21Vianet Group, Inc. (VNET) CEO Alvin Wang on Q2 2019 Results - Earnings Call Transcript

Aug. 20, 2019 1:52 AM ETVNET Group, Inc. (VNET)
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21Vianet Group, Inc. (NASDAQ:VNET) Q2 2019 Earnings Conference Call August 19, 2019 8:00 PM ET

Company Participants

Rene Jiang - Investor Relations

Alvin Wang - Chief Executive Officer and President

Sharon Liu - Chief Financial Officer

Conference Call Participants

Yang Liu - Morgan Stanley

Rex Wu - Jefferies

Stella Li - Citi

Operator

Good morning and good evening ladies and gentlemen. Thank you and welcome to 21Vianet Group's Second Quarter 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. We will be hosting a question-and-answer session after management's prepared remarks.

With us today are Mr. Alvin Wang, Chief Executive Officer and President; Ms. Sharon Liu, Chief Financial Officer; and Ms. Rene Jiang, Investor Relations Director of the company.

I now like to turn the call over to the first speaker today, Ms. Rene Jiang, IR, Director of 21Vianet. Please go-ahead ma’am.

Rene Jiang

Hello everyone. Welcome to our second quarter 2019 earnings call. Before we start, please note that this call may contain forward-looking statements made pursuant to the Safe Harbor provisions of 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 statement, 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.

I will now turn the call over to Mr. Alvin Wang, CEO and President of 21Vianet.

Alvin Wang

Thank you, Rene. Good morning and good evening everyone. Thank you for joining us for our earnings call today. During the second quarter 2019, our revenues increased to RMB888 million and adjusted EBITDA increased to RMB260.7 million, both within our previously announced guidance range. Adjusted EBITDA margin expanded to 29.4% during the quarter from 26.7% in the previous year period.

Hosting MRR per cabinet increased by 4.7% year-over-year in the second quarter of 2019, while decreasing sequentially due to the previously announced discontinuation of major client contracts in early 2019. Despite the macro economic uncertainties, we achieved meaningful progress during the quarter on three fronts. Capitalizing on the growing demand for IDC solutions, upselling additional capacity to existing clients providing new clients, expanding our capacity pipeline.

First, through constant client dialogues and market monitoring we discovered that the demand for IDC solutions is growing rapidly. On the one hand, large corporations are accelerating their business expansion to solidify their market leadership thus elevating their demands for large scale IDC solutions. On the other hand, small and medium size companies are adapting to rapid market changes thus requiring scalable and flexible IDC solutions.

Our tailored IDC solutions are well suited for such market demand. On a new client front, we have added several notable clients that are both large scale and long-tail. Including a leading manufacturer of mobile devices and an auto finance companies of our top global OEM, both have signed long-term contracts that will take effect in the third quarter of 2019. They will have to accelerate our recovery from the impacts of previous customer [achievement] [ph] and our cabinet utilization.

Furthermore, we expect that these customers demand for cabinet capacity will improve our utilization rates significantly in the second half of 2019. On the wholesale front, we signed a memorandum of understanding in August with a major public cloud service provider in China to provide a number of cabinets. According to the MoU, all cabinets will be delivered by April 2020.

Secondly, on client relationship front, we have been actively upselling additional capacity to existing clients. During the quarter, we are expanding our service contracts and sell additional capacity to Qunar, [indiscernible] and [SpeedyClouds] [ph]. All those customers affirmed that our carrier neutrality and service reliability are highly desirable. Consequently, as they expand their business volume, they require us to grow in tandem with them.

Certainly, we continue to make strides in expanding our cabinet capacity to meet the increasing market demand. For example, following our successful expansion into Chengdu at the end of 2018, we completed the inspection of 500 retail cabinets in the city and have brought them into our sales pipeline. Going forward, we also plan to add 1,000 cabinets to our sales pipeline during the third quarter of 2019 through our acquisition in the [south of] [ph] Beijing made in the previous quarter.

We expect to complete four products currently under construction by the fourth quarter of 2019. To further increase our cabinets capacity and bolster our sales pipeline, we continue to develop our long-term high growth scale data center in Jiangsu province during the second quarter. The Jiangsu Campus boasts an estimated space of around 80,000 square meters and have the capacity to host over 8,000 high power density cabinets.

