VNET Group, Inc.
Q3 2017 Earnings Call Transcript

Published: 6 Dec 2017

[Operator:]

Good morning, and good evening, ladies and gentlemen. Thank you and welcome to 21Vianet Group’s Third Quarter 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode. We’ll be hosting a question-and-answer session after management’s prepared remarks. Before we begin, I will read the Safe Harbor statement. This call may contain forward-looking statements made pursuant to the Safe Harbor provisions for the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on management’s current expectations and observations that involve known and unknown risks, uncertainties and other factors not under the company’s control, which may cause actual results, performance or achievements of the company to be materially different from the results, performance or expectations implied by these forward-looking statements. All forward-looking statements are expressly qualified in this entirety by the cautionary statements, risk factors and details of the company’s filings with the SEC. 21Vianet undertakes no duty to revise or update any forward-looking statements for selected events or circumstances after the date of this conference call. With us today are Mr. Steve Zhang, the company’s Chief Executive Officer; and Mr. Terry Wang, the company’s Chief Financial Officer. At this time, I would now like to turn this conference call over to Mr. Steve Zhang, CEO of 21Vianet. Please proceed, sir.

[Steve Zhenqing Zhang:]

Thank you, operator. Good morning and good evening, everyone. Thank you for joining us for the earnings call today. Our core IDC business maintained its steady growth in the third quarter, driven by more demand for computing power in the storage space because of the continuous rights of big data, artificial intelligence, IoT and the mobile Internet. Our self-built cabinets, which have higher gross margins increased by 302 to 21,273. At the same time, we clean up our existing partnered inventory, which have lower gross margins and the reduced partnered cabinets are 239. During the third quarter, several of our large-scale clients further expanded their capacity as our data centers. For example, JD Finance increased its cabinets by around 200 to accommodate its rapid growth in the installment payments or buy that business. Ele.me added around 60 cabinets and Momo added close to 100 cabinets, and Xiaomi remains a larger customer with over 900 cabinets under management, adding over 100 cabinets this past quarter. To give some more color on our customers, we segmented the market into three tiers

[Terry Wang:]

Thank you, Steve. [Technical Difficulty] and reached RMB135 million, 19.3% in the third quarter last year to 21.4% this past quarter. Moving on to our MNS business, as Steve mentioned, we completed the divestiture of our two businesses in units on September 2017. I would like to reiterate that divestiture of our MNS business represents a milestone in our strategic realignment, which allow us to optimize our business structure of RMB402 million and WiFire Entities. The six companies engaged in CDN hosting area network services and their route optimization businesses, 21Vianet and its joint venture partners are committed to inject up to RMB100 million and RMB200 million, respectively, into this entities within the next 12 months. The injections will be in installments and based on the business need of WiFire Entities. And it can be in the form of an equity or a bridge loan, depending on the timing of the investment by the joint venture partners. As of November 2017, 21Vianet has already injected RMB15 million and one joint venture partner has already injected RMB30 million into WiFire Entities. Now, let’s take a closer look at our quarterly financial results. Our net revenues were RMB886 million, compared to RMB968 million in the prior year period and RMB879 million in the second quarter of 2017. Net revenues declined year-over-year due to the decrease in our revenues from managing network services, which partially offset by the increase in the revenues from hosting and related services. Our revenues from the hosting and a related services increased by 9% to RMB759 million, compared to RMB699 million in the prior year period and RMB743 million in the second quarter of 2017. The increase was mainly due to the increase in revenues from our efficiency lying across the segment. Our total and monthly recurring revenue or MRR per cabinets for third quarter increased to 8,571 from 8,311 in the second quarter of 2017. Hosting MRR per cabinets for the third quarter increased to 7,817 from 7,615 in the prior year period and 7,697 in the second quarter. The main difference between total MRR and the hosting MRR is that the former inks the revenue from CDN. Net revenues from managed network services were RMB127 million, compared to RMB270 million in the prior year period. The decrease was mainly due to increased competition and pricing pressure. Our adjusted gross profit was RMB221 million, compared to RMB225 million in the prior year period. Adjusted gross margin increased to 24.9% compared to 23.2% in the prior year period. Adjusted operating expenses improved by 21% year-over-year to RMB228 million compared to RMB287 million in the prior year period. As a percentage of net revenue, adjusted operating expenses improved to 25.8% compared to 29.7% in the prior year period. Sales and marketing expenses improved by 23% year-over-year to RMB77 million, compared to RMB100 million in the prior year period. The improvement was mainly due to increase – decrease in the third-party channel cost. The general and administrative expenses improved by 20% year-over-year to RMB130 million, compared to RMB163 million in the prior year period. The improvement was mainly driven by the reduction in headcount. Research and development expenses were RMB38 million, compared to RMB36 million in the prior year period. Our adjusted EBITDA increased to RMB135 million, compared to RMB68 million in the prior year period and RMB109 million in the second quarter of 2017. Adjusted EBITDA margin increased to 15.2% compared to 7% in the prior year period and 12.4% in the second quarter of 2017. Adjusted EBITDA for our hosting and related services business increased by 41% year-over-year to RMB176 million, compared to RMB125 million in the prior year period. Adjusted EBITDA for our MNS business was negative RMB41 million, an improvement of 28%, compared to negative RMB57 million in the prior year period. Adjusted net loss improved to RMB69 million compared to RMB91 million in the prior year period. Adjusted net margin was negative 7.8%, compared to negative 9.4% in the prior year period. Adjusted diluted loss per share was RMB0.10, which represents the equivalent of RMB0.60 per ADS. Turning to our balance sheet. Our cash and cash equivalents and short-term investments were RMB1.8 billion. Now, let me provide you with our guidance. Starting from fourth quarter of 2017, we will only provide the guidance for our hosting and related services business, as we completed the spin-off of our MNS business. For the fourth quarter of 2017, we expected net revenues from our hosting and related services business to be in the range of RMB740 million to RMB760 million, compared to RMB703 million in the prior year period. Adjusted EBITDA for our hosting and related services business expected to be in the range of RMB160 million to RMB170 million and compared to RMB130 million in the prior year period. This concludes our prepared remarks for today. Operator, we’re now ready to take a questions.

