VNET Group, Inc.
Q3 2014 Earnings Call Transcript

Published: 27 May 2015

[Operator:]

Good morning, ladies and gentlemen. Thank you everyone and welcome to 21Vianet Group's First Quarter 2015 Earnings Conference Call. At this time, all participants are in listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference call. 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 their 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. Josh Chen, Chairman and Chief Executive Officer; Mr. Shang Hsiao, Chief Financial Officer, and Mr. Eric Chu, Vice President of Capital Markets and Business Development. Following management's prepared remarks, we will conduct the Q&A. At this time, I would now like to turn the conference call over to Mr. Josh Chen, 21Vianet's Chairman and Chief Executive Officer for opening remarks.

[Josh Chen:]

Good morning and thank you for joining us today. Before going over operating details, I would like to first spend a few minutes through the current market dynamic opportunities and challenges we are facing in China internet infrastructure market. First of all, we believe we have great opportunities in three key areas. One, developing ecosystems, two, improving operating efficiencies and three optimizing capital structures. In terms of ecosystems, we are still at a very early stage in the China markets including verticals such as broadband ASPs, financial service and call computing service providers, which prove to be strong growth engines for many of our peers in more advanced economies. Most specific in China is the broadband market. Now current regulators are just starting to exquisitely open up the market to private investment and more competition. For example, the central government has set clear goals to issue 100 broadband licenses and target RMB 10 billion in total investment by year end 2015. The trial will be increased to more than 30 by year end and open up to nationwide by 2017. As this market is further deleveraged we believe this emerging broadband ASPs will create demand for interconnection and cross-connect service over time which will offer attractive growth opportunities for our business. In terms of operating efficiencies, we believe this is also a lot of room to make improvement especially compared to some of our peers in the more advanced economics. For the purchase of the resource such as bandwidth and intercity to operating expenses such as sales, marketing and overhead expenses to further optimize our business operations especially taking into account some of the changing market conditions we have set up a special team to drive this initiative, which work very closely with our product team, key customer teams and regional teams. In terms of capital structure, we believe there is also a room for further improvement as the Chinese government make the regulatory change to encourage internet infrastructure build-up they are potential financing opportunities that could offer low-cost field report test that is supported by the government association financial institutions as public listed company, we also continue to look for ways to further optimize our capital structure and support our datacenter expansion. While we are very excited upon these potential opportunities, we also recognize that we face some challenges in a very dynamic market. For example, as call computing service become an increasingly viable option for small customers, we have to continue to look for ways and increase our value proposition to this type of customers as hybrid call service provider become a reality. We are evaluating different approaches in adapting and retain medium and large customers to adjusting this change in a market. Meanwhile, we also recognize that some of our domestic peers are equipped with the cheaper capital resource and might engage in the regional competition. Our management team is spending a lot of time with our operations, financial and regional teams in finding solutions to address some of these changing market conditions. Now, moving on to our operating results. We are off to a good start this year as we witness continued growth in both our core IDC business and Microsoft call service business. This has led to a solid year-over-year top-line revenues, profitability and a scaled up operation. In addition, we are on check with the integration of the Aipu Groups and Dermot Entities both of which we acquired in 2014. As we mentioned last quarter, 2014 was focus on strategically repositioning our business platform to seize new opportunities while 2015 will be a year of – and execution of our enhanced platform and work hard strategy. Our 2015 objectives will be continue to focus our core IDC business after adding close to 3400 cabinets in the fourth quarter in 2015 will further increase our total cabinet count by another 500 in the first quarter of 2015 to over 22,000 cabinets and now we are close to 68% in our datacenters. They are key opportunities for us to serve not only retail collocation customers, but also an increasing number of VAT customers such as Alibaba and others. As we further expand our scales and operational capacities, our goal is to be the most recognized and – in China internet infrastructure market. Now let’s look at our cloud enabling business. We are very happy on the performance of our Microsoft cloud business with revenue growing more than 200% year-over-year. We also renew the commercial operator agreement with Microsoft for their public cloud service. The agreement was extended by four years and we are now being in tact until December 31, 2018. This extension will allow us to build on the strong results and we saw from Microsoft an offers 365 service which now support over 85,000 enterprise customers including both multinational corporations and increasing number of domestic companies. Finally, we are encouraged by the increased adoption of IT outsourcing by financial institutions. As these enterprises become more sophisticated they increasingly look to the internet infrastructure provider to manage their mission-critical applications in a cost-effective manner. For example, we have already assisted in migrating their core production system to [Indiscernible] and expect the financial institution to follow as they gradually become more comfortable with the high level of security we can offer and are able to reduce their own infrastructure cost. Now, I’d like to take a moment and talk about our MNS and CDN business. We experienced some softening in both segments which caused a larger than expected impact to our financial results. For MNS business, we have mentioned in the past few quarters, we have faced some headwinds in this space mostly due to an industry-wide pricing decline and greater competition. To that end, we have continued our network grooming process and adapt our business model to the changing market dynamics. For the CDN business, most of the softening can be attributed to stronger than a stated seasonality and to a lesser extent declining bandwidth prices. We are actively addressing these issues by working closely with our customers and suppliers as well as further optimizing our cost structure to ensure we get this business back on check with a stronger pipeline and as well as we enter seasonality strong seasonally strong second half of the 2015. We are confident in our ability to continue executing on our strategies and we accelerate revenue growth. To conclude, I want to thank all our colleagues and investors for your continued support. We are [Indiscernible] and excited about the [Indiscernible] are confident we continue to grow with the dynamic internet market in China. Now, I would like to hand the call over to Shang, our CFO.

