Hello, ladies and gentlemen. Thank you for standing by for the Fourth Quarter and Full Year 2022 Earnings Conference Call for VNET Group Inc. [Operator Instructions] Participants from our management include Mr. Jeff Dong, Chief Executive Officer; Mr. Tim Chen, Chief Financial Officer; and Ms. Xinyuan Liu, Investor Relations Director of the company. Please note that today’s conference is being recorded. I will now turn the call over to your first speaker today, Ms. Xinyuan Liu. Please go ahead.

Thank you, operator. Hello, everyone and welcome to our fourth quarter and full year 2022 earnings conference call. Our earnings release was distributed earlier today and you can find a copy on our IR website 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 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 include the disclosure of unaudited GAAP financial matters 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 matters. 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.

Thank you, Xinyuan. Good morning and good evening everyone. Thank you for joining our fourth quarter and full year 2022 earnings conference call. Leading with macroeconomic headwinds and COVID-related disruptions, 2022 was an extraordinary year. Amid this challenging environment, we delivered solid financial and operational results through excellent execution of our Dual-Core strategy. We achieved our 2022 delivery target by ending approximately 8,400 self-built cabinets. By the end of the fourth quarter, our total cabinets under management had grown to approximately 87,320 from 78,540 a year ago. Meanwhile, cabinets utilized by customers increased sequentially by approximately 2,500 to approximately 48,000 compared to approximately 41,700 1 year ago. Our overall utilization rate was 55%. In addition, our retail MRR per company increased to RMB9,371 in the fourth quarter, up from RMB9,287 in the third quarter. We concluded 2022 with a resilient fourth quarter revenue of RMB1,881 million, an increase of 7.7% year-over-year and adjusted EBITDA of RMB424 million. For the full year, our revenue grew 14.1% to RMB7,065 million and adjusted EBITDA increased 6.8% to RMB1,873 million. Before we get deeper into our business details for the fourth quarter, I’d like to touch on broader macro climate in China for some context. According to 2023 government work report issued earlier this month, the central government set a GDP growth target of around 5% for this year, up from last year’s 3%. 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. Last month, the central government rolled out a plan to build Digital China by 2025, which highlights the country’s focus on expanding data resources and improving digital infrastructure. Encouraged by these supportive measures and positive signals, we expect industry’s vitality to…

Thank you, Jeff. Good morning and good evening, everyone. Before we start the detailed discussions 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 included in our earnings press release. Please also note that unless otherwise stated, all the financials we present today are for the fourth quarter of 2022 and in terms. As Jeff just mentioned, we concluded 2022 with resilient operating and financial performance, admits a myriad of external challenges, which speaks to our outstanding execution. Next, let me walk you through our fourth quarter financial results. Unless otherwise specified, the growth rates I will be reviewing are all on a year-over-year basis. In the fourth quarter, our net revenue increased by 7.7% to RMB1.88 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 and VPN services. Gross profit was RMB328.4 million in the fourth quarter of 2022, representing a decrease of 13.6% from the same period of 2021. Gross margin was 17.5% in the fourth quarter of 2022 compared to 21.8% in the same period of 2021. Adjusted cash gross profit, which excludes depreciation, amortization and share-based compensation expenses, was RMB740.1 million in the fourth quarter of 2022, an increase of 3.7% from the same period of 2021. Adjusted cash gross margin in the fourth quarter of 2022, was 39.4% compared to 40.9% in the same period of 2021. Adjusted operating expenses, which exclude share-based compensation expenses, compensation for post combination, deployment and acquisition, impairment of loan receivable…

Thank you. [Operator Instructions] Our first question comes from the line of Yang Liu of Morgan Stanley. Please proceed with your question.

Good morning. Thank you for the opportunity to ask questions. Two questions from my side. The first one is about the moving. Could management share the color year-to-date, what is the moving looks like from your retail and wholesale customer? And what should be the utilization rate by the end of this year, if we add another 8,000 to 9,000 cabinets. Yes, that’s the first question. And the second question is we are glad to see that the company onboard a new wholesale customer with a pretty big order size. When should we expect the financial contribution will be visible in future? Thank you.

Hi, Yang, can you hear me?

Yes, I can.

Okay. Let me take the second question, and then I’ll pass it 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 next – basically end of this year, early next year. So obviously, it’s going to take us time to deliver the cabinets. So by the time, meaningful financial contribution takes place all be 2024. 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.

Hi, Yang, it’s Jeff. We wrap up – regarding the ramp-up at the end of 2022, we will be 55% utilization rate. We expect more for this year. And given the – let me give you some colors on the new customers, just Tim mentioned. It certainly is actually the large majority of the available cabinets in Q4. So, we can see, as you mentioned, moving from Internet players 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 will see by the end of this year, as over 70 megawatts next year. So, we see substantially and large financial contributions will be come up by the end of this year and probably early next year.

