Hello, ladies and gentlemen. Welcome, and thank you for standing by for the Fourth Quarter and Full Year 2023 Earnings Conference Call for VNET Group, Inc. [Operator Instructions]. Our participants from our management team includes: Mr. Jeff Dong, Chief Executive Officer; Mr. Qiyu Wang, Chief Financial Officer; Ms. Xinyuan Liu, Investor Relations Director of the Company. Please note that today's conference call is being recorded. And I will 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 Fourth Quarter and Full Year 2023 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 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 VNET's earnings press release and this conference call include the disclosure of unaudited GAAP and 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.

Thank you, Xinyuan. Good morning, and good evening, everyone. Thank you for joining our call today. I'd like to begin by providing an overview of our fourth quarter and full year 2023 performance. We ended 2023 on a solid note that made the steady economic recovery, demonstrating effective execution of our dual-core growth strategy. We meet our 2023 delivery targets with 8,321 self-built cabinets delivered during the year. As of year-end 2023, we had grown our total cabinets under management to approximate 93,600 compared with approximately 87,300 a year ago. The number of utilized cabinets increased by 2,827 to 55,235 in the fourth quarter, driving our overall utilization rate to 59% compared with 55% a year ago. Our Retail IDC MRR per cabinet remained stable in the fourth quarter at RMB 9,477. In terms of our financial performance, we continue to focus on high-quality revenues during the quarter, driving our net revenues to RMB 1.9 billion as well as a 3.8% year-over-year increase in our adjusted EBITDA to RMB 440.2 million. Turning to our full year performance. Our net revenues increased by 4.9% year-over-year to RMB 7.41 billion, and adjusted EBITDA grew by 8.9% year-over-year to RMB 2.04 billion. Our robust operational and financial performance reflects our effective strategy and strong execution, as well as our ability to grow our business by skillfully leveraging market trends and the supportive policy environment. According to this year's government work report, China is increasing its efforts to promote the innovative development of the digital economy, specifically the report call for policy support for the digital economies, high-quality development, and stated channel will set about the development and application of big data and artificial intelligence, launched the AI plus initiative and build world-class digital industry clusters. We believe these initiatives and goals will further…

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 exclude certain noncash expenses, which are not part of our core operations. The details of these expenses may be found in the reconciliation tables, including our earnings press release. Please also note that unless otherwise stated, all the financials we present today are for the fourth quarter and the full year of 2023 and in renminbi terms. Now let me walk you through our fourth quarter and the full year of 2023 financial results. Unless otherwise specified, the growth rates I will be reviewing are all on a year-over-year basis. We concluded 2023 with solid financial and operating performance, both in line with our guidance. More in currently, our wholesale business continued strong growth momentum. During the year of 2023, we added 109 megawatts of capacity to our wholesale business, growing a year-over-year increase of around 70% in our wholesale revenue. In the fourth quarter, our net revenues increased by 0.9% to RMB 1.9 billion from the same period last year, mainly driven by the continued growth of our core business. Gross profit was RMB 290.9 million in the fourth quarter of 2023, representing a decrease of 11.4% from the same period of 2022. Gross margin was 15.3% in the fourth quarter of 2023 compared to 17.5% in the same period of 2022. The year-over-year decrease was primarily attributable to an increase in depreciation and amortization expenses as additional data center were put into service during the past quarters. Adjusted cash gross profit, which excludes depreciation, amortization and share-based compensation expenses was RMB 741.7 million in the fourth quarter of 2023, an increase of 0.2% from the same period of…

[Operator Instructions]. Our first question comes from Yang Liu of Morgan Stanley.

I have two questions. The first one, can management update us in terms of the cooperation with the strategic shareholder, Shandong Hi-Speed? What kind of a pipeline are you talking about? Or what should be the timeline that we can see the 2 parties will do something together with either revenue synergy or cost synergy in the coming year? And the second question is the -- can management update us in terms of the 2024 CapEx guidance? And what will be the key investment area? What type of customers or what type of -- or what kind of a region in the company is investing?