[Shang Hsiao:]

Thank you, Josh. Good morning everyone. As Josh mentioned, we have a solid quarter in our core IDC business. In particular, we saw a record number of cabinets in the quarter supported by the significant capacity expansion in the last few quarters. Our sales pipeline remains strong for the second half of 2015. As our year is typically back-end loaded, as our customer ramp up the resource usage of this new cabinet and as we lease up new datacenter location we are confident that our IDC revenue growth can further accelerate in the coming quarters. In the first quarter, we further improved our cost structure by more effectively managing our adjusted operating expenses. Our adjusted sales and marketing expenses, adjusted general and administrative expenses and adjusted R&D expenses as a percentage of revenue all improved sequentially from the first quarter of 2014. I would also like to briefly highlight our working capital condition. As we mentioned during the past few quarters, we have been steady in improving our working capital situation. During the third quarter last year, our days sales outstanding or DSO was 92 days and decreased to 78 days in the first quarter. In the first quarter of 2015, DSO has remained steady at 78 days despite the huge challenge faced around the Chinese New Year and is still currently surpassing our mid-term goal of 80 to 90 days. We are still striving to improve these important metrics in 2015. Now moving on to our financial results. Before I begin, I would like to state that we will non-GAAP measure today. Our non-GAAP results exclude certain non-cash expenses, which are not a part of our core operations. The detail of these expenses may be found in the reconciliation table included in our earlier release. Also note that all the financial number we are presenting today are in RMB amounts and percentage change is year-over-year unless otherwise noted. Our net revenue for the first quarter of 2015 increased by 46.8%, to RMB860.1 million. Net revenue from hosting and related service increased by 51.6% to RMB613.2 million primarily due to an increase in total cabinet under management, increased demand for cloud service as well as the contribution from the acquisition of Cloud VPN service provider Dermot Entities. The MRR per cabinet was RMB 10,031 in the first quarter of 2015, as compared to RMB 10,400 in the fourth quarter of the 2014. The sequential decline in MRR per cabinet was primarily due to record sales of new cabinets which use lower power and ensure product and due to higher contribution from outside of Beijing which carry a relatively lower MRR. Net revenue from management network service increased by 35.9% to RMB246.9 million. This increase was primarily because of contribution from the acquisition of the Aipu Group which was partially offset by the continuing network grooming effort due to an industry-wide decline in bandwidth price. Adjusted gross profit increased by 59.4% to RMB272.7 million. Adjusted gross margin was 31.7%, compared with 29.2% in the prior year and 34% in the first quarter of 2014. The year-over-year increase in adjusted gross margin was primarily due to a higher margin revenue contribution from acquisition and Microsoft cloud service. The quarter-over-quarter decrease in adjusted gross margin was primarily due to the higher than expected seasonal graduation in CDN revenues continues – and continued softness in MMS business. Adjusted operating expenses increased to RMB209.4 million. As a percentage of the net revenue adjusted operating expenses was 24.2%, compared with 18.8% in the prior year period and 27.5% in the first quarter of 2014. More specifically, adjusted sales and marketing expenses increased to RMB85.1 million from RMB39 million in the prior year period due to the expansion of our sales and service personnel to support growth and due to acquisition with higher and sales and marketing expenses partly benefited by the cost control initiatives. Adjusted general and administrative expenses increased to approximately RMB91.7 million from RMB47.4 million in the prior year period, primarily due to an increase in headcount, provisional fees and other expansion-related expenses and due to acquisition that have higher general and administrative expenses partly benefit by the cost control initiatives. Adjusted research and development expenses increased to RMB32.6 million from RMB23.6 million, which reflected our effort to further strengthen our research and development capability and expand our cloud computing and CDN service offering. The difference between the adjusted operating expenses and our high GAAP total operating expenses amount is primarily due to change in the fair value of contingent purchase consideration payable, which was a loss of RMB20.9 million and share-based compensation expenses of RMB44.2 million. The change in the fair value of contingent purchase consideration payable resulted from a increase in the present value of estimated cash and share consideration as of March 31, 2015 associated with our Company past acquisition. From a profitability perspective, adjusted EBITDA increased by 47.8% to RMB166.9 million from RMB112.9 million in the comparable period in 2014. Adjusted EBITDA margin was 19.4%, compared to 19.3% in the prior year period and 18.8% in the first quarter of 2014. Our adjusted net profit was RMB18.9 million compared to RMB33 million in the prior year period. Adjusted net profit margin was 2.2% compared with 5.6% in the prior year period and 0.8% in the first quarter of the 2014. Adjusted diluted earnings per share was RMB0.02, which represents the equivalent of RMB0.12 or $0.02 per ADS. As of March 31, 2015 our cash and cash equivalent and short-term investment was RMB2.02 billion, equivalent to $326.1million. Pro forma for the equity investment transaction with Kingsoft, Xiaomi and Temasek for a total amount of US$296 million, the funds of which was received in the earlier second quarter of 2015. Our cash and cash equivalents and short-term investments totaled approximately RMB3.2 billion or US$516.2 million. Looking at our financial outlook, currently, we expect second quarter 2015 net revenue to be in the range of RMB886 million to RMB922 million, which at the midpoint represent growth of approximately 37% from the comparable period in 2014. Adjusted EBITDA is expected to be in the range of RMB152 million to RMB172 million, which at the midpoint represent growth of approximately 23% from the comparable period in 2014. Net revenue for the full year of 2015 are expected to be in the range of RMB3.91 billion to RMB4.11 billion, which at the midpoint represent approximately [indiscernible] 2014. For the full year of 2015, adjusted EBITDA is expected to be in the range of RMB760 million to RMB860 million, which at the midpoint represent approximately 45% growth over 2014. This forecast reflects the Company current and preliminary view, which is subject to change. This concludes our prepared remarks for today. Operator, we are now ready to take some questions.

