Q4 2022 VNET Group Inc Earnings Call
Speaker 1: and adjusted EBITDA of RMB 424 minutes. For the full year, our revenue growth 14.1% to RMB 7,065 minutes and adjusted EBITDA increased 6.8% to RMB 1,873 minutes. Before we get deeper into our business details...
Speaker 1: In addition, the government will continue to accelerate the digital transformation of traditional industries and small and medium-sized enterprises. We are also supporting the development of the platform economy.
Speaker 1: Last month, the central government rolled out a plan to build a digital China by 2025, which highlights the country's focus on expanding data resources and improving digital infrastructure.
Speaker 1: Encouraged by these supportive measures and positive signals, we expect industry's vitality to gradually recover and business confidence to rebound. In particular, we believe the internet giants will play to their strengths in technology to empower.
Speaker 1: development of the digital economy, and unleashing greater demand across the market. As China's leading IDC service provider, we are well positioned to capture new growth of in case ahead.
Speaker 1: Now let's take a closer look at our Q4 business updates. Execution of our dual core strategy continues to prove strongly effective both in the wholesale and retail IDC markets.
Speaker 1: On wholesale fronts, we continue to gain robust sales momentum with two major orders, despite the macro challenges. In the fourth quarter, we extended our wholesale data center services contract with one of our largest existing customers, a leading social platform in China. This extended order will generate capacity of approximately 33 miles per hour.
Speaker 1: through our IDC assets located in the Yangtze River Delta region. This collaboration represents a significant development opportunity for us, and it's our proven track record of providing IDC services to powerhouse companies across China's internet industry.
Speaker 1: Moving on to our retail business, we continue to make meaningful progress on our customer-based expansion in the fourth quarter, supported by our premium co-location and interconnectivity offerings as well as our value-added services.
Speaker 1: We continue to extend our services to existing customers and attract new customers, meeting increasing demands from a wide spectrum of industries including financial services, local services, mobility, online gaming and some traditional industries.
Speaker 1: In particular, our connectivity services have tapped into a variety of sectors, including public transportation, public cloud, and healthcare, another testament to our industry-leading service capabilities. Next, I would like to highlight our progress on hybrid cloud offerings.
Speaker 1: In the fourth quarter, we successfully facilitated digital transformation for the mainland China. Operations of Washington, a leading Asian health and beauty retailer. We provided the customer with a one-stop infrastructure as a service, our IRS solution, as well as complete operations and maintenance services for both software and digital services.
Speaker 1: and hardware to optimize customers' IT architecture, enhances business reliability, and improve operational efficiency. Looking ahead, we'll continue to empower our customers' transitions into the evolving digital area by leveraging our IDC asset, network, and service capabilities.
Speaker 1: Turning to our ESG initiatives, we have always held our long-term commitment and responsibilities to our industry, environment, and society as a foundation of our ongoing success. Our dedication and hard work are paying off. Earning the company brought recognition from global renowned ESG rating agencies.
Speaker 1: in China's Internet service and infrastructure industry. In addition, our ESG score measured by the S&P Corporate Sustainability Assessment reached 57, ranking in the top 10% among all companies in the IT services industry globally. We also submitted CDP's Climate Change Questionnaire in 2022.
Speaker 1: and achieved a big rate, which exceeded 96% of participating companies in China. These accomplishments and accolades clearly demonstrate the effectiveness of our ESG strategy, while strongly affirming our long-term investment value and development prospects.
Speaker 1: Moving into 2023, while economic recovery is still underway and may need time to realize the full rebounds, we remain confident in the long-term growth potential of China's market as well as the IDC service industry as a whole. As a result, we set our 2023 delivery plan.
Speaker 1: in the range of 8,000 to 9,000 cabinets. We believe supportive government policies will accelerate China's digitalization across multiple industries. And our proven dual-core growth strategy and industry-leading service capabilities will keep us at the helm of market recovery.
Speaker 1: will remain agile as we navigate shifting market dynamics and capitalize our future growth opportunities, creating sustainable and long-term value for our shareholders. Thank you everyone. I will now turn the course to our CFO team to discuss our financial performance for the quarter and our business outlook.
Speaker 2: Thank you, Jeff. Good morning and good evening, everyone.
