VNET Group, Inc. (NASDAQ:VNET) Q3 2022 Earnings Call Transcript

VNET Group, Inc. (NASDAQ:VNET) Q3 2022 Earnings Call Transcript November 23, 2022

VNET Group, Inc. misses on earnings expectations. Reported EPS is $-0.41 EPS, expectations were $-0.08.

Operator: 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.

Xinyuan Liu: 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 against the backdrop of the mounting macroeconomic headwinds. We remain focused on fulfilling market demand for high-quality and reliable additional services. By the end of the third quarter, we had grown total cabinet on the measurement to 82,660 from approximately 65,300 one year ago and same time cabinet utilized by customers increased sequentially by 1027 to approximate 45,530 compared to approximately 38,300 one year ago. As a result, overall utilization rate remained flat at 55.1% as compared with the end of June.

In addition, our retail MRR for the company went up to RMB 9287 in the third quarter, compared with RMB 9186 in the previous quarter. Our third quarter financial results reflect healthy progress in our wholesale and retail business, as well as our effective execution of our dual-core strategy. Our net revenues for the third quarter increased by 16.3% year-over-year to RMB 1.814 billion and adjusted EBITDA reached RMB 455 million. Today’s world is preparing for digital as a new norm for business to attempts and thrive in this new era, digital transformation is paramount as we witnessed at 20th National Congress of the CPC. The central government’s support this transformation as part of China’s high-quality growth trajectory, policy guidelines fueling technological innovation and digital development across a wider spectrum of industries in place.

We are excited to say that digital infrastructure sector as a forefront of this broad-based digitalization and believe that it will further fill market demand for data center services as a leading player in IDC space, we are ideally positioned to capture this burgeoning demand and unleash new growth potential going forward. Despite a challenging and volatile near-term macro environment, we see long-term demand remains strong, with fundamentals surrounding cloud and digital transformation to impact. In response to the short-term headwinds, we plan to adopt a more prudent approach to our capital delivery for the fourth quarter. Therefore, we are further revising our 2022 full year company delivery plan to the range of 8000 to 9000 from a previous year range of 9400 to 12400.

The current outlook has factored in macro softness to lower moving and the COVID-related restrictions. Now let’s take a closer look at our progress across our business lines during the third quarter. On a wholesale basis front, we continued to gain sales momentum, in the third quarter we signed a new contract of approximately 15 with a leading cloud service provider in China to build a network infrastructure in the Yangtze River Delta region. Moreover we recently, once again extending our wholesale data center services contract with one of our largest existing customers, the leading social platform in China. This new order will generate capacity of approx 33 megawatt, since the launch of our wholesale business in 2019, we have established a strong presence in this market segment, accumulating total constructed capacity in the service or under MoU of 283 megawatts by the end of the third quarter.

Our in-depth industry know-how methodical resource management and sophisticated engineering capabilities are key to our success in this sector. On the regional business front, we are pleased to help deliver growth amid a challenging macro environment highlighted by an expanding customer base, and exciting progress in value-added service offerings. In the third quarter, existing customers in automobile, financial services, online gaming, local services and many other sectors expanding their orders with us. At the same time, we also attracted more new customers among financial institutions, the healthcare service providers and the local service platforms. Furthermore, our value-added services continued to attract new prospects to our retail business.

In the third quarter, we won several prestigious customers for our interconnectivity services, including a world-leading consumer electronics tech brands, a leading insurer in China, and a well-known restaurant chain operator in China. In particular, for this restaurant chain operator, we began to offer our in-house developed interconnectivity solution built on our innovative SD-WAN technology. In addition, this solution will successfully provide deployment of secure, flexible and reliable connectivity across a customer’s national network with more than 2000 stores. We view this project as a milestone in the cloud market of our state-of-the-art SD-WAN technology, as well as a good starting point to roll out a solution into different verticals.

