Q1 2022 VNET Group Inc Earnings Call

May 25, 2022

Hello, Ladies and gentlemen, thank you for standing by for the first quarter 2022 earnings Conference call for <unk> Group, Inc.

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

After the management's prepared remarks, there'll be a question and answer session.

Participants from our management will include Mr. Samuel Chen Chief Executive Officer, and executive Chairman of retail I D C.

Mr. Tim Chen Chief Financial Officer, and there's genuine Liu Investor Relations director of the company.

Please note that today's conference call is being recorded.

I would like to turn the conference over to the first speaker today Mr.

Jim you undo please go ahead.

Thank you operator, Hello, everyone and welcome to our first quarter 2022 earnings Conference call. Our earnings release was distributed earlier today and you can find a copy of our website as well as unused wire 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 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 SEC.

<unk> does not undertake any obligations to update any forward looking statements except as required under.

I play falloff.

Please also note that.

<unk> earnings press release, and this conference call include the disclosure all audited GAAP financial measures as well as audited non-GAAP financial measures.

Earnings Press release contains a reconciliation of the audited non-GAAP financial measures to the audited GAAP measures.

As a reminder, this conference is being recorded in addition, a webcast of this conference call will also be available on our IR website.

Our top V now dot com.

I will now turn the call over to our CEO send me off.

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

Thank you for joining our first quarter 2022 earnings conference call.

As we continue executing our dual core growth strategy.

To grow our reach in retail and wholesale IDC market. We are pleased to report another solid quarter amid a complex macro environment.

From a performance standpoint, we got off to a solid start in fiscal 2022.

Neighboring healthy operational and financial growth first quarter.

Total cabinets under management increased to approximately 79000 compared with approximately 56000 at the end of first quarter of last year.

Cabinets utilized by customers increased to approximately 43000 compared with approximately 33500 in a comparable period last year.

Our retail MMR per cabinet grew to RMB 9236, first quarter compared with RMB 9144 in the same period of 2021.

For the first quarter, our revenue grew 18, 6% year over year and adjusted EBITDA grew 21, 9% year over year, both in line with our expectations.

The phenomenal rise of the digital economy, and a favorable policy landscape.

Our proven ability to execute our strategy have all continued to bolster our business momentum across each of our business segments.

First of all more supportive policy developments are paving the way for continued progress reinforcing our positive outlook for the IDC sector and its role in China's digital transformation and technology development.

The most recent meeting of the Central financial and Economic Affairs Commission held last month.

China's central government extended the National initiative to further modernize infrastructure across the information technology logistics and other industries.

Aiming to deploy a considerable number of next generation <unk> facilities, which includes supercomputers cloud AI platforms and broadband backbone networks.

As one of the service providers to support this major initiative, we're well position to benefit from the fast growing demand in a more favorable and healthier regulatory environment.

Additionally, as the significant national infrastructure advancement initiatives Eastern data Western computing was released earlier this year to boost data center computing power across the nation, we continue to see great potential for the expansion of our core business with even more.

More efficient and effective approach.

Before I discuss our business segments and the more details I'd like to speak about the COVID-19 resurgence in certain key locations and its impact on our operations.

A lockdown and related travel restrictions that were imposed in Shanghai, Beijing and several cities in Hubei province have impacted some of our customers are moving rates and our progress with respect to the construction of some of our new projects in these areas.

Our data centers in the affected areas have continued to operate uninterrupted throughout the lockdowns and we truly appreciate each of our onsite employees efforts to keep things running smoothly.

We will continue to closely monitor pandemic developments and together with our partners.

<unk> measures to mitigate risk for our operations.

Now, let's look at the first quarter performance and latest developments of our wholesale business.

As digitalization is taking place across sectors and geographies more TMT customers.

Especially internet players cloud service providers in accurately expand their efforts to enhance their data processing and storage capacities to keep up with frontier technology trends and gain competitive edges.

Our compelling value proposition rooted in extensive industry knowhow in depth resource capabilities and well seasoned operation teams.

Continually enhance the appeal of our wholesale service offerings, two leading technology players.

During the first quarter, we signed a four contract generating a total of approximately 60 megawatts in capacity.

Including an extended pre committed order of approximately 11 megawatts from a leading social platform operator and three older.

Others under multi year contract with two existing customers. It was stayed on cloud service providers in China southwestern region.

We continue to see the increase in demand from our wholesale business and we're quite optimistic about our future prospects in this segment.

Moving onto our retail business in the <unk>.

First quarter, our ongoing efforts to advance our value added service offerings.

Steady growth in orders from both existing and new customers reaffirming the effectiveness of our strategy and the increasing efficiency of our execution.

New customer expansion was primarily driven by growing demand from the financial services E Commerce automotive and energy sectors.

So as we continually enhance our service capabilities and enrich our one stop service offerings, a large number of existing customers, including Internet players cost service providers Cross border E Commerce player financial service providers and local service online marketplaces continue to extend or upgrade their contract to procure.

Additional value added services spanning a wide spectrum of areas from Interconnectivity bare metal services in hybrid multi cloud solutions. In addition to Colocation services.

Technological innovation is a crucial driver for the business development of our digital services.

We just launched a new in house developed Interconnectivity solutions that aims to provide all in one enterprise connection services.

Our innovative SD Wan technology and backbone network.

It also includes an array of cutting edge features catering to different platforms and hybrid access networks to enable application aware intelligent routing and then worldwide visualization.

In addition, we just rolled out new stack, a customer oriented full stack cloud native services to empower corporate developers to build and run scalpel application in public private and hybrid clouds.

Leading digital transformation initiatives.

This new product launches.

So represent our powerful engineering capabilities to enrich our service portfolios deliver additional value to customers and diversify our revenue streams.

In addition to serving corporate customers across various verticals, we continue to explore opportunities to partner with more state owned enterprises by leveraging our aptitude for technology and healthy government relationship.

Recently.

We signed an inclusive exclusive partnership agreement with people data, but superior People's Daily online.

Fluoridated media platform in China.

Under the agreement.

As the exclusive partner Venus will jointly build and operate people cloud the cloud platform of people data.

The alcohol its role in serving local government and Soe customers' needs for cloud computing.

In this regard we will provide all around services, including Colocation Interconnectivity called platform cloud native workloads and industry specific cloud solutions.

On the Blue cloud business front.

We have been actively exploring business opportunities in different vertical industries.

Leveraging our season cloud service operation expertise and through take a long exclusive partnership with Microsoft.

And currently in Q1, 2002, we began to offer operations and maintenance services to.

To support the digital business system.

One in power one of China's largest electric power companies with.

We'll deliver first class 24 by seven O&M services across a wide array of core business systems as well as secure a higher visibility architecture for relevant business continuity.

The initial feedback we have received from our customers has been remarkable.

Our solutions and services not only enabled customer systems to run trouble free, but also optimize their efficiency and performance to better meet business needs, while effectively reducing their operating costs.

As this system performance enhancement.

Improve the overall operating efficiency.

Our customers overall business management capabilities also grows stronger.

Which in turn semi their competitive advantages.

We expect to further expand our industry specific solutions for other sectors.

Last but not least I'd like to reiterate that in the highly dynamic market in which we operate are holding long term commitments and responsibilities to our industry environment and society is central to our ongoing success.

Our industry shift towards Green datacenter operations and the world becomes.

The work comp to embrace sustainable Enterprise management, we are committed to building BNET is a positive force for the betterment of society.

For more than two decades.

We have been committed to advancing a wide range of ESG initiatives within the stakeholder communities we serve.

Our 2021 ESG report published in April .

Showcases this initiatives and demonstrates our commitment to integrating sustainability into every aspect of our operations.

Some highlights include our carbon neutrality target by 2030.

Lower than industry average P E and the fact that we are the first data center service providers in China too.

We disclosed the third party verification of our carbon inventory results.

As a prominent domestic enterprise and the global industry player. We will continue to lead by example in these aspects.

Looking ahead.

We'll remain dedicated to utilizing our core expenses, while continue to focus on our growth strategy, we expect to capture greater opportunities and fulfill more growing digital demand.

<unk> wide ranging verticals.

As the digital transformation progresses.

Thank you everyone.

With that I will now turn the call over to our CFO , Tim to discuss our financial performance for the quarter and our business outlook.

Dan.

Thank you very much Samuel.

And good evening everyone.

Before we start the detailed discussion of our financials. Please note that we will present non-GAAP measures today.

Our non-GAAP results exclude certain noncash expenses, which.

Which are not part of our core operations.

