Q2 2023 VNET Group Inc Earnings Call

Hello, Ladies and gentlemen, thank you for standing by for the second quarter 2023 earnings Conference call V. Net Group Inc. At this time all participants are in listen only mode.

After the managements prepared remarks, there will be a question and answer session participants from our management and crude Mr. Jeff Dong Chief Executive Officer.

Mr. Qing Yu, Wang Chief Financial Officer Mr.

Mr. Kim Chen Chief strategy Officer, and Mr. Shang Chuang Singalong, Liu Investor Relations director of the company. Please note that today's conference call is being recorded I would now.

I'll turn the call over to the first speaker today Ms Senior Rong Luo. Please go ahead.

Thank you operator, Hello, everyone and welcome to our second quarter.

Earnings Conference call.

What's your view.

Earlier today.

Okay.

That's right.

Yes.

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.

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

Well go to a 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.

Applicable laws.

Please also note that we announced earnings press release and this conference call include that disclosure.

GAAP financial matters as well.

Yes.

non-GAAP financial measures.

With Us earnings press release.

Reconciliation of this.

Our non-GAAP measures to the.

Did it matters.

As a reminder, this conference is being recorded.

Well that past today's conference call will also be available.

Our web site at.

There'll be no dotcom.

I'll now turn the call over 12 senior debt.

Thank you.

Uncle <unk>.

Thank you all for joining our call today.

Start with the overview of our second.

Second quarter results.

I will turn the call to achieve our CFO and she our CFO .

To discuss our financial results and outlook in more detail.

We are pleased to report a solid second.

Quarter was utilized covenant screen by 2000.

Utilization rates further improving to 59%.

Companies under management reached 86900 by the end of the quarter.

With approximately 87 800.

Our retail MMR per cabinet continue climbing to reach a new high.

It'd be nice on 530 during the color as we have mentioned our focus on high quality revenue business to drive higher margin and better profitability.

We achieved second quarter revenue of RMB 182 billion, representing an increase of five six year over year.

The EBITDA of <unk>.

575 minutes.

Increase of nine 9%.

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Our solid operational and financial performance reaffirms, our ability to quickly capture incremental market demand.

High quality scalable.

This is a maintenance steady economic recovery.

It's very clear that digital economy is becoming an increasingly important driver of China's overall economic development to accelerate in the post pandemic recovery on the both growth China's policymaker stepping up supported policies to strengthen the digital economy, an upward industries with cutting edge.

Technologies, such as big data AI.

G.

<unk> newly application scenarios emergent across different industries in China, unlocking more demand for IDC services at screening and optimized AI models require massive compute empower them.

So the good news.

As a computing power partner in <unk>.

AI innovation partnership program set up by the Beijing.

It's both government and it's July .

This government tax program aims to build the synergy synergies cost by Janssen generative.

So your value chain.

Supporting AIG see companies with high performance.

Highly scalable computing power on a field in the development of foundation models.

Inclusion in this program.

Once again showcase our outstanding track record strong computing power resources on our service capabilities.

Expansion into more AI driven demand in the near future.

Now, let's take a closer look at our second quarter business update.

First I'd like to share some exciting early science of growing demand from general <unk> for our business.

So large language models have already been launched across different sectors. This year, although many of them are still in the screening stage general models dominated by Internet Johns Laura vertical models are being built by a leading player in specific industries as well as some tech stops.

Of the three fundamental elements for developing AI computing power.

On data computing power plays the most critical role for Chinese companies effectively training their AI models as many companies have already developed advanced algorithms on the vast data sets.

Our wholesale data centers are able to offer high powered dusty companies up to 40 kilowatt per cabinet well capable of powering large language model financed on deployments for Ethernet platform operators, our retail confidence also have a service from a capacity for high performance computing components.

<unk> offering over 30 kilowatt single cabinet generative AI demand is already arising from our existing customers across a variety of industries, such as local services health care and the virtual reality.

Demand expense further for data processing and storage requirements stemming from the AI boom, we have confidence our expertise in high performance data center gives on coupled with our extensive resources.

Switching capabilities.

Enable us to drive the next wave of IDC service growth.

Next moving to our wholesale business, which continued to build robust sales momentum recently.

One <unk>.