[Operator:]

Ladies and gentlemen, we will now begin the question-and-answer session [Operator Instructions]. Your first question comes from the line of Yang Liu of Morgan Stanley. Go ahead. Please ask your question.

[Yang Liu:]

Hello, good morning.

[Steve Zhenqing Zhang:]

Hi, Yang.

[Yang Liu:]

Congratulations on each of the EBITDA in the third quarter. I have a question regarding the MRR. We see a sequential improvement for both the hosting and a total MRR. And could you please elaborate more on what is behind that and how about the outlook going into the next year? Thank you.

[Steve Zhenqing Zhang:]

Thank you. First, let me give you our rough outlook for going forward. We expect the hosting MRR to be stable. There are some little fluctuation between quarter-to-quarter. It depends whether the customers are using up the cabinets with high electricity density, or low your efficiency-based density cabinets. But on average, the hosting MRR has to be stable.

[Yang Liu:]

Thank you. I have a second question regarding the next year new cabinet deployment trend. We know that there are some organic addition, some of self-built data center or cabinet, and also there are some clean up in term of the partnered data center. What is the overall data center cabinet deployment plan next year? Thank you.

[Steve Zhenqing Zhang:]

Let me first talk about our Q4 plan 2017 first. For our Q4 20107, we have two large centers that will go into production. Right now, we are in the process of ramping up the inspection before the final deployment. In quarter four, this year, we’ll have roughly 2,500 cabinets that will go into deployment that to be ready to be used by customers. For 2018, we are still in the budgeting cycle by roughly probably will be somewhere around 4,000 to 5,000 cabinets next year.

[Yang Liu:]

Okay, thank you. That’s all my questions.

[Steve Zhenqing Zhang:]

Okay.

[Operator:]

[Operator Instructions] Your next question comes from the line of Stella Li of Citigroup. Go ahead. Please ask your question.

[Stella Li:]

Hi, thank you for the opportunity. I have three questions. The first question is, what was our EBITDA be for the second quarter, if we exclude the MNS business?

[Steve Zhenqing Zhang:]

The second quarter or third quarter 2017?

[Stella Li:]

Second quarter.

[Steve Zhenqing Zhang:]

Second?

[Stella Li:]

Sorry, sorry, the third quarter of 2017?

[Terry Wang:]

It’s about RMB176 million.

[Stella Li:]

Okay, that’s good. So the second question is, we issued U.S. dollar bonds a few months ago. I remember at that time, the company’s guidance was this U.S. dollar bond would be for refinancing purpose. So I wonder, any other short-term debt that we already refinanced with the proceeds of the U.S. dollar bond and what would be – what would we expect to be the short-term debt level maybe currently or by the end of this year?

