Hello, ladies and gentlemen. Thank you for standing by for the Third Quarter 2022 Earnings Conference Call for VNET Group, Inc. At this time, all participants are in a listen-only mode. After the management's prepared remarks, there will be a question-and-answer session. Participants from our management include Mr. Jeff Dong, Chief Executive Officer; Mr. Tim Chen, Chief Financial Officer; and Xinyuan Liu, Investor Relations Director of the Company. Please note that today's conference call is being recorded. I’ll now turn the call over to the first speaker today, Ms. Xinyuan Liu. Please, go ahead.

Thank you, operator. Hello, everyone, and welcome to our third quarter 2022 earnings conference call. Our earnings release was distributed earlier today. And you can find a copy on our IR website as well as our 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 that may cause actual results to differ materially from our current expectations. For detailed discussions of these risks and uncertainties, please refer to our latest annual report and other documents filed with the SEC. VNET does not undertake any obligation to update any forward-looking statements, except as required under applicable laws. Please also note that VNET's earnings press release and this conference call includes the disclosure of unaudited GAAP financial measures, as well as unaudited non-GAAP financial measures. VNET’s earnings press release contains a reconciliation of the unaudited non-GAAP measures to the unaudited GAAP measures. As a reminder, this conference is being recorded. In addition, a webcast of this conference call will also be available on our IR website at ir.vnet.com. I will now turn the call over to our CEO, Jeff. Jeff Dong Thank you, Xinyuan. Good morning and good evening, everyone. This is Jeff. It’s a great pleasure to meet and speak with all of you today. I’m deeply honored to take on the role of CEO and excited to explore the great opportunities and prospects ahead for VNET. I look forward to leveraging my cross-industry expertise and working closely with our talented team and drive the company's dual core growth strategy and cement our commitment to delivering sustainable long-term value to our shareholders. I'd like to start with an overview of our third quarter performance…

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 results exclude certain non-cash expenses, which are not part of our core operations. The details of these expenses may be found in the reconciliation tables, including in our earnings press release. Please also note that unless otherwise stated, all the financials we present today are for the third quarter of 2022 in renminbi terms. We're pleased to report another quarter of results which reflects the effectiveness and agility of our dual core growth strategy in a challenging macro environment. We remain confident in our distinctive growth strategy, outstanding value proposition and a powerful suite of service offerings, which empower us to capitalize on long-term prospects of the data center industry in China. Next, let me walk you through our third quarter financial results. Unless otherwise specified, the growth rates I will be reviewing are all on a year-over-year basis. In the third quarter, our net revenue increased by 16.3% to 1.81 billion from the same period last year, 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 business and VPN business. Gross profit was 316.6 million in the third quarter of 2022, representing a decrease of 15.6% from the same period of 2021. Gross margin was 17.5% in the third 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 707.7 million in the third quarter of 2022, an increase of 4.9% from the same period of 2021. Adjusted cash…

We will now begin the question-and-answer session. [Operator Instructions]. Our first question will come from the line of Yang Liu from Morgan Stanley. Your line is open. Yang, your line is open.

Hey, hello, can you hear me? I have one question regarding the future CapEx plan, given the company has already decided to set up a JV with partner, how do we think about the future CapEx split or the stakes in the JV for the future expansion. I just have this question. Thank you.

Okay. In terms of the CapEx plans, I'll leave the question to Tim to address the cooperation with the Changzhou, I will highlight is from my discussion, winner will take 35% of the equity interest in the JV structure with Changzhou which are kind of the strategic partnership between the winner and the Changzhou Hitech [General] [ph] Holding Group, subsidiaries of state-owned group. To form a joint venture, we thought as of RMB 2 billion. I mean, we can say that joined both company's resources and expertise, this new joint venture will pursue new opportunities in the future to acquire, develop and operate certain projects across the nation. I mean, for VNET, the JVs initial pipeline includes a number of the high-quality assets located in the Greater Beijing Area and the Greater Bay Area, which is especially for the Bay Area, which is I mean, kind of the strategic exposure to us since we have less exposure there. And this partnership also represents an important breakthrough in expanding our business horizon. For example, our future for management and also strengthening our presence in the digital infrastructure centers.

Can you hear me?

Yes.