Speaker 2: Before we start the detailed discussions of our financials, please note that we will present non-GAAP measures today.
Speaker 2: Our non-GAAP results exclude certain non-cash expenses which are not part of our core operations.
Speaker 2: The details of these expenses may be found in the reconciliation tables included in our earnings press release.
Speaker 2: Please also note that unless otherwise stated,
Speaker 2: All the financials we present today are for the fourth quarter of 2022 and in MMB terms.
Speaker 2: As Jeff just mentioned,
Speaker 2: We concluded 2022 with resilient operating and financial performance amidst a myriad of external challenges.
Speaker 2: which speaks to our outstanding execution.
Speaker 3: Next.
Speaker 2: Let me walk you through our fourth quarter financial results.
Speaker 2: unless otherwise specified, the growth rates I will be reviewing are all on a year-over-year basis.
Speaker 2: In the fourth quarter, our net revenue increased by 7.7% to $1.88 billion from the same period last year.
Speaker 2: mainly due to increased customer demand for our highly scalable carrier and cloud-neutral IDC solutions from both wholesale and retail IDC businesses, as well as the continued growth of our cloud and VPN services.
Speaker 2: Gross profit was $328.4 million in the fourth quarter of 2022, representing a decrease of 13.6% from the same period of 2021.
Speaker 2: Gross margin was 17.5% in the fourth quarter of 2022 compared to 21.8% in the same period of 2021.
Speaker 2: Adjusted cash gross profit, which excludes depreciation, amortization, and share-based compensation expenses was $740.1 million.
Speaker 2: in the fourth quarter of 2022, an increase of 3.7% from the same period of 2021.
Speaker 2: adjusted cash gross margin in the fourth quarter of 2022
Speaker 2: was 39.4% compared to 40.9% in the same period of 2021.
Speaker 2: Adjusted operating expenses, which exclude share-based composition expenses.
Speaker 2: compensation for post-combination
Speaker 2: employment and acquisition, impairment of loan receivable to potential investee
Speaker 2: and impairment of long-lived assets were 355.4 million in the fourth quarter of 2022, compared to 273.7 million in the same period of 2021.
Speaker 2: impairment of long-lived assets were $355.4 million in 2022 compared to $273.7 million in 2021. As a percentage of net revenues, the
Speaker 2: adjusted operating expenses in the fourth quarter of 2022 were 18.9%.
Speaker 2: compared to 15.7% in the same period of 2021.
Speaker 2: A justifia in the fourth quarter of 2022 was 424.3 million, representing a decrease of 8.3% from the same period of 2021.
Speaker 2: Jassidipa Ta in the fourth quarter of 2022 excluded a reversal of share-based compensation expense of $7.8 million.
Speaker 2: adjusted the Bada margin in the fourth quarter of 2022 was 22.6% compared to 26.5% in the same period of 2021.
Speaker 2: Our net loss attributable to ordinary shareholders in the fourth quarter of 2022 was $64.2 million.
Speaker 2: compared to a net loss of $27.3 million in the same period of 2021.
Speaker 2: and diluted loss were both 0.07 per ordinary share and both 0.42 per ADS.
Speaker 2: Each ADS represents six Class A Ordinary Shares.
Speaker 2: The SDS represents six Class A ordinary shares. Now turning to our balance sheet.
Speaker 2: As of December 31, 2022,
Speaker 2: the aggregate amount of the company's cash cash equivalents
Speaker 2: and restricted cash was $2.99 billion. Meanwhile, net cash generated from operating activities in the fourth quarter of 2022 was $569.6 million compared to $664 million in the same period of 2021.
Speaker 2: Our CapEx in the fourth quarter of 2022 was 1.21 billion.
Speaker 2: And the total capex for the full year 2022 was $3.35 billion.
Speaker 2: Now moving to our outlook, we expect net revenues for the full year of 2023,
Speaker 2: to be in the range of 7,600 million.
Speaker 2: to 7,900 million.
Speaker 2: representing a year-over-year increase.
Speaker 2: of 7.6% to 11.8%.
Speaker 2: of 7.6% to 11.8%. Energicity of a dial.
Speaker 2: to be in range of $2,025 million.
Speaker 2: to 2125 million.
Speaker 2: representing a year-over-year increase of 8.1%.
Speaker 2: representing a year over year increase of 8.1% to 13.5%.