Thank you, Yang Liu. Let me answer the two questions. For the Shandong Hi-Speed synergy, as a strategic investor, Shandong Hi-Speed Holding will pay a positive growth in providing support and guidance to the executive team of our company at the Board level. We remain committed to operating in accordance with market standards with existing executive team responsible for the day-to-day operations. Being a Fortune 500 enterprise, Shandong Hi-Speed Holding as the rich financial resources, they bring variable support to our onshore financing effort. Also, just like Jeff said, the strong synergy between their green energy business and our IDC wholesale business in the new infrastructure projects present significant opportunities. Also recently, the company signed a strategic collaboration agreement with Inner Mongolia [indiscernible] government and with Shandong Hi-Speed Holdings to construct green computer projects together. So this is the -- I hope the 2 parts. One is the cost efficiency in the onshore financing efforts will show some number in this year balance sheet. Also, I think the growing energy opportunity cooperation also will start from this year. For the CapEx and the side, our full year CapEx should be around RMB 3.7 billion to RMB 4.2 billion for this year, driven by the strong demand from our wholesale customers, around 70% the CapEx on the wholesale business. Compared about RMB 3.6 billion CapEx in 2023, the estimated CapEx for this year is expected to increase about around 10%. For the financial side, after the company repaid the USD600 million convertible bonds in early this year, the company's credit status remain solid, considered a more favorable domestic financing elements in terms of cost efficiencies -- efficient need. We plan to primarily fulfill the 2020 this year CapEx demand through onshore financing. Thanks for Shandong Hi-Speed Holdings support, we will be able to operate in onshore financing approval more efficiently. Excluding the series and the asset disposals, we plan to raise fund through credit-based, project-based and existing asset-based financing in onshore financing market with the financing cost expected to around the LPR. We plan to rise around RMB 5 billion in financing in this year. This amount of financing with 6% already secured and about 40% under negotiation. Also...

Sure, management can provide more color that will be more -- it will be better.

Our next question comes from Edison Lee of Jefferies Hong Kong Limited.

I have two questions. Number one is, I'm looking at your debt breakdown on Page 20 of your PPT. And assumes that by the end of this year you have RMB 4.2 billion -- RMB 4.25 billion of convertible promissory notes that will come to you. So is that -- how much of that is U.S. dollar? And how are you going to cover that? So that's question number one. Number two is that, can you talk about the write-down on your long-lived assets that you took in the fourth quarter of this year because in your earnings announcement you said that this is related to some plan to consolidate your data centers or certain data centers. So I wonder if you can elaborate on that. And then number three, on the CapEx guidance that you just gave, RMB 3.7 billion to RMB 4.2 billion, so would that totally support the 119 megawatt projects under construction? And also maybe a little bit aside follow-up on that, how much of that 119 megawatt is wholesale and how much is retail? Because you said 70% of the CapEx will go to wholesale.

Let me first answer the second and third question. For the loss in the fourth quarter of 2023, the company conducts impairment testing on goodwill and long-lived assets, including with the U.S. GAAP. The result shows that the fair value of the reporting unit and certain asset groups were lower than their carrying amounts. As a result, a one-off impairment of goodwill and long-lived assets was recognized. Excluding the one-off impact, the net loss, it's same as 2022. The increasing number of data center puts into operation in recent years has resulted a significant increase in the company's depreciation and amortization expense, which has negatively impacted gross profit and net profit. Due to change in both internal and external environment, the company recently conduct reassessment of the useful lease and its fixed assets. Actually [indiscernible] will also conduct and will be informed the actual useful life of certain machinery and equipment exist to provide estimates of 10 -- 8 to 10 years. As a result, the company plans to make accounting estimate change in 2024 and extend the depreciation period for certain machinery and equipment. After the adjustment, the average useful life of the company's fixed assets will be extend to about 14 years, aligned with the industry average. This adjustment is expected to have a positive impact on gross profit and net profit in this year. We, excluding uncertainty factors such as foreign exchange gain or loss and fair value change, the company expects achieving breakeven by this year. So also, the third question for the CapEx. Most of the CapEx from the wholesale business -- around 80% from the wholesale business. Sorry, what is the first question? Could you please...

Just on the CapEx, can I clarify that if 80% of the CapEx is going to wholesale, does it mean that 80% of that 119 megawatt project is wholesale?

Yes, yes.

Okay. My first question is about the debt breakdown by maturity on Page 20 of your PPT, right? So you saw that in 2024, you have RMB 4.25 billion of convertible debt deal. So I want to know how much of that is U.S. dollar and what is your plan to cover that?