Okay. So basically, for the second part of the question, I think you're asking a little bit in terms of the CapEx and impact the sort of CapEx split. I think, the company is looking at its overall CapEx spend. Obviously, the markets are challenging at the moment on the offshore side. But I would stress that overall, VNET continues to enjoy very, very strong support from the local onshore renminbi banks, which is a project financing and other forms of financing available to us. But we are looking at the overall CapEx and cooperations or joint ventures, like the one that Jeff just mentioned, I think are an important way for us to continue to be able to secure the resources necessary for our customers, while at the same time perhaps moderating the cash spent on our site. So really is an attempt to find, ultimately, the split between kind of these types of ventures and VNET will depend on the target projects. So Jeff's talked about some of the areas that are focused with Changzhou. And so for those types of projects, obviously, then we would have a smaller share or smaller split. But that overall scale itself is also capped. So I'd say keep watch over the space. But at the moment, it is a way for us to diversify our funding sources of it. Thank you.

My follow up is that, the company will not put all the new pipeline in the JV, right, it’s seen active project to emerging?

That's correct. That's correct. There are targeted projects that will be put in so not the entire pipeline, no.

Is there any overall strategy or rule, what is the thought, what type of project will be putting the JV and what will be done by VENT itself or partner with other potential funding partner or other peers? Thank you.

I'll tackle this as well. So Jeff just now mentioned, sort of greater Beijing area, Greater Bay area. So those are two areas that we're looking at specific projects with Changzhou, on the JV. Obviously, that could expand but there is a limited pool of capital there as well. So that's the initial focus. And there are already targeted projects that we're looking at with them. So when do we have more details, we'll be assured disclose it to the market.

Thank you.

Most welcome.

Thank you. One moment for next question. Our next question comes from the line of Edison Lee from Jefferies. Your line is open. Edison Lee from Jefferies, your line is open.

Hi, thank you very much for taking my question. My first question would be very much targeting, Jeff. And I want to congratulate Jeff on becoming the CEO. But, Jeff, can you share with us your near-term objectives in this position, and maybe also your longer-term vision for the company. And I think it's important for investors to also find out what your KPIs are. And because there's a privatization deal going on right now. So I think investors definitely would like to find out, in fact, where the company is headed under your leadership. So that's question number one. Question number two is about the Changzhou JV. I understand that VNET is going to manage all the projects that will be acquired by this Changzhou JV. So I want to know operationally, what are those RDCs that will be acquired by the Changzhou JV will actually be integrated with VNET and how does that work? Thank you.

Okay, thank you. First question, I would like to see my goal actually, for short term, I try to -- I mean, there is a couple of things. The first thing is, in terms of the strategy, I will continue to stress in our wholesale and retail dual core growth strategy. And second of all is try to improve our operation, optimize the overall operations and diversify our customer base, we will have some new customers such as the financial institutions and some new economy like the EV sectors et cetera. And another thing is, try to reach -- we've done some restructure from our mid-office, try to improve our efficiency as well. And for the long-term, we will do some cost control and acquire some quality, EBITDA, increased, et cetera, as we mentioned and that’s to address the first question. And regarding your second question. And for the Changzhou, I think most of the people are interested in this part. And I would say Changzhou co-operation, it’s more like we team up together to identify some certain assets, and which is kind of debt restructure on target. So going forward, we'll try to leverage the Changzhou platform, and to extend our AUM and our exposures going forward which is a key to strategically position ourselves on this perspective. So that's my answers.

Thank you, Jeff. We kind of follow-up with another question, which is, will VNET be selling your existing assets into this joint venture?

These are new projects, Edison. So we would not -- this is not an instrument where we would be selling our existing pipeline into this entity. So there are new projects being identified and targeted. Jeff talked about sort of debt restrictions, these are also projects where perhaps there is an opportunity, given the current owners of some of these projects. And so we are teaming up with someone with the financial firepower to be able to take advantage of these opportunities.

I see. So let me clarify that. So it seems that the Changzhou transaction will focus on brownfield projects. And so that's why we never continue to focus on greenfield projects. So would that be an accurate thinking?

The current targets, yes, would be potentially a brownfield or otherwise, yes. So less greenfield projects.

Okay, thank you.

But yes, we won't be selling our pipeline into that entity itself.

Okay. Yes, thank you. That's it for me.

Thanks, Edison.

One moment for next question. Our next question comes from the line of Sara Wang from UBS. Your line is now open.