Extended its contract for a 45 megawatt of additional capacity from the existing.

Existing internet John customer.

Our compelling value proposition broad industry expertise in depth research capabilities, and our strong execution scales assure the appeal of our wholesale service offerings towards Internet John's.

Turning to our retail business, where are we continue to make meaningful progress expanding and diversifying our customer base, our new customer wins.

Were primarily attributable to a digital demand from the acute services manufacturing.

Our services sectors also our scalable high quality services can handle secure inquiry mental demand from existing customers across various industries, including local services financial services online gaming VR technology manufacturing and more ability.

Notably in the second quarter, we extended our contract for southern megawatt with our existing retail customer, which is a leading player in the local services sector.

Our innovative value added services on a customized solutions also continue to provide solid support to our retail business, especially in the emerging demand for general deployment.

In the second quarter.

Although it's a new full stack bare metal as a service solution to support a significant computing power required by foundation models in general.

This new solution.

<unk> data storage bare metal and the direct cloud connect services.

<unk> primary unsecure connections between customers and multiple cloud providers during the quarter, we signed the contract with pioneer and macro versus company in China for our one stop source that addresses US featuring this new solution. This comprehensive set of Subsys will help the customer.

Quickly acquire.

Sauces business peaks for me is on demand computing needs.

Supporting its large modal training to better expand its matter of our business with a low latency high fidelity and <unk>.

Immersive user experience.

Going forward, leveraging our extensive IDC resources large customer base and the high quality of services we offer.

It's a solution to serve a broader range of industries ceiling, new opportunities arising in the AI space.

Next I want to share an update on the broker business during the second quarter with one the new multinational Corporation.

The customer Mark a worldwide a designer manufacturer and the integrator of precision control components on the system, we will provide more with the deployment and implementation services caused a high bright call infrastructure, specifically will support the customer in building a new.

He environment for business development and operations in China.

Localized.

Hi Tech infrastructure and are implementing data migration to China based call computing platforms to ensure business continuity, we have built a wealth of experience and practical knowledge in this field by helping many msas landauer business alongside <unk> infrastructure in China.

Successful implementation of amongst projects will further strengthen our ability to tap into the increase in demand from multinational customers.

Raymond localization on the cloud migrations to merge with Chinese business systems.

On the ESG performance of fronts, we are honored to be selected for inclusion in the S&P Global's first China edition of the sustainability Yearbook 2023 published in late June .

<unk> global evaluated nearly 1600 Chinese companies across 16 industries. So is 2022 corporate sustainability assessment and ultimately recognized 88 companies from his ear book Vienna earned the highest ESG score more Chinese.

So as companies participating in the assessment.

Clearly a reflection of our industry, leading practice and achievements in ESG.

We forged ahead with our sustainability action plans, we will continue to innovate and implement strategies and initiatives that make a real difference.

Positioning arena as a sustainability leader in Iot SaaS services industry.

To summarize our ongoing progress across each of our base of lives the increasingly unfavorable policy landscape and aes.

Growing prevalence reinforcing our confidence in the mid and long term growth prospects, all the China side using service industry.

With our reliable and scalable services high power density deployment capabilities, and a loyal and expanding customer base, we are well positioned to maximize our deal cost strategy to serve digital demand driven by a wealth, Brian digital transformation and outdoor.

Thank you everyone I will now turn the call to Tim on <unk> to discuss our financial performance for this quarter.

Thank you very much Jeff 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 measure of 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. We present today are for the second quarter of 2023 and in Renminbi terms.

Now, 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.

We remain dedicated to advancing high quality revenue business to drive margin and profitability improvements.

In the second quarter, our net revenues increased by five 6% to 182 billion from the same period last year, mainly driven by the continued growth of our IDC business as well as our cloud and VPN services.

Profit was $342 7 million in the second quarter of 2023, representing a decrease of four 2% from the same period of 2022.

Gross margin was 18, 8% in the second quarter of 2023 compared to 27% in the same period of 2022.

Adjusted cash gross profit, which excludes depreciation amortization and share based compensation expenses was $742 9 million in the second quarter of 2023, an increase of four 1% from the same period of 2022.

Adjusted cash gross margin in the second quarter of 2023 was 48% compared to 41, 4% in the same period of 2022.