The details of these expenses maybe found in the reconciliation tables included in our earnings press release.

Please also note that unless otherwise stated.

All the financials, we present today are for the first quarter of 2022 in renminbi terms.

First we're pleased to have achieved solid results on our top line and adjusted EBITDA in the first quarter.

In line with our expectations the sequential.

The decrease in revenue was mainly due to seasonality given that the first quarter is typically not a strong period for business because of Chinese new year.

In addition, our move in rate was also impacted by Lockdowns.

Our robust financial performance against the backdrop of macro fluctuation reflects our continued efforts to further expand our service offerings diversifying our customer base and invest in our core capabilities.

Next let me walk you through our first quarter financial results.

Unless otherwise specified the growth rates I will be reviewing are all on a year over year basis.

In the first quarter, our net revenue increased by 18, 6% to $1 $65 billion from the same period last year, mainly due to the increased customer demand for highly scalable carrier and cloud neutral IDC solutions from both wholesale and retail IDC customers as well as the continued growth of our cloud business.

Gross profit was $355 5 million in the first quarter of 2022, representing an increase of 10% from the same period of 2021.

Gross margin was 21, 6% in the first quarter of 2022 compared to 23 three in the same period of 2021.

Adjusted cash gross profit, which excludes depreciation amortization and share based compensation expenses was $684 8 million in the first quarter of 2022, an increase of 13, 1% from the same period of 2021.

Adjusted cash gross margin in the first quarter of 2022 was 41, 6%.

As compared to 43, 6% in the same period of 2021.

Adjusted operating expenses, which excludes share based compensation expenses and compensation for both companies <unk> employment and an acquisition.

It was $208 million in the first quarter of 2022.

Representing a decrease of five 5% from the same period of 2021.

As a percentage of net revenues adjusted operating expenses in the first quarter of 2022 was 12, 2% compared to 15, 3% in the same period of 2021.

Adjusted EBITDA in the first quarter of 2022 was $506 2 million, representing an increase of 21, 9% from the same period of 2021.

EBITDA in the first quarter of 2022 excluded share based compensation expenses of $43 2 million adjusted.

Adjusted EBITDA margin in the first quarter of 2022 was 38% compared to 29, 9% in the same period of 2021.

Our net profit attributable to ordinary shareholders in the first quarter of 2022 was $97 million compared to a net loss of $84 7 million in the same period of 2021.

Basic and diluted profit was zero.

<unk>, one <unk> 0.03 per ordinary share, respectively, and zero point fixed and 0.18 per <unk>, respectively.

Jade, Yes 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 March 31, 2022 was $3 36 billion.

While net cash generated from operating activities in the first quarter of 2022 was $482 6 million compared to $274 5 million in the same period of 2021.

Our capex in the first quarter of 2022 was $1 billion.

Looking ahead, we remain committed to investing in our core capabilities to advance our two core growth strategy.

Brought in the spectrum of our services.

Increased customer diversification and further tap into the long term potential of digital economy development in China.

Moving to outlook for the full year of 2022, our outlook remains unchanged from the previously provided estimates.

We anticipate net revenues to be in the range of 7000 $450 million to 7000 $750 million.

Adjusted EBITDA to be in the range of 1970 $5 million to 2000 and $125 million.

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

This concludes our prepared remarks for today operator, we are now ready to take questions. Thank you.

Thank you.

I will begin the question and answer session.

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

Withdraw your question. Please press the pound key.

Our first question will come from Yang Liu Morgan Stanley . Please go ahead.

Okay.

Thanks for the opportunity.

Question.

Two major questions here. The first one is on the Covid impact.

Could management to update us in terms of what percentage of your data centers.

<unk>.

The lockdown issue.

<unk>.

In terms of the second quarter moving should we expect.

Even lower the first quarter, given both Shanghai and Beijing.

And then maybe also known for as well.

And also for the new capacity construction, whether the.

Locked down.

Delay the new capacity delivery.

Of course, whether that will bring some capex savings this year.

So that is the overall impact.

Question.

Colby impact question.

And the second one is on demand.

<unk>.

We saw a new line in the disclosure that is utilized.

Cabinet.

And I think that is.

Pretty important.

Metric market is.

Monitoring.

Management.

<unk> what is the number at the end of last year.

The expected growth or do you expect to increase for the full year 2022.

Just on current demand profile.

Got you.

Thank you Jan this is Samuel let me take the first part of.

The question that you had with regard to the.

Lockdown impact.

First of all that locked out and also related travel restrictions.

That were imposed in Shanghai and recently in Beijing, and also several cities in Hubei Province definitely impact.

Some of our customers moving rates and our progress with respect to the construction of.

Some of the new projects.

And separately, we're also seeing some of the industry.

<unk> auto.

Basically there are slowing down their plant expansion due to their supply chain issues.

That being said, we will continue monitoring the situation working with customers and partners.

And figure out a way a puppy measures to mitigate potential risks.

For the business operation.

And also based upon what we have seen so far and our assumption and wait to see.

Stages, four cities to incrementally loosen restriction business and individuals.

Like what we have seen in Shanghai.

We'll hope to see.

In months.

Is going to getting better and so we expect our Q2 revenue probably is going to probably going to grow mid teens year over year and EBITDA and also.

To grow low single digits, maybe year over year, but having said that we're going to do every single.

Every single team possible.

To accelerate once the situation is getting better.

Tim do you want to.

And any comments you have.

Yes sure.

Let me also talk about the the point about the whole capacity of delivery.

And our original plans the deliveries were in the back end of the year.

So I think that once the control measures.

Our east.

We will do our very best to have the construction.

So I would catch up.

And then again the original plan was to have it in the second half of the year are back ended so I think there is at least a greater chance for that to then take place.

For that.

The second I guess.

Part of the question young.

<unk> had questions about the number of cabinets.

And so at the end of.

2021% of fourth quarter.

We're.

Around just over 41000.

But it's actually 41 seven.

Cabinets.

And so you can sort of calculate to obviously the quarter on quarter increase in number of cabinets.

As to the full year.

We can sort of speak a little bit more but at this point as you can appreciate.

We are still in the middle of the slow ramp up due to the COVID-19 measures that the semi which is talking about so at this moment.

There are probably three or four different scenarios there are going through our heads in terms of when that eases. Obviously, there is going to be pent up.

Ramp up demand.

But there's also then the physical constraints.

How quickly people are going to ramp up so I would say we remain optimistic in terms of the full year ramp up.

Just on the basis that we've seen that when customers need to ramp up quickly.

We're able to accommodate those requests.

And make sure that it can happen.

So I think that it really now as a matter of call on how long some of these measures will be in place and the Shanghai Beijing area.

Yes.

Okay. Thank you.

Our next question will come from Edison Lee at Jefferies. Please go ahead.

Alright, thank you.

Hi, Tim.

Jim.

I have two questions number one is more on the financial side. So why did the <unk> 22 revenue lower than $14 21.

Imagine that you may have to do with the cloud business or the VPN business could you elaborate a little bit more on that.

And then on <unk>.

Because we are already at the end of May so for <unk>.

I think you commented that maybe it will be worse than <unk>. So.

It doesn't mean that you remain very confident that second half because we'll be able to catch up.

And what does that catch up is realistic based on your assessment right now and the last question is on <unk>.

The healer.

Carbonization Ofer because the company has not made any official comments on it. So is it possible for you to share some of the.

Color and maybe what has.

And thinking about in terms of that proposition offer. Thank you.

Sure thing, let me take a crack at that.

I'll have a samuel add additional color as well.

With regards to the revenue side.

We do have a situation in the fourth quarter compared to first quarter.

Where there is.

One off.

Events in the fourth quarter and typically you have a lot of annual events on the E Commerce site that lead to increased revenues.

From those customers and their requirements.

And that doesn't repeat in first quarter and so that is sort of the primary driver.

That difference.

In terms of looking at second quarter and the ability.

For the customers to ramp up.

I would say that.

The.

Headwinds remain.

But if you look at not just second quarter were two thirds through second quarter right now.

Do see that their customers are ramping up still.

And so we now also have a much better gauge obviously as it go through the year similar to what I was answering a young earlier on which is that.

First half.

We have good visibility.

It really is going to be second half on how quickly the measures are east so that there's pent up demand can take place.

Last question in terms of the offer.

At the moment again.

<unk> told the market, we would have updates.

When it's a.

Appropriate and right now there has not been any decisions taken by the board.

That we are able to disclose to the market. So.

