Q2 2022 VNET Group Inc Earnings Call
[music].
Okay.
Hello, Ladies and gentlemen, thank you for standing by for the second quarter 2022 earnings Conference call for feed that group Inc. At this time all participants are in listen only mode.
After the Speakers' presentation. After the management prepared remarks, there will be a question and answer session participants from our management team Mr. Samuelson, Chief Executive Officer, and executive Chairman of retail IDC, Mr. Tim Chen Chief Financial Officer, and Mr. <unk> <unk>.
Vascular relations Doctor off the company.
Please note that today's conference call is being recorded.
I'll now turn the call back to the first speaker today mid single Liu. Please go ahead.
Thank you operator, Hello, everyone and welcome to our second quarter.
Earnings Conference call.
The earnings release was distributed earlier today and you have final Colby.
As well as on 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.
Cause actual results to differ materially from our current expectations.
For a detailed discussion of these risks and uncertainties. Please refer to our latest annual report and other documents filed with SEC.
<unk> does not undertake any obligation to update any forward looking statements, except as required under <unk>.
Click for logs.
Please also note that we announced earnings press release and this conference call include that disclosure audited GAAP financial matters.
Our audited non-GAAP financial matters.
<unk> earnings press release contains a reconciliation of the audited non-GAAP measures to the audited.
As a reminder, this conference is being recorded.
In addition, a webcast of this conference call will also be available.
Web site.
There'll be no dot com.
I'll now turn the call over to obviously your semi.
Alright, Thank you Shannon good morning, and good evening everyone.
Thank you for joining our second quarter 2022 earnings conference call.
During the second quarter, our focus remains on driving healthy results.
The high quality solutions and services to our customers.
The solid growth momentum.
Our business segments.
Amid macro challenges clearly reflects the effectiveness of our growth strategy and our strong execution capabilities on.
On the operations front total cabinets under management, Inc.
Increased to approximately 80008 hundred by the end of the second quarter.
Compared with approximately 62000 and 901 year ago.
The same time.
Kevin is utilized by customers increased sequentially by approximately 1005 hundred 44500 by the end of the second quarter comp.
Compared with approximately.
36601 year ago.
Accordingly, the overall utilization rate.
Ken a sequential ramp up reaching 55, 1% by the end of the second quarter.
Our retail MMR per cabinet reached RMB 9186, showing a healthy increase from the same period last year.
On the financial front, we delivered a robust financial performance with a year over year growth of 15, 2% and 14, 5% in <unk>.
Revenue and adjusted EBITDA year over year, respectively.
With the rapid growth of China's digital economy.
As a leading ICT service providers are in a good position to benefit from this growth momentum and local government support measures.
This may the National Committee of the Chinese People's political Consultative conference.
Health, a consultative session and call for stronger efforts to both development also these two economy across a broad swath of industries.
Technological empowerment was highlighted as a vital driver for higher quality economic growth.
We believe this will carry immense potential.
Significantly amplify demand for IDC services.
Within this environment, we are confident in our strength and our ability to capture the exciting new growth opportunities.
Next let's take a closer look at our business updates.
With the recovery momentum from the impact of Covid resurgence is <unk>.
Encouragingly in June with the gradual easing of COVID-19 related lockdowns and mobility restrictions.
Hi, Beijing in Hubei Province.
Your resume construction on new projects in these areas and have seen moving rates recovering steady.
Next a review of our progress in key business segments during the quarter.
Our wholesale business made solid progress in the second quarter, we once again extended our contract with an extension of existing customer a leading social platform in China for building its network infrastructure in the northern region of China.
This new order will generate a total capacity of approximately 14 megawatts and further demonstrates our value proposition for this business segment.
In addition, we recently signed a new contract of approximately 15 megawatts with the leading cloud service providers in China to build its network infrastructure Yazoo River Delta region.
In a datacenter for this customer.
Aside from conventional Eric Cohen will also offer liquid cooling solutions and more sustainable approach that will help reduce P E and carbon emissions.
Moving onto our retail business.
Thanks to our diversified customer base, we are pleased to see our retail business growing steadily.
Macro challenges in the second quarter, we leverage our technology expertise to cater to various vertical needs with a suite of very ash services.
Existing customer expansion and new customer acquisition both achieve.
Impressive results driven by rising digital demand from a wide variety of industries.
Local service automobile financial services hardware manufacturing and online gaming.
Looking ahead, we plan to harvest, our advanced engineering capabilities to enrich our service portfolios, creating more value for our customers and generating more diverse revenue streams.
Although blue collar business front, we continue exploring opportunities that will allow us to diversify our industry specific cloud solutions during.
During the second quarter, we extended our manufacturing execution system.
Hey, MBS to a leading automotive speaking manufacturer in China.
Through the delivery of Mes, we help the customer manage manufacturing flexibility in.
Through productivity and maximize efficiency by deploying digitalization automation and new technologies that will provide a real time workflow visibility flexibility and insight into the entire manufacturing operations process order release to ready for shipment.
This system has been successfully implemented.
We implemented across all of our customers production lines.
Very pleased with the progress we have made in this area.
In the meantime, we are actively accumulating more industry specific expertise and look forward to tap into greater opportunities in the cloud business industry in the future.
Despite macro headwinds.
Unprecedented COVID-19, resurgence and lockdowns in the first half of the year.
Our sustained growth highlighting our excellent business resilience and our ability to capture the rising demand for high quality IDC services.
However.
Near term <unk> got certain economic outlook and threat of COVID-19 outbreaks may bring some short term challenges to us.
Wireless alter demand trend is to cure taking into account the short term challenges of the current slowdown environment and the impact from Covid related disruptions, we are adjusting our outlook for the full year of 2022.
Revising our full year delivery plan to a range of 9400 to 12400 cabinets from previously provided 14400 to 17400 cabinets.
Going forward we.
We remain focused on our dual core growth strategy, leveraging our scalable service offerings to drive growth and building our customer base across verticals.
As the industry front runner.
Fundamental links in China's digitalization change, we will seize the opportunities from the nation's rapidly.
Painting and evolving digital economy.
Creating sustainable value for our stakeholders in the long term.
Thank you everyone wished.
With that I will now turn the call over to our CFO , Tim Chen to discuss our financial performance for the quarter and our business outlook.