We plan to install cabinets at this campus in phases. By the end of 2020, our first batch of cabinets at this campus should be ready for customer orders. Furthermore, we are restructuring our partnership with Warburg Pincus to enhance our pipeline capacity, as part of this restricting will not only receive cash payment, but also ownership of our products and their development in the Shanghai Waigaoqiao Free Trade Zone.

We will use this product to increase our cabinet capacity, which will further augment our leadership in Shanghai and its satellite areas. This new location will have capacity to host 6,000 cabinets. The first phase of this construction is expected to include over 2,000 cabinets and to be completed by early 2020. Going forward, we will continue to cautiously assess and prudently invest in our capacity expansion initiatives throughout the second half of 2019.

Our steadfast commitments to client’s relationship, flexible offerings, and a capacity expansion to further solidify our industry leadership. We’re confident of our ability to capture the current market opportunities.

Now, I would like to turn the call over to Sharon Liu, CFO of our company, to give you more details on our financial results.

Sharon Liu

Thank you, Alvin, and hello everyone. Before we start our detailed financial discussion, please note that we will present non-GAAP matters 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 included in our press release. Please note that all of the financials numbers we are presenting today are in RMB terms and that percentage changes are on a year-over-year basis, unless otherwise stated.

During the second quarter, we ramped up our cabinet delivery capacity to satisfy an increased number of client orders and continue to grow our sales pipeline through strategic resource planning and prudent capital management. Our success in this area and the growing market demand have contributed to our strong balance sheet, as well as year-over-year growth in our revenues and adjusted EBITDA.

For the second quarter, our revenue increased by 7.2% year-over-year to 888 million. Revenue benefits from client demand for scalable quality IDC services. Our hosting MRR per cabinet was 8,663 in the second quarter of 2019, remain stable, compared with the first quarter of 2019. Adjusted cash gross profit, which exclude depreciation, amortization, and share based compensation expenses increased by 10.9% to 403.8 million from 364 million in the same period of 2018.

For the second quarter, we continue to add high-margin [self-built] [ph] cabinets to our sales mix and that achieved greater economics of scale causing our adjusted cash gross margin to expand by 1.6 percentage point to 45.5% from 43.9% in the same period of 2018. Adjusted operating expenses, which exclude share-based compensation expenses and changes in the fair value of contingent purchase consideration payables, decreased to 181.3 million from 161.9 million in the same period of 2018.

As a percentage of net revenues, adjusted operating expenses decreased to 18.2% from 19.5% in the same period of 2018, which showed the companies continuous efforts to realize operating leverage. Adjusted EBITDA grew by 17.9% year-over-year to 260.7 million staying within the guidance range we have provided in the previous quarter.

Adjusted EBITDA margin increased by 2.7 percentage points to 29.4% from 26.7% in the same period of 2019. Net loss attributable to ordinary shares was 102.1 million. Basic and diluted loss was $0.15 per ordinary shares and $0.19 per ADS, each ADS represents 6 ordinary shares.

Moving on to our balance sheet and the liquidity. At the end of the second quarter, our debt-to-assets ratio was 59%, and our debt-to-adjusted EBITDA ratio was 3.2. We generated a positive net operating cash flow to 127.1 million during the second quarter. As of June 30, 2019, we maintained a sizeable cash position of 3.25 billion, the sufficient cash will cover our expansion plans.

Going forward our healthy liquidity and operating leverage will provide a solid foundation for us to cease growth opportunities and attract more clients in a broader range of locations in China. Furthermore, our financial leverage will enable us to continue expanding our national capacity in a straight-line manner and bolstering our ability to secure low cost funding.

Due to the growing market demand, and our expanding cabinet capacity, we are raising our 2019 CapEx plan to a range of 1.4 billion to 1.6 billion with an additional 600 million investment for IDC capacity expansion beyond 2019, including investment for the wholesale project and the Shanghai Waigaoqiao project.

Turning to our guidance. We expect net revenue for the third quarter of 2019 to be in the range of 950 million to 980 million and adjusted EBITDA to be in the range of 250 million to 270 million. For the full-year of 2019, we maintained our previous guidance for the net revenue to be in the range of 3.76 billion to 3.86 billion, and adjusted EBITDA to be in the range of 1 billion to 1.1 billion. This forecast reflects our challenge and preliminary views on the market and operational condition, which are subject to change. This concludes our prepared remarks for today.