[Operator:]

Thank you. [Operator Instructions] The first question comes from the line of Colin McCallum from Credit Suisse. Please go ahead.

[Colin McCallum:]

Good morning. Thanks for the opportunity. Couple questions from me. First of all, can y you tell us what was the cloud revenue in 1Q 2015 both from Microsoft and IBM? And could you also confirm that you are putting that revenue into the hosting and related services line item? That’s the first question. Secondly, can you tell us what’s the revenue from the Aipu and Dermot business units were in the first Q of 2015? And can you also confirm that both of those are going into the managed network services line item? That would be great. Thank you.

[Josh Chen:]

Okay, thank you, Colin. Okay, this is starting from the Microsoft. In 1Q, Microsoft actually had the revenues around $10 million. Okay, here we reiterate, okay, confirm the whole year Microsoft revenue will be $50 million. So that’s for Microsoft and for the IBM, the first quarter actually somewhere around RMB6 million, so it’s close to $1 million revenue. Okay, that’s the revenue we have right now. For the Aipu and also VPN revenue that we are talking about a large number, also which is a inter-company elimination et cetera, after the call, we will provide all the detail to you, okay.

[Colin McCallum:]

Okay, and in terms of which line items are going into, what I suggested is correct? So cloud revenue is going into, okay, all right, thank you.

[Eric Chu:]

Hey, Colin, this is Eric. Just wanted to clarify there really quick so, if you look at the breakdown that we provided on our P&L, the hosting and related services items that line item actually includes the Dermot Entities. So do you want to ask - that is included in the hosting and related services.

[Colin McCallum:]

Okay.

[Eric Chu:]

The Aipu Group, contribution from Aipu Group, that’s included in our managed network services.