Thank you.

One moment for our next question. Our next question comes from the line of Sara Wang of UBS. Please proceed with your question.

Hi. Thank you for the opportunity to ask the questions. 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 bond might be put for early next year. Thank you.

Thanks Sara for the question. It’s Tim here. With regards to the overall financing plan, we have obviously started already at the end of last year going through the alternatives available to the company. We have 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 a very healthy operating cash flow. Outflows would be mainly the CapEx, and at this moment, we are expecting CapEx to be quite similar to what it was in 2022, which is between RMB3 billion to RMB3.5 billion. However, I would then point out next is that this CapEx is not all committed or contracted. So, we do have the ability to ratchet back during the course of the year, and we will do so really for two areas. One is, as we see the customer demand and also the customer requirements in terms of delivery dates, if they shift, you have seen us also in 2022 adjust during the course of the year as required. 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 are keeping a very close eye on and obviously looking to the various alternatives. Obviously, given where share prices are for us and our peers, we will be looking mainly at debt and convertible as the main instruments. Also something that we already mentioned last year, we continue to work on would be onshore renminbi financings both in the form of private and public reach. I hope that answers your question, Sara.

Thank you. And just a quick follow-up. On the operating cash flow for 2022, it seems it was RMB2.6 billion. So, how shall we think about the operating cash flow level for 2023? Thank you.

Yes. I would say that, look, the working capital points will not move very, very much. So, you are looking at underlying EBITDA as a good proxy. So obviously, we have given some guidance on EBITDA. I think you can use that as a proxy on where directionally we expect operating cash flow to go as well.

Got it. That’s clear. Thank you.

Thank you, Sara.

[Operator Instructions] One moment please. Our next question comes from the line of Edison Lee of Jefferies. Please proceed with your question.

Okay. Alright. Thank you. Hi Tim and Jeff. Thank you for the presentation. I have two questions. Number one is, on this new customer side, you have signed up for over 100 megawatt. So, based on your comment a little bit earlier, I assume that the 3,000 that you are including in your 2023 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 companies? And my number two question is, is it possible for you guys to give us an update on your joint venture IPC fund with [indiscernible] government and in fact is that being factored into your 2023 guidance or how much of that is being factored into that automatically? Thank you.

Hi Edison. Let me answer your questions. The first one, in terms of new customers. Yes, it is. We included 3,000 companies this year, which is from the first phase of the new customer.

Sorry, yes. So, can I confirm that this 3,000 cabinets will be delivered towards the end of the year, so that’s why the financial contribution in 2023…

Yes. That’s correct. It’s Tim here. That’s correct. We are 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 at the very beginning of it. But really, the meaningful contribution will be in 2024, first quarter.

Sorry. Can I also follow-up with just one related question. So, will this 100 megawatts be fully delivered within 2024 or it’s going to go into 2025?

It’s going to be divided into the different phases. The first phase will be this year and early next year, we will deliver like one-third – sorry, two-thirds and the remaining will be delivered in the next year.

So, it will be completely delivered in 2024?

No, sorry. The first phase, the first part is going to be mainly in the 2023 into the early part. 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 their 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 years?

I am 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 an increase is actually not specified in the MOU. Is this understanding correct?

Only part of it is specified and the balance is not. The indications that they have given us – yes, yes, correct.

Tim, let me put this way. Edison, we will be fully delivered within the 3 years for the MOU with the customer.

And in the same location, right? All this capacity is in the same location?

Yes, same location. Yes.

Okay. Thank you.

Yes. In terms of the second question...

Sorry, Jeff, please go ahead.

Okay. Let me answer your questions in terms of the JV with Changzhou. We have actually – we recently we signed an SPA [ph] in Langfang area with one project, which is the largest one from the identified portfolio. The JV has already committed over RMB500 million on asset proportion, we also committed the capital. And this Langfang project will achieve IT scale of about 140 megawatts and also will be delivered cabinets more than 17,000 cabinets in total. So, that’s what we have done so far. And some other projects, we are also closely in discussion with Changzhou and will be ramp up soon, probably by the end of this year, including Shenzhen, Dongguan and also in Central Beijing areas.

Thank you. Just a follow-up. So, will this Langfang project be contributing profitability to VNET this year.

I wouldn’t see it contribute to VNET’s financials, but we will – it’s also divided into the different phases. The Phase 1 and Phase 2 has already had customers and we are signing the SPA on the Phase 3 and Phase 4, which is a greenfield project with a full regulatory license, hopefully, will be delivered by the end of this year and ramping maybe next year.

Okay. Thank you very much.

Ladies and gentlemen, that concludes our conference today. Thank you for participating. You may now disconnect.