Tim.
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 measure today.
non-GAAP results exclude certain noncash expenses, which are not part of our core operations.
The details of these expenses may be found in the reconciliation tables included in our earnings press release.
Please also note that unless otherwise stated all the financials represent today are for the second quarter of 2022 and in Renminbi terms.
For the second quarter.
Again, we delivered a robust financial performance driven by rising demand from both our wholesale and retail businesses.
Our solid financial position gives us a firm foundation to drive a long term and sustainable growth.
As we continue to leverage our scalable service offerings and build our customer base.
Across a wider variety of industries.
Next.
Let me walk you through our second quarter financial results.
Unless otherwise specified the growth rates I will be reviewing are all on a year over year basis.
Okay.
In the second quarter.
Net revenue increased by 15, 2% to $1 72 billion.
From the same period last year.
Mainly due to increased customer demand for our highly scalable carrier and cloud neutral ADC solutions from both wholesale and retail IDC customers as well as continued growth of our cloud business.
Gross profit was $357 8 million in the second quarter of 2022.
Roughly flat compared with the same period of 2021.
Gross margin was 27% in the second quarter of 2022.
Compared to 24% in the same period of 2021.
Adjusted cash gross profit, which excludes depreciation amortization and share based compensation expenses was 713.7 million in the second quarter of 2022, an increase of 11, 5% from the same period of 2021.
Adjusted cash gross margin in the second quarter of 2022 was 41, 4% compared to 42, 8% in the same period of 2021.
Adjusted operating adjusted operating adjusted upward.
Yes.
Compensation post combination of deployment in an acquisition and impairment of loan receivables to a potential investees were 257.
$7 million in the second quarter of 2022.
<unk> two $235 6 million in the same period of 2021.
As a percentage of net revenues.
Operating expenses in the second quarter of 2022 were 14, 5% compared to 15, 7% in the same period of 2021.
Adjusted EBITDA in the second quarter of 2022 was $486 9 million, representing an increase of 14, 5% from the same period of 2021.
Adjusted EBITDA in the second quarter of 2022 excluded share based compensation expenses of 47 five.
$5 million.
Adjusted EBITDA margin in the second quarter of 2022 was 28, 2% compared to 28, 4% in the same period of 2021.
Our net loss attributable to ordinary shareholders in the second quarter of 2022 was $377 2 million.
<unk> to a profit or net profit of $455 9 million in the same period of 2021.
Basic and diluted loss.
0.43 per ordinary share and both 258 per eds.
Each ads represents six class a ordinary shares.
Turning to our balance sheet.
As of June 30th 2022, the aggregate amount of the company's cash cash equivalents and restricted cash was $3 62 billion.
Meanwhile, net cash generated from operating activities in the second quarter of 2022 was $942 7 million compared to $340 8 million in the same period of 2021.
Our capex in the second quarter of 2022.
$546 million.
And now.
Onto our financial outlook.
As Samuel mentioned, we faced the impact from Covid related disruptions in the second quarter of 2022 on data center construction and customer move in schedules and ongoing macroeconomic uncertainties as well.
As a result.
We adjusted our outlook for 2022.
Based on our current estimates we expect our net revenues to be in the range of 7000 $250 million to 7000 $550 million.
And adjusted EBITDA to be in the range of 1000 $800 million to 1900 $50 million.
We always believe opportunities go alongside challenges.
The COVID-19 impacts are short term in nature.
And digitalization is rapidly advancing and the wider society.
Looking ahead.
We will remain committed to advancing our dual core growth strategy.
Broadening the spectrum of our services increasing customer diversification.
And capitalizing on the enormous opportunities presented by driving digital economy in China.
This concludes our prepared remarks for today.
Operator, we are now ready to take questions.
Thank you we will now begin the question and answer session to ask a question. Please press star one one on your telephone.
First question comes from the line of Ethan Chung from Nomura. Please proceed. Thank you.
Thank you management for let me ask the first question. So I have two questions. The first of all it is.
Given the current situation that the electricity suppliers in China, especially as the fifth wave two clients.
You see the trend of the utility cost in the second half of this year and the impact on our EBITDA margin.
And second question is regarding <unk>.
Capex trends, so I remember, we guided to at the Ralph I've been at RMB Capex for the full year on the tube, but during the first half.
Since that we own.
Completed the limited portion of our Capex targets so Josh.
Wonder if we maintain the previous guidance on our Capex spending for this year and how would be our focus our target for capex spending in the second half of this year. Thank you.
Thank you very much.
Let me take the first two questions first in terms of electricity and impact of some of the areas Sichuan as an example, we.
We do not expect to be a major increase in the electricity tariffs. However.
However in the areas that are impacted by electricity shortages not dissimilar to last year and early parts of this year.
Some of the data centers would be just switchover to diesel.
Or would you actually acquire diesel in preparation for potential shortfalls in terms of electricity supply I think that will show up in the figures for the second half, especially for anything in the affected areas as to the Capex and whether there are any changes to the capex guidance.
We still expect.
To spend roughly in a range of 4 billion renminbi.
And that's despite some of the capacity.
<unk> pushed into 2023 as you know these constructions do have a longer lead time, and so there will still be money being spent with regards to the power infrastructure.
The buildings and so forth.
<unk> be a slow down a little bit, but we still expect that it will be for the full year around Jeff 4 billion.
That answer your questions.
Thank you.
Thank you for the questions. Our next question comes from Edison Lee of Jefferies. Please proceed with your question.
Hi, Good morning, Samuel and Tim. Thank you very much for the presentation.
I wanted to see.
What kind of <unk>.
Our cost increases that you are assuming in your guidance for the second half.
And also I want to know what the two new wholesale projects.
What is the timing in terms of surface launch.
And <unk>.
EBITDA contribution.
Thanks.
Hi, Allison, let me talk about the first one first in terms of the second half.
We've assumed a small.
Increases in terms of coming from the power side as you know some of the power increases already took place in the first half we do expect a little bit of further increases, but not really the tier one areas, but I would say the outer areas of the regions. We can go into some weather the details later on.
But.
Not a very large increase I think the full year, we had given to the market previously was about a 1% margin impact I'd say that this moves the needle a little bit in the second half, but nothing that would be a very material.