[Terry Wang:]

Yes. We have the short-term. And once we’ve done, paid the balance of the dim sum bonds over RMB400 million in June, we – in August, we renewed about RMB1.6 billion loans, which are the – has been was borrowing –borrowed to pay down. Last year, the part of the majority of the dim sum bond, RMB1.5 billion. And that one has been renewed in August. So we renew about nine months, so that short-term. And recently, just last week, yes, last week, we executed to paid out the RMB1.6 billion loan with our budget U.S. dollars in the merchant bank account. So now in the process to redeem that bond, that loan, but I think that will be done within this week. So with that, we have a benefit of saving approximately RMB70 million interest expense annually.

[Stella Li:]

RMB70 million interest expense.

[Terry Wang:]

Right.

[Stella Li:]

You’re saying.

[Terry Wang:]

RMB…

[Stella Li:]

RMB70 million, right, okay.

[Terry Wang:]

RMBS.

[Stella Li:]

Okay. So you are saying, we are in the process of paying down around RMB1.6 billion note with the proceeds on the U.S. dollar bond, expect to complete this week, right?

[Terry Wang:]

Right, because remember we have a – we issued a US$300 million. And as we’re talking about both the proceeds of the bond is aiming to pay down the borrowing RMB1.6 billion loan, that’s our goal for the bond offering.

[Stella Li:]

Sure, very clear. And also in the third quarter in the cash flow statement there, it’s around like a RMB300 million short-term investment, what’s that for – payment for short-term investments RMB337 million?

[Terry Wang:]

We did – we have our restricted cash and RMB1.9 million restricted cash. Once we pay out the RMB1.6 million and the short-term investment is the CDE that we deposit. And as a part of the restricted cash to borrow and we deposit, we have the cash flow down domestically.

[Stella Li:]

Okay. So it’s just a kind of a cash management, right?

[Terry Wang:]

Right. Cash – the part of the cash management is to be able to support operations and short-term.

[Stella Li:]

Okay, I see. And there’s also another RMB600 million of derivative liability as of September, I wonder, what’s that for?

[Terry Wang:]

It’s almost RMB677 million?

[Stella Li:]

Yes, yes that [Multiple Speaker]

[Terry Wang:]

Okay. If you look at the balance sheet, the quarter before, you can –you should see we have aligned the cost below these liability. Total liability line is equity section, it’s called a redeemable controlling expense interest, that’s a RMB700 million, yes. So that because of the spin-off and this amount moved to up to the liability section. The reason is, we – once we – you remember, we spin-off the last-mile of business, which this is part of related our last-mile business once the time we have signed an agreement with them. And they have a put option that approximately RMB700 million. And that will be excluded by end of the 2019, which is RMB677 million is recalculated through the discount rate to calculate the present value of that put option. And because of it, we spin-off. We’re not – it’s not – we don’t control that company, so that become a liability.

[Stella Li:]

Okay.

[Steve Zhenqing Zhang:]

Basically, I think, it’s in 2017, we acquired a 50% interest in the Aipu business. And our original agreement there was a put option that we have granted to the other shareholder, they can accept the put option by end of 2019. But since we spin-off that business, we are right now in the process of discussing with the original shareholder to find a solution for this put option.

[Stella Li:]

Okay, I understand. Thank you very much.

[Operator:]

[Operator Instructions] Thank you. [Operator Instructions] Next question comes from the line of Stella Li again of Citigroup. Go ahead. Please ask your question.

[Stella Li:]

Hi, sorry. Follow-up questions from me. So for the impairment that we did in the third quarter, are there related to the MNS business or they have other related other business as well?

[Steve Zhenqing Zhang:]

Majority come from the – this – the spinoff of the MNS business. Only RMB20 million that related to other small investment impairment.

[Stella Li:]

And this impairment, it sounds like, so that quarter or going forward, we would not be seeing this divestiture?

[Steve Zhenqing Zhang:]

That’s correct.

[Stella Li:]

Okay, that’s good. Thank you very much.

[Steve Zhenqing Zhang:]

Thank you.

[Operator:]

[Operator Instructions] There are no further question at this time. I would now like to hand the conference back to today’s presenter. Please continue.

[Steve Zhenqing Zhang:]

Once again, thank you for all – thank you all for joining us today. Please don’t hesitate to contact us if you have any further questions. We look forward to talking with you in the coming quarter. Thank you.

[Terry Wang:]

Thank you.

[Operator:]

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