Good morning and good evening, ladies and gentlemen. Thank you and welcome to 21Vianet Group's Second Quarter 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. We will be hosting a question-and-answer session after management’s prepared remarks. With us today are Mr. Alvin Wang, Chief Executive Officer and President; Ms. Sharon Liu, Chief Financial Officer; and Ms. Rene Jiang, Investor Relations Director of the company. I will now turn the call to Ms. Rene Jiang, IRD of 21Vianet. Please go ahead ma’am.

Hello everyone. Welcome to our second quarter 2018 earnings call. Before we start, please note that this call may contain forward-looking statements made pursuant to the Safe Harbor provisions for the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on management’s current expectations and observations that involve known and unknown risks, uncertainties, and other factors not under the Company’s control, which may cause actual results, performance, or achievements of the Company to be materially different from the results, performance, or expectations implied by these forward-looking statements. All forward-looking statements are expressly qualified in their entirety by the cautionary statements, Risk Factors, and details of the Company’s filings with the SEC. 21Vianet undertakes no duty to revise or update any forward-looking statements for selected events or circumstances after the date of this conference call. I will now turn the call over to Mr. Alvin Wang, CEO and President of 21Vianet.

Thank you, Rene. Good morning and good evening everyone. Thank you for joining us for the earnings call today. This is the third quarter since we completed the divestiture of our loss-making MNS business. Our strategy to focus entirely on our call hosting and the related services business including IDC, cloud and VPN services has proven to be a key driver of our growth. During the last nine months, we saw continuous improvements in both our financial and operational results. We are particularly pleased to achieve a 29% year-over-year growth of our adjusted EBITDA this quarter while expanding the adjusted EBITDA margins to 26.7% from 22% in the same period last year. The healthy trajectory of our financial performance is fueled by our relentless efforts to optimize our operational efficiencies. With our attention and resources fully focused on our core business, we were able to make marked improvements in the management of our cabinet’s capacity, power usage and the human resources. And our results were significantly enhanced the efficiency of our cost and the expense structure making our business leaner and stronger than ever before. Furthermore, in the first half of 2018, we introduced a series of incentives to our employees called performance stock units. We believe our incentive plans based on the detailed KPIs are well-designed to further motivate our teams and boost their productivity. We will continue to implement this incentive program in the coming quarters. Our improvements in operational efficiency built upon our already robust capability in network reliability, service quality and the carrier and cloud’s neutrality allowing us to capture new opportunities in the rapidly growing Chinese IDC markets. During the quarter we welcomed new customers in Chinese internet and financial services sectors including IMD Cloud, a subsidiary of China Merchant Bank, Single Data, an Asia…

Thank you, and hello everyone. As Alvin mentioned earlier, we divested MNS business by the end of the third quarter of 2017. Since then, all of our revenues and expenses are entirely generated by our call hosting and related services. To make our year-over-year comparisons relevant and meaningful in the following remarks, we have excluded our revenues and expenses related to the MNS business from our second quarter of 2017 results. We believe this would offer better clarity and insight into the true performance of our core business. Please also note that we will present non-GAAP matters today. Our non-GAAP results exclude certain non-cash expenses, which are now a part of our core operations. The details of these expenses may be found in the reconciliation tables included in our press release. Please note that all the financial numbers we are presenting today are in RMB terms and at that percentage changes are on a year-over-year basis unless otherwise stated. During the quarter, we remained focused on enhancing the efficiency and effectiveness of our operations while sustaining our strong top and bottom-line growth momentum. Our net revenue in the second quarter increased by 11.4% year-over-year to RMB828.3 million driven by the rising customer demand for more cabinet capacity. Hosting MRR per cabinet for the second quarter was RMB8,271, compared to RMB7,697 in the same period of last year and RMB7,905 in the first quarter of 2018. The increase in MRR was mainly due to an increased amount of hybrid IT services and added services that our customers pursued during the quarter. Our adjusted cash gross profit, which excludes depreciation, amortization and share-based compensation expenses increased to RMB364 million this quarter representing an increase of 14.4% from RMB318.2 million in the prior year period. Adjusted cash gross margin further expanded to 43.9%…

[Operator Instructions] Our first question comes from Yang Liu from Morgan Stanley. Please go ahead.

