Hello, ladies and gentlemen. Thank you for standing by for standing by for the Third Quarter 2023 Earnings Conference Call for VNET Group, Inc. At this time all participants are in listen-only mode. After managements prepared remarks there’ll be a question and answer session. 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'd now like to 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 2023 earnings conference call. Our earnings release was distributed earlier today, and you can find a copy on our website as well as on Newswire services. Please note that, today's call 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, we announced earnings press release and this conference call include the disclosure of audited GAAP and non-GAAP financial matters. VNET's earnings press release contains a reconciliation of the 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.

Thank you, Xinyuan. Good morning, and good evening, everyone. Thank you for joining our call today. I'd like to start with the overview of our third quarter performance. Our solid growth in the third quarter reflects our continued focus on high-quality business opportunities. Cabinet deliveries are progressing smoothly, by the end of the quarter, we had grown our total cabinets under management to approximately 88,900 compared with approximately 82,660 a year ago. The number of utilized cabinets increased by 1,092 to 52,408 in the third quarter, driving our overall utilization rate to 59%. Furthermore, our retail MRR per cabinet during the quarter stayed high at RMB9,495. We remain dedicated to ending high-quality revenues in both the wholesale and the retail IDC market in the third quarter. Generating solid year-over-year growth with our total net revenues increasing by 4% to RMB1.89 billion and adjusted EBITDA growing by 11.6% to RMB507.9 million. With the rapid pace of large language model training and AI application deployments, computing power is becoming a new productive force to meet the growing need for computing power, china's governing authorities have recently unveiled an action plan for the high-quality development of computing power infrastructure nationwide. As the industry leading player, we are seeing increasing demand for premium IDC services, and we remain a clear choice for customers to ride the wave of digital transformation. Now let's take a closer look at our third quarter business update. First, AI is driving increasing demand for computing power and IDC services. Our wholesale data center continues to meet the increasing AI demand, driven by our customer traffic-growing business equipped with high-power density capabilities we sell empowering large language model training and deployment for Internet platforms. Our core competencies, spending resources and execution capabilities enable us to support our customers involving and…

Thank you, 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 include 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 third quarter of 2023 and in Renminbi terms. Now let me walk you through our third quarter financial results unless otherwise specified the growth rates I will be reviewing all on a year-over-year basis. In the third quarter, we continued to deliver solid results with our focus on high-quality revenues. Our net revenue increased by 4% to RMB1.89 billion from the same period last year, mainly driven by the continued growth of our mine [ph] business. Gross profit was RMB306.5 million in the third quarter of 2023, representing a decrease of 3.2% from the same period of 2022. Gross margin was 16.2% in the third quarter of 2023 compared to the 17.5% in the same period of 2022. Adjusted cash gross profit, which excludes depreciation, amortization and share-based compensation expenses was RMB738.4 million in the third quarter of 2023, an increase of 4.3% from the same period of 2022. Adjusted cash gross margin in the third quarter of 2023 was 39.1% compared to 39% in the same period of 2022. Adjusted operating expenses, which excludes share-based compensation expenses and the compensation for the post-combination deployment in the acquisition were RMB264.8 million in the third quarter of 2023 compared to RMB275.1 million in the same period of 2022, as a percentage of the net revenue, adjusted operating expenses in the third quarter of 2023 were…

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

Thanks for the opportunity to ask a question. I would like to have an update in terms of the company's upcoming convertible bond repayment in February next year. What has been done? Or what is the current progress of the asset monetization to prepare for the repayment? Both for the potential REIT issuance and also the selling income minority stakes of existing projects, et cetera, whatever you can share now. Thank you.

Yes. Thank you. I know this is the most important question for us. Taking the liability management issue has been my top priority since I asked since I took the CFO position. We are busy working on two major ways for resolve the issue. One is right new funding from new equity and debt investment, because we need to follow the NASDAQ rules. So we will be dedicated to pursuing new investors and then, it's the right time, we will make the public announcement if there is any concrete progress. Also continue to activity engaging with our CB creditors to find the best way forward. Also, we also try our best to present OpEx management and all positive progress in other funding rising, just you say, including the asset sell minority share and also the REIT. These both have some significant progress, but also need some time to closing this deal. So -- yes. We will, -- we will try our best to leverage this incoming CBs. So we are a firm plan to put and leveraging on both internal and external resources. Thank you.

May I follow up with another question on the business update? For the downward revision of the revenue and the EBITDA guidance, where do you see more business come from? Is it from the traditional retail business or more from the wholesale business? Thank you.

