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21Vianet Group (NASDAQ:VNET)

Q3 2013 Earnings Call

November 25, 2013 8:00 pm ET

Executives

Frank Meng - President

Shang-Wen Hsiao - Chief Financial Officer and Principal Accounting Officer

Analysts

Chad Bartley - Pacific Crest Securities, Inc., Research Division

Yajun Liu - JP Morgan Chase & Co, Research Division

James D. Breen - William Blair & Company L.L.C., Research Division

Eric Z. Chu - Canaccord Genuity, Research Division

Wendy Huang - Standard Chartered PLC, Research Division

Gary Yu - Morgan Stanley, Research Division

Operator

Good morning, ladies and gentlemen. Thank you, everyone, and welcome to 21Vianet Group's Third Quarter Earnings Conference Call. [Operator Instructions]

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 risk, 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. Frank Meng, 21Vianet's President; and Mr. Shang Hsiao, Chief Financial Officer. 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. Frank Meng, 21Vianet's President, for opening remarks.

Frank Meng

Thank you, operator. Good morning and good evening, everyone, and welcome to 21Vianet's Third Quarter Earnings Conference Call. During this quarter, we continued to focus on growing our core Internet data center business, as well as expanding our client offerings, further strengthening our position as China's leading Internet infrastructure provider.

For our core IDC business, we increased our total self-built cabinet count by 16% from the second quarter of 2013 by adding 1,172 cabinets to our self-built data center this quarter. This significant addition brought our total self-built data center cabinets to 8,576, or 64% of our total 13,307 cabinets under management, allowing us to get closer to our optimal split of 80% self-built and 20% partnered cabinets.

In addition, as a result of solid data center demand, we were able to improve the utilization rate to 73.7% from 70.2% in the second quarter of 2013. This ramp up in capacity was backed by our strong sales in Beijing, as well as improved utilization in Southern China. In particular, we added 988 cabinets to our self-built Beijing and 6 data center by the end of the quarter, where the pre-sales remain very strong.

Our strong growth has been further supported by the industry research firm, IDC. IDC's recent industry analysis shows that 21Vianet has extended its overall market share to 12%, or to 31% among the carrier-neutral IDCs, further solidifying its market leadership in China's Internet data center sector. According to IDC's recent industry numbers, we remain the largest and the fastest growing carrier-neutral Internet data center operator in China in 2012, as measured by the revenues.

In addition, IDC has increased its 5-year compounded annual growth rate from 25.5% to 28.4%, estimating that the Internet data center industry in China will exceed USD 6 billion in 2017. This compares to our performance, where our net revenue increased to RMB 1.5 billion in 2012, from only RMB 240.8 million in 2008. This represents a strong 5-year CAGR of 58.6%. We firmly believe that our ongoing structure shift to more self-built data centers, as well as of the upcoming commercial launch of Microsoft cloud business will further help to reinforce our market leadership position.

Moving on to our cloud business, since our successful launch of the public preview for Microsoft Windows Azure and Office 365, we have received a strong market response, with a total of over 15,000 customers signing up and still using the public beta platform since its launch. We have begun selective commercialization of the Windows Azure and Office 365 and have already secured a number of large customers in our pipeline, including several well-known Fortune 500 enterprises. These clients have moved from the 3 beta tests into a new contract with us and will begin to make payments starting from the fourth quarter of 2013. We are now expecting full commercialization to occur in early 2014.

More importantly, in response to the strong-than-expected demand in China, our partnership has formulated aggressive expansion plan to significantly grow the capacity for the cloud services. These initial achievements demonstrate the user's effective traction and trust in the quality and the stability of 21Vianet and the Microsoft cloud business platform and strengthened our confidence that our cloud business is on track to become a major growth driver, alongside our hosting business.

We are also very pleased with the progress of these strategic initiatives from the past quarter, which will help in expanding our service portfolio and the business opportunities going forward. In particular, our strategic joint venture with the Dongguan Government to build a new IDC in Southern China will help us extend our data center footprint and reinforce our cloud computing-related service offering throughout China.