Adjusted operating expenses, which exclude share based compensation expenses and compensation for post combination of employment and an acquisition were $241 5 million in the second quarter of 2023 compared to $250 7 million in the same period of 2022.

As a percentage of net revenues adjusted operating expenses in the second quarter of 2023 were 13, 3% compared to 14, 5% in the same period of 2022.

Adjusted EBITDA in the second quarter of 2023 was 535 million, representing an increase of nine 9% from the same period of 2020 to adjust.

Adjusted EBITDA in the second quarter of 2023 excluded share based compensation expenses up $8 million.

Adjusted EBITDA margin was 29, 4% in the second quarter of 2023 compared to 2008, 2% in the same period of 2022.

Our net loss attributable to <unk> Group, Inc. In the second quarter of 2023 was $232 9 billion compared to a net loss of $377 2 million in the same period of 2022.

Basic and diluted loss were both 0.26 per ordinary share and both 156 per ads.

Each eds represents six class a ordinary shares.

Turning to our balance sheet as of June 32023, the aggregate amount of the company's cash and cash equivalents.

Strict cash and short term investments was $2 76 billion.

Meanwhile, net cash generated from operating activities in the second quarter of 2023 was $423 5 million compared to $942 7 million in the same period of 2022.

Our capex in the second quarter of 2023 was $405 million.

Finally, I want to thank you all and our team for all the support and partnership over the past couple of years and thrilled to continue working with the company's executive team on strategic initiatives and I'd like to now turn it over to achieve.

Thanks, Tim.

Thanks, Jeff.

Owner to be part of <unk> leadership team.

I look forward to leveraging my 20 years of industry experience and working with our team to drive our Duke energy and unlock more growth potentials.

In terms of our outlook.

Currently maintain our full year 2023 guidance and in fact <unk> revenues to be in the range of 700000.

$600 million to 7000 $900 million.

Year over year increase of seven 6% to 11, 8%.

And adjusted EBITDA to be in the range of 2000 $25 billion through 2000 $105 million, we Brandon King year over year increase of eight 1% to 13, 5%.

Looking forward we.

We will continue to focus on high quality revenue business to drive margin and profitability improvement.

Additional maybe I'll explore new opportunities.

A rising from robust digital demand, especially AI product demos and further strengthen our position.

Moving IGT player a roku will proven do core growth <unk> highly scalable service offering and solid financial and operational results.

Confidence in our prospects, who deliver the timbale value to our stakeholders.

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

Thank you now begin the question and answer session to ask a question. Please press star one on your telephone and to a draw. Your question. Please press star one again.

One moment for our first question.

Our first question will come from the line from the line of Yang Liu from Morgan Stanley . Your line is open.

Okay.

Hello Learning management does Pablo subject Keith Thank you for the question.

Opportunity to ask questions.

<unk> recently.

Question.

Regarding capital.

Okay.

Thank you.

Okay.

Got it.

Thank you.

Thanks, a lot Pam led it's Tim here.

We mentioned to the market before we have been actively reaching out to multiple tenants.

Channels.

To the market I think you are aware of our efforts in terms of the sea rates asset disposals.

Both public bonds and private placements.

Also I'd like to point out we have a growth Tivoli healthy cash balance of over 2 billion renminbi of unrestricted cash.

With the.

Shifting to the management team.

We're able to bring a larger focus also onto some of our onshore and our renminbi financing channels with the addition of <unk> to the senior team. So all of that is part of our efforts.

At the moment, we are still closely monitoring.

Bond markets in the U S. Obviously they are volatile.

But all of our preparation work is completed so we will.

Wait for the next market window on that site, but to continue our efforts on all the other areas. Thanks Pamela.

Great. Thank you.

For next question.

And our next question will come from the line of Edison Lee from Jefferies. Your line is open.

Hey, Thank you for taking my questions first of all congratulations on it.

That's on one another.

So maybe the first question was about that wholesale water can we just talk a little bit about the time line of the Dmitry.

And then also the terms there is somewhat similar to the previous owner.

And then can you remind me.

Quarter 3000 cabinets that you appealed against on that site walking back of work, but it's equivalent to the first question is about that.

Number two is on your <unk>.