Good morning, management. Thanks a lot for the opportunity to ask questions. And first, I would like to congratulations on the strong results and also the upward revision of your guidance. I have four questions. The first one is related with MRR. I noticed that it’s up almost 5% quarter-on-quarter, 7.5% or 4% on year-over-year and the management – I imagine that it was driven by the hybrid IT and VAS. I just want to make sure, the hybrid and the VAS are all recurring revenue and I’d like to know if relatively high level of MRR in the second quarter is sustainable going forward or not? That’s my first question. The second one is that, we are very happy to see the good cooperation with Tus-Holdings in the IDC pipeline. Will this capacity for retail business or wholesale business expansion? And are the two projects within the current guidance of around 3,000 or 4,000 new cabinets per year, or it’s on top of that current guidance and how about the CapEx will play to build the two new projects? And the third question is related with the execution of the incentive program, employee incentive program. So, it is – I know, it’s still in the early stages. So we will appreciate if management could share some progress or something you observe that in the execution of the whole management team. The last question is related with FX loss. I guess, it’s due to the US dollar denominated bonds and I would like to know if company have further or future hedging strategy to control the risks. Thank you.

Okay, thank you, Yang. This is Sharon. I will take your first question on MRR. First I want to emphasize that over 90% of our revenue are recurring basis and the increase of MRR in this quarter nearly 5% compared to Q1. The increase was contributed by sequential demand for hybrid IT and value-added service from customers. Our MRR is a blended rate which includes different products and customer mix besides collocation power if customers lack more connectivity, hybrid IT, hybrid cloud services and other value-added service, our MRR per company will increase accordingly. We are trying to provide more value-added service to the customer not only to increase our revenue, but also to enhance our customers’ business. In the second half of 2018, we estimate that MRR will remain at the same level of Q2 with little fluctuation. Okay. So, Alvin will take your next two questions.

Regarding the cooperation with Tus-Holdings, we are happy to see that we achieved very good progress not only in Shanghai, but also in Beijing this quarter. And also that regarding, that’s a property that currently we were targeting both wholesale and retail customers as well and the majority of our focus will be retail customers in city area Beijing. And regarding the CapEx, actually, the majority of the CapEx will be in 2019. So currently that’s 3,000 to 4,000 cabinets CapEx plan is beyond our current plan. And also that the delivery of the cabinets will be in three phases - sorry, in two phases. So, the first batch will be in 2019 and the second batch will be in 2020. Regarding TSU, that’s currently that’s – as you mentioned we already started the implementation of the TSU program and currently the program covers the management team and key personnel of the 21Vianet’s Group with around 60 people covered. And so, we see very positive feedback from our key talents and also going forward, we will continue to implement this program based on our performance and also based on the new talents added. So regarding the fourth question, that I will turn back to Sharon.

Okay. Our answer to the fourth question regarding the foreign exchange loss, you are right, the loss was mainly due to the depreciation of RMB for foreign exchange. The reason for that, we raised capital offshore and purchased equipment and property onshore in RMB. Typically, that two ways of offshore capital transferring across border which has also require – and there are the approvals of sales. One is equity method which is injecting paid-in capital from offshore subsidiary to onshore subsidiary. Under this method, the offshore subsidiary’s long-term investment and onshore subsidiary’s paid-in capital will be highly eliminated during the consolidation of the financial statements. The other way is loan method. Offshore subsidiary lend capital to onshore subsidiary. Under this method, offshore subsidiary as receivable cannot be entirely eliminated by the onshore subsidiary’s payable. So, we recognize bringing change getting a loss accordingly based on the quarterly and the foreign exchange. In the history, we used both the two methods, both the equity and loan method for the cross border capital injection. Under the loan method, once RMB depreciates, we will recognize loss. Once RMB appreciates, we recognize gain. So we recognized gain in Q1and recognized loss in Q2. But I want to emphasize that all this amount are unrealized non-cash amount because the loans within our subsidiaries we have rolled over the loan very easily. For the US$300 million loans you are concerned, we are now holding over two-thirds of that loan in US dollar and we are also doing some hedging to avoid foreign exchange risks. Okay, thank you. Hope, I clarify your concerns.

Thank you. Actually I have one follow-up question regarding the new project. Given the quite tight power quota – power consumption quota in Beijing or Shanghai, do management team expects any difficulties to secure the power consumption quota for the two new projects? Thank you.

Regarding the new projects in Shanghai, as we mentioned there was 1000 cabinets capacity. Actually, we got all the approval. So basically that’s why we delivered the cabinets in the second half of this year in two batches. And so, regarding the projects in Beijing, we are still waiting for the final approval from the relative authorities. But still it’s a – we have very strong confidence that we can have all the approvals in the coming quarters since we have pre-communications on all the measures in place. So, there is a risk, but still it’s manageable.

All right. Thanks a lot.