[Colin McCallum:]

Got it. Okay, thank you and cloud is included in hosting, right? Cloud revenues, is that included?

[Josh Chen:]

It’s on the hosting revenue, okay.

[Colin McCallum:]

All right. Thank you.

[Operator:]

Thank you for the questions. Your next question comes from the line of Harsh Agarwal from Deutsche Bank. Please go ahead.

[Harsh Agarwal:]

Hi, I had three questions actually. One was, you are sitting on a lot of cash balance. Can you give a sense of what is the company’s CapEx plans for this year? And also if you are looking for anymore acquisitions over the course of this year given the high cash balance you are sitting on right now? That’s my first question.

[Josh Chen:]

Yes, right now we have a higher repo of the cash on hand. For this year, right now, current plan, our CapEx plan will be between RMB900 million to RMB1 billion, but I have to say strong demand from the market, we may consider to add inter-company the second half of the year. If we do that, we may increase the CapEx amount accordingly. This is number one question. Number two is, currently the company has plans to do any acquisition at this moment. Okay, thank you.

[Harsh Agarwal:]

Okay, got it. Sorry, just one more housekeeping question was you said your cash balance at the end of March was about $326 million and then once you received the $296 million from the equity investors in the second quarter this year your pro forma cash balance, how do you get the number of $516 million. I thought the pro forma cash, if I just add the two numbers; it should be more than $600 million?

[Josh Chen:]

Yes, actually, the equity investment by Kingsoft, Xiaomi and Temasek actually is cash under two phase. The total amount is close to $300 million. So in the first quarter $100 million cash already in and when we go into the beginning of the second quarter, actually in the April and the other $200 million remaining to the company. So it’s $100 million plus, $200 million, okay.

[Harsh Agarwal:]

Got it, got it. Thanks, I had more questions. So I’ll come back in the queue. Thank you.

[Josh Chen:]

Okay, thank you.

[Operator:]

Thank you. The next question comes from the line of Cheng Cheng from Pacific Crest Securities. Please go ahead.

[Cheng Cheng:]

Hi, thank you. A quick question on utilizations in Q1 it seems like it took a bit of drop. I am just wondering the rational behind that and kind of expectations around utilization or maybe the billing cabinets for the rest of the year?

[Josh Chen:]

Okay, thank you, Cheng Cheng. Yes, utilization actually was dropped, that’s a consistent, we saw expectation because in the last quarter of the 2014, the cabinets totally deployed more than 3000 cabinets, actually 6400 cabinets. So those are number of cabinets we need to enter into the sales process. In the first quarter actually you have Chinese New Year et cetera. So the sales actually little bit slowed, so that’s why you see the 65% utilization rate. When we get into the second quarter, then we expect the utilization rate was starting to climb, maybe increase 2 to 3 percentage let’s say go to the 67%, 68% in the Q2. But when we enter the Q3 because currently, we have more than 2000 cabinets planned to be deployed in the second quarter and that’s another big amount of the cabinets to be deployed in the second quarter. So, at the third quarter, you probably see the utilization maybe drop back to 65%. So that’s the utilization rate rational. That’s all based on a number of the cabinet we deployed per quarter. Okay, Cheng Cheng?

[Cheng Cheng:]

Yes, great. Thank you. And as a quick follow-up, is there any update on any of the large cloud deployment bids that are currently going on, can you give us any updates there? Thank you.

[Josh Chen:]

Okay, yes. Actually, currently, there are couple, we are working on it and it’s a big one, the size is big. Okay, but once we sign the contract; we will let the market know. Okay?

[Cheng Cheng:]

Great. Thank you.

[Josh Chen:]

Thank you.

[Operator:]

Thank you for your questions. Your next question comes from the line of John Choi from Daiwa. Please go ahead.

[John Choi:]

Good morning guys. Thanks for taking my question. I have a quick question on the CDN and MNS business. You did mentioned that it was kind of weak due to seasonality. Can you elaborate a bit more on what kind of challenges you guys are facing for CDN and MNS and what should we be expecting for – in the second quarter and the second half. Thank you.

[Shang Hsiao:]

Okay, I think for answer to you, maybe, Josh can say, it’s actually my feel and I can talk about financial data, okay. I speak in Chinese and Eric can translate this.