Operator, we’re now ready to take questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] First question comes from the line of Yang Liu from Morgan Stanley. Please go ahead.

Yang Liu

Thanks for the opportunity to ask questions. I have three questions here. First, congratulations on the first wholesale deal. Could management elaborate more about the size of the wholesale deal and the location, economics, etcetera, whether it is under the JV with Warburg Pincus or fully under 21Vianet leasehold? The second question is that in terms of the wholesale progress or what is the future outlook here, whether management expect to sign more contracts in the following quarters this year or next year? And third one is, the outlook for the selling activity for the retail data centers, especially the early look of the new pipeline that VNET plans to release in fourth quarter this year, and also current utilization rate is not particularly high. I would like to hear your view on the selling activity of the retail data center? Thank you.

Alvin Wang

Hi. This is Alvin here. Thank you for the question from Yang. Actually, it is – the first question regarding the wholesale products, we do receive our non-binding memorandum of understanding from one leading public cloud provider. Actually, so this product is not very big, actually it is few hundred cabinets. So, we have – both side of this project will be the beginning of the long-term strategic cooperation. And these projects will be – basically the term will be around 8 years and it will renew annually or after and behind renegotiation – renegotiate. And this project is in the area close to Shanghai and the whole project is fully owned by 21Vianet.

And also looking forward, we have – as we mentioned before we do have a very strong customer engagement with leading customers from top public cloud service providers and also leading Internet players and also some other financial institutes. So, going forward – looking forward, so we have very strong confidence we can secure at least another wholesale projects in the coming one or two quarters. And of course, we are optimistic in the coming years to come, we can establish our position in the wholesale segment.

And the third question regarding the utilization rate and the retail pipeline. We do have pressure from the customer churn in the first quarter and second quarter. And as we mentioned before, we already signed medium-to-large size contract with a few leading customers. So, our utilization rates will recover in the second half of this year and we expect that in the second half we can ramp up another – around 2,000 cabinets and you add it into our utilized capacity.

And also, regarding our annual construction projects, we have strong confidence we can deliver the capacity by the end of this year, and also, we already we see very strong pre commitment of very strong sales pipeline [coverage] [ph] from our leading customers, Internet players, and also financial institutes as well. Thank you.

Yang Liu

Thank you.

Operator

Thank you for the questions. Next question comes from the line of Rex Wu from Jefferies. Please ask your question.

Rex Wu

Thank you, management, for taking my question. So, I have two question now. So, first is, can you elaborate more about the partnership with the JV partner? What's the cost for buying back Waigaoqiao data center and what is planned for? Is this planned for wholesale or retail? And my second question is, is regarding to the retail business, just housekeeping. So, whether have you seen any potential customer churn, have similar reason as your churn in Q1, Q2 in the next couple of quarters? Thank you.

Sharon Liu

Okay. Thank you, Rex. This is Sharon. I will answer your first question about our partnership with Warburg Pincus. Based on our agreement, the joint venture 2 was distributed asset and projects to 21Vianet and Warburg Pincus on a project basis, which was on [39%][ph] of equity shares so the total cost will be in the range of 100 million to 500 million but the final price will depend on the auditor’s report. So, currently we have not – have the exact amount. And for the Shanghai Waigaoqiao project it will delivered at least 6,000 cabinets for the wholesale customers and the tailored retail customers and currently we have attracted the potential customers from the internet and the finance verticals. Thank you.

Alvin Wang

Regarding the retail business, currently we have very strong customer demand from retail customers, especially from the top leading internet players and also that’s – looking forward we have no – we haven’t seen - a big risk to have a big customer churn in the coming quarters. Thank you.

Operator

Thank you for the questions. [Operator Instructions] Follow-up question from Rex Wu, From Jefferies. Please go ahead. Hi, Rex, your line is now open please go ahead.

Rex Wu

Thank you, management. Just a follow-up question on the Q2 results. So, we saw the adjusted cash profit actually increased 10.9% year-over-year, I think that’s one of the major drivers for the improving adjusted EBITDA margin. So, like – can you elaborate a little more about the improvement on the cash gross margin and can you, do you have any guidance for the EBITDA margin long-term like when it will be break 30%? I think since your utilization is going to improve in the next two quarters, I think it is very likely it will go over 30%, I assume. Thank you.