We will provide updates as and when appropriate but nothing further from what we've already released to the market.

Semi only thing I would add to that.

Pardon me.

The only a few things to add on top of what team just mention about <unk>.

<unk>.

Last year, we acquired a company call <unk> cost, which is called native type of company, providing the solution and platforms.

To the enterprise customers.

There are patients also have the seasonality tends to be.

The second half is more heavier.

To deliver and so.

Aside the one off.

The project due to.

The retail type of.

Online retail type of business driven we also have some other business tend to be more bottom happy.

That's right.

That's the additional color.

Okay can I quickly follow up on the privatization offer so.

I understand.

Just discussing that so can you share a little bit more color as to what are the board is looking for more information from.

Peter.

Or the board is considering.

Alternatives or the board is actually discussing with the beta.

Are there any more color that you can share.

There is no additional color we can offer at this moment Edison, but again when there is something that we can disclose we will do so to the market properly.

Okay. That's great. Thank you.

Our next question comes from Hamzah <unk> from CIC. Please go ahead.

Hi management.

I have two questions.

First one is about the people.

Recently.

<unk>.

I also participated.

I'm curious about.

I'll, let Jack typically.

Thank God.

That's our business.

And the second question is on <unk>.

<unk>.

Ratio okay.

In the third quarter.

In Q2.

About 4% so.

Could management share.

Your current R&D.

Yes.

How about if I take the first one and then you can cover the <unk>.

Second question on CIT.

Yes.

Sure no problem at all.

In terms of the <unk>.

The partnership with the people cloud it is true that we just signed.

An exclusive strategic partnership.

The agreement with people data.

For those of you probably know the people deals better than people data people data is actually a subsidiary of People's Daily online.

David is online.

Irritated media platform in China. They are one of the leading.

Authoritatively medium platforms.

So under the agreement.

As an exclusive partner.

Net which only bill.

Build and operate people cloud.

People data it trying to targeting the people cloud as the cloud platform to uphold its role in serving local government and Soe customers' needs.

For their specific cloud computing.

So in that regard.

As I said earlier, we will provide a full stack all around services all the way from the co location.

Interconnectivity.

Bare metal services cloud platforms called.

Cloud native workloads.

And some other industry specific solutions on top of that.

Because what happened is.

Most of you probably know the China one of the latest countries.

Capacity, new omnibus privacy law.

Secondly from November 1st of last year.

The personal information protection law.

Okay.

Al.

As China's first comprehensive law designed to evacuate online data and protect personal information.

And in <unk>.

People data.

As the agenda in a way to making sure. They can provide a dedicated cloud platform in a way that to honor the IPL and to serve the Stifel enterprise customers and solid support.

The partnership is still in the very early stage. So two parties working together figure now the product roadmap and so forth.

That being said I think it's a good indicator.

To demonstrate or to showcase our government relationship.

Our ability to partner with one of the leading.

States are enterprise.

So hopefully that gives some of the others, but happy to report the progress.

When the time comps.

Okay. Thank you. So let me take the question on the R&D costs. So I think you had sort of a question around what is the investment focused on or around.

And this links back to what was in our press release, but also what Samuel mentioned in his part of the presentation earlier on which is about new products New solutions. So the USD one into productivity solution would be one of them.

And these are the products that we offer mainly through to our retail and enterprise customers.

Whether or not the R&D will stay at these levels I would say, yes, but.

Part of it is actually a re categorization of some of the costs were in other departments, which now we've now re categorized as R&D.

So overall.

We're not going up but rather a characterization in terms of what we're now looking at R&D.

I think hopefully that answers the questions you had.

Clear thank you.

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

Yes. Thank you management team. My first question is still second half outlook.

If I heard you right second quarter second quarter commentary suggests only 5% sequential growth and if you want to achieve the full year guidance.

Probably need more than 25% half on half growth and comp I understand there should be some seasonality in second half.

I look at the historical trend, it's just like.

Mid to high teens.

With all the macro headwinds.

On enterprise spending slowdown.

That's why we are so bullish in the second half demand outlook is there any leading indicators such as new booking or could you share any feedback on the sea.

On your thing.

Discussion with the new customer.

And my second question is you mentioned a lot of new wholesale customer wins since first quarter.

In last quarter.

<unk> <unk> Hudson moving rate outlook for the new customer and is there any pricing difference between the new orders and the existing one.

Thank you.

All right, let me take the first part of that and I guess, Samuel if you want to jump in as well.

In terms of the second half or if your second quarter, and then leading into the second half again, I think if youre looking for the leading indicators I mean, we do have.

Feedback from our customers desire to ramp up and really the constraint right now are the measures that have been put in place by the government.

Don't allow them to actually ramp up and move into the data centers. So so I think that pent up demand again, we've seen a number of our customers in a very very short period of time ramp up to very high numbers.

And so we are quite confident that if and when these measures are eased.

These customers will be able to ramp up quite quickly.

And perhaps even ahead of what we had sort of predicted this happened last year as well.

But again.

It will depend on these measures now look if these measures continue on indefinitely. Then obviously, we'll look to see what that means in terms of third quarter fourth quarter, and obviously then the full year.

Your second question I guess was on the new Mou's sorry, you are asking.

What was the progress or.

Is there any pricing difference.

Or moving rate difference between the new owners and the existing one.

Nope.

They are actually more mirrored to our existing contracts with these customers.

So.

No slower.

And then pricing is generally the same.

Okay.

Understood.

And another follow up question.

Moving rate I understand they are probably some constrain in Shanghai and Beijing.

Did you see any saturation moving rating other region, because customer may be afraid of potential lockdown.

<unk> do you have any color on that.

Yes.

If I, if I look back I would say.

The Shanghai region locked down.

It does have impact.

The customers moving rates.

That being said.

As I stated earlier.

The lockdown and travel restrictions.

Do create some of the impact I would say negative impact, but that's not going to be a.

Long term.

Today, when we look at the West region.

Data center that we have for example, Chongqing Xi'an areas.

Not seen.

That type of impact as a matter of fact.

While the COVID-19 created a lot of headwinds.

From a customer point of view.

They are digital transformation has been accelerated.

And so thats the reason.

We are cautiously.

I'd say optimistic.

If we come.

I mean, the whole country.

Having the dynamic coffee zero policy and then.

And then we want to make sure the major city.

To keep the societal Colby.

I think the situation will be getting better probably going to be impacted by a month and two months, but right. After that is going to be accelerated.

And then we had.

Even though.

People in Beijing, and we are working from home, but I do have a regular conversation with the customers the key customers and based upon the conversation I had with the customers and also the impact coming from our sales channel.

Customers do want to accelerate.

Once the lockdowns over so.

I'd say first of all.

Keep the.

The country's agenda at a top priority, but Nokia is going to change after that so it's going to be a impact is going to be like a hiccup.

For a given period of time, but overall still pretty positive in my opinion.

Thank you.

Okay.

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

Okay.

Hi management. Thank you for taking my question. My first question is on wholesale demand.

Yes, a follow up question.

We are seeing some slowdown in the cloud business.

And in traditional wholesale customers.

One you recently reported.

So my question is how should we expect this to impact kind of wholesale outlook, particularly in the second half.

Host the Covid impact that's right.

Number one question My second question is.

On.

The.

Potential pricing or margin impact as we have seen over the last two quarters, we have seen.

It is or government related customers.

Uh huh.

New take on and so with this impact any of our margin profiles. So thank you.

Okay.

This is sammy happy too.

If you take all of your questions and welcome to chime in.

With the additional colors.

I think.

For the wholesale segment point of view, but in the past that we tend to focus on core service providers big name Internet companies, especially for those.

Video type of.

Internet Giants are required.

Data centers to store data and so on.

So for us so a lot of times the analysts might be worried about is governed really support.

Internet sectors.

No.

So let me kind of do a very quick spin on that one I think in general the Chinese government is very supportive of the internet sectors.

Given the fact that the sector is innovation.

That has contributed to the growth of the country's economy in the past 20 years.

Yet it is equally important to note the regulatory risk.

Step up recently, probably in the past.

Tough months for some of the Internet verticals.

As you can see some of the antitrust law, Unlike gaming impact livestream and impact social media services or even for the profit making in off campus tutoring.

Therefore, we have to stay agile to cope with the government policy, while partnering with our customers to plan for their business grows accordingly.

There are definitely some headwinds, but also <unk>.

<unk>.

In terms of the.

Pricing or pricing pressure pricing competition.

That that you asked about.

We're not seeing a material difference.

From what we have seen in the past quarter.

