the Chinese economy is highly regulated and then and given the fact that you know the government has to be a national policy to.

Describe the peak of carbon dioxide emissions before 2030 and achieve carbon neutrality before 2016.

Therefore, the part a quicker I would say it case by case.

Location by location would be different.

The good thing is I think.

Because we have in the industry.

For so long.

Literally literally all of our 25 years and within our data centers, we have a very credible customers with a very serious workflows and because you know again kudos to our do acquire so other than the Internet Giants or cloud service providers.

We actually have a lot of very serious enterprise customers.

Data centers and then.

And government policy.

On one hand.

It's to drive a very healthy.

Industry ecosystem harness the ecosystem and so on and so forth, but on the other hand, they also want to reward.

Long term players like us so, albeit I would say.

Getting power quota is going to be challenge.

But we're confident.

In a way.

To continue moving down the row to get what we need so again, we have our high hope and we're going to continue working.

Our butts off to get the park water on the location there.

That we have.

Our resources, so that would be my answer to you excellent question.

Tim do you want to take on the the part two.

Sure sure.

In terms of the part to and and you know 25000 cabinets for next year and I guess the ability of the question is around the ability to.

Slow down is it just.

It's a sort of match if there's any slowdown in customer ramp up and how to how do we sort of slowdown.

I would say, yes look the.

The ability is there to the extent that we have the visibility from the customers.

Where their demand needs a change and I would say, that's both speeding up and slowing down.

Within sort of physical possibilities, if a customer tells us look we needed a month or two months earlier, absolutely we can factor that in.

And if the customer says I need a quarter later or two quarters later, they were fully that capability.

Two two shift and so that will again, we look to our guiding kind of overall, 60% utilization.

Utilization rate and.

And we monitor that to make sure that we're not just building cabinets.

We're also making sure that those are those Itc's are then felt and so that's something we keep a close eye on.

And we manage to that.

So we're not just stuck on one variable I think theres a number of different operational variables should we manage to and making sure that what we built and the money that we spend.

Does that generate the correct returns to us and our stakeholders.

That answers that question.

Thank you that's helpful.

Yeah.

Our next question comes from <unk> Wang at Tyler. Please go ahead.

Oh, Thanks, Benjamin for opportunity to ask a question Hum along from that what kept home we know if that's a.

South Florida is the ramp up of four large her atrophy compared hey, so Joe the before 2019.

So want to know the reason for it.

So don't expect to run pumps and also.

We know that given the tightened their supply of called a poll.

Your bedroom and Guangdong and from regimens have views do.

Do we have any addition of aggravation.

For high quality ice is in a in some tier one status I'm I've.

Chinese anyone or maybe it wasn't true because we know you guys are are you a reduced capacity.

Capex.

For this year's significantly so want to have a better understanding of our competition strategy.

Maybe oh I made it a fierce competition and also the.

So we could demand thanks.

Let me I guess, let me take the first part I guess the question was around a ramp up.

Of the mature cabinets our utilization rate.

Yeah, I mean, I would say look we'd be we continue to deliver cabinets and obviously as I D. He's click past into the sort of two years and older you will see some small fluctuation.

But no we have not seen necessarily a very large difference in terms of the ramp up of our customers for these are mature datacenters.

Data centers.

Sorry, what was the second part of that question.

Something about.

Beijing, Guangdong power quota.

Oh, Yeah, I, just about all our our location of our Oh, capex, regardless, because we have reduced our capex and 50 years. It basically today. So we want to reserve for the maybe a future development maybe in the second half of next year all three.

Due to the fierce competition and maybe some over ly oversupply in some regions do you do a more intra interests of nuclear so in 2020 on one country or one yeah. So that's my questions. Okay. Okay.

If I understand correctly sort of impact or relationship between Capex and then competition is that correct.

Yes.

Okay, well I would say I mean, we we had a I guess a short discussion earlier on on the Capex side for US again Theres two parts of that Capex. One is actually the building off of the data center and a large part of that actually is the power infrastructure.

To connect data center to the power source.

So that part of it is related to our overall rollout.

Of our plan to.

To that second part a is going to be related to the acquisition of land and power resources.

For the future and like I said, you know what we're what we're building out and developing today largely was acquired years ago and so.

If you're saying that have we sort of slow down or have we not spend as much in relation to 'twenty three 'twenty four landed resources.

I'd say that you know it is not necessary related to competition, but rather actually making sure that we're acquiring the land and other resources in the right places to meet our customers' demands and the customer demand does change. So what we don't want to do is actually go out and buy a bunch of land that we want to deal up building for.

Another three or four years in the wrong places.

Because that would just be idle land and and trapped capital.

So I think that's the kind of the main point I would make there.

Thank you.

Was there a third part or was that also linked to that gets old real competition.

Okay.

Yes.

Oh, Yeah, yeah yeah.

Thank you. So yeah, yeah, yeah, sorry, I was asking was there a third part of the question I I I'm I'm I wasn't sure. If that was linked to also then to the overall competition a point that I was making earlier on.

Oh, Yeah, Yeah, Yeah, Yeah, just I'll have all been understanding all our longer term yeah, yeah competition on the development strategy. So yeah, you just mentioned the points.

No.

Yes.

Thank you so much ladies and gentlemen, this will conclude our conference for today. Thank you also participating you may now disconnect.