Pass to Samuel to talk a little bit about the two hotel wins.
Thanks sure. Thank you Tim and also thank you Edison floor.
Question.
Regarding the wholesale wins that we announced today.
The social platform it is actually.
Existing customers with.
With the new contract and the basically a country side in the second quarter and then and then another one which is the public cloud service providers and then what are you expecting to sign a contract in Q3.
We're pleased because.
It's been quite a bit of time working with the customers and finally see cooler a design win so that's pretty encouraging for us.
Can you just talk about the timing of these contracts coming into service.
Oh, yes, as I've said.
Social platform wins that will be second quarter. This quarter and then for public cloud service providers are the contract will be signed in Q3 and then we expect in this.
To be to be serviced and the ramp up starting from Q4 this year.
Okay. So as I said both of these both of these I would say.
Small or negligible contribution in 2022.
But the ramp ups should be within 2023.
So if the ramp up period also two years with these two projects.
They should actually be quite quick again contractually as you know our customers will sign a commitment, but what we've seen at least from the customers that we've just talked about.
Can actually ramp up extremely quickly so I would say at the moment, probably assuming that most of the ramp up should be within 2023 for these projects.
Okay. Thank you Tim yes, most of them.
Thank you for the questions.
As a reminder to ask question. Please press star one on your telephone.
Our next question comes from July Health, Alex Wang from Sidewalk capital markets. Please proceed with your question.
Sure.
Okay.
Management.
My first question regarding our pipeline on those two that we carved out.
Capacity additions in the near term.
The way progress guys.
Roughly 17 installments photonics for Anthony for capacity additions. So I want to have more color on that spend do we have any change on the valkyrie or scatter.
The second thing is about using data.
So how do you see a ramp up of acceleration.
Existing projects starting.
Starting from July .
So.
Got it.
Currently you hit that hurdle rate for new wholesale cortex.
And David on currency macro and the Covid situation.
Most of that's about it.
What's the typical Korea.
For Dave kind of overcapacity at rates normalized you would say that youre right.
Thanks.
Thank you Alex So let me take the first question in terms of the pipeline you are correct. I think previously we had a range from 14 four to 17400 in terms of the cabinet deliveries in 2022.
Did revise down down to a range of 9000 412400.
Youll see the details that we've included in the.
IR ppt be uploaded to our website.
But.
So that is the range of guidance down from the 17 four that you discussed earlier on you.
Youll see that the projects that we've taken out again.
Some of these we expect to take place in 2023.
There is some related to construction slowdowns, and then others related to customer demand being pushed back and so rather than <unk>.
Yep everything ramped up in terms of delivering the cabinets and then waiting for the customer we decided to tell us what that match, our pace of delivery with the customer requirements as well.
The second question, maybe I'll pass to Samuel and he can address that for you.
Yes in terms of the ramp up.
For all of our wholesale customers.
What happened is most of the customers basically from the contract with <unk>.
<unk> to have two years to ramp up to hit the 90% or even higher utilization rate, but in reality.
From our experiences and by talking to the customers.
Given their business growth normally.
It will be within a year, they basically hit the 90% or even higher and so forth.
You too.
Mou that we talked about today.
Including the social platform in public cloud service providers.
The high expectation.
That kind of ramp up too.
90% of even higher.
You gave a time given the current forecast.
And then separately from a retail point of view, we're also seeing kind of.
The momentum from the customer digital transformation trend as well so.
I would say given.
Even though with the macro conditions.
Conditions, a little bit uncertain.
But the parts of the business is pretty solid.
Quarters ahead of time.
Thank you.
The questions. Our next question comes from the line of Sara Wang from UBS. Please proceed.
Hi, Simon and team thanks for the opportunity to ask a question Paul IHOP to question.
First is due on delivery target and ask what's the split between wholesale and retail.
The deliberate target.
Evidence.
And another question.
So what's the.
Increased magnitude.
The magnitude of power tariff increase in second quarter.
I noticed that.
The EBITDA margin actually stayed relatively stable versus last year.
Just wondering if there's any other area.
<unk> FCC costs to offset the public carriers decreased thank you.
Hi, Sir could you repeat the first is the first part of the question. Please again.
Hi.
First question is what's the split between wholesale and retail.
Others of our dividend target.
Okay. Thank you let me handle the first question I would say that.
Right now the split between the wholesale and retail.
We're still looking at a similar split of around $66 40.
So we've talked about again in the past 62000, 2060 being the wholesale and then scale retail and retail so we still expect that to be the same.
In that range.
More than half being wholesale related maybe up to two thirds wholesale related.
Okay.
In terms of the power increases again, the vast majority of the increase that we saw.
Were in the tier one cities again, the earlier part of the year, we seldom go up by anywhere from 10% to 20% to the tier one cities.
And so we factored in the impact to the full year.
Margins.
In quarter, one we did have some tax rebates and other income and Thats kind of some of the reasons behind why the margins in the first quarter weren't impacted as much and then the second quarter there were some costs.
<unk> there, but again, we have been quite focused on making sure. We hope to implement cost controls. So we'll continue to do that in the third and fourth quarter.
But there are going to be limits to how much we can do to offset increases in our operating cost in general.
I hope that helps there.
Got it thank you.
Thank you for the questions.
Our next question comes from the line of Albert <unk> of J P. Morgan. Please proceed with your question.
Alright.
And Jonathan and thank you for taking my question. My first question is if I look at the client funded two new guidance.
EBITDA margin implies that second half.
Adjusted EBITDA could be like 22%, which is a multiyear low.
Although the one of structural margin drag in second half.
Drive the.
Market recovery in the next year.
And second question is.
The cost in the revenue is mainly driven by wholesale or brokered IDC demand weakness.
From your point of view how loan Tidjane.
The downside to that historically, our spending will be the leading indicator for ITC.
Dan.
Right now.
Hardware spending looks still quite weak.
Second half implied.
Implied folks help next year, we'll also see.
Are we seeing there.
In the ITC.
Yes.
Okay. Thank you Albert.
Let me take the <unk>.
First part of the question and then maybe Tim can help to chime in with additional cost.
Contacts.
As Tim pointed out the very.
The first quarter of the year because we.
We did have the tax subsidies and annual reimbursement.
Reimbursement from the Depository Bank and then so by removing.