That being said because of the COVID-19 or the pandemic.

Great.

Thats the impact to <unk>.

Most of the verticals.

Local life entertainment or even for the online retail therefore, it is prudent to assume customers would be more cost sensitive moving forward.

Given the market conditions.

So that being said in short we're not seen a material impact.

But we have the empathy.

To understand the customers could be cost sensitive.

So hopefully that addresses your question not sure where the team you have additional color you want to add.

Not for that part.

The second question you had a question about margin impact on state unquote.

Yes, that's correct. So just wondering if in terms of the contract terms.

To.

Private wholesale kind of orders or would that be meaningfully different than how would that.

Potentially impact our long term.

I think it's probably still still early I mean, we're just getting our first orders now to sort of see if there is an overall trend.

But SME was explaining earlier on about the partnership that we have with People's cloud.

These customers are likely going to engage us across.

A range of the services that we offer one of the products.

So I don't expect at the moment for there to be a sort of material margin.

Impact I think they are like other customers that they have requirements and those requirements will be priced accordingly.

So I hope that helps okay. Thank you that's very clear thank you.

Yes.

Sure.

Our next question will come from Sara Wang UBS. Please go ahead.

Hi, Thank you for the opportunity to ask a question. So I have two questions for you on demand just a quick follow up on the previous questions on demand. So is it not to say that on the wholesale side, we are seeing.

Seeing all of that is from the Internet sector, and then how about the retail side do we see any change in the BARDA.

BARDA telecom farmer customer mix.

Certain industries might grow faster than the other.

We'll meet and.

Talk about others.

And then second question is on the comp.

No.

Why.

People data choose <unk> over others that party additive providers or I saw your telecom IDC services.

Thank you.

Okay.

Thank you Sarah for the question.

So first of all from the retail momentum.

If you look at the first quarter this year, our top five verticals remained the same.

Still going to be IP services financial services.

Carriers local life entertainment.

And so forth so nothing.

Particularly changed.

And also from the momentum point of view, we're seeing a pretty strong year over year double digits, that's for sure whether or not we have.

The pocket resources.

To meet the customers' demand. That's why question. The second thing is we're seeing more and more customers.

Looking for.

The full stack services, so other than a colocation.

That's a very typical enterprise.

I would say a mentality.

Wanted to find a single throat to choke, so making sure they can partner with.

Credible partner, who is a long term player has the credential.

And be able to support their needs.

The recent lockdown is.

It's a very good showcase because even though we were impacted by the lockdown in Shanghai area. We're talking about two months and our engineers for example, O&M services are taking much lack.

Locked and the data center.

A little over two months and we're making sure nothing.

Stop.

Our services and support.

The customer point of view even receive.

Customers feedback and appreciation and so and so forth.

That's a.

Great.

Ammonia.

No.

A reason for that.

On.

And so so from a retail point of view I think.

That's a very very good that's a very good thing a good momentum, which as opposed to kind of keep it up.

Your second question, it's about the people data.

We can tell in the.

Industry.

In China, probably unlike the rest of the world well dedicate cloud plausibly, you're going to be the main stream.

And his team because.

From a public health point of view or from a private cloud point of view.

Have their advantages, but also disadvantages.

We call them players, but typically it's the advantages would be the dynamic cost.

Customer have less technical control.

Customers can only have limited customization.

From a practical point of view the customer can do have very obvious disadvantages such as higher cost.

Limited access for their mobile users.

Can't keep up with.

Predictable demand.

So for us.

In China, what happened is because it's a highly regulated.

The economy and so there is new policy new regulation.

And today people, even pay extra attention on the data sovereignty and data privacy.

Therefore it.

That's why we believe because given the track record given the full stack services capabilities.

<unk> data.

Went through there.

Ah study.

Due diligence.

And finally pick up.

The net at their exclusive partners.

So so for that work were pretty honored.

Have the opportunity to partner with them, but that is that.

It is still early stage.

And then so.

Nope.

Hopefully, we'll see some great progress and then at that point of time happy to share with all of the topic.

Got it thank you.

Thank you.

Our next question comes from Ethan Zhang Nomura. Please go ahead.

Good morning Timna.

Two questions. The first one is regarding the margin trend I saw that the first quarter adjusted EBITDA margin was improved by around four percentage points.

Compared to <unk>.

Just wonder what's the main driver behind this.

What's the margin for the second quarter and second half is it only the current.

Please go back to Lockdown in China and second one the follow on question on the Tivo cloud just longer.

I understand that what we provide with the private or hybrid cloud.

Yes, so your customer.

Comparison compared comparison between our on.

The pubic cloud in our.

Retail and wholesale customers for example, the contract size the price level, that's what the budget. Thank you.

Let me take the first question and see if <unk> has any follow on.

Answers to the People's cloud.

<unk> in terms of the first quarter margins.

If you look at the breakdowns that we provided in the press release earnings release.

Mainly it's driven by cost control as well as obviously the top line was not as high.

And so that those two things combined resulted in a higher.

Higher margin.

Going forward, we're looking at the full year I would say that.

Looking at the full year margins that we had expected.

There will be some cost.

You've sort of pointed out in relation to the.

<unk> locked down.

Our personal incremental costs that were unexpected to be factored in but also we would expect again the topline revenues to also then start to ramp up once the customer is actually into the data centers. So there will be a combination of both.

Yes, I would say that the margins are probably a little bit higher.

Just driven by those two factors that we talked about earlier on.

Sam you want to see if there's any other color you want to give.

In terms of the people thought.

Sure.

Other than what I.

Stated earlier I think at two other two other key points.

Could possibly reiterate number one is think about.

Hybrid and multi cloud.

In China. Unlike the rest of the World I think that's that's.

One of the key messages the second one would be it's.

Great endorsement for that if it cloud.

Mentioned earlier address the previous question.

Regarding the advantages and disadvantages for.

Do you have to compare among the public cloud private cloud and also dedicate cloud I think.

The partnership that we have with people, whose data is a great endorsement for the delicate clouds importance here in China.

Thank you.

Yeah.

Our next question comes from Golan Guang.

Please go ahead.

Central management, it's a score from.

From <unk> capital markets.

So.

My first question.

Guarding your pipeline I think there is no material change.

And the pipeline.

Compared to last quarter or so.

That's not a lender.

Hmm.

Right.

So, but we also created a low end of the rents which are approximately 13 opponents.

So depending on your current market demand dynamics.

Sure.

Do we have any kpis, such as green commitment the rates up.

In deciding what is the capacity to inject depending on the real situation in the second half.

That's my first question again, and those 10 point is our customer diversification.

About two questions regarding the people people data, which is a subsidiary of people DNA. So.

I think what we have achieved that.

It doesn't progress in Internet finance sector.

We are talking about a lot about the new energy and other tax charge to shop with.

We now have more color about.

Product sounds a penetration strategy into at Oes and other in the.

Future upsides.

<unk> 19 impact from Internet in the near term. Thanks, so much.

Yes.

I'll try I'll, let me take a crack at the pipeline question and then leave the second customer went to use Samuel.

Sorry go ahead in terms of the first question on pipeline I guess, you're asking youre looking at the sort of the pipeline seems theres been no changes.

Again, we talked about the sort of construction progress of these projects. They are back ended in our original plan.

There are delays so we'll have to see how much the teams engineering teams can catch up.

But as of now we're still being told that they will be able to complete as per plan within this year and so that's the.

The reason for the number.

There is a range that we've provided in that range is really twofold, one is dependent on the.

Construction progress, but also there are projects that were.

Given customer feedback on when they can ramp up.

And on the demand side.

Those are some of the projects, where we may actually push into 2023 and so that's why you have that range in the first place. So we will continue to closely monitor and as we progress into each quarter. We will update when we have more visibility on whether or not things will from a construction point of view or from a customer demand point of view shifted.

'twenty three or not.

Okay.

Second question you asked about the people it's data and you also talk about the state owned enterprise. So if I understand your question correctly.

What happened in the past I would say 80 20, 80% of the net revenue coming from the key sectors like <unk> services financial services carrier local live entertainment.

This type of industry of course, including traditional enterprises as well.

What happened to pass the government institution.

<unk>.

What is not.

On top of our list.

That being said last year, we acquired <unk> cloud one of the leading cloud native platform here in China, and then created a lot of the synergies because takeout.

Major customers happen to be the financial services industry.

Also provide.

Technical support for some of this gateway enterprise.

So the partnership that we have with people data, which is one of them.

Subsidiary of peoples peoples Daily People's Daily online.