Yes, we do some change to our guidance. What I want to share is with close to 13 years of IDC industry experience and market insights. We will be navigating our business towards very aware with focused greater profit margin business in short or midterm. For example, this year, we have locating more of the IDC resources to areas such the AI model driven wholesale business line. Very clearly, the booming market and promote our profit margin. So we focus this high profit business, and then we try to close some low profit business. So you can see if you compare the revenue and EBITDA guidance the EBITDA guidance only decreased or very minor around 2%. So in addition, we're planning to certain dual core value [indiscernible] practice within this year. So as our ongoing financial statement could better reflect the nature and transmission of our business. And then we continue to focus the high-profit business, for example, the wholesale and the AI-driven demand business.

Thank you. I don’t have any other questions.

Thank you, Yang. Our next question comes from the line of Charlie Bai from Jefferies. Please ask your question, Charlie.

This is Charlie Bai from Jefferies. My first question is about third quarter MRR. I saw a quarter-on-quarter decline on both utilization rate and retail MRR. May I know what is the reason behind it? Thank you.

In terms of MRR, I would say for Q3, still say at a high level is in line with our expectation. There might be some fractions from quarter-to-quarter, which is quite normal. So we believe at the end of the year, and it's come up again and also in terms of utilization rates, our estimate of UR [ph] by the end of 2023 will be on part of the Q3 2023 level with a faster growth, especially for our wholesale customers, particularly those in the short video sectors, we expect a higher utilization rate in 2024.

Thank you. My follow-up with another question. May I have some color on the outlook of the CapEx plan this year and in 2024? Thank you.

Yes. This year, the full year CapEx is expected to be around RMB3.8 billion, which is about 10% more than our guidance. The main reason is that the demand for wholesale data center business is growing faster. And next year, there will be a significant increase in the full year CapEx, mainly due to the increased growth rate of the wholesale business and high an AI-driven demand. So we will specific figure the CapEx announced in the full year guidance early next year.

Okay, thank you. I have no more question.

Thank you, Charlie. Our next question comes from the line of Timothy Zhao from Goldman Sachs. Please ask your question, Timothy.

Sure. Thank you, management for taking my question. I want to understand more about your updated guidance for this year. Just wondering, could you share a little bit more in terms of the revenue breakdown for the full year guidance for your wholesale IDC, retail IDC and also the non-IDC business? And you mentioned that you are going to turn down or reduce the exposure to those low-margin business. Could you elaborate more on what exactly are those lower-margin business? I believe that does include the retail business and like how much more do you expect to reduce the exposure, I think, in this segment? Thank you.

Yes. Because now -- because the wholesale and the AI-driven demand is increase faster. So we try to move, find more resources, for example, in some retail data center, we shut down and we closed some business for traditional retail customer and then move the space and the power supply to the AI customer. So this is the main reason, our reduced the revenue guidance. And on the same way, you'll see the EBITDA impact. This impact EBITDA is very minor. So I think this is not our business, it's the speed of our business is slowed down. It's on other way, this is the signal is that EBIDTA margin and EBITDA is more positive than before.

Got it. That’s helpful. Thank you.

Our next question comes from the line of Daley Li from Bank America Securities. Please ask your question, Daley.

Hi, management. Thanks for taking my question. Just one on the AI space. You mentioned more high power is deployment for your data center. Could you please share the demand trend driven by AI? Do we have any like breakdown, how much demand from AI for the retail or for the wholesale business? And looking into next year, how do we view the AI demand for our data center business? Thank you.

Okay. In terms of AI, which is very popular since this year, we have seen actually the rapid growth of AIGC in China. Dozens of large language modeling across different sectors has already been launched since early this year. Many of them are still being trained and the generic models are dominated by actually the internet giants, whether the verticals are led by the leading players in specific industries some tech start-ups as well, aside from the internet giants. Back to the impact on our IDC demand. I would say from the wholesale side, the AI-driven demand from wholesale customers mainly searched by internet giant customers especially the short video e-commerce business. Notably, we deliver as announced this quarter, around 3,500 cabinets during the quarter to two wholesale customers, all of which actually are high-power density cabinets. And in terms of the retail side, we are still receiving increasing AI demand from retail customers across various industries, such as local services, healthcare and VR. And also, we are further exploring into the demand from some new economy industries such as Fintech. We are in the dialogue with them. And in terms of high-power density cabinets, actually, those cabinets located from a VNET located in the Great Beijing area, Yans River Delta and also Great Bay area. In terms of their size, we have about from up to 40 kilowatts to an over 30 kilowatts, for the wholesale and the retail. And so far, we have, from all delivered, we received this quarter about over 90%, I would say it's coming from a high power density area.

Okay, quite clear. Thank you, management for your instructions. Thank you.

Thank you. We have reached the end of the question-and-answer session. And with that, ladies and gentlemen, that concludes our conference for today. Thank you for participating. You may now disconnect your lines. Have a good day.