The onetime theme.
And then just.
Second quarter margin is pretty much on par.
With the revised guidance as you can see our second half EBITDA margin is going to be roughly about 22% ratio.
I would say in a nutshell.
Hide from the fact that some of the cost and expense got the late <unk>.
The second half.
Colby outbreak and locked down in the first half.
We're also expecting.
Some of the revenue in the pipeline.
Basic.
For new retail customer acquisition.
And then.
Some of the increased engineering cost.
Focusing now on the invest ahead of revenue.
And then so that basically.
Impact.
Our EBITDA margin in the second half.
So a lot of the analyst asking about the power tariffs.
Even though our data center maintenance and upgrades.
I think both electrical and mechanical parts.
Although not really Mckee, we'll put data center, but if we add up.
Steel.
Amount.
P&L, so that basically impact the EBITDA.
Ratio in the second half are we expecting.
That will continue going on.
Which Tony doubt because.
A lot of the cost basically impact in the second half it's more.
More seasonality and so we're expecting to have.
Improvement in.
In 2023.
And then can you.
You want to take on the second question.
Hi.
In terms of the you were asking about how long. This will last for I think Samuel started to address that and kind of all of this drag into 2023. It was a leading indicators I would say that.
Our shifting of some of the capacity deliveries to 2023, alongside our matching with the customer demands.
Is that we already see some of the things that they had initially you wanted by end of year being pushed into the first half of 2023.
There is that visibility that customers still intend.
To require.
These data centers, but it has been shifted backwards.
In terms of which area, we've kind of seen let's say the slower ramp ups I would say just given the sheer scale of.
The ramp up pace of a wholesale customer versus the retail customer I would say that it is more on the on the wholesale side. They are a sort of larger contributor in terms of billable cabinets ramp ups.
Not to say that we've not seen sort of similar.
Lower pace.
During the times that there were lockdowns in place, we certainly hope that we see less and less.
These types of Lockdowns.
In the second half and so then customers can actually resume more normal pace of ramp up.
During the rest of this year and into next year.
Thank you.
Two questions.
Our next question comes from the line of.
<unk> Chen from Credit Suisse. Please proceed with your question.
Yeah.
Hi, Thank you management for taking my question.
<unk>.
Two questions. The first one is regarding wholesale demand.
<unk> for the.
Move ins you have seen for the existing customers, we have had or existing orders.
How different is that say in terms of month.
Months required full ramp up.
Yes.
Okay.
It's different to our previous expectations.
Previous guidance versus your guidance.
Number one question.
My question is.
Oh I see.
There is a small decline in MSR.
MSR.
Two quarters running quarter on quarter.
Was wondering is there any trends, we should pick up yet or should we still.
Expect.
Sam can be broadly in line.
Previously, we had madison slightly outwards in the longer term.
Two questions.
Hi, Thank you I will say from the wholesale customers point of view.
Basically I think Tim and I and we've talked about.
Specific to type of your wholesale customers.
We're talking to almost on a weekly basis, the public cloud service providers.
Social platforms.
Especially for.
Video type.
Customers.
Who requires a huge stars.
Start the data.
I would say.
We're not seeing any difference.
They're moving rates aside from the COVID-19 impact of Lockdowns impact and so on so forth.
Their business continues to grow.
So.
When we talk to them proactively.
Plan their demand forecast and do the site selection and then when we participate and win the bid.
It is not just one type deal it is more like a lifetime.
Ownership and so forth. So again from our partnerships, we're seeing the similar trend from a moving rate perspective. So.
So that's a reason when Kevin talked about.
Aside from what contractual.
<unk> is committed to.
Ramp up to 90%, we actually seen the actual results.
We more faster than that so again.
Two Mou that we talked about today.
Hopefully, we're seeing exactly thanks, Ken as we talked about.
Can you do you want to address.
The monthly recurring badly for the retail one yes sure.
In terms of the monthly recurring revenue.
I think the main thing is quarter to quarter, you will see some.
<unk> and Thats because the figure there is a total retail related revenue divided by cabinets.
Do you expect that these levels will remain around 9000, and glad youre absolutely correct.
The second part of your statement, which is whether or not we expect this longer term to trend upwards. I think the answer is definitely yes, and thats going to be driven by some of the investments that Samuel mentioned earlier on.
The investments on the retail services side.
That that will then allow us to provide again, a larger suite of services to the customers and expand then the contribution of the value added services to the overall MLR. So again longer term I expect that to trend up.
I think quarter to quarter to quarter, roughly fluctuating around the 9000 level.
That helps.
Thank you very much.
Thank you.
Thank you for the questions.
Your next question comes from the line of Ming Ron Lee of CIBC. Please proceed with your question.
Carl Nelson.
Taking my questions I have two questions.
First one is.
The column herculean railcar demand.
Can you share more about the data.
The pipeline and client engagement.
Thank you Tony can disconnect.
And my second question is regarding the utility costs.
This concludes on wages in China.
Our supply shortage is there any material impact Flores.
More detail about the future trend is think of the utility costs and the impact on our margin.
Yes, let me take those two questions in terms of I guess capex and delivery plans for 2023, I would say that based on the fact that some of the capacity we had plan for 'twenty two being shifted into 'twenty three.
I'd say year on year, we would expect that the capacity in terms of megawatts will be larger in 'twenty three as compared to 22 clearly.
As things ramp up again and also asked some of the construction delays.
Hopefully as we see.
Covid less COVID-19 impact year in 2023.
And so Capex also we talked about earlier on that we still expect capex spend to be around four 4 billion renminbi. This year next year likely will be higher than that.
As we then continue to build out the capacity, especially with the additional Mou wins.
Those will then clearly form part of what we see in terms of the spend for the latter part of this year, but also that into next year in terms of where you expect it to future tender wins as well.
The second question in terms of power.
Again.
The cost that we're seeing is largely similar to the last time around where they were power shortages around China.
And these were related to.
Mostly short term purchases of diesel fuel.
And making sure that our Datacenters continue operating.
When there was uncertainty in terms of.
Continued power supply.
From the grid.
These are the costs that we expect to see.
Then on a single data center basis.
These are not material, if they persist or if they start to spread throughout China.
Then it will become a larger figure but at the moment I think largely covered in what we've already provided to the market in terms of what our views are for the second half and balance of the year.