Partnering with Dongguan Government will also provide us ample capital and government support to develop and implement next-generation networking technologies. This endeavor represents an important stride in our company's roadmap to develop China's own interconnection market, further strengthening our position as a leading Internet infrastructure and data center service provider in China. Our investment into this joint venture will be held in escrow for registered capital purposes when applying for any necessary licenses.

Looking forward, with the addition of funding from our recent bond offering, the investment from Temasek, as well as the newly announced government guidelines that are encouraging greater participation of private companies in China's telecommunication sector, we believe we are well positioned to continue strengthening our position as the leading Internet infrastructure company over the long term.

At this point, I would like to turn the call over to Mr. Shang Hsiao, our CFO, who will discuss our financial performance, as well as the financial forecast in great detail.

Shang-Wen Hsiao

Thank you, Frank, and good evening, everyone. Now I will go through our financial details. I would like to state that we will present non-GAAP measures on today's conference call. Our non-GAAP result excludes certain noncash expenses which are not a part of our core business. The detail on 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 amount unless otherwise noted.

Our net revenue for the third quarter of 2013 increased by 29.8% year-over-year to RMB 514 million. Net revenue from hosting and related service increased by 54.3% year-over-year to RMB 337.6 million, primarily due to an increase in total cabinet under management, as well as increased demand for the company's CDN service. The MRR per cabinet was RMB 10,522 in the third quarter of 2013, as compared to RMB 10,559 in the second quarter of 2013. Net revenue from managed network service decreased by 0.4% year-over-year to RMB 176.4 million in the third quarter of 2013. This decrease was primarily because of lower pricing due to increasingly competitive environment.

For the third quarter of 2013, adjusted gross profit increased by 25.2% to RMB 148.7 million. Adjusted gross margin was 28.9% in the third quarter of 2013, compared with 30% in the prior year and 28.8% in the second quarter of 2013.

Adjusted operating expenses increased to RMB 91.7 million. As a percentage of the net revenue, adjusted operating expenses was 17.8%, compared with 17.4% in the prior-year period and 18.2% in the second quarter of 2013. More specifically, adjusted sales and marketing expenses increased to RMB 35.9 million from RMB 25 million in the prior-year period due to the expansion of our sales and service support team and our marketing effort associated with the launch of Microsoft premier cloud service.

Adjusted general and administrative expenses increased to approximately RMB 36 million from RMB 26.8 million in the prior-year period, primarily due to an increase in headcount, office rentals and other expansion-related expenses associated with our effort to expand its cloud computing service offering.

Adjusted research and development expenses increased to RMB 19.7 million from RMB 17 million, which reflect our effort to further strengthen its research and development capability and expand our cloud computing service offering. The difference between adjusted operating expenses and our higher GAAP total operating expenses amount is primarily due to the change in the fair value of contingent purchase consideration payable, which was a loss of RMB 10.7 million and share-based compensation expenses of RMB 15.6 million. The change in the fair value of contingent purchase consideration payable resulted from an increase in the present value of estimated cash and share consideration as of September 30, 2013, associated with our company past acquisition.

From a profitability perspective, adjusted EBITDA for the third quarter of 2013 increased to RMB 95.4 million. Adjusted EBITDA margin for the quarter was 18.6%, compared with 19.2% in the prior-year period and 18.5% in the second quarter of 2013. Our adjusted net profit for the quarter was RMB 29.5 million, compared with RMB 52.2 million in the prior-year period. Adjusted net profit margin was 5.7% compared with 13.2% in the prior-year period, 4% in the second quarter of 2013. Adjusted diluted earnings per share for the quarter was RMB 0.08, which represents an equivalent of RMB 0.48 or USD 0.08 per ADS.

As of September 30, 2013, our cash and cash equivalent and short-term investment was RMB 2.2 billion, equivalent to USD 362.9 million.