Yang I will add more color on your questions about the two new projects, the CapEx. Actually, the Shanghai project is we generally will deliver around 3500 cabinets. So the CapEx is around – is over RMB400 million and we already spent RMB20 million last year. And there will be additional spend around $40 million in this year which is included – which are not included in our CapEx guidance, which is RMB400 million to RMB500 million this year and for Beijing project, the target cabinet delivery is in the range of 3,000 to 4,000 cabinets. So the CapEx is also around RMB400 million. We will be effecting that CapEx in the next year’s CapEx. Okay, thank you.

Thank you.

Our next question comes from Justin Zhang from China AMC. Please go ahead.

Hi, management. Congrats on the strong quarter. I have probably two questions here. First, may I have the – what’s the capacity of your Beijing new project? How many cabinets that you will provide? And can we see some revenue acceleration in the second half of this year? And the second, based on your guidance, do you think that the EBITDA in 4Q will be slightly down Q-on-Q from third quarter? Can you provide more color on this? Thank you.

Sorry. Thank you. Sorry, it’s – thank you, Justin, it’s Alvin here. I will address your first question regarding the new project in Beijing. For that project, we have 3000 to 4000 cabinets capacity and the majority of the customer will be retail customers. So the ramp up here is - will be around six months to 24 months. So, the majority of the revenue will come from – starting to come in 2020. Thank you.

Hi, Justin. Regarding your question on our guidance, I want to say that our past Q3 results beat proved the healthy financial of the company. We were continuing to optimize our operational efficiency. So, based on kind of looking with our guidance as Alvin and I are the co-management of 21Vianet it’s a conservative way to communicate with the public. So we raised the revenue and the EBITDA guidance in that range. Currently, we have full confidence to beat that - or reach the guidance for both revenue and EBITDA sides. Thank you.

Thank you.

Our next question comes from Harsh Agarwal from Deutsche Bank. Please go ahead.

Hi, thank you for taking my questions. I have a few questions actually from my side as well. One is, your cash balance that you have, the RMB2 billion odd cash balance, how much of this is actually in U.S. dollars versus RMB roughly?

Okay, so, almost two – over two-thirds of the cash balance is in the U.S. dollars currently.

Okay. That’s good. And the – also in your cash flows, there is a big inflow in the investing cash flow section. I think the amount is RMB357 million where you say it’s proceeds from other investing activities. Just curious what is this – what exactly is this? It’s in the investing cash flow section.

Okay. So you are asking about the investing activities, right?

Correct. The RMB357 million.

Oh, that’s related to the joint venture arrangement between we and Warburg Pincus. Actually, we settled in the third project with Warburg Pincus and we received their cash for the 49% of the – our third project valuation.

Okay. And this is, sorry - this is like a datacenter joint venture project with Warburg or what exactly is it? I am sorry. I don’t know what it’s.

Actually, we set up a joint venture with Warburg Pincus to do many purchase on the wholesale projects. We have a joint – we have two joint ventures with them and in one joint venture we owned 51% of the equity and that amount is because of Warburg Pincus by the 49% of equity for the property in Beijing. And we will inject that amount in Q3 to the joint venture two and working with Warburg Pincus to do the further datacenter expansion.

Okay. So, this is for the first joint venture you are saying, is it, the RMB357 million?

Yes.

Okay. And the second joint venture, how much stake do you have and how much stake does Warburg have?

Actually, after we injected over 300 capital in the joint venture, they will have over RMB800 on hand to do the further expansion.

Okay. So the second joint venture hasn’t started yet basically?

Yes, there are several pipelines in that joint venture.

Okay, okay. Got it. Okay, and, one last question from me was, there are some headlines about the Chinese government is looking to reform lot of universities in China and there are talks about that Tsinghua University might actually sell Tus-Holdings. I am just curious, any thoughts on that side. Is it likely that we will see a change in ownership in Tus-Holdings and what does that mean for 21Vianet?

It’s Alvin. I’ll answer that question. Regarding the information you mentioned is, we haven’t received any formal instructions from Tus-Holdings. And we do have some communications with Tus-Holdings and they are final controlling shareholders and the message we’ve received that, whatever changes happen in Tus-Holdings that – still that 21Vianet will remain one of the key ties of the Tus-Holding Group. And also that Tus-Holding Group will continue to support 21Vianet with - in their best efforts. Thank you.

All right. Thank you so much.

[Operator Instructions] Our next question comes from Eveline Jiang from Citi. Please go ahead.

Hi, management team. Good morning. So, I only have one question. Just want to ask if there is any progress on your wholesale business. Can you please share more details? Thanks.