Hope that helps.
Thank you.
Thank you management for the insurance, ladies and gentleman that concludes our conference for today. Thank you for joining.
Okay.
The conference will begin shortly.
As Johan during Q&A, you can dial star one one.
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Hello, Ladies and gentlemen, thank you for standing by for the second quarter 2022 earnings Conference call for feed that group Inc. At this time all participants are in listen only mode.
After the Speakers' presentation. After the management's prepared remarks, there will be a question and answer session participants from our managements include Mr. Samuelson.
Executive Officer, and executive Chairman of Reto IDC, Mr. Tim Chen Chief Financial Officer, and Mr. <unk> Liu.
Better relations Doctor off the company.
Please note that today's conference call is being recorded.
I'll now turn the call over to the first speaker today missing undue. Please go ahead.
Thank you operator, Hello, everyone and welcome to our second quarter <unk> earnings Conference call.
Earnings release was distributed earlier today and you can find a copy of FX as well as on 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.
<unk> actual results to differ materially from our current expectations.
For a detailed discussion of these risks and uncertainties. Please refer to our latest annual report and other documents filed with SEC.
The net.
Undertake any obligation to update any forward looking statements except as required.
Four logs.
Please also note that we.
Earnings Press release, and this conference call include disclosure audited GAAP financial matters.
Our audited non-GAAP financial measures.
Earnings Press release contains a reconciliation of the <unk>.
Audited non-GAAP measures to the ATA has merit.
As a reminder, today's conference is being recorded.
In addition of that path of this conference call will also be available.
Right.
There'll be net dot com.
I will now turn the call over to Alex CEO Samuel.
Alright, Thank you Shannon good morning, and good evening everyone.
Thank you for joining our second quarter 2022 earnings conference call.
During the second quarter, our focus will remain on driving healthy results and delivering high quality solutions and services to our customers.
Our solid growth momentum across our business segments.
Amit macro challenges clearly reflects the effectiveness of our growth strategy and our strong execution capabilities.
On the operations front total cabinets under management increased to approximately 80008 hundred by the end of the second quarter.
Compared with approximately 62000 and 901 year ago.
The same time.
Kevin is utilized by customers increased sequentially by approximately 1005 hundred 44500 by the end of the second quarter.
With approximately.
36601 year ago.
Accordingly, the overall utilization rate maintain a sequential ramp up reaching 55, 1% by the end of the second quarter.
Our retail MMR per cabinet reached RMB 9186, showing a healthy increase from the same period last year.
On the financial front, we deliver a robust financial performance with a year over year growth of 15, 2% and 14, 5% in revenue and adjusted EBITDA year over year, respectively.
With the rapid growth of China's digital economy.
As a leading ICT service providers are in a good position to benefit from this growth momentum and local government support measures.
May the National Committee of the Chinese People's political Consultative conference.
Health, a consultative session and call for stronger efforts to both development of the digital economy.
A broad swath of industries.
Logical empowerment was highlighted as a vital driver for higher quality economic growth.
We believe this will carry immense potential.
Significantly amplify demand for IDC services.
Within this environment, we are confident in our strength and our ability to capture the exciting new growth opportunities.
Next let's take a closer look at the business update.
Starting with the recovery momentum from the impact of Kobe resurgence. This.
Encouragingly in June with the gradual easing of COVID-19 related Lockdowns and mobility restrictions in Shanghai, Beijing, and Hubei Province.
Immediately resume construction on new projects in these areas and have seen moving rates recovery status.
Next a review of our progress in key business segments during the quarter.
Our wholesale business made a solid progress in the second quarter, we once again extended our contract with an extension of existing customer a leading social platform in China for building its network infrastructure in the northern region of China.
This new order will generate a total capacity of approximately 14 megawatts and further demonstrates our value proposition for this business segment.
In addition, we recently signed a new contract of approximately 15 megawatts with the leading cloud service providers in China to build network infrastructure Yazoo River Delta region.
In a datacenter for these customer.
Aside from conventional Eric Choline, we will also offer liquid cooling solutions, a more sustainable approach that will help reduce P E and carbon emissions.
Moving onto our retail business.
Thanks to our diversified customer base, we are pleased with our retail business growing stebbins.
Macro challenges in the second quarter, we leverage our technology and expertise to cater to various vertical needs.
With a suite of value added services.
Existing customer expansion and new customer acquisition both achieve.
Impressive results driven by rising data demand from a wide variety of industries.
You asked for local service automobile financial services hardware manufacturing and online games.
Looking ahead, we plan to harvest, our advanced engineering capabilities to enrich our service portfolio.
Creating more value for our customers and generating more diverse revenue streams.
Alibaba cloud business front, we continue exploring opportunities that will allow us to diversify our industry specific cloud solutions.
Second quarter, we extended our manufacturing execution system Haa MBS to a leading automotive speaking manufacturer in China.
Through the delivery of Mes.
Help the customer manage manufacturing flexibility improved productivity and maximize efficiency by deploying digitalization automation and new technologies that will provide a real time workflow visibility flexibility and insight into the entire manufacturing operations process.
Release, two ready for shipment.
This system has been successfully.
Across all of our customers production lines.
We're pleased with the progress we have made in this area.
In the meantime, we are actively accumulating more industry specific expertise and.
Look forward to tap into greater opportunities in our core business industry in the future.
Despite macro headwinds.
Price of decades, COVID-19, resurgence and locked out in the first half of the year.
Our sustained growth highlighting our excellent resilience and our ability to capture the rising demand for high quality IDC service.
However in the near term you guys started the economic outlook and threat of COVID-19 outbreaks may bring some short term challenges to us.
Wireless alter demand trend is secure taking into account the short term challenges of the current slowdown environment and the impact from Covid related disruptions.
We are adjusting our outlook for the full year of 2022.
And revising our full year delivery plan.
Range of 9400 to 12400 cabinets from previously provided 14004 hundred to 17400 cabinets.
Going forward.
We remain focused on our dual strategy.
And our scalable service offerings to drive growth and building our customer base across verticals.
As the industry strong runner and a fundamental link in China's digitalization change, we will seize the opportunities from the nation's rapidly expanding and evolving digital economy.
Creating sustainable value for our stakeholders in the long term.