Hi, thank you for the opportunity to ask questions. So I have one question. So I noticed that we have revised down the cabinet delivery plan. So what's our latest cabinet budget for this year and next year. And also, as Jeff just mentioned, cost control is one of the long-term target. So just wondering if there's any timeline target for VNET to achieve a positive free cash flow or self-financing? Thank you.

Hey, Sara. Can you hear me?

Yes.

Okay. Good. I'll take this one. So your first question was on cabinet delivery. And for that, we are, as we mentioned, revising our cabinet delivery into the range of 8000 to 9000. And basically, the outlook for this sort of rest of this year into next year, we've already factored in the overall macro softness that we've seen. Also, the slower moving and then there are some construction delays related to COVID-related restrictions. But those are I would say less of a factor but still a factor in terms of shifting perhaps this year into next. In terms of our outlook, in terms of 2023, we'll give some more color in fourth quarter, but we're expecting that next year's delivery will be similar to this year perhaps a little bit better. What's your second question, Sara?

So as cost control is one of the long-term target. So just wondering if there's any timeline target for VNET to achieve self-financing? Or like positive cash flow. Yes.

So I think overall, if you look at our financing plans, right now, there's a couple of things that we're focused on. One is on the CapEx side. And obviously, extra cash out. I would say that we're increasingly selective on our CapEx and sort of putting CapEx spend. We do also still have very strong support from the domestic banks onshore financing. And then alternative financing, in terms of the Changzhou co-operation, as well as exploring onshore restructures. And then, last but not least, when you're sort of looking at our overall ramp up, you continue to see the billable cabinets increasing. I would say that just given all these things put together, probably targeting 2024. I think next year still will be quite challenging, just given the fact that we were still targeting something in a range of 3.5 billion to 4 billion of CapEx, but again, some of it we can moderate with these co-operations.

Got it. Thank you.

Most welcome.

One moment for next question. Our next question comes line of Ethan Zang from Nomura. Your line is open. Ethan Zeng from Nomura, your line is open.

Oh, sorry. Thanks. My question is, I noticed that our third quarter EBITDA margin was so like three percentage points, compared to 3Q of last year. Just wonder, could management give us some breakdown or quantitative impacts of different macro factors that affect our EBITDA margin? And what is the outlook for the EBITDA margin for next year? Thank you.

Hi, Ethan. It's Tim here. In terms of overall, EBITDA margin, actually, the company has been working quite hard on cost controls, because we have seen during the course of this year, obviously costs like utilities and so forth going up. But we've managed to moderate that with some cost controls, and also deferral of costs for third quarter. In terms of the next year and expectations, I think that we expect that the margin compression will also then flatten out. But it will depend on the overall continued ramp up of the business, and that there will be no further changes to our underlying cost of sales. But we'll have some more details in fourth quarter in terms of our views as we end this year.

Got it. Thank you.

Thank you. One moment for next question. Our next question comes the line of Alex Wang from Daiwa. Your line is open.

Yes. Can you hear me?

Yes, very clear.

Okay. It’s [indiscernible] from Daiwa. So the first two questions. So first, as you guys -- what about estimated CapEx before all our aggravating unfinished project we have done. And second question is, can you share more color on that repayment issue and the pressure from potential lingering?

Sure. Let me take your second question first. In terms of repayments, we have a small, outstanding convertible note that's coming up next year first half around U.S.$70 million. And then our next maturity bump will be our 600 million in CD. So that's something that we have already started planning for. And we'll be tackling during the course of 2023. In terms of your second question. You're talking about CapEx on our outstanding MoU projects or what do you mean by -- where we have CapEx spend this year, obviously, for projects that we're delivering in 2023. But we also then have the continued development of new projects as well. So just want to clarify the question.

Yes. That's excluding the partnership with a Changzhou, yes. So what's the estimated CapEx for our existing unfinished projects within our own pipeline in the next three years?

Probably won't be able to give you in the next three-year guidance here. We have actually more than one of these Changzhou types of projects under discussion. So what I can tell you is that what we're looking at for next year is probably a similar CapEx this year, and it includes the remaining deliveries for this year for deliveries in 23. And obviously, preparations next year for deliveries in 24, in terms of the power infrastructure and so forth. We'll probably come to you offline and have some discussion on the general parameters for the coming three years. But obviously, as we continue to get new MoUs each quarter, that number will change and shift. And so we'll have to rerun those numbers as well because we've just had a couple of new MoU wins. Thank you.

Okay. Thank you.

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