<unk>.

They are major customers happened to be the case or enterprise and so it's a great leverage all the data from the from the customer point of view.

And also a good synergy from a technical standpoint of view because.

What happened in the past if you look at the all the public cloud service providers. They are offering their offerings tend to be January .

Generic.

For certain verticals.

There <unk>.

Services workload scenarios.

Tend to be on laser beam focus.

Which is a great workloads on top of the cloud native platforms.

So I think from <unk>.

Customer touch point and also from a technical synergy point of view.

It is a great partnership with definitely looking forward.

To having some of the positive impact.

Moving down the road.

Like I said before I'm happy to.

No update.

Once we have a good progress and hitting the milestones.

Okay got it.

Thank you, ladies and gentlemen that does conclude our conference for today. Thank you for participating you.

You may now disconnect your lines.

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Hello, Ladies and gentlemen, thank you for standing by for the first quarter 2022 earnings Conference call.

<unk> Group, Inc.

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

After the management's prepared remarks, there'll be a question and answer session.

From a management will include Mr. Samuel Chen Chief Executive Officer, and executive Chairman of retail IDC.

Mr. Tim Chen Chief Financial Officer, and his genuine Liu Investor Relations director of the company.

Note that todays conference call is being recorded.

I'd now like to turn the conference over to the first speaker today Miss seeing you on Liu. Please go ahead. Thank you operator, Hello, everyone and welcome to our first quarter 2022 earnings Conference call.

Our earnings release was distributed earlier today and you can find a copy of upside as well as unused wire 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 Act of 90 95.

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 obligations to update any forward looking statements except as required.

Falloff.

Please also note that VNS.

<unk> earnings press release, and this conference call include that disclosure.

GAAP financial measures as well as audited non-GAAP financial measures <unk> earnings press release contains a reconciliation of the unaudited non-GAAP financial measures to the related GAAP measures.

As a reminder, this conference is being recorded in addition, a webcast of this conference call will also be available on our site.

I don't mean that dot com.

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

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

Thank you for joining our first quarter 2022 earnings conference call.

As we continue executing our dual core growth strategy.

To grow our reach in retail and wholesale IDC market. We are pleased to report another solid quarter amid a complex macro environment.

From a performance standpoint, we got off to a solid start in fiscal 2022.

Neighboring healthy operational and financial growth in the first quarter.

Total cabinets under management increased to approximately 79000 compared with approximately 56000 at the end of first quarter of last year.

<unk> utilized by customers increased to approximately 43000 compared with approximately 33500 in a comparable period last year.

Our retail MMR per cabinet grew to RMB 9236, first quarter compared with RMB 9144 in the same period of 2021.

For the first quarter, our revenue grew 18, 6% year over year and adjusted EBITDA grew 21, 9% year over year, both in line with our expectations.

The phenomenal rise of the digital economy, and a favorable policy landscape.

As well as our proven ability to execute our strategy have all continued to bolster our business momentum across each of our business segments.

The most recent meeting of the Central financial and Economic Affairs Commission held last month.

China's central government extended the National initiative to further modernize infrastructure across information technology logistics and other industries.

Aiming to deploy a considerable number of next generation it in facilities, which includes supercomputers cloud AI platforms and broadband backbone networks.

As one of the service providers to support this major initiative, we are well positioned to benefit from the fast growing demand in a more favorable and healthier regulatory environment.

For efficient and effective approach.

Before I discuss our business segments in more details I'd like to speak about the COVID-19 resurgence in certain key locations and its impact on our operations.

A lockdown and related travel restrictions that were imposed in Shanghai, Beijing and several cities in Hubei province have impacted some of our customers moving rates and our progress with respect to the construction of some of our new projects in these areas.

Our datacenters in the affected areas have continued to operate rapidly throughout the lockdowns and we truly appreciate each of our onsite employees efforts to keep things running smoothly.

We will continue to closely monitor pandemic developments and together with our partners.

Measures to mitigate risk for our operations.

Now, let's look at our first quarter performance and latest development of our wholesale business.

As digitalization is taking place across sectors and geographies more TNT customers.

Especially internet players cloud service providers in accurately expander actress to enhance their data processing and storage capacities to keep up with frontier technology change and gain competitive edges.

Our compelling value proposition rooted in extensive industry knowhow in depth resource capabilities and well seasoned operation teams.

Continually enhance the appeal of our wholesale service offerings, two leading technology players.

During the first quarter, we signed up for contract generating a total of approximately 60 megawatts in capacity.

Including an extended pre committed order up approximately 11 megawatts from a leading social platform operator and three.

Others under multiyear contracts with two existing customers and one stayed on cloud service providers in China southwestern region.

We continue to see the increase in demand from our wholesale business and we're quite optimistic about our future prospects in this segment.

Moving onto our retail business in the first quarter, our ongoing efforts to advance our value added service offerings.

Steady growth in orders from both existing and new customers reaffirming the effectiveness of our strategy and a quick increasing efficiency of our execution.

New customer expansion was primarily driven by growing demand from the financial services E Commerce automotive and energy sectors.

So as we continually enhance our service capabilities and enrich our one stop service offerings, a large number of existing customers, including Internet player cost service providers Cross border E Commerce player financial service providers and local service online marketplaces continue to extend or upgrade their contract to procure.

Additional value added services spanning a wide spectrum of areas from Interconnectivity bare metal services in hybrid multi cloud solutions. In addition to Colocation services.

Technological innovation is a crucial driver for the business development of our digital services.

We just launched a new in house developed Interconnectivity solutions that aims to provide all in one enterprise connection services.

Our innovative SD Wan technology and backbone network.

It also includes an array of cutting edge features catering to different platforms and hybrid access networks to enable application aware intelligent routing and then worldwide visualization.

Leading digital transformation initiatives.

This new product launches.

So represent our powerful engineering capabilities to enrich our service portfolios deliver additional value to customers and diversify our revenue streams.

In addition to serving corporate customers across various verticals, we continue to explore opportunities to partner with more states on enterprises by leveraging our aptitude for technology and healthy covenant relationship.

Recently.

We signed an inclusive exclusive partnership agreement with people data a superior People's Daily online and authoritative media platform in China.

Under the agreement as.

As the exclusive partner Vienna will jointly build and operate people cloud the cloud platform of people data.

<unk> its role in serving local government and Soe customers' needs for cloud computing.

In this regard we will provide all around services, including Colocation Interconnectivity cloud platform cloud native workloads and industry specific cloud solutions.

On the Blue cloud business front.

We have been actively exploring business opportunities in different vertical industries.

Leveraging our season cloud service operation expertise and through data long exclusive partnership with Microsoft.

More encouragingly in Q1, 2002, we began to offer operations and maintenance services to.

To support the digital business system.

One in power one of China's largest electric power companies, we will deliver first class 24 by seven O&M services across a wide range of core business systems as well as secure a high availability architecture for relevant business continuity.

The initial feedback we have received from our customers has been remarkable.

This system performance enhancement in.

<unk> the overall operating efficiency, our customers overall business management capabilities also grows stronger.

Which in turn send that they are competitive advantages.

We expect to further expand our industry specific solutions for other sectors.

Last but not least I'd like to reiterate that.

In the highly dynamic market in which we operate are holding long term commitments and responsibilities to our industry environment and society is central to our ongoing success.

As our industry shift towards Green datacenter operations and the world becomes.

The work comp to embrace sustainable Enterprise management, we are committed to building BNET is a positive force for the betterment of society.

For more than two decades.

We have been committed to advancing a wide range of ESG initiatives within our stakeholder communities we serve.

Our 2021 ESG report published in April .

Showcases this initiatives and demonstrates our commitment to integrating sustainability into every aspect of our operations.

Some highlights include our carbon neutrality target by 2030.

Lower than industry average P E and the fact that we are the first data center service providers in China too.

We disclosed the third party verification of our carbon inventory results.

As a prominent domestic enterprise and the global industry player. We will continue to lead by example in this aspect.

Looking ahead.

We'll remain dedicated to utilizing our core expenses, while continue to focus on our growth strategy, we expect to capture greater opportunities and fulfill more growing digital demand.

Wide range in verticals.

As the digital transformation progresses.

Thank you everyone wished.

With that I will now turn the call over to our CFO , Tim to discuss our financial performance for the quarter and our business outlook.

Dan.

Thank you very much Samuel good morning, and good evening everyone.

Before we start the detailed discussion of our financials. Please note that we will present non-GAAP measures today.