Thank you everyone.
With that I will now turn the call over to our CFO , Tim Chen to discuss our financial performance for the quarter and our business outlook.
Tim.
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 measure 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 earnings press release.
Please also note that unless otherwise stated all the financials represent today are for the second quarter of 2022 and in Renminbi terms.
For the second quarter.
Again, we delivered a robust financial performance driven by rising demand from both our wholesale and retail businesses.
Our solid financial position gives us a firm foundation to drive a long term and sustainable growth.
As we continue to leverage our scalable service offerings and build our customer base.
Across a wider variety of industries.
Next.
Let me walk you through our second quarter financial results.
Unless otherwise specified the growth rates I will be reviewing are all on a year over year basis.
In the second quarter.
Net revenue increased by 15, 2% to $1 72 billion.
From the same period last year.
Mainly due to increased customer demand for our 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 $357 8 million in the second quarter of 2022.
Flat compared with the same period of 2021.
Gross margin was 27% in the second quarter of 2022.
Compared to 24% in the same period of 2021.
Adjusted cash gross profit, which excludes depreciation amortization and share based compensation expenses was 713.7 million in the second quarter of 2022, an increase of 11, 5% from the same period of 2021.
Adjusted cash gross margin in the second quarter of 2022 was 41, 4% compared to 42, 8% in the same period of 2021.
Adjusted operating adjusted upward adjustments upwards.
Yes.
Compensation post combination employment, and an acquisition and impairment of loan receivables to a potential investor.
257.
$7 million in the second quarter of 2022.
<unk> two $235 6 million in the same period of 2021.
As a percentage of net revenues.
Operating expenses in the second quarter of 2022 were 14, 5% compared to 15, 7% in the same period of 2021.
Adjusted EBITDA in the second quarter of 2022 was $486 9 million, representing an increase of 14, 5% from the same period of 2021.
Adjusted EBITDA in the second quarter of 2022 excluded share based compensation expenses of 47.5.
$5 million.
Adjusted EBITDA margin in the second quarter of 2022 was 28, 2% compared to 28, 4% in the same period of 2021.
Our net loss attributable to ordinary shareholders in the second quarter of 2022.
$377 2 million.
<unk> to a profit or net profit of $455 9 million in the same period of 2021.
Basic and diluted loss were both <unk> 43 per ordinary share and both 258 per eds.
Each ads represents six class a ordinary shares.
Turning to our balance sheet.
As of June 32022, the aggregate amount of the company's cash cash equivalents and restricted cash was $3 62 billion.
Meanwhile, net cash generated from operating activities in the second quarter of 2022 was $942 7 million compared to $340 8 million in the same period of 2021.
Our capex in the second quarter of 2022 was $546 million.
And now.
Onto our financial outlook.
As Emil mentioned, we faced the impact from Covid related disruptions in the second quarter of 2022 on data center construction and customer moving schedules and ongoing macroeconomic uncertainties as well.
As a result.
We adjusted our outlook for 2022.
Based on our current estimates we expect our net revenues to be in the range of 7000 $250 million to 7000 $550 million.
And adjusted EBITDA to be in the range of 1000 $800 million to 1900 $50 million.
We always believe opportunities go alongside challenges.
Covid impacts are short term in nature.
And digitalization is rapidly advancing and the wider society.
Looking ahead.
We will remain committed to advancing our dual core growth strategy.
Broadening the spectrum of our services increasing customer diversification.
And capitalizing on the enormous opportunities presented by driving digital economy in China.
This concludes our prepared remarks for today.
Operator, we are now ready to take questions.
Thank you we will now begin the question and answer session to ask a question. Please press star one one on your telephone.
First question comes from the line of Ethan Chung from Nomura. Please proceed. Thank you.
Thank you management for let me ask the first question. So I have two questions first of all it is.
Given the current situation that the electricity suppliers in China, especially as the fifth wave two clients.
You see the trend of.
The utility cost in the second half of this year and the impact on our EBITDA margin.
And second question is regarding <unk>.
Capex trends, so I remember, we guided to at the Ralph IP, the RMB Capex for the full year two but during the first half.
Things that we own.
Completed the limited portion of our Capex targets. So just.
Wonder if we maintain the previous guidance on our Capex spending for this year and how would be our forecast or target for capex spending in the second half of this year. Thank you.
Thank you very much.
Let me take the first two questions first in terms of electricity and impact of some of the areas Sichuan as an example, we.
We do not expect to be a major increase in the electricity tariffs. However.
However in the areas that are impacted by electricity shortages not dissimilar to last year and early parts of this year.
Some of the data centers would need to switch over to diesel or <unk>.
Good actually.
Acquire diesel in preparation for potential shortfalls in terms of electricity supply.
I think that will show up in the figures for the second half, especially for anything in the affected areas.
As to the Capex.
And whether there are any changes to the capex guidance.
Still expect.
To spend roughly in a range of 4 billion renminbi.
And thats, despite some of the capacity being.
Being pushed into 2023 as you know these constructions do have a longer lead time and so there will still be money being spent with regards to the power infrastructure.
Buildings and so forth.
Just be a slow down a little bit, but we still expect that it will be for the full year around <unk> 4 billion.
I hope that answers your questions.
Thank you.
Thank you for the questions. Our next question comes from Edison Lee of Jefferies. Please proceed with your question.
Hi, good morning, Tim.
You very much for the presentation.
I want to see.
What kind of <unk>.
Our cost increases that you are assuming in your guidance for the second half.
And also I want to know what the two new wholesale projects.
What is the timing in terms of surface launch.
And.
The EBITDA contribution.
<unk>.
Hi, This is Doug let me talk about the first one first in terms of the second half.
We've assumed.
Small.
Increases in terms of coming from the power side as you know some of the power increases already took place in the first half we do expect a little bit of further increases, but not really the tier one areas, but I would say the outer areas of the regions. We can go into some weather the details later on.
But.
<unk>.
A very large increase I think the full year, we had given to the market previously was about a 1% margin impact I'd say that this moves the needle a little bit in the second half, but nothing that would be a very material.
Let me pass to Samuel to talk a little bit about the two wholesale wins.
Thanks sure. Thank you Tim and also thank you Edison floor.
The question.
Regarding the wholesale wins that we announced today.
