Earnings Labs

VNET Group, Inc. (VNET)

Q2 2023 Earnings Call· Thu, Aug 24, 2023

$8.51

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Transcript

Operator

Operator

Hello, ladies and gentlemen. Thank you for standing by for the Second Quarter 2023 Earnings Conference Call from VNET Group, Inc. [Operator Instructions]. Participants from our management include Mr. Jeff Dong, Chief Executive Officer; Mr. Qiyu Wang, Chief Financial Officer; Mr. Tim Chen, Chief Strategy Officer; and Ms. Xinyuan Liu, Investor Relations Director of the company. Please note that today's conference call is being recorded. I will now turn the call over to the first speaker today, Ms. Xinyuan Liu. Please go ahead.

Xinyuan Liu

Analyst

Thank you, operator. Hello, everyone, and welcome to our second quarter 2023 earnings conference call. Our earnings release was distributed earlier today, and you can find a copy on our site 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 obligations 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 measures as well as unaudited non-GAAP financial matters. VNET's earnings press release contains a reconciliation of this audited 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 website at ir.vnet.com. I will now turn the call over to our CEO, Jeff.

Jeff Dong

Analyst

Thank you, Xinyuan. Good morning, and good evening, everyone. Thank you for joining our call today. I will start with an overview of our second quarter results. After that, I will turn the call to Tim, our CSO; and Qiyu, our CFO, who will discuss our financial results and outlook in more detail. We are pleased to report a solid second quarter with utilized covenants growing by 2,000 and overall utilization rate, further improving to 59%. Total covenants under management reached approximately 86,900 by the end of the quarter compared with approx 80,800 a year ago. Our retail MRR per cabinet continue climbing to reach a new high at RMB 9,530 during the quarter. As we maintained our focus on high-quality revenue business to drive higher margin and better profitability, we achieved second quarter revenue of RMB 1.82 billion, representing an increase of 5.6% year-over-year and adjusted EBITDA of RMB 535 million, an increase of 9.9% year-over-year. Our solid operational and financial performance reaffirms our ability to quickly capture incremental market demand for high-quality, scalable IDC services made a steady economic recovery. It's very clear the digital economy is becoming an increasingly important driver of China's overall economic development. To accelerate the post-pandemic recovery on both growth, China's policy makers are stepping up supportive policies to strengthen the digital economy and upgrade industries with cutting-edge technologies such as big data, AI and 5G. Recently, new AI application scenarios are emerging across different industries in China, unlocking more demand for IDC services as training and optimize AI models require massive computing power. I'm proud to share the good news, VNET was selected as a computing power partner in a Generative AI Innovation partnership program set up by the Beijing municipal government in July. This government-backed program aims to build synergies across…

Tim Chen

Analyst

Thank you very much, 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 measure 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 5.6% to CNY 1.82 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. Gross profit was CNY 342.7 million in the second quarter of 2023, representing a decrease of 4.2% from the same period of 2022. Gross margin was 18.8% in the second quarter of 2023 compared to 20.7% in the same period of 2022. Adjusted cash gross profit, which excludes depreciation, amortization and share-based compensation expenses, was CNY 742.9 million in the second quarter of 2023, an increase of 4.1% from the same period of 2022. Adjusted cash gross margin in the second quarter of 2023 was 40.8% compared to 41.4% in the same period of 2022. Adjusted operating expenses, which exclude share-based compensation expenses and compensation for post combination employment in an acquisition were CNY 241.5 million in the second quarter of 2023 and compared to CNY 250.7 million in the same period of 2022.…

Qiyu Wang

Analyst

Thanks, team. Thanks, guys. It's an honor to be part of VNET's leadership team. I look forward to leveraging my 20 years of industry experience and working with our team to drive our new core strategy and unlock more growth potential. In terms of our outlook, we currently maintain our full year 2023 guidance and expect net revenues to be in the range of CNY 7,600 million to CNY 7,900 million, resulting a year-over-year increase of 7.6% to 11.8%. And adjusted EBITDA to be in the range of CNY 2,025 million to CNY 2,125 million, representing a year-over-year increase of 8.1% to 13.5%. Looking forward, we will continue to focus on high-quality revenue business to drive margin and profitability improvements. In additional, we will explore new opportunities arising from robust digital demand especially AI-driven demand and further strengthen our position as a leading IDC player. Our proven new core growth strategy highly scalable service offering and solid financial and operational results give us confidence in our prospects to deliver sustainable value to our stakeholders. This concludes our prepared remarks for today. Operator, we are now ready to take questions.