It's the USD 600 million, which we already have completely repayment in February.

All right. So that has been taken care of.

Our next question comes from Timothy Zhao of Goldman Sachs.

Also two questions here. One is regarding your guidance for 2024 regarding the top line as well as EBITDA. Can management share what is the underlying assumption for the high end and low end? And any color on the, for example, the amount or the utilization rate and also the revenue growth between your IDC and non-IDC business, wholesale versus retail. I think any color on that would be quite helpful. And secondly, I think back to your CapEx plan for '24, just wondering, I think in your prepared remarks you mentioned something about the AI-related demand. Just wondering any color on what percentage or what proportion of that wholesale CapEx is related to the CapEx on-grid occur to meet the demand for the higher power density cabinets? And how do you think about the overall environment in China for the IDC market?

Let me answer the first question and Jeff will answer the second. For the year 2023, our retail IDC business and non-IDC business is quite stable. With the wholesale business, it's a growth rapidly. By the end of 2023, our wholesale companies represent over 30% of our total cabinets and the contribution -- contributed around 20% of our total IDC revenue. Our wholesale revenue grew 70% year-to-year in 2023. The assumption of our 2024 guidance range is mainly based on our stable retail IDC business and non-IDC business. And the rent is -- mainly the reason is the utilization rate of our wholesale IDC business. So we expect to provide more color on wholesale, retail and non-IDC starting from the fourth quarter of this year. So maybe in next quarter earnings, we will show more number from -- about our wholesale and the retail and the non-IDC business. So, Jeff?

Yes, in terms of AI IDC demand, I would say we have seen actually a rapid growth in China and AI-driven demand from our customer side continue to climb, especially computing power demand for training and LLM, and those models are dominated by the Internet giants, which the vertical models are led by the leading players in specific industries, as I mentioned, some tax top-ups aside from the Internet giants. For our business, for the wholesale, AI-driven demands are mainly searched by Internet giant customers, especially like short video and e-commerce business. As I mentioned on the call, we can see short video customers are ramping up very, very fast that we expect, which is highly contributed by the strong AI-driven demand. In terms of retail side, we are receiving actually interesting demand from retail customers across various industries like the autonomous driving local services and virtual reality and so on. We will -- in 2024, we will explore into further demand from that side. And also, we have the value-added service part, can also provide solid support to the AI demand. And as you mentioned, in terms of the CapEx side to -- I mean, to category into the AI driven, as of 2023, around 20% of our stored CapEx high-power density and especially for the company to deliver new delivered during 2023. I would say the large majority is hard power density covenants, which are all for wholesale customers. For cabinets to be delivered during 2024, I would say it will be 100% is high power density companies, which are all for wholesale customers. So come back to the current CapEx side, I would say, like -- a majority of the CapEx will go to the high-power density wholesale customers.

Our next question comes from Daley Li of Bank of America Securities.

I also have two questions. Firstly, regarding our guidance. We guided like adjusted EBITDA growth for this year is to have higher growth on the top line. So what would be the key drivers for the margin you mentioned. First, same question about the new capacity -- new capacity expansion. And for the 100, 120 megawatts of this capacity, what's the delivery timetable for this year will be majority in the second half or like 4Q or some will be in first half of this year.

Thank you. Let me answer the first question about guidance. The main reason for the company's EBITDA growth higher than the revenue growth in this year's guidance as follows, there's 3 reasons. The first one, the expected growth in this year is primarily driven by the wholesale business. Considering the nature of the wholesale business, we does not include the exact revenue in income. The wholesale business tend to have -- the wholesale business, the EBITDA margin is higher than the retail. So the growth of the wholesale business in this year is to contribute more EBITDA for this -- for the company. The second is that we plan to update and improve certain retail data center, that's a lower EBITDA margin, for this initial arms to enhance our operating efficiency and increase their contribution to the EBITDA. Three, further cost control matter will be employment to improve the company's operating efficiency will positively impact EBITDA growth.

In terms of the 100 to 120 megawatts will deliver in 2024, I would say, the pace will be similar to our previous years. So the majority of our deliveries will be -- happen in the second half of this year.

Thank you. This concludes today's conference call. Thank you all for participating. You may now disconnect. Have a great day, everyone. Thank you very much.