The social platform it is actually.
Existing customers with.
With the new contract and the basically the country side in the second quarter, and then and then another one which is the public cloud service providers and then we're expecting to sign a contract in Q3.
We were pleased because.
It's been quite a bit of time working with the customers and finally secure a design win so that's pretty encouraging for us.
Can you just talk about the timing of these contracts coming into service.
Yes, as I said.
Social platform wins that will be second quarter. This quarter and then for public cloud service providers. The contract will be signed in Q3 and then we expect in this.
Just to be to be serviced and the ramp up starting from the Q4 this year.
Okay. So as I said both of these both of these I would say.
Small or negligible contribution in 2022.
But the ramp ups should be within 2023.
So is the ramp up period also two years with these two projects.
They should actually be quite quick again contractually as you know our customers will sign a commitment, but what we've seen at least from the customers that we've just talked about.
Can actually ramp up extremely quickly so I would say at the moment, probably assuming that most of the ramp up should be within 2023 for these projects.
Okay. Thank you, yes, most welcome.
Thank you for the questions.
As a reminder to ask a question. Please press star one on your telephone.
Our next question comes from July Health, Alex Wang from <unk> Capital markets. Please proceed with your question.
Sure.
Okay.
Thanks management.
Paul My first question regarding our pipeline on those two that we carved out.
Capacity additions in the near term.
On the wafer of your skies, roughly 17 installments photonics for Anthony for capacity additions. So I want to have more color on that spend do we have any change or was that a <unk> scanner.
The second thing is.
Hey, Ron Rocco.
Have a good revpar box at a ratio.
Existing projects.
Starting from July .
So.
Could we get more color on the.
Currently we hit that hurdle rate for Erith your wholesale codecs.
And David on currency macro and the Covid situation.
Most of us about it.
What's the typical career.
For this kind of overcapacity at rates normalized you will hit that hurdle rate.
Thanks.
Thank you Alex So let me take the first question in terms of the pipeline you are correct. I think previously we had a range from 14 four to 17400 in terms of the cabinet deliveries in 2022.
Did revise down down to a range of 9000 412400.
Youll see the details that we've included in the.
IR ppt be uploaded to our website.
But.
So that is the range of guidance down from the 17 four that you discussed earlier on you.
You will see that the projects that we've taken out again.
Some of these we expect to take place in 2023.
There is some related to construction slowdowns, and then others related to customer demand being pushed back and so rather than <unk>.
Yep everything ramped up in terms of delivering the Capex and then waiting for the customer.
It's also then match our pace of delivery with the customer requirements as well.
The second question, maybe I'll pass to assemble that he can address that for you.
Yes in terms of the ramp up.
For all of our wholesale customers.
What happened is.
Are the customers basically from the contract with <unk>.
To have two years to ramp up to hit the 90% or even higher utilization rate, but in reality.
From our experiences and by talking to the customers.
Given their business growth normally.
We will be within a year, they basically hit the 90% or even higher and so forth.
You too.
Mou that we talked about today.
Including the social platform in public cloud service providers.
Have a high expectation.
That can ramp up too.
90% of even higher.
David time, given the current forecast.
And then separately from a retail point of view, we're also seeing kind.
Kind of.
Momentum from the customer digital transformation ciena as well so.
I would say given.
Even though with the macro conditions.
Conditions are a little bit uncertain.
But the parts of the business is pretty solid.
In the quarters ahead of time.
Thank you.
The questions. Our next question comes from the line of Sara Wang from UBS. Please proceed.
Hi, Simon and team thanks for the opportunity to ask a question Paul I have two question.
First is due on delivery target and ask what's the split between wholesale and retail.
Of the delivery target.
Evidence.
And another question.
So what's the.
Increased magnitude.
The magnitude of powered tariff increase in second quarter.
I noticed that our adjusted EBITDA margin actually stayed relatively stable versus last year.
Just wondering if there's any other area.
FCC costs to offset the public carriers decreased thank you.
Hi, Sir could you repeat the first is the first part of the question. Please again.
Hi.
The first question is what's the split between wholesale and retail.
Others of our delivery targets.
Okay. Thank you let me handle the first question I'd say that.
Right now the split be.
<unk>, the wholesale and retail.
We're still looking at a similar split of.
Around 60 60 40.
We've talked about again in the past 62000, 2060 being the wholesale and then scale retail and retail so we still expect that to be the same.
In that range.
More than half being wholesale related maybe up to two thirds speaking with cell related.
In terms of the power increases again, the vast majority of the increase that we saw.
Were in the tier one cities again, the early part of the year, we saw them go up by anywhere from 10% to 20% to the tier one cities.
And so we factored in the impact to the full year.
Margins in.
In quarter, one we did have some tax rebates and other income and Thats kind of some of the reasons behind why the margins in the first quarter weren't impacted as much and then the second quarter there were some costs.
<unk> there, but again, we have been quite focused on making sure we.
I hope to implement cost controls. So we will continue to do that in the third and fourth quarter.
But there are going to be limits to how much we can do to offset increases in our operating costs in general.
I hope that helps there.
Got it thank you.
Thank you for the questions.
Our next question comes from the line of Albert <unk> of J P. Morgan. Please proceed with your question.
Alright.
And Jonathan and thank you for taking my question. My first question is if I look at the two new guidance.
EBITDA margin implies that.
Second half.
Adjusted EBITDA could be like 22%, which is a multiyear low going to.
Although the one offs and structural margin drag in second half.
Just drive the market recovery in the next year.
And second question is.
In the revenue is not only driven by wholesale or brokered IDC demand weakness and from your point of view all known P. J.
The downside to that historically, our spending will be the leading indicator for ITC.
Right now the <unk>.
Spending looks still quite weak in second half implied.
Implied first half next year, we'll also see.
Hello.
In the ITC.
Yes.
Okay. Thank you Albert.
Let me take the <unk>.
First part of the question and then maybe Tim can help to chime in with additional comp.
Contacts.
As Tim pointed out.
The first quarter of the year because we.
We did have the tax subsidy even annual reimbursement.
Reimbursement from the Depository Bank and then so by by removing.
The onetime theme.
And then the second quarter margin is pretty much on par.
With the revised guidance as you can see all of our second half EBITDA margin is going to be roughly about 22% ratio.