Regarding CapEx, in the third quarter of 2013, we spent approximately RMB 201.6 million CapEx on our infrastructure build-out. For the full year of 2013, we plan to spend approximately RMB 600 million, as we announced previously, including investment in the additional data center we plan to build in 2013.

Looking at our financial outlook; currently, we expect 4Q net revenue to be in the range of RMB 540 million to RMB 550 million. This represents a 30.4% growth in the comparable period in 2012. Adjusted EBITDA is expected to be in the range of RMB 100 million to RMB 105 million. This forecast reflects the company current and preliminary view, which is subject to change.

This conclude our prepared remark for today. Operator, we are now ready to take some question.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Chad Bartley from Pacific Crest.

Chad Bartley - Pacific Crest Securities, Inc., Research Division

I had 2 questions. The first, can you talk about the rollout of the self-built cabinet and how that is going? The additions in Q3 were a bit below our forecast. And if you can update us on where you think you'll end the year. And also, if you can, 2014 targets would be helpful. And then I'll save my second question.

Shang-Wen Hsiao

Okay. Thank you, Chad. Okay, right now, original, our schedule is to deploy somewhere around 2,000 cabinet in Q3 and additional 5,000 cabinet to be deployed in Q4. When I say Q4, it's a bit towards the very end of the Q4, okay. Right now, for the Q3 one, okay, the remaining cabinet will deploy in Q4, but for the original Q4, we plan to deploy somewhere around -- towards the end of December, we may consider to deploy it then, okay, in the earlier of next year, okay, Q1 of the next year, in order to maintain a higher utilization rate, okay. But the company goal is, okay, with the total number of the cabinet to be reached in 2014, okay, that should reach somewhere around like 27,000 cabinet. That had not been changed. And we also plan to deploy -- the company have a total additional cabinet to reach 35,000 in the year of 2015. That had not been changed, too, okay. Thank you.

Chad Bartley - Pacific Crest Securities, Inc., Research Division

Okay. And then, Shang, could I ask one more? In terms of the comments around competition and pricing in the network services business, when did you start seeing that? Who are you seeing that from? And is that a risk going forward?

Shang-Wen Hsiao

Okay. I think we saw those pricing competition starting from middle and late of September, okay. And the pricing down, it's now only just from one region. Actually, there's a couple -- lots have happened from couple of region in China, okay. So we're starting to seeing that. So towards end of the September, the company decide, okay, to lower down the pricing, okay, in order to compete with some of the local ISP, okay. And the company actually already implement, okay, certain remedies, okay. We should be able to think, okay, starting to change, okay, in the beginning of the next year. We still remain confident, okay, we should be able to see some growth again from our management network service again in the beginning of the next year.

Operator

Your next question comes from the line of Lucy Liu from JPMorgan.

Yajun Liu - JP Morgan Chase & Co, Research Division

I have a couple of questions. Firstly, it's on your hosting business. It seems like your traditional rates actually turned out to be better, but what happened to the MMR (sic) [MRR]? It seems this was the first time we see the quarter-on-quarter decline in the last couple of years, so I just wonder what's the reason behind. And also, can you give us some guidance in terms of the fourth quarter, those utilization rates and, also, MMR trend? That will be helpful. And then secondly, in terms of cloud, so I just wonder -- so now, what's the latest progress? How -- like is there any revenue incurred in third quarter at all or no? Any change to the guidance for this year and the next year as well, especially since I think recently, government also -- basically, they encouraged the local -- in terms of the SOE -- it encouraged SOE and also the government to use more China domestic software, so whether you see any impact in terms of this part of the business?

