21 Vianet (VNET) reported earnings last week.
- Net revenue: $57.4 million, + 58% y/y, vs consensus estimate of $58.1 million
- Hosting revenue: $32.3 million, +40.8% y/y
- Managed network revenue: $25.1 million, +88.1% y/y
- Adjusted gross margin, excluding share-based expense: 30.3% vs. 30% last quarter
- Adjusted EPS: $0.11 per share
What I liked: Strong ramp up on self-built cabinets, building the high-capacity cabinets
During the quarter, VNET had 10,394 total cabinets, of which 6,450 are self-built cabinets and 3,944 are partnered cabinets. The company added 2,280 self-built cabinets during the quarter to bring its self/partnered cabinet mix to 62/38 from 52/48 in the previous quarter.
Self-built cabinet is critical to VNET in that it allows the company to be less reliant on the cabinets owned by the telecom operators and carries higher margin than partnered cabinets. Recall that self-built cabinet carries a 31-32% gross margin compared with the partnered cabinet that carries 21-22% gross margin. By the end of the year, management expects self/partnered cabinet mix to be 65/35.
Another point that I liked was the introduction of high-capacity cabinets, which carry more servers and handle more power (4KVA vs 2KVA of the traditional cabinet) to meet the rising demand of a fast and reliable internet infrastructure. High-capacity cabinets also command higher ASP, which will further improve VNET's margins going forward.
What concerned me: Weak guidance, bandwidth cost
Management guided $62.5 million in revenue for Q3, slightly weak in my view. While the management indicated that the company will increase the price by about 5-10% annually, the soft outlook contradicts the overall pricing trend.
Another area that management briefly touched upon was bandwidth cost. In China's tier-one cities, bandwidth cost is rising, but decreasing in lower tier cities. However, investors should be keep in mind that tier one cities are where VNET's cabinets have the highest utilization while cabinets in lower tier cities usually have lower than average utilization rate of 80%.
Maintaining "Overweight" And $15 Price Target
Despite soft outlook, I am maintaining my $15 price target and remain "Overweight" on VNET shares as the company continues its growth trajectory to maintain its industry leadership in China's fast growing datacenter industry.
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