Operator, you can call it since the second quarter with a lot lower on a year on year basis is about 22% lower on a year on year basis can you share your outlook on operating costs for the second half of this year.

Okay.

Hello, I will take the first question on the on our contracts.

We actually I mentioned.

In the course, we recently actually we won the extended contract.

For 45 megawatts.

Additional capacity from our existing Daytona John customer.

The contract is already signed actually.

To attach with previous we announced.

In total 160 megawatt together.

To be fulfilled in the different phases.

Let me elaborate it will be.

More in details on the on this contract, we we Dubai into a different phase.

The first phase.

A couple of buildings will be delivered.

The Holocaust fall by the end of the year.

The second will be the half of next year. So so so the movie and it will be very fast.

This is something that we can share with you.

Okay.

Sorry can I just follow up by asking.

You indicated that this year you would deliver 3000 cabinets on that site. So what is the equivalent of <unk> 3000 cabinets.

Yes, correct. So we'll deliver so you saw that.

A year.

And what is the back of what equivalent without 3000 cabinets.

Yes.

Paul.

100 megawatt.

Okay.

Okay. Thank you.

One moment for our next question.

Yes.

And our next question will come from the line.

Of Sara Wang from UBS. Your line is open.

Sara Your line is open.

Yes. Thank you for the opportunity to ask question. So may I ask if there is any change to the capex guidance for this year. Thank you.

Hi, Sir Thanks for the question in terms of Capex guidance at the moment. There are no further adjustments in terms of the Capex guidance. Obviously, we are very much focused on the capex.

For delivery of this year's cabinets.

And where we can cut back we actually have been scaling some of that activity back just given the fact that we want to build up a healthy cash reserve also for our upcoming refinancing.

And the good news on the Capex front also is that.

Although we are focused on the delivery of this year's cabinets. We also have.

A number of very very strong project financing.

Associated with those projects.

So overall, we expect that the cash impact.

Should be more.

Manageable.

The activity that we have in terms of completing those cabinets for 2023 deliveries.

Got it thank you.

Well enrollment for next question.

And our next question will come from the line of Timothy Zhao from Goldman Sachs. Your line is open.

Sure. Thank you management for taking my question. My question is regarding the.

The EBITDA.

Just wondering I think compared to your full year guidance.

The low end to high end just wondering what are the key variables that you are thinking for the second half of this year for the company to achieve say midpoint or the high end and also any color into the EBITDA margin into the second half, including any trend that you see from the top power <unk> power cost et cetera that would be very helpful.

Yes.

Hi, Timothy let me take this question here.

Look good question on the EBITDA margins, obviously for both first and second quarter.

We've been working very hard on the cost control side.

So that's actually helped there are a few I would say one offs.

The positive side, both in first and second quarter.

We've shared with the market that will not be repeated in third and fourth quarters.

We do expect there to be I guess a reversion.

Terms of third quarter.

Some of the bigger factors that have impacted in second quarter and expect it to continue to impact the third quarter relates to power.

And tariff costs.

The average unit cost actually has been relatively stable.

In the second quarter. However.

This is not unlike our peers in China right now there is now a seasonality in terms of the summer months, where we do expect.

The utility costs to be higher also as you can see from our figures in the PPC we've.

Had some substantial ramp up in terms of customers moving into our data centers and obviously that also increases our overall.

Utility costs less.

Last but not least in terms of an outlook.

I would say that in a moment our guidance for the full year EBITDA remains unchanged there.

There is an element of uncertainty around let's say second half power costs.

There is an NDA RC notification about provincial electricity transmission distribution prices.

During the third regulatory period. So we expect that that will inject another layer of uncertainty I would say around power.

And I think for third quarter at the moment.

Probably I expecting that.

EBITDA margins will contract a bit as compared to the second quarter as some of these one offs will disappear from the second quarter.

But if the power cost remains stable then we expect that third to fourth quarter fourth quarter. We'll then have an improvement in margins, obviously, given the cooler weather.

The winter months.

Thanks, Tony.

Thank you that's helpful.

Thank you that's all the time, we have for Q&A today, and with that ladies and gentlemen that concludes our conference for today. Thank you for participating you may now disconnect everyone have a great day.

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