Turning to our Blue Cloud business. We have continued to make progress on our cloud landing internal business. In the third quarter, we have a leading international IoT automation company to manage it is cloud-based product offerings accessible to customers in China and are providing operation and maintenance service accordingly. This process illustrates our remarkable value proposition in helping international technology companies to find a more efficient and effective way to enter an expand into the China market. In addition, this quarter we’re extending a cloud solution to emerging Chinese smart EV enterprise by developing an integrated and efficient supply chain management system, which is seamlessly tailored to the customer’s auto parts, procurements process, and the deeply integrated with other module-based solutions in digital infrastructure.

Going forward, we aim to assess our presence in automotive ecosystem, and explore more industry specific cloud business opportunities across a wide variety of verticals by leveraging our unique status in IDC technology and cloud services. Before I read past my remarks today, I’d like to take a moment to celebrate our valuable partnership with Changzhou Hi-tech Holding Group, a subsidiary of the CL Changzhou Hi-tech Group. We formed a joint venture with a total investment of RMB 3 billion. The capital contribution from VNET will be up to RMB 700 million and joining on both companies resources and expertise. This new joint venture will pursue new opportunities to acquire, develop and operate IDC projects across the nation. The JVs initial pipeline offers a potential acquisition targets includes a number of high-quality data center assets located in multiple mega city clusters in China, such as the Greater Beijing area and the Greater Bay Area.

This partnership represents an important step towards extending our business horizon and strengthening our presence in the digital infrastructure sector. In summary, we see strong long-term demand and the bright future for IDC services in China, despite short-term macro turbulence with growth. Our effective and dual core strategy and competitive service offerings. We are well equipped to navigate near-term challenges and capitalize on future demand prospects. We will continue to execute prudently yet decisively, strategically positioning the company to capture rising opportunities as more industries further head with their digital transformation, creating long-term value for our shareholders along the way. Thank you everyone. With that, I will now turn the call over to CFO, Tim to discuss our financial performance for the quarter and our business outlook.

Tim Chen: 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 gross margin in the third quarter of 2022 was 39.0% compared to 43.2% in the same period of 2021. Adjusted operating expenses, which excludes share-based compensation expenses, and compensation for post combination employment in an acquisition, or 275.1 million in the third quarter of 2022 compared to 244.0 million in the same period of 2021. As a percentage of net revenues, adjusted operating expenses in the third quarter of 2022 or 15.2% compared to 15.6% in the same period of 2021. Adjusted EBITDA in the third quarter of 2022 was 455.3 million representing an increase of 1.1% from the same period of 2021. Adjusted EBITDA in the third quarter of 2022 excluded share-based compensation expenses of 35.2 million. Adjusted EBITDA margin in the third quarter of 2022 was 25.1% as compared to 28.9% in the same period of 2021.

Our net loss attributable to ordinary shareholders in the third quarter of 2022 was 425.2 million, compared to a net profit of 156.2 million in the same period of 2021. Basic and diluted loss were both 0.48 per ordinary share, and both 2.88 per ADS. Each ADS represents six Class A ordinary shares. Turning to our balance sheet, as of September 30, 2022, the aggregate amount of the company’s cash, cash equivalents and restricted cash was 3.76 billion. Meanwhile, net cash generated from operating activities in the third quarter of 2022 was 607.4 million compared to 134.7 million in the same period of 2021. Our CapEx in the third quarter of 2022 was 580.5 million. Moving to our financial outlook, we are maintaining our outlook for the full year of 2022, with net revenues expected to be in the range of 7250 million to 7550 million and adjusted EBITDA expected to be in the range of 1800 million to 1950 million.

This concludes our prepared remarks for today. Operator, we’re now ready to take questions. Thank you.

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Q&A Session

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

Yang Liu: 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.

Jeff Dong: 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 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.

Yang Liu: Can you hear me?

Xinyuan Liu: Yes.

Tim Chen: 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.

Yang Liu: 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?

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

Yang Liu: 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.

Tim Chen: 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.

Yang Liu: Thank you.

Tim Chen: Most welcome.