Shang-Wen Hsiao

Okay. Thank you, Lucy. The MMR per company, actually, we are down a little bit, okay, compared -- I'm talking about MRR per company, okay, like $30 -- RMB 30, okay. What happened is for our business actually, MRR per cabinet, okay, if we sell cabinet in Beijing, the MRR will be higher because in Beijing, the company is able to sell somewhere around RMB 13,000 per cabinet per month. In Shanghai, okay, the pricing actually is somewhere between RMB 10,000 to RMB 11,000 per cabinet per month. If you go down to even south, to Shenzhen and Guangzhou, the cabinet price is somewhere between RMB 8,000 to RMB 9,000. So we sold out Shanghai cabinet, okay. So as a result, MRR actually is very, very slightly, okay, decreased compared to the previous quarter. But like I say, okay, we do expect, okay, our MRR will increase before the end of this year because the company just deployed one of the data center in Beijing, M6, 988 cabinets, and those sale in Beijing will increase our overall, okay, MRR per cabinet. And for the 4Q utilization rate, earlier, I mentioned, okay, the company tend to shift some of late deployment in December for some of the cabinet into early of next year. Somehow, that imply our MRR will continue to increase, okay, in the last quarter of this year. Right now, we are shooting -- should be somewhere around between 75% to 76% utilization rate, okay, into Q4. Okay, we hope we can achieve that. That's one. And second question is regarding to the status of the cloud computing, our partnership with Microsoft, okay. On September 20, actually, the partnership are starting to sign, something we call MS Lab, okay. MS Lab is a program designed by Microsoft. We can say it's -- we're starting to sign those VIP customer. VIP customer mean, okay, those customer will provide the partnership, okay, with more than -- okay, somewhere around USD 200,000 revenue annually. We're starting to sign those customer. So far, we already signed many of them, okay. The company actually -- the customer we signed -- I think I can release name to you, including Coke, Siemens, Bosch, even including Samsung China, okay, and we believe more to come. And earlier, Frank did mention a product [ph], okay. As of today, we still have more than 15,000 customer, okay, from the Windows Azure, as well as the Office 365 still remain in the property beta, okay. So that's a very strong indication, okay, that the recent demand should be there, okay. And when we say for the commercialization, okay, what we mean here is that we have a program called West Direct. So west means the west side. So once we open the West Direct mean any customer, including the individual and small enterprise, they can just go to the west side and side -- and demand their service and pay for it, okay, and they will receive the service immediately. That part, okay, we will do that, okay, in the early of next year. That's our current plan, okay. And regarding to your third question, regarding to the parliament encouraged to use domestic software, yes. Okay, if you look at Office 365 -- so I think most of you do know, okay, they are including Outlook, Excel, PowerPoint, et cetera, okay. They have been widely adopted and been used, okay, in China. The penetration rate was such Office 365, actually are very, very high, okay. But we do see the sign from the government, okay, to encourage the use of domestic software. But at this moment, okay, we remain confident, okay, Office 365 should do very well in China, as evidenced by the penetration rate of the people to use such service, okay, such service application. Thank you, Lucy.

Yajun Liu - JP Morgan Chase & Co, Research Division

Shang, just sorry, one follow-up on that. So just can you clarify, is there any cloud-related revenue booked in the third quarter? And also, any change to the guidance in for this year and the next year, please?

Shang-Wen Hsiao

Okay. We -- when we signed Coke, okay, Siemens, Bosch, we signed -- they -- actually, it's in the late September. Accounting-wise, we should see some very small revenue, okay, from this. In Q3, actually, we include very, very small amount, okay. But we should start then to see the revenue from Q4, okay. The company did mention about we provide a guidance, okay, for the year 2014. So our guidance is somewhere around USD 40 million, okay of revenue, okay, will be contributed by this Microsoft product, okay. The guidance have not been changed, okay, because if we can, okay, untie to deploy also the West Direct, okay, in early of the next year, I think USD 40 million, okay, at this moment, should be in target, okay. Thank you, Lucy.

Operator

Your next question comes from the line of James Breen from William Blair.