Our non-GAAP results exclude certain noncash expenses, which.

Which are not part of our core operations.

The details of these expenses maybe found in the reconciliation tables included in the earnings press release.

Please also note that unless otherwise stated.

All the financials, we present today are for the first quarter of 2022 in renminbi terms.

First we're pleased to have achieved solid results on our top line and adjusted EBITDA in the first quarter in.

In line with our expectations. The sequential decrease in revenue was mainly due to seasonality given that the first quarter is typically not a strong period for business because of Chinese new year.

In addition, our move in rate was also impacted by Lockdowns.

Our robust financial performance against the backdrop of macro fluctuation.

<unk> our continued efforts to further expand our service offerings, diversifying our customer base and invest in our core capabilities.

Next let me walk you through our first quarter financial results.

Unless otherwise specified the growth rates I will be reviewing are all on a year over year basis.

In the first quarter, our net revenue increased by 18, 6% to $1 $65 billion from the same period last year, mainly due to the increased customer demand for highly scalable carrier and cloud neutral ADC solutions from both wholesale and retail IDC customers as well as the continued growth of our cloud business.

Gross profit was $355 5 million in the first quarter of 2022, representing an increase of 10% from the same period of 2021.

Gross margin was 21, 6% in the first quarter of 2022 compared to 23 three in the same period of 2021.

Adjusted cash gross margin in the first quarter of 2022 was 41, 6%.

As compared to 43, 6% in the same period of 2021.

Adjusted operating expenses, which excludes share based compensation expenses and compensation for both companies <unk> employment and an acquisition was $208 million in the first quarter of 2022.

Representing a decrease of five 5% from the same period of 2021.

As a percentage of net revenues adjusted operating expenses in the first quarter of 2022 was 12, 2% compared to 15, 3% in the same period of 2021.

Adjusted EBITDA in the first quarter of 2022 was $506 2 million, representing an increase of 21, 9% from the same period of 2021.

Adjusted EBITDA in the first quarter of 2022 excluded share based compensation expenses of $43 2 million.

The EBITDA margin in the first quarter of 2022 was 38% compared to 29, 9% in the same period of 2021.

Our net profit attributable to ordinary shareholders in the first quarter of 2022 was $90 7 million compared to a net loss of $84 7 million in the same period of 2021.

And diluted profit was zero, one and 0.03 per ordinary share, respectively, and 0.6 and 0.18 per <unk> respectively.

Each ats 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 March 31st 2022 was $3 36 billion.

Meanwhile, net cash generated from operating activities in the first quarter of 2022 was $482 6 million compared to $274 5 million in the same period of 2021.

Our capex in the first quarter of 2022 was $1 billion.

Okay.

Looking ahead, we remain committed to investing in our core capabilities to advance our two core growth strategy.

What in the spectrum of our services.

Increased customer diversification and further tap into the long term potential of digital economy development in China.

Moving to outlook for the full year of 2022, our outlook remains unchanged from the previously provided estimates.

We anticipate net revenues to be in the range of 7000 $450 million to 7000 $750 million.

And adjusted EBITDA to be in the range of 1970 5 million to 2000 and $125 million.

This concludes our prepared remarks for today.

Operator, we are now ready to take questions. Thank you.

Thank you we will 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 key.

Our first question will come from Yang Liu Morgan Stanley . Please go ahead.

Okay.

Thanks for the opportunity.

Question.

Two major question here.

First one is on the Covid impact.

<unk>.

Could management to update us in terms of the what percentage of your data centers.

<unk>.

The lockdown issue.

<unk>.

In terms of the second quarter moving should we expect.

Even lower the first quarter Kevin.

Shanghai and Beijing.

Maybe also lung front as well.

And also for the new capacity construction, whether the.

Lockdown will delay the new capacity delivery.

Of course, whether that will bring some capex savings this year.

So that is overall.

<unk>.

Question.

Covid impact question.

And the second one is on.

Demand.

<unk>.

We saw a new line in the disclosure that is utilized.

Right.

And I think that is.

Pretty important.

Metric market as.

Good morning.

Can management.

Disclose what is the number at the end of <unk>.

Last year.

Is that expected growth or you expect to increase for the full year of 2022.

Based on current demand profile.

Thank you.

Okay.

Thank you Jan Mr. Samuel Let me take the first part of the <unk>.

Question that you had with regard to the.

Lockdown impact.

First of all the Lockdowns.

And also related travel restrictions that were imposed in Shanghai and recently in Beijing and also several cities in Hubei Province definitely impact.

Some of our customers moving rates and our progress with respect to the construction of.

Some of the new projects.

And separately, we're also seeing some of the industry.

Auto.

Basically there are slowing down their plant expansion due to their supply chain issues.

That being said, we will continue monitoring the situation and working with customers and partners.

And figure out a way of pumping measures to mitigate potential risks.

Florida business operation.

And also based upon what we have seen so far and our assumption and wait to see.

Stages, four cities to incrementally loosen restriction business and individuals.

What we have seen in Shanghai.

We'll hope to see.

In months.

Is going to getting better and so we expect our Q2 revenue pop is going to probably going to grow mid teens year over year and EBITDA and also.

To grow low single digits, maybe year over year, but having said that we're going to do every single.

Every single team possible.

To accelerate once the situation is getting better.

Tim do you want to.

And any comments you have.

Yes sure.

Let me also talk about the the point about the whole capacity delivery.

In our original plans the deliveries were in the back end of the year.

So I think that once the control measures.

Our east.

We will do our very best to have the construction.

On slide catch up.

And then again the original plan was to have it in the second half of the year are back ended so I think there is at least a greater chance for that to then take place.

For that.

The second part.

Part of the question.

<unk> had questions about the number of cabinets.

And so at the end of two.

<unk>, 2021% of fourth quarter.

We're.

Around just over 41000.

Cabinets actually 41, 7%.

Cabinets.

And so you can sort of calculate obviously the quarter on quarter increase in number of cabinets.

As to the full year.

We can sort of speak a little bit more but at this point as you can appreciate.

We are still in the middle of the slow ramp up due to the COVID-19 measures that the semi which is talking about so at this moment.

There are probably three or four different scenarios there are going through our heads in terms of when that eases. Obviously, there is going to be pent up.

Ramp up demand.

There's also then the physical constraints.

How quickly people are going to ramp up so I would say, we remain sort of optimistic in terms of the full year ramp up.

Just on the basis that we've seen that when customers need to ramp up quickly.

We're able to accommodate those requests.

And make sure that it can happen.

So I think that it really now as a matter of a call on how long some of these measures will be in place and the Shanghai Beijing area.

Okay. Thank you.

Yeah.

Our next question will come from Edison Lee at Jefferies. Please go ahead.

Alright, thank you.

Hi, Sam.

Tim.

I have two questions number one is more on the financial side. So why did the <unk> 22 revenue lower than 421, because you mentioned that you may have to do with the cloud business or the VPN business could you elaborate a little bit more on that.

And then on <unk>.

Because we are already at the end of May so for <unk>.

I think you commented that maybe it will get worse in <unk>. So.

It doesn't mean that you remain very confident that second half because we'll be able to catch up.

And where does that catch up.

Is realistic based on your assessment right now and the last question is on <unk>.

The handler.

Carbonization Ofer because the company has not made any official comments on it. So is it possible for you to share some of the color and maybe what has.

And thinking about in terms of that proposition offer. Thank you.

Sure thing, let me take a proof bracket.

I'll have Samuel add additional color as well.

With regards to the revenue side.

We do have a situation in the fourth quarter compared to first quarter.

Where there is.

One off.

Events in the fourth quarter and typically you have a lot of annual events on the E Commerce site that lead to an <unk>.

Increased revenues.

From those customers and their requirements.

And that doesn't repeat in first quarter and so that is sort of the primary driver.

The difference.

In terms of looking at second quarter and the ability.

For the customers to ramp up.

I would say that.

The.

Headwinds remain.

But if you look at not just second quarter were two thirds through second quarter right now.

Do see that their customers are ramping up still.

And so we now also have a much better gauge obviously as it go through the year similar to what I was answering a young earlier on which is that.

First half.

We have good visibility.

It really is going to be second half on how quickly the measures are east. So that this pent up demand can take place.

Last question in terms of the offer.

Moment again, we've told the market we would have updates.

When it's appropriate and right now there has not been any decisions taken by the board.

We are able to disclose to the market so again.

We will provide updates as and when appropriate but nothing further from what we've already released to the market.

Semi only thing I'll add to that.

Pardon me.