Okay. That’s – thank you for your question regarding wholesale. That’s – as we mentioned previously that we have very strong confidence to address the wholesale markets. As you know, that we haven’t put a lot of efforts in the last two to three years in this domain. So it take us for a while to establish our internal team and also especially with resources – or property to serve the leading customers. And in the past two quarters, we do see very strong pipeline quarter, ongoing especially with the top public cloud providers here in China. And in the past quarter, we do see a lot of progress, especially in one project. We have very in-depth discussions with that leading customer and we are very close to sign legal bonding or agreement, but still that’s – since we haven’t reached our agreement yet, so we cannot disclose any further information from that perspective. Thank you.

[Operator Instructions] Our next question comes from [Indiscernible] Please go ahead.

Hi, management. I just got one follow-up question on the Beijing’s new project. Was it a wholesale or retail focused project and was it 100% controlled by your company or owned by the JV with Warburg Pincus? Thank you.

Thank you for your question. For the new Beijing project, for the whole project it’s – the land is – we leased from a financed it from a Tus-Holdings subsidiary and the whole project is owned by 21Vianet rather than the joint venture with Warburg Pincus. And for the customers the main focus will be retail customers since we do see very strong demand and especially this property has very good location in Beijing. So we have quite strong confidence to drive the retail customers with higher profitability. Thank you.

Thank you. Actually I have a one follow-up question. Can you briefly comment on the supply and demand for the datacenter in Beijing and Shanghai respectively? Thank you.

Okay, thank you for your question. From our view, we see very strong demand from Beijing and Shanghai and also we see very strong supply from Beijing and Shanghai at this moment. So, we do see very strong competition these days in Beijing and Shanghai. Going forward, we see even stronger demand coming up and we see relatively limited supply from both Beijing and Shanghai. So, going forward we have – we are very optimistic regarding the whole business, especially in Beijing and Shanghai. Thank you.

Thank you.

[Operator Instructions] Our next question comes from the line of Charles Lee from Goldman Sachs. Please go ahead.

Hey, thanks management’s sharing on today’s earnings call and congratulations on the numbers. And we would like to more about your cooperation with Warburg Pincus going forward and what’s the plan for the JV? And how this whole strategy played out in your outlook both in financial as well as strategic cooperation? Thanks.

Thank you for your question. Regarding the joint venture, we formed the joint venture one year ago. Currently, we – the whole joint venture teams are fully established and we do see a very strong pipeline projects ongoing in Tier-1cities, especially in central part of China. And we do have one project already signed, it’s a legal bonding or agreement with the property owner. So we will acquire that property in Shanghai with 7,000 cabinets capacity in total in three cities. So, looking forward, this joint venture will be one of the main platforms for 21Vianet to address the wholesale markets across China. Thank you.

Our next question comes from the line of Stanley Chan [ph] from China Orient. Please go ahead.

Thanks for taking my questions. So, I want to clarify further about the Warburg Pincus joint venture. So, how many CapEx are we going to spend each year for that wholesale business? And how much will be contributed by our side and their side? Thank you.

Okay, so regarding the joint venture, that’s – currently, the shareholding – share structure is likely that – for the new project, 21Vianet owns 49% and Warburg Pincus has 51%. And both sides will contribute capital – contribute cash into that joint venture and we still have the cooption to have another – to acquire another 2% on each single project. So, basically, that’s - going forward, we – both sides will continue to drive wholesales markets and in selected projects, we have the power and we have the rights to consolidate their projects into 21Vianet group. And then regarding the CapEx, as I mentioned, it’s still that we have many pipeline projects ongoing. So the CapEx plan for this year is quite flexible. We still have enough – we have very strong cash position in this joint venture. So, for this year and for the coming year, we have very strong confidence to cover the whole CapEx with our own capital. Thank you.

And then so what would be the target for this year and next year? Do you have a rough idea of – on the CapEx amounts?

Sorry. Can you repeat your question? Sorry.

I mean, what is the estimated amount of CapEx we are going to spend this year and next year?

For the joint venture, right?

For the whole company as a whole including joint venture, equity part.

Let me clarify this. Actually, for – as the joint venture, we only owned 49% of the equity share and the joint venture has already have over RMB800 on hand as paid-in capital we think for each of the pipeline projects. They can do their project financing themselves on the – in the joint venture.

So, basically, we will not inject any further capital into that joint venture for new projects on that platform.

Okay, got it. Thank you.

[Operator Instructions] There are no further questions. I will now turn the call back to management for closing comments.

Thank you once again for joining the call today. If you have any further questions, please contact us at ir@21vianet.com. Thank you.

Thank you so much. Ladies and gentlemen, that does conclude the conference for today. Thank you so much for your attendance. You may all disconnect.