James D. Breen - William Blair & Company L.L.C., Research Division

With respect to competition, just you made commentary about seeing competition on the network side in certain markets. Is it, one, single sort of nationwide competitor or does it tend to be smaller regional players? And then secondly, are you seeing any sort of competition within the data center business in those same markets?

Shang-Wen Hsiao

Okay. So the competition -- right now, for the managed network service, the competition, most of them actually are some player we call ISP, Internet service provider, okay. It's -- most of them, they are the local player, okay, because we don't see the nationwide, big ISP, okay, game, too, in this business. So the competition is from the more like a -- from the small local player. That's one. Well, for our hosting business, Frank did mention about it, according to the IDC report, okay, our market share, okay, continue to increase. In term of the overall market share, right now, okay, IDC report say 21Vianet, we have 12%. But in terms of the carrier-neutral market share, at this moment, 21Vianet already has 31%, okay. We continue to enlarge. For the 2011 IDC report, is that time only show 21Vianet has somewhere around 25% of the carrier-neutral market share. One year later, our carrier-neutral market share increased to 31%, okay. We are doing great at least for our data center business in China. New player, okay, again, okay, our biggest competitor it still come out from the China Telecom and Unicom, okay. They did try to build out certain data center, okay, in China. But in term of the carrier-neutral player, okay, also, according to the IDC report, the player behind us, they only have somewhere between 5% to 6% of the overall market share, and they are only half of our size. So, at this moment, we think our competitive edge is still very, very strong, and competition from other player probably cannot make a big challenge of our company at this moment. Thank you, Jim.

James D. Breen - William Blair & Company L.L.C., Research Division

Are you -- on the network side, you're seeing pricing competition. These -- are you seeing volumes increase also, is that part of the cause of more competition in the space?

Shang-Wen Hsiao

Yes. Actually, we -- first of all, yes, the competition increased. In fact, okay, our volume, okay, was increased in Q3, okay. But we voluntarily reduced pricing, okay, in order to expand the quantity, okay. So the key thing is for the certain local player, okay, we need to compete heavily with them, okay. And if we're using the price, okay, our logical thinking is also small player, okay, this cannot sustain long term competition with us, okay. Right now, that's our strategy, okay. Those strategy are -- we think, will be good, okay, at this moment. Of course, we also, okay, mentioned we are going to -- we already implement certain remedies, okay, to -- not only sell a single management network service, okay; we also try to bundle with other service in order to penetrate the market, okay, and also in order to maintain a better pricing, okay, to compete with the local player.

Operator

Your next question comes from the line of Eric Chu from Canaccord.

Eric Z. Chu - Canaccord Genuity, Research Division

Yes. Actually, I have a couple, if I may. So looking at the '14 guidance, I was just wondering what's the amount of cloud revenue that has been presently embedded in there? And also, on the network services side, I think, if I -- you said you started to see some of the pricing pressure in mid-August or mid-September, if I heard correctly. Just wanted to get a sense of how much of the incremental, going forward, for the fourth quarter. How should we be thinking about that? And I have a quick follow-up after this.

Shang-Wen Hsiao

Okay. Okay. For the cloud revenue, okay, in our 4Q guidance, right now, okay, we only forecast somewhere around USD 1 million, okay, because, like I say, okay, the West Direct have not been opened yet, okay. And for the MS Lab [ph], okay, we are under a selective, okay, basis to sign with a customer who potentially can generate more than USD 200,000 per year with us, okay. I already named certain customer, okay, those customer we signed, actually, the way we charge them were based on their actual usage. So, in the beginning, we tried to be very conservative, okay, to forecast their revenue, and we also need to share the revenue with Microsoft. But we forecast our portion, okay, we will receive, okay, for the fourth quarter should be USD 1 million, okay. We need to -- because this project is still early, okay, in term of the revenue generation, okay. Even a couple of months that we shall see the momentum, okay. That's the first question. And second question is for the MNS revenue, right now, for the fourth quarter, actually, we expect again a revenue flat, okay, just like Q3, okay, to compare to the same period of the last year. We expect flat in Q4. Right now, our forecast is to increase. We should be able to see the growth, okay, starting from Q1 of next year, okay. For the -- even for the whole year guidance, okay, we can provide to you is for the MNS, right now, we forecast that MNS the full year revenue in 2014, we should be able to see somewhere between 10% to 15% growth, okay, over the year of 2013. Okay, Eric?