I'd say in a nutshell.
Hide from the fact that some of the cost and expense got the late Q2.
The second half.
Colby the outbreak and locked down in the first half.
We're also expecting some.
Some of the revenue in the pipeline.
<unk>.
For new retail customer acquisition.
And then.
Some of the increased engineering cost.
Mainly.
Focusing on the invest ahead of revenue.
Yeah.
And then so that basically.
Impact our EBITDA margin in the second half.
So a lot of the analyst asking about the power tariffs or even our data center maintenance and upgrades.
I think both electrical and mechanical parts.
Although not really Mckee, we'll put data center, but if we add up it is steel.
Amount in the P&L, so that basically impact the EBITDA ratio in the second half are we expecting.
That will continue going on.
We saw it out because a lot of cost basically impact in the second half it's more.
March's analogy and so we're expecting to have.
Improvement in.
In the 2023.
And then can.
Tim do you want to take on the second question.
In terms of the you were asking about how long. This will last for I think Samuel started to address that and kind of all of this drag into 2023 and it was a leading indicators I would say that in our shifting of some of the capacity deliveries to 2023 alongside our match.
<unk> with the customer demands.
Is that we already see some of the things that they had initially wanted by end of year.
Being pushed into the first half of 2023.
So there is that visibility that customers still intend to.
To require.
Data centers.
It has been shifted backwards.
In terms of which area, we've kind of seen let's say the slower ramp ups I would say just given the sheer scale of.
The ramp up pace of a wholesale customer versus the retail customer I would say that it is more on the on the wholesale side. They are a sort of larger contributor in terms of billable cabinets ramp ups.
Not to say that we've not seen sort of similar slower pace during the times that they were lockdowns in place, we certainly hope that we see less and less of these types of lockdowns.
Second half and so then customers can actually resume more normal pace of ramp up.
During the rest of this year and into next year.
Thank you.
Yes.
Questions.
Our next question comes from the line of <unk> Chen from Credit Suisse. Please proceed with your question.
Hi, Thank you management.
Taking my question.
Two questions. The first one is regarding wholesale demand.
So for.
The move ins you have seen for the existing customers, we have had all existing orders.
How different is that say in terms of <unk>.
Required full ramp up.
Yes.
Okay.
It's different to our previous expectations, a previous guidance versus your guidance.
Number one question. The second question is.
MSR IC.
There is a small decline in.
And this all.
With two quarters running quarter on quarter.
I was wondering is there any trends, we should pick up yet or should we still.
Expect.
Sam to be broadly in line.
Previously, we Madison slightly outwards in the longer term.
Thank you two questions.
Hi, Thank you.
I will say from the wholesale customers point of view.
Basically I think Tim and I and we've talked about.
Specifically two type of your wholesale customers were with.
We're talking to almost on a weekly basis, the public cloud service providers and social platforms.
Especially for.
Video type.
Customer.
Who requires a huge stars.
<unk> the data.
I would say.
We're not seeing any difference.
Theyre moving rates aside from the COVID-19 impact of Lockdowns impact and so on so forth.
Their business continues to grow.
And then so.
When we talk to them they proactively.
Plan their demand forecast and do the site selection and then when we participate and win the bid.
It is not just one type deal it is more like a lifetime.
Ownership in Tulsa, So again from our partnership we're seeing the similar trends from a moving rate perspective.
That's the reason when came in and talked about aside from what's contractual say two years commit to.
Went up to 90%, we actually seen the actual results.
More faster than that so again.
Two Mou that we talked about today.
Hopefully we're seeing it.
Thanks, Ken as we talked about.
Tim do you want to address.
Recurring badly for the retail one yes sure.
In terms of the monthly recurring revenue.
I think the main thing is quarter to quarter.
You will see some.
A fluctuation and thats because the figure there is a total retail related revenue divided by cabinets.
We do expect that these levels will remain around 9000, and glad youre absolutely correct.
Your second part of your statement, which is whether or not we expect this longer term to trend upwards I think the answer is definitely yes and.
That's going to be driven by some of the investments that Samuel mentioned earlier on.
Hey investments on the retail services side.
That will then allow us to provide again, a larger suite of services to the customers and expand then the contribution of the value added services to the overall MLR. So again longer term I expect that to trend up.
But I think quarter to quarter to quarter, roughly fluctuating around the 9000 level.
I hope that helps.
Thank you very much thank you.
Thank you for the questions.
Your next question comes from the line of <unk> Li of CIBC. Please proceed with your question.
Carl Nelson.
Taking my questions.
Two questions.
First one is based on the current wholesale and retail demand.
Could you share more about the data.
Pipeline in Capex, Brian .
Thank you Tony.
And then my second question is regarding the utility costs.
Queens on wages in China, and there was a power supply shortage.
Any material impact Flores and could you share more detail about the future trend is think of the utility costs and the impact on our margin.
Yes, let me take those two questions in terms of I guess capex and delivery plans for 2023.
I would say that based on the fact that some of the capacity we had plan for 'twenty two being shifted into 'twenty three.
I'd say year on year, we would expect that the capacity in terms of megawatts will be larger in 'twenty three as compared to 22 clearly.
As things ramp up again and also as some of the construction delays.
Hopefully as we see.
Covid less COVID-19 impact year in 2023.
And so Capex also we talked about earlier on that we still expect capex spend to be around four 4 billion renminbi. This year next year, it likely will be higher than that.
As we then continue to build out the capacity, especially with the additional Mou wins.
Those will then clearly form.
Part of what we see in terms of the spend for the latter part of this year, but also into next year in terms of expected future tender wins as well.
The second question in terms of power.
Again.
The costs that we're seeing is largely similar to the last time around where they were a power shortages around China.
And these were related to.
Mostly short term purchases of diesel fuel.
And making sure that our data centers continue operating.
When there was uncertainty in terms of.
<unk> power supply.
From the grid.
These are the costs that we expect to see.
On a single data center basis. These are not material, if they persist or if they start to spread throughout China.
Then it will become a larger figure but at the moment I think largely covered in <unk>.
What we've already provided to the market in terms of what our views are for the second half and balance of the year.
Hope that helps.
Thank you.
Thank you management for the onshore ladies and gentleman that concludes our conference for today. Thank you for joining.