Speaker 2: Looking forward, we will continue to execute on our dual core growth strategy and remain focused on our core business as well as higher quality revenues.
Speaker 2: In addition, we will continue to explore more capital resources to further strengthen our financial position.
Speaker 4: This concludes our prepared remarks for today. Operator, we are now ready to take questions. Thank you. Thank you. At this time, we will conduct a question and answer session. As a reminder to ask a question, you will need to press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again.
Speaker 4: Please stand by while we compile the Q&A roster.
Speaker 4: Our first question comes from the line of Yang Liao of Morgan Stanley . Please proceed with your question.
Speaker 5: Good morning. Thanks for the opportunity to ask questions.
Speaker 5: Two questions from my side. The first one is about moving. Could management share the color year to day? What does moving look like from your retail and wholesale customer? And what should be the...
Speaker 5: utilization rate by the end of this year if we add another 8,000 to 9,000 cabinet.
Speaker 5: That's the first question. And the second question is, we are glad to see that the company onboard a new wholesale customer with pretty big order size. When should we expect financial contribution will be visible in future? Thank you.
Speaker 2: Hi, Jan. Can you hear me?
Speaker 2: Can you hear me? Yes, I can.
Speaker 2: Okay, let me take the second question and then I'll pass back to Jeff and the team on the first question on the ramp ups. For the new customer that we've announced just now, we're expecting the financial contribution to take place basically end of this year or early next year.
Speaker 2: Obviously, it's going to take us time to deliver the cabinets. By the time meaningful financial contribution takes place, I think it will be 2024.
Speaker 2: I hope that's helpful. Let me pass the ramp up in terms of what we've been seeing in fourth quarter and the first few months of the first quarter to Jeff and team.
Speaker 1: Hi, it's Jeff. We wrap up regarding the wrap-up at the end of 2022. We expect more for this year. Let me give you some colors on the new customers that the team mentioned.
Speaker 1: Essentially, it's actually the large majority of the available cabinets in code 4.
Speaker 1: So we can see, as you mentioned, moving from the Internet player is very good and faster than what we expect from the cloud service providers. Given the contribution to our financials, I would say in terms of this contract, we
Speaker 1: We will see by the end of this year, it's about over 70 megawatts. We will see by the end of this year,
Speaker 1: next year. So we see substantially and large financial contributions will come out by the end of this year and early next year.
Speaker 6: Thank you.
Speaker 4: One moment for our next question.
Speaker 4: Our next question comes from the line of Sarah Wang of UBS. Please proceed with your question.
Speaker 7: Hi, thank you for the opportunity to ask a question. So I have one question. So would management please walk us through the financing plan and also the major cash inflows and outflows for this year, especially given one of the comfortable bonds might be put full early next year? Thank you.
Speaker 2: Thanks Sarah for the question. It's Tim here. With regards to the overall financing plan, we've obviously started already at the end of last year going through the alternatives available to the company.
Speaker 2: We've seen with quite positive news that the public markets are gradually opening up. As to the major sort of inflows and outflows, obviously the business continues to generate very healthy operating cash flow. Again, those would be mainly the caucuses, and we've been very pleased with what we've
Speaker 2: And at this moment, we're expecting CapEx to be quite similar to what it was in 2022, which is between 3 to 3.5 billion RMB. However, I would then point out next is that this CapEx is not all committed or contracted.
Speaker 2: So, we do have the ability to ratchet back during the course of the year and we'll do so really for two areas. One is as we see the customer demand.
Speaker 2: and also the customer requirements in terms of delivery dates if they shift. You've seen us also in 2022 adjust during the course of the year as required.
Speaker 2: And then secondly, obviously, is we are planning our overall cash flow for the potential refinancing of the convertible bond that would be in first quarter of 2024. So that's something that we're keeping a very close eye on and obviously looking to the various alternatives. Democratic Republican
Speaker 2: Obviously, given where share prices are for us and our peers, we will be looking mainly at debt and convertible as the main instruments.
Speaker 2: Also, something that we've already mentioned last year, we continue to work on would be onshore remimbi financings, both in the form of private and public reach.
Speaker 7: I hope that answers your question, Sarah. Thank you. And just a quick follow up. On the operating cash flow for 2022, it seems it was $2.6 billion RMB. So how shall we think about the operating cash flow level for 2023?