Eric Z. Chu - Canaccord Genuity, Research Division

Okay, great. And I have a quick follow-up. Actually, we have seen some reports that in China, the -- some of the incumbents could potentially lower the interconnection costs that -- my question is, if that's the case, would that be really benefiting your gross margin? And how do you see that in terms of timing?

Shang-Wen Hsiao

Okay. Yes, so we also saw the report, okay. China Telecom and China Unicom, actually, they are making a commitment, okay, to the ministry, MIIT, what -- the report, okay, talked about the importance, okay, to reduce bandwidth cost, okay, by 30% over the next 5 years, okay. With 21Vianet, we purchase a bandwidth not just from one single office. Actually, we purchase a bandwidth from more than 55 cities right now, okay, in China. The place we purchase bandwidth, actually, are where we have the features, okay. So we are -- this is a report or it's a commitment, okay. If this happens, this will significantly benefit the company gross margin because at this moment, okay, the bandwidth purchase represent somewhere around 23% of the company revenue, okay, 33% -- 34% of our total cost of sales. If this can cut down 30% of cost, you can see, okay, and the company gross margin, okay, assuming ARPU versus ARPU and we should be able to see the gross margin, okay, go up somewhere around 10% 5 years later. But the key question is when China Telecom and Unicom, if they make such commitment, at this moment, we are not sure, okay, when they were starting to lower down their bandwidth cost, okay, but it's a very, very important thing, okay, for the company.

Operator

Your next question comes from the line of Wendy Huang from Standard Chartered.

Wendy Huang - Standard Chartered PLC, Research Division

My first question is really about price competition. So are you seeing price competition and mainly from which region or which city? Is it high-pricing city like Beijing? Or is it low-pricing city like Guangzhou?

Shang-Wen Hsiao

The pricing competition?

Wendy Huang - Standard Chartered PLC, Research Division

Yes, or if it's a...

Shang-Wen Hsiao

I'm sorry, Wendy, you...

Wendy Huang - Standard Chartered PLC, Research Division

Or is it a price competition nationwide from those local players everywhere?

Shang-Wen Hsiao

Okay. We have pricing competition, okay, for the MNS. Actually, it's for a certain place, okay, not necessarily just in one region. Earlier, I mentioned in a couple of region, okay, already. But for the MNS, okay, typically, actually, in Beijing area, we don't have that many MNS pieces. That's managed network service, okay. Actually, we see small branded Tier 2 city. Because in Tier 1 city, most of the customers, okay, they just put in the server which are -- for example, in Beijing, those Internet company, our customer, they just put in the server with us and also the purchase of bandwidth from us. But for the managed network service, it's -- we provide such service, meaning we provide those interconnectivity to our customer. And those customer, actually, they don't put their server, okay, in our data center, okay. The purpose for their purpose to use our service is to really see, okay, a lot faster transmission of their data and content through our own network. So right now, we see pricing competition, okay, more from the Tier 2 city and some of the Tier 3 city. But in the Tier 1 city, at this moment, we still think the pricing of the bandwidths remain stable. But earlier, I think Eric, okay, already mentioned about it, okay, that China Telecom and Unicom, okay, they, too, have an intention, okay, to reduce bandwidth cost, okay. So the bandwidth cost reduced, one question is, yes, the company can increase, okay, our gross margin. And the other side is, maybe, in certain area, we need to lower down our price, okay, in order to beat the competition, okay. So that's what happened in China right now. You see some sign already, okay, of the bandwidth pricing reduction. Thank you, Wendy.