[Josh Chen:]

[Foreign Language]

[Eric Chu:]

Yes, so in the – the first thing that Josh mentioned is that, right now, we are going through, really the early stage of the broadband market changes from a regulatory perspective and also driven by very rapidly increasing network traffic. So the bandwidth as a result of those two factors, the bandwidth prices are declining and we are actually getting some outside impact from those changes, but at the same time, we believe that we are going in the right direction as the overall market is moving closer and closer to the more open, more developed economies. [Foreign Language]

[Eric Chu:]

So when you look at the US market, say about ten years ago, it was really the datacenter and the interconnection market started really after the really the openness of the competitive local exchange carriers that’s enabled by the Telecom Act of 1996 back in the late 1990s. And so, in China, we are about 10, 15 years behind the US, but we are literally just at the starting point of seeing more and more internet traffic being transmitted based on theory – based on interconnection rather purely based on transit. So, during this transition, we are seeing some impact, it’s actually with our MNS business, but at the same time, we are also working very diligently to take advantage and leverage that we are in this market position and to capture the market opportunity in interconnection and cross-connects as that market develops. [Foreign Language]

[Eric Chu:]

More specific for our CDN business, because of the relatively even it’s easier to change from carrier-to-carrier, we do have higher fluctuation as compared to our core collocation business. And in the first quarter more specifically, especially around Chinese New Year, there was some expected revenues that had expected to become earned but did not come in, in reality which impacted our overall financial condition.

[Josh Chen:]

This is Chen, okay, we talk about CDN and MNS from the financial side, for the MMS business, this year we expect that the revenue from the MMS would be flat, no growth, but we already see the revenue in operation and right now in the pattern. So the revenue, we expected no growth. But with the CDN business, you guys can recall, three years ago we acquired the Fastweb, since the acquisition, Fastweb actually under, anywhere more than 50% growth year-over-year already for two years. This year, again, we expect our CND revenue will have growth more than 50%. So, seasonality impact our Q1 revenue but based on the sales of our pipeline et cetera, we do expect very strong second half of this year to see the CDN revenue growth. Okay, thank you. Operator Thank you for the question. Next question comes from the line of Matthew Heinz from Stifel. Please go ahead.

[Matthew Heinz:]

Hi, thanks for taking the questions. I was wondering just in terms of the cloud business and the $50 million guidance you have out there for Microsoft, does that include, does that assume bookings of the few large customers that have been discussed late last year and I think that’s slipped into this year and you kind of alluded to a large deal in the pipeline as well. Does the guidance include the onboarding of those customers?

[Josh Chen:]

Matthew, the answer will be yes. So, we have contract with Microsoft, when you mention about couple of big contracts, that’s we mentioned that and those contract continues we are working on it. When we are booking that $50 million revenue, we did – actually, that includes certain parts that we are working on it. Okay?

[Matthew Heinz:]

Okay, thanks and then maybe, secondly just an update, kind of on the regulatory front. As the conversations changed or evolved at all with respect to the basic broadband license, what kind of visibility do you have around that at this point particularly as the government sort of assess the shift in internet infrastructure towards the pairing model?

[Josh Chen:]

Yes, we talk about the broadband license. Actually, during the last months, the central government through the MIIT, they issued a circular to talk about they were opened broadband license in certain cities. Actually, right now, the cities they have planned to open is somewhere around 16 cities, but they also later on they come and say, they will increase the cities to be opened up from 15 to 31, my CEO already mentioned about it. But the broadband license right now they try to open including, number one, the last mile, the second one is including the – we call metropolitan area network. So right now they have planned to open this and with the timing, okay, we believe the timing should be around the middle of this year, but the key message what we hear the central government, the MIIT, they won’t issue a nation-wide license to a particular company et cetera, actually somewhere be MI, local city MIIT, they were issued the local license. They say, if you plan to operate with ten cities, then you are supposed to get ten licenses from each local MIIT. Okay, that’s the current plan by the government.

[Matthew Heinz:]

Okay, thank you very much.

[Eric Chu:]

Hey this is Eric. Matt, this is Eric, just wanted to add a couple of things really quick there. So in addition to the licenses that we need to receive from the regulators, we are also working on couple of other fronts. One is on the ecosystem, because license is one thing and the another to really capture that market opportunity, you really do need to have a ecosystem, be it financial services, or ISPs or cloud computing services providers. So that’s something that we are working on currently right now. The other thing is, we also need to educate some of our customers, because in China, a lot of customers even though they are becoming increasingly sophisticated, some of the customers, frankly speaking just don’t know the benefits or what’s the possibility of the benefits that can be provided by interconnection and cross-connect services. So that’s another factor that we also have to work on.