Operator

Operator

[Operator Instructions] Our first question will come from the line of Yang Liu from Morgan Stanley.

UnidentifiedAnalyst

Analyst

This is Pamela from Yang team. So I think recently, the last asked question is regarding company's point to repay the convertible bond. So I'd just like to give some more mention comments on this.

Tim Chen

Analyst

Thanks a lot, Pamela. This is Tim here. As we've mentioned to the market before, we've been actively reaching out to multiple financing channels to the market. I think you're aware of our efforts in terms of the C REITs, asset disposals, both public bonds and private placements. Also, I'd like to point out we have a relatively healthy cash balance of over CNY 2 billion of unrestricted cash. Obviously, with the shift to the management team, we're able to bring a larger focus also on to some of our onshore and our renminbi financing channels with the addition of Qiyu to the senior team. So all of that is part of our overall efforts. At the moment, we are still closely monitoring the 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 continue our efforts on all the other areas. Thanks, Pamela.

Operator

Operator

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

Edison Lee

Analyst

First of all, congratulations on very one another best wholesale order. So maybe the first question is about that wholesale order. Can we talk a little bit about the time line of the delivery? And then also the terms are they somewhat similar to the previous order? And then can you remind me for the 3,000 cabinets that you're building on that side, what megawatt that is equivalent to? So my first question is about that. Number two is on your operating cost. It seems that second quarter is a lot lower on a year-on-year basis. It's about 22% lower on a year-on-year basis. Can you share your outlook on operating cost for the second half of this year?

Tim Chen

Analyst

I'll take the first question on contract. We actually, I've mentioned in the call, we recently actually, we won extended contracts for 45-megawatt as additional capacity from existing internet joint customer. The contract has already signed actually to attach with previously announced in total 160 megawatts together to be fulfilled in different phases. Let me elaborate a little bit more in details on this contract. We divide into a different phase. In the first phase, a couple of buildings will be delivered highly possible by the end of the year and the second will be the half of next year. So the move-in will be very fast. So that's something we can share with you.

Edison Lee

Analyst

Sorry, can I just follow up by asking -- you indicated that this year you would deliver 3,000 cabinets on that side. So what is the equivalent megawatt for that 3,000 cabinets.

Tim Chen

Analyst

Yes, correct. So we will deliver 3,000 by the end of the year.

Edison Lee

Analyst

And what is the megawatt equivalent with that 3,000 cabinet?

Tim Chen

Analyst

It's about less than 100 megawatts.

Operator

Operator

And our next question will come from the line of Sara Wang from UBS.

Sara Wang

Analyst

Yes. Yes. So may I ask if there's any change to the CapEx guidance for this year?

Tim Chen

Analyst

Sara, 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 CD refinancing. And the good news on the CapEx front also is that although we are focused on the delivery of the shares cabinets, we also have a number of very, very strong project financing associated with those projects. And so overall, we expect that the cash impact should be more manageable from the activity that we have in terms of completing those cabinets for 2023 deliveries.

Operator

Operator

For our next question, and our next question will come from the line of Timothy Zhao from Goldman Sachs.

Timothy Zhao

Analyst

My question is regarding the EBITDA. Just wondering compared to your full year guidance, the low end and high end. Just wondering what are tables that you are thinking for the second half of this year in order for the company to achieve the midpoint or the high-end. And, also any color into the EBITDA margin into the second half, including any like a trend that you see from the tariff power -- tariff power cost, et cetera, that would be very helpful.

Tim Chen

Analyst

Tim, 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. And so that's actually helped. There are a few, I would say, one-offs on the positive side both in first and second quarter, which we've shared with the market. That will not be repeated in the third and fourth quarters. So we do expect there to be, I guess, a reversion in terms of third quarter. Some of the bigger factors that have impacted in second quarter and expect it to continue to impact in the third quarter relates to power and tariff costs. The average unit cost actually has been relatively stable in the second quarter. However -- and this is not unlike our peers in China right now. There is now so in terms of the summer months, where we do expect the utility cost to be higher. Also, as you can see from our figures in the PPT, 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. 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 is, I guess, an element of uncertainty around, let's say, second half power costs. There is an NDRC 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, we're probably expecting that EBITDA margins will contract a bit as compared to second quarter as some of these one-offs will disappear from the second quarter. But if the power costs remain stable, then we expect that third into fourth quarter, fourth quarter will then have an improvement in margins, obviously, given the cooler weather of the winter months.

Operator

Operator

That's all the time we have for Q&A today. And with that, ladies and gentlemen, that concludes our conference for, thank you for participating. You may now disconnect. Everyone, have a good day.