The only a few things to add on top of what team just mention about <unk>.

<unk>.

Last year, we acquired a company call <unk> cost, which is called native type of company, providing the solution and platforms.

To the enterprise customers.

There are patients also have the seasonality we tend to be.

The second half is more heavier.

To deliver and so.

<unk> one off.

Yes.

Projects do too.

The retail type of.

Online retail type of business driven we also have some other business tend to be more bottom happy.

That's right.

As additional color.

Okay can I quickly follow up on the proper decision offer so.

Understand.

You're still discussing that so can you share a little bit more color as to what are the board is looking for more information from.

Peter.

Or the board is considering.

Alternative or the board is actually discussing with the bidder is there.

Any more color that you can share.

There is no additional color we can offer at this moment Edison, but again when there is something that we can disclose we will do so to the market properly.

Okay. That's great. Thank you.

Okay.

Our next question comes from Hamzah <unk> from CIC. Please go ahead.

Hi management.

I have two questions.

One is about the people crowd.

Recently.

Acquired loans.

So participated.

I'm curious about.

Jack typically.

I think.

That's our business.

And the second question is on the RMB.

<unk>.

<unk> ratio okay.

In the third quarter.

In Q2.

4% so.

Could management share.

All right.

That's it thank you.

How about if I take the first one and then you can cover the <unk>.

Second question on CIT has.

Sure Bill comes at them.

In terms of the the partnership with the people cloud.

It is true that we just signed.

An exclusive strategic partnership.

The agreement with people data.

For those of you probably know the People's daily better than people data people data is actually a subsidiary of People's Daily online.

David is online.

<unk> media platform in China. They are one of the leading.

Authoritatively meeting platforms.

So under the agreement.

As an exclusive partner.

Net which all of the.

Build and operate people cloud.

People data it trying to targeting the people cloud as the cloud platform to uphold its role in serving local government and Soe customers' needs.

For their specific cloud computing.

So in that regard.

As I said earlier, we will provide a full stack all around services all the way from the co location.

Interconnectivity.

Bare metal services cloud platforms called.

Cloud native workloads.

And some other industry specific solutions on top of that.

Because what happened is.

Most of you probably know the China one of the latest countries.

Capacity, new omnibus privacy law.

Secondly from November 1st of last year.

The personal information protection law.

Okay.

Al.

As China's first comprehensive law designed to evacuate unlike data and protect personal information.

And in <unk>.

<unk> data.

As the agenda in a way to making sure. They can provide a dedicate cloud platform in a way that to honor the PPL and to serve the Stifel enterprise customers and so forth.

The partnership is still in the very early stage. So two parties working together figure now the product roadmap and so forth.

That being said I think it's a good indicator.

To demonstrate or to showcase our government relationship and our ability to partner with one of the leading.

Based on our enterprise.

So hopefully that gives some of the colors are happy to report the progress.

When the time comps.

Okay. Thank you. So let me take the question on the R&D costs. So I think you had sort of a question around what is the investment focused on or around.

And these are the products that we offer mainly through to our retail and enterprise customers.

Whether or not the R&D will stay at these levels I would say, yes, but.

Part of it is actually a re categorization of some of the costs were in other departments, which now we've now re categorized as R&D.

So overall.

Ross.

We're not going up but rather a categorization in terms of what we're now looking at R&D.

So I think hopefully that answers the questions you had.

Thank you.

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

Yes, Thank you management.

First question is still about second half outlook, if I heard you right second quarter second quarter commentary suggests only 5% sequential growth in <unk>.

We want to achieve for the full year guidance.

Probably need more.

5% half on half growth and top.

I understand there should be some seasonality in second half, but if I look at the historical trend it's just like.

Mid to high teens.

So with all the macro headwinds.

Enterprise spending slowdown.

May I ask why we are so bullish in the second half demand outlook is there any leading indicators such as new bulking or could you share any feedback on the on your thing.

Discussion with the new customer.

And my second question is you mentioned a lot of new wholesale customer link seems percent quarter.

In last quarter.

And May I know, how its been moving rate outlook for the new customer and is there any pricing difference between the new orders and the existing one.

Thank you.

Albert Let me take the first part of that and I guess, Samuel if you want to jump in as well.

In terms of the second half or if your second quarter, and then leading into the second half again, I think if youre looking for the leading indicators I mean, we do have.

Feedback from our customers desire to ramp up and really the constraint right now are the measures that have been put in place by the government.

And so we are quite confident that if and when these measures are eased.

These customers will be able to ramp up quite quickly.

And perhaps even ahead of what we had sort of predicted this happened last year as well.

But again.

Your second question I guess was on the new Mou's sorry, you are asking.

What was the progress or.

Is there any pricing difference.

Or moving rate difference between the new orders and the existing one.

Nope.

They are actually more mirrored to our existing contracts with these customers.

So.

No slower.

And then pricing is generally the same.

Okay.

Understood.

And another.

Another follow up question.

Moving rate I understand they are probably some constrain in Shanghai and Beijing.

But did you see any.

Saturation moving rates in other region, because customer may be afraid of potential lockdown.

<unk> do you have any color on that.

Yes.

If I, if I look back I would say.

The Shanghai region locked down.

It does have impact.

The customers moving rates.

That being said.

As I stated earlier.

The lockdown and travel restrictions.

That do create some of the impact I would say negative impact.

But that's not going to be a.

Long term.

Today, when we look at the West region. The data center that we have for example, Chongqing Xi'an areas, we're not seeing.

That type of impact.

Matter of fact.

While the COVID-19 created a lot of headwinds.

From a customer point of view.

They are digital transformation has been accelerated.

And so thats the reason.

We are cautiously I would say optimistic.

If we.

In the whole country having.

Having the dynamic coffee zero policy and then.

And then we want to make sure the major city.

To keep the societal zero Colby.

I think the situation will be getting better probably going to be impacted by a month and two months, but right. After that is going to be accelerated.

And then we had.

Even though.

Customers do want to accelerate.

Once the Lockdowns solver.

<unk>.

I would say first of all.

Keep the.

The country's agenda at a top priority.

Nokia is going to change after that so it's going to be a impact is going to be like a hiccup.

For a given period of time, but overall still pretty positive in my opinion.

Thank you.

Okay.

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

Okay.

Hi management. Thank you for taking my question.

My first question is on <unk>.

Wholesale demand.

I guess a follow up question.

We are seeing some slowdown in the cloud business.

And in traditional wholesale customers.

<unk>.

One you recently reported.

So my question is how should we expect this to impact kind of wholesale outlook, particularly in the second half post the COVID-19 impact that's right.

Number one question.

One question is on.

D a.

Potential pricing or margin impact as we have seen over the last two quarters, we have seen orders or government related customers.

<unk>.

New take on and so with this impact any of our margin profiles.

Yes.

Okay.

This is samuel.

Thank you.

To take on your questions and welcome him to chime in.

With the additional colors.

I think.

For the wholesale segment point of view, but in the past that we tend to focus on core service providers Big name Internet companies, especially for those video type of.

Internet Giants are required.

The data center to store data.

And so forth. So a lot of times the analysts might be worried about is governed really support.

Internet sectors.

No.

So let me kind of do a very quick spin on that one I think in general the Chinese government is very supportive of the internet sectors.

Given the fact that the sector's innovation.

That has contributed to the growth of country's economy in the past 20 years.

Yet it is equally important to know the regulatory risk.

Step up recently, probably in the past.

Tough months for some of the Internet verticals.

As you can see some of the antitrust law, Unlike gaming impact livestream and impact social media services or even for the profit making in off campus tutoring.

Therefore, we have to stay agile to cope with the government policy, while partnering with our customers and to plan for their business grows accordingly.

There are definitely some headwinds, but also a tailwind.

In terms of the.

Pricing or pricing pressure pricing competition.

That that you asked about.

<unk> not seen a material difference.

From what we have seen in the past quarter.

That being said because of the COVID-19 or the pandemic.

Great.

Thats the impact to <unk>.

Most of the verticals.

Local life entertainment or even for the online retail therefore, it is prudent to assume customers will be more cost sensitive moving forward.

The market conditions.

So that being said in short we're not seen a material impact.

But we have the empathy.

To understand the customers could be cost sensitive.

So hopefully that addressed your question not sure where the team you have additional color you want to add.

Not for that part.

The second question you had a question about margin impact on the state unquote.

Yes, that's correct. So just wondering if in terms of.

Contract terms.

<unk> two.

Private wholesale kind of orders or would that be bidding for the tax rate and then how would that.