[Matthew Heinz:]

Okay, thank you.

[Eric Chu:]

Thank you.

[Operator:]

Thank you for the questions. Next question comes from the line of Leping Huang from Nomura. Please go ahead.

[Leping Huang:]

Thank you for taking my question. So, my question follow – it’s also about MS, so the state consulate now recently push operators to increase network speed and lower the tariff and also we see a lot of negative media reports about the, in China, I think in my knowledge, China Mobile buy a lot of bandwidth through the independent companies from Unicom Telecom and these – I am not whether this is related to MS service, but this seems to be negative news report upon this one. So, do you think that this government to push on the lower tariff – mainly affect your MS service tariff, or will also negatively affect your volume or what do you see or do you think if you look the organic growth of the MS business, it will take all the acquisitions, the Fastweb acquisition, do you see long-term this will – it will spread or it will decline? Thank you.

[Josh Chen:]

Okay, Leping, okay. Well, MMS actually is volume business, in fact our volume sales to our customer continue to increase, but the pricing decrease a lot. We monitor the pricing, I can give you a example of the pricing, actually, in the second quarter of the last year, the pricing at that time probably, it’s a three time, four times of the current price. What that means that pricing has been declined by more than 60%, 70% year-over-year. So we face the pressure, we face the pressure, but our customer continue to increase. But I have to say, by the traffic from those MMS revenue they are very, very important to us even this business result the revenue grows, but our traffic amount continue to increase. We do have our network strategy and plan. So we already go into the market, the revenue of the MMS this year will remain stable as well as their margin actually will remain the stable. So that’s the current situation, but you also need to consider because, China is going to open the broadband license in a very short period of time. Accumulate of the traffic from the last mile, from the metropolitan network as a way as the traffic platform also very, very important for us, not because of revenue, but somehow that’s very important to our network cost structure. Okay, thank you.

[Leping Huang:]

Thank you.

[Operator:]

Thank you for the questions. Your next question comes from the line of Louis DiPalma from William Blair. Please go ahead.

[Louis DiPalma:]

Thanks for taking the question. A quick one, when do you forecast that utilization will return to 70%?

[Josh Chen:]

How many percent? I am sorry, seven…

[Louis DiPalma:]

70%.

[Josh Chen:]

70%, okay. Well, the 70% that was the first – that was the Q4 number right. And for the 70% I think, if we look at maybe in the Q4 this year, okay, maybe we can see the 70%, if I answer your question.

[Louis DiPalma:]

Yes, and just a follow-up, can you remind me how many cabinets of capacity you expect to add in total for 2015?

[Josh Chen:]

Okay, our guidance right now is between 7000 to 9000, which is a midpoint 8000. And I can reaffirm that guidance. So, if you want to do your math, it’s 8000 cabinet deployment for this year. Okay, with the second quarter, somewhere, more than 2000 cabinets and again more than 2000 cabinets in Q3 and more than 2000 cabinets in Q4. In total, more than 8000 cabinets.

[Louis DiPalma:]

Great, that’s all I had. Thanks for taking the question.

[Josh Chen:]

Thank you.

[Operator:]

[Operator Instructions] You have a follow-up question from Mr. Harsh Agarwal from Deutsche Bank. Please go ahead.

[Harsh Agarwal:]

Hi, do you mind just to reminding us again what has been the change in the VAT system that you talk about in the results?

[Josh Chen:]

I am sorry, could you repeat your question?

[Harsh Agarwal:]

What has been the change in the VAT system that you mentioned in the results that has impacted your revenues?

[Josh Chen:]

Okay, so VAT, actually, that is company impact, let me summarize like this. Right now the company use VAT tax system because we have been required to do that after June of the last year and in the beginning we said the VAT invoice, because the local tax bureau they did not get pass enough, okay, VAT, after the close to the end of the last year and we will see this official VAT invoice and everybody can see our DSO right now, it’s quite stable around the 78 days. So, that one right now it’s not a issue anymore. Okay?

[Harsh Agarwal:]

Okay, thanks.

[Josh Chen:]

Okay, thank you.

[Operator:]

Thank you. Ladies and gentlemen, we have no further questions from the phone line. I would like to hand the call back to the management for closing remarks.

[Eric Chu:]

Thank you everyone.

[Operator:]

Ladies and gentlemen, that concludes the conference for today. Thank you for your participation. You may now disconnect the lines.