Wendy Huang - Standard Chartered PLC, Research Division

Okay. And also, you mentioned in those low-tier cities that the competition is mainly from the local ISP. So what are the price gap you have versus those competitors right now?

Shang-Wen Hsiao

Okay. When we say we lower down the pricing, is we just follow them because we have a very good quality of the network. Well, I think we lower down the pricing it's because our competitor, they lowered down the pricing to compete, okay, with us. So we just lowered down to the same pricing they have, okay, with our high quality of the network service. So we believe that we shall be able to win the competition.

Operator

The next question comes from the line of Chad Bartley from Pacific Crest.

Chad Bartley - Pacific Crest Securities, Inc., Research Division

I just want to make sure I heard you correctly that the growth that you expect in the network services business next year is about 10% to 15% and then, if you are talking about 2014 growth, I mean, can you give us a sense what the hosting business might grow next year?

Shang-Wen Hsiao

Okay. The company -- actually, we plan to provide a new guidance, okay, for the next quarter earnings release, okay. So by that time, okay, we will provide -- give you guidance on our hosting, okay. But so far, I can tell you the hosting business look, so far, quite strong, okay, in op cost based on our impact, okay, in the capacity, okay, in Beijing area and also some other area. But this number, okay, we probably need to wait until next quarter to give you guys the annual guidance, all right?

Chad Bartley - Pacific Crest Securities, Inc., Research Division

Okay.

Shang-Wen Hsiao

Thank you, Chad.

Operator

The next question comes from the line of...

Shang-Wen Hsiao

But, Chad, I'd like to -- operator, sorry, okay, let me provide one more comment over here to Chad, okay. But Chad, you already saw, okay, Q3, okay, our hosting business grows, okay. It's more than 50% already, okay. That trend look very, very strong right now for our hosting. You can somehow reference our Q3 number, okay. Thank you.

Operator

Your next question comes from the line of Gary Yu from Morgan Stanley.

Gary Yu - Morgan Stanley, Research Division

I have 2 questions on the hosting business. First, I noticed that your utilization rate has improved in third quarter. Can you share your utilization rate in both Beijing and Southern China? And what do we expect these 2 utilization rates to reach by the year-end? Secondly, if I look at your hosting revenue growth of 54% in third quarter, how would your [indiscernible] contributed by CDN revenue from Fastweb [indiscernible]? In that last quarter, we have about RMB 30 million of CDN revenue. What is the CDN contribution in third quarter? And lastly, just one follow-up question on cloud computing. I understand that you probably have around USD 1 million revenue expectation in fourth quarter. Are there any incremental costs that we should expect associated with cloud coming in the next quarters because I -- so that your EBITDA guidance is still fairly conservative? Is there any increasing cost associated with cloud going forward?

Shang-Wen Hsiao

Okay. First, regarding to the utilization rate, okay, earlier, I did mention right now, okay, we look at each region, okay. For example, in Beijing, okay, in Beijing area, our utilization rate actually is somewhere around 85%, okay, overall, okay, overall. In the southern part of China, right now, okay, we did a lot better from the second quarter. Right now, we just passed 40% utilization rate for the southern part of China, okay. So that's the current utilization rate. You also asked me how about before the end of this year. Before the end of this year, right now, we are looking for -- it should be somewhere around between -- maybe between 75% to 76%. That's what we are shooting for. We still have 1 month to go, okay. We pushed -- particularly, we are pushed very, very hard for the data center pieces in the southern part of China, okay, but we should expect, okay -- we have a better utilization rate in the next quarter, okay, Q4. So that's one. In term of the revenue breakdown, okay, you see the growth, okay. So the CDN, actually, pieces contribute to like somewhere around RMB 21 million to RMB 22 million it does contribute our hosting business, okay, in Q3. And for the cloud, we probably will see some -- starting to see some sales and marketing expenses, okay, into Q4, okay, sales and marketing in order to -- starting to -- very aggressively, to promote Windows Azure and Office 365, okay. Right now, we do forecast purchase certain sales and marketing expenses. Like I say, okay, this partnership, in term of the sales and marketing, the major driver, of it will be from Microsoft, okay, Microsoft China and Microsoft U.S., okay, and then they would actually [ph] and drive that. But as a partner, we also contribute our sales and marketing, okay, with the certain amount of the budget. Okay, Gary?