Sharon Liu

Thank you, Rex. Our cash cost margin increased personally, due to our mix shift from the partner data centers to the self-built data centers that’s the main driver of our cash flows margin. And for the second half of this year, especially for Q4, as well as deliver additional 6,000 cabinets to the market and the related costs and expenses will recognize in our income statement. So, Q4, our EBITDA margin was lower. Thank you.

Rex Wu

Sorry, can I just follow-up? Like where do you see the demand in 2020 for the new rate here or governance, like, is that mainly driven by – like few customers, just a number of customers or is it very diversified? Thank you.

Alvin Wang

Hi, Rex. It is Alvin here. Thank you for the question regarding the customer demand. If we look at the market dynamics, we do see very strong kind of trends, the leading players especially in the Internet domain. We will take an even bigger market share. So, which means that from our customer mix that we see the major demands for our cabinet capacity will from few customers than before, but still that’s one of the key strengths of 21Vianet that we have very strong retail customer base and we have very strong courage.

So, going forward, we will pursue both smaller and high growth retail customers and also leading customer, not only the public cloud players, but also the big internet players very strong internet – very strong state-owned projects and, of course financial sectors as well. Thank you.

Rex Wu

Thank you.

Operator

Thank you for the question. [Operator Instructions] We have a question from the line of Stella Li from Citi. Please go ahead.

Stella Li

Hi, management. I just want to clarify firstly how much cabinets do we expect to deliver in the second half of this year, and then how much for next year? Can you clarify the numbers again? And also, you mentioned that we expect to raise our CapEx guidance to 1.4 to 1.5 billion this year. I want to know for this additional 600 million and you mentioned for the capacity beyond 2019, is this regionally expected for our two-year guidance or this is new cabinet and new CapEx in addition to our guidance you gave out previously? And then another question is, I see the financial outlook for the third quarter, we expect our revenue to go up to 950 to 980, however the EBITDA margin is in the range still similar to second quarter. So, I want to know what are the reasons for the lower EBITDA margin for third quarter outlook? Thank you.

Alvin Wang

Thank you, Stella. This is Alvin. Thank you for the questions. I will take the first one that’s regarding the capacity expansion. As we have talked before, this year as we aim to increase our capacity by 6,000 to 8,000 cabinets, and we already delivered 500 in the first half of this year and also, we have a firm plan to deliver another 1,000 in Q3, by the end of Q3 this year. And which means that we have another 4,500 to 8,000 around cabinets to deliver by the end of this year. And going forward, the next year that’s – currently as we aim to deliver 15,000 cabinets. And I like to turn to Sharon to answer your second and third questions.

Sharon Liu

Hi, Stella. This is Sharon. Regarding your question on the CapEx guidance. We reached another 600 million for other projects. This is the new additional CapEx for the project, which includes the Shanghai Waigaoqiao, which will deliver the first phase by early next year and also the CapEx for the wholesale projects. And your third question is about our EBITDA margin. As in Q3, our utility cost will increase due to the high temperature. So, we provide an EBITDA guidance just in the same range of Q2. Thank you.

Operator

Thank you for the questions. [Operator Instructions] Follow-up questions from Stella Li from Citi. Please go ahead.

Stella Li

Hi, thank you for the opportunity again. Just want to clarify, you mean the higher utility cost in 3Q expected, is this like, incur in every summer or every 2Q or 3Q that we are expecting to see this? And then usually what’s the impact on the financials. And also, another question that the whole thing MRR for the second quarter, if we compare to the first quarter it’s actually slightly lower, is there any expectation for this trend for 3Q and 4Q for this hosting MRR? Thank you.

Sharon Liu

Thank you, Stella. The utility cost was always high during summer time obviously from June to September, while our EBITDA guidance is more conservative. And for the MRR, company believe that the MRR will be stable in the second half of this year, and that we expect our MRR per cabinet to remain at 8,700 levels in the second half of this year. Thank you.

Operator

Thank you for the question. We have no more questions from the line. I would like to hand the call back to the management for closing remarks.

Sharon Liu

Thank you for joining our call. If you have any further questions, please feel free to contact IR. We look forward to speaking with everyone next quarter.

Operator

Thank you, ladies and gentlemen. That does conclude the conference for today. Thank you for your participation. You may now disconnect your lines.

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