Potentially impact our long term.

I think it's probably still too early I mean, we're just getting our first orders now to sort of see if there is an overall trend.

But SME was explaining earlier on about the partnership that we have with People's cloud.

These customers are likely going to engage us across.

A range of the services that we offer one of the products.

So I don't expect at the moment for there to be a sort of material margin.

Impact I think they are like other customers they have requirements and those requirements will be priced accordingly.

So I hope that helps okay. Thank you, yes, yes, that's very clear thank you.

Yes.

Our next question will come from Sara Wang.

Please go ahead.

Hi, Thank you for the opportunity to ask a question. So I have two questions for you on demand just a quick follow up on the previous questions on demand.

Is it not to say that on the wholesale side, we are seeing.

Seeing all of that is from the Internet sector, and then how about the retail side do we see any change in the BARDA.

BARDA telecom farmer customer mix.

Certain industries might grow faster than the other.

With me and others.

Then second question is on the comp.

No.

Why.

People data choose <unk> over others that party providers or I know your telecom IDC services.

Thank you.

Okay.

Thank you Sarah for the question.

So first of all from the retail momentum.

If you look at the first quarter this year, our top five verticals remained the same.

Still going to be IP services financial services.

Carriers local life entertainment.

And so on so forth so nothing.

But particularly changed.

And also from the momentum point of view, we're seeing a pretty strong year over year double digits, that's for sure whether or not we have.

The pocket resources.

To meet the customers' demand. That's one question. The second thing is we're seeing more and more customers.

I was looking for.

The full stack services, so other than a colocation.

That's a very typical enterprise.

I would say a mentality they wanted to find a single throat to choke so making sure. They can partner with a credible partner who is a long term player has the credential.

And be able to support their needs.

The recent lockdown.

A very it's a very good showcase because even though we were impacted by the lockdown in Shanghai area, we're talking about two months and.

Our engineers for example, O&M services are taking much lack.

Locked and the data center.

Little over two months, and we're making sure not in stock.

Stop.

Our services and support from the customer point of view even receive.

Customers feedback.

Appreciation and so and so forth so I think thats.

Great testing.

Testimonial.

Uh huh.

The reason for that.

And so so from a retail point of view I think that is.

A very very good.

<unk> seen a good momentum, which as opposed to kind of keep it up.

Your second question is about the peoples data.

We can tell me in the industry.

That in China.

Unlike the rest of the world.

Well dedicate cloud, probably youre going to be the mainstream.

Reasons being because.

From a public health point of view or from a private cloud point of view.

They have their advantages, but also disadvantages.

Poppy call players, but typically it's the advantages would be the dynamic cost.

Customer has less technical control so the customers can only have limited customization.

From a practical point of view the customer can do have very obvious disadvantages such as higher cost.

Limited access for their mobile users.

They can't keep up with.

The unpredictable demands and social for us.

In China, what happened is because it's a highly regulated.

The economy and so there is new policy new regulation.

And today people, even pay actual attention on the data sovereignty and data privacy.

Therefore it.

That's why we believe because given the track record given the full stack services capabilities.

It's data.

Went through there.

Ah study due diligence.

And finally pick up.

The net at their exclusive partners.

So so for that work were pretty honored.

Have the opportunity to partner with them, but that is that.

It is still early stage.

And then so.

Hopefully, we'll see some great progress and then at that point of time happy to share with all of the topic.

Got it thank you.

Thank you.

Our next question comes from Ethan Zhang from Nomura. Please go ahead.

Good morning, two minutes Emil.

Two questions. The first one is regarding the margin trend I thought that the first quarter adjusted EBITDA margin was improved by around four percentage point.

Compared to <unk>.

Just wonder what's the main driver behind it.

The margin correct in the second quarter and second half is it only the current.

COVID-19, Lockdown in China, and second one a follow up question on the people cloud just longer.

I understand that what we provide with the private cloud.

Customer Milwaukee comparison comparable comparison between our.

The pubic cloud in our prisons.

<unk> and hotel customers.

Example, the contract size the pricing level, that's why I asked the question. Thank you.

Let me take the first question and see if <unk> has any follow on.

So as to the the People's Cloud question in terms of the first quarter margins.

And if you look at the breakdowns that we provided in the press release earnings release.

Mainly it's driven by cost control as well as obviously the top line was not as high.

And so that those two things combined resulted in a higher.

Higher margin going.

Going forward, we're looking at the full year I would say that we're still looking at the full year margins that we had expected.

There will be some cost.

You've sort of pointed out in relation to.

<unk> locked down.

Our personal incremental costs that were unexpected to be factored in but also we would expect again the top line. The revenues to also then start to ramp up once the customer is actually into the data centers. So it'll be a combination of both.

But yes, I would say that the margins are probably a little bit higher.

Just driven by those two factors that we talked about earlier on.

Sam you want to see if there's any other color you wanted to give.

In terms of people slowed.

Sure.

Other than what I.

Stated earlier I think two other two other key points.

Could possibly reiterate number one is think about.

Hybrid multi cloud.

Norm in China. Unlike the rest of World I think that that's.

One of the key messages the second one would be it.

Great endorsement for that if it cloud.

Mentioned earlier address the previous question.

Regarding the advantages or disadvantages for.

You have to compare among the public cloud private cloud and also dedicate cloud I think.

The partnership that we have in which people with data is a great endorsement for the delicate clouds importance here in China.

Thank you.

Our next.

Question comes from Golan Guang.

Tyler Please go ahead.

Central amendments.

From BMO capital markets.

So Mike.

My first question is regarding your pipeline.

There is no material change.

And the pipeline.

To laughter culture.

Vendor.

Alright.

But we also created a low end of the rents which is approximately 13 components.

Depending on your current market demand dynamics.

Sure.

Do we have any kpis, such as green commitment the rates up.

What's the capacity to impact depending on the real situation independent harp.

So thats my first question again, and the second one is our customer diversification.

Talking about two questions regarding the people people data, which is not.

Alright.

So.

What we have achieved.

Southern progressing our 19th and that end up in that sector.

We are talking about a lot about the new energy and other tax start to.

We now have more color about.

Product sounds a penetration strategy into <unk> and other.

In the future to offline now.

Impacts from the Internet.

Near term thanks, so much.

Yes.

I'll try.

Let me take a crack at the pipeline question and then.

The second customer went to Samuel Norton.

Hi in terms of the first question on pipeline I guess, you are asking youre looking at the sort of the pipeline, saying theres been no changes.

Again, we talked about the sort of construction progress of these projects. They are back ended in our original plan.

There are delays so we'll have to see how much the teams engineering teams can catch up.

As of now we're still being told that they will be able to complete as per plan within this year and so that's the reason for the number.

There is a range that we've provided in that range is really twofold, one is dependent on the.

Construction progress, but also there are projects that were.

Given customer feedback on when they can ramp up.

The demand side.

We will update when we have more visibility on whether or not things will from a construction point of view or from a customer demand point of view shift into 'twenty three or not.

Okay.

I think you asked about the people it's data and you also talk about the state owned enterprise.

So if I understand your question correctly.

<unk> in the past I would say 80 20, 80% of VNS revenue coming from the key factors like the IV services financial services carrier local live entertainment.

This type of industry of course, including traditional enterprises as well.

What happened in the past the government institution.

What's not.

On top of our list.

That being said last year, we acquired <unk> cloud one of the leading.

Cloud native platform here in China, and then and created a lot of the synergies because takeout.

Major customers happen to be the financial services industry. They also provide.

Technical support for some of the states all enterprise. So so the partnership that we have with People's data.

Which is one of them.

Subsidiary of peoples peoples Daily People's Daily online.

There are major.

Customers happened to be the state owned enterprise.

It's a great leverage all the data from the <unk>.

From a customer point of view.

And also a good synergy from a technical standpoint of view because what happened the past if you look at the all the public cloud service providers. They are offering their offerings tend to be.

Generic.

For certain verticals.

There <unk>.

Services workload scenarios tend to be laser beam focus.

Which is a great workloads on top of the cloud native platform.

So I think from <unk>.

Customer touch point and also from a technical synergy point of view.

It is a great partnership with definitely looking forward.

To having some of the positive impact.

Moving down the road.

Like I said before I'm happy to.

No update.

Once we have a good progress and hitting the milestones.

Okay got it thanks David.

Thank you, ladies and gentlemen that does conclude our conference for today. Thank you for participating.

You may now disconnect your lines.

Q1 2022 VNET Group Inc Earnings Call

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