Gary Yu - Morgan Stanley, Research Division

Okay.

Shang-Wen Hsiao

Thank you.

Operator

Your next question comes from the line of Lucy Liu from JPMorgan.

Yajun Liu - JP Morgan Chase & Co, Research Division

Shang, I have 2 questions. One is for your M6 data center report in third quarter, just wondering what's the take-up rate right now. And also, secondly, is what's the reason -- if I didn't hear rallies [ph], what's the reason you delayed the data center deployment in fourth -- originally scheduled for fourth quarter to the early next year? What's the reason behind?

Shang-Wen Hsiao

Okay. For the M6, okay, we deployed 988 cabinet, okay, on September 30, last day, and the company did not recognize any revenue in Q3, okay. We should expect we will have the revenue over there. The 988 cabinet, at this moment, 90% have been presold, all 90% because that's the maximum utilization rate we can do. It's 90%. So -- but like I always mentioned, okay, normally, the company will give our customer 30 day to 45 days installment period. So in Q4, we should be able to see, okay, some of the revenue from the M6 with that 988 cabinet. But for you to do the math, okay, remember, 30 to 45 days installment period, okay. After that, then we can start then to recognize revenue. That's one. And the second thing is when I say delayed or postponed, okay -- because originally, we are scheduled to deploy, okay, 3,400 cabinet from our Beijing Daxing data center and also, okay, somewhere around 1,600 cabinet from our Hangzhou data center [indiscernible]. These 2 new data centers actually are going to deploy towards the very, very end of December. We are thinking about it. Maybe we will postpone them to January, okay, or maybe even February, okay. In order -- okay, the #1 thing. In order to gain, okay, or to protect a higher utilization rate, overall, for the company, okay, because as you know, okay, once we deploy a big chunk, okay, of the cabinet in the particular price, even if we can only sell one cabinet, the whole depreciation, okay, of the data center will hit the company cost of sales immediately, okay. Then you will see a lot of number, okay, the depreciation and they will see lower gross margin and everything. That may not really reflect, okay, the company actual operation, actual performance. So we are thinking about to delay 1 to 2 months, okay. That would be better, okay, for the company, financial-wise, okay. That's the major purpose at this moment of time.

Yajun Liu - JP Morgan Chase & Co, Research Division

Sorry, is this some sort of -- I mean I thought in the cost previously, you used weighted average utilization rate, so meaning that even though you deploy on the last day of December, but it won't impact this quarter utilization rate, because it only impact 1 day. So, sir, I don't quite get...

Shang-Wen Hsiao

Okay. Even for 1 day utilization rate, with 5,000 cabinets, around 14,000 cabinets, that can impact it, okay. That can impact it. And plus the presale from those Beijing Daxing data center actually is quite good, okay. So once we deployed it, okay, like I say, okay, in the second month of the -- for both months of the Q1, okay, that will look better, okay. Particularly, if you look at the gross profit, okay, you will see the future amount depreciation hit our cost of sales. So in order to protect, okay, better financial result for the Q4, okay, we think it would be better, okay, for us to move to the next quarter on the deployment, okay?

Yajun Liu - JP Morgan Chase & Co, Research Division

Okay.

Shang-Wen Hsiao

Thank you.

Operator

There are no further questions at this time. I would now like to turn the call back to Mr. Shang Hsiao, CFO of 21Vianet.

Shang-Wen Hsiao

Okay. Thank you, everyone, to participate our call. Thank you. Bye-bye.

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