Speaker 2: Thank you. I would say that the working capital points will not move very much. So you're looking at underlying EBITDA as a good proxy. So obviously we've given some guidance on EBITDA. I think you can use that as a proxy on where directionally we expect operating capital to go as well.
Speaker 4: Thank you. Thank you, Sarah. As a reminder to ask a question, please press star 11 on your telephone. If you have any questions, please press star 11 on your telephone.
Speaker 4: Got it. That's clear. Thank you. Thank you, Sarah. As a reminder to ask a question, please press star 11 on your telephone. Please stand by.
Speaker 6: One moment, please.
Speaker 4: Our next question comes from the line of Edison Lee. Jefferies, please proceed with your question.
Speaker 5: Okay, hi, thank you. Hi, Tim and Jeff. Thank you for the presentation. I have two questions. Number one is on this new customer that you have signed up for over 100 MACA ones. So based on your comment a little bit earlier, I assume that the 3000 cabinets that
Speaker 5: you are including in your 2020 guidance is not related to this customer. I just want to confirm that. And also, could you give us some color on the pricing and also on the potential for follow-on orders for this particular customer in the same region or in the same data center campus.
Speaker 5: And my number two question is, is it possible for you guys to give us an update on your joint venture IDC fund with the Changzhou government? And in fact, is that being factored into your 2023 guidance or how much of that is being factored into that? Yeah, that would be great. Thank you. Take care.
Speaker 1: Let me answer your question. The first one in terms of new customers, yes it is. We include 3000 companies as it is here, which is from the first phase of the new customer.
Speaker 5: Sorry, Jeff, can I confirm that this 3,000 cabinets will be delivered towards the end of the year, so despite the financial contribution.
Speaker 2: That's correct. We're expecting that these will be delivered at the very tail end of the year and so I don't expect, at least from my side, any meaningful financial contribution, probably a little bit, the very beginning of it, but really the meaningful contribution will be in 2024.
Speaker 1: Can I also follow up with just one related question? So will this 100 megawatts be fully delivered within 2024 or is it going to go into 2025?
Speaker 1: It's going to be divided into different phases. The first phase will be this year and early next year. We will deliver two thirds and the remaining will be delivered in the next year.
Speaker 8: It will be completely delivered in 2024.
Speaker 2: No, no, no. No, no, sorry. The first phase, the first part is going to be mainly in the 2023 into the early part of 2024.
Speaker 2: But the balance, we will need to see whether the customer will give us the heads up. So it depends on their move-in rate. If the move-in rate is very, very strong, they may give us an earlier go-ahead, in which case, yes, it would be in 2024. But if not, it could actually drag into the outer ears.
Speaker 8: I'm sorry, I want to further clarify because I think that's an important point. So this 100 megawatt contract, you already signed the MOU with the customer. However, the timing of delivery is actually not specified in the MOU. Is this understanding correct? Only part of it is.
Speaker 2: specified and the balance is not. Based on what they've, the indication that they've given us, yes, correct.
Speaker 1: Tim, let me put it this way. We will be fully delivered within three years per the MOU with the customer.
Speaker 8: Okay, and in the same location, right? All these capacities at the same location. Yes, same location. Yes.
Speaker 8: Okay, thank you.
Speaker 6: Thank you.
Speaker 8: Sorry Jeff, please go ahead.
Speaker 1: Okay, let me answer your questions in terms of the GV with Changzhou. We have actually recently we signed a PA in Langfang area with one project, which is the largest one from the identified portfolio.
Speaker 1: The GV has already committed over 500 million RMB and as a proportion we also committed the capital. And this long-form project will achieve IT scale of about 140 MW and also will be delivered for eight days.
Speaker 1: by the end of this year, including Shenzhen, Dongguan, and also in central Beijing areas.
Speaker 8: Thank you. Just a follow-up. So will this Langfang project be contributing profitability to VNet this year?
Speaker 1: I wouldn't say it contributes to VNES financials, but it's also divided into different phases. Phase 1 and phase 2 already have customers. We are standing at SPA on phase 3 and phase 4, which is a Greenfield project.
Speaker 4: Ladies and gentlemen, that concludes our conference today. Thank you for participating. I now disconnect.