21Vianet Group, Inc. (VNET) CEO Alvin Wang on Q3 2019 Results - Earnings Call Transcript

Nov. 19, 2019 1:55 AM ETVNET Group, Inc. (VNET)
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21Vianet Group, Inc. (NASDAQ:VNET) Q3 2019 Earnings Conference Call November 18, 2019 8:00 PM ET

Company Participants

Rene Jiang - IR

Alvin Wang - CEO and President

Sharon Liu - CFO

Conference Call Participants

Rex Wu - Jefferies

Camille Xu - Morgan Stanley

Stella Li - Citigroup

Operator

Operator

Ladies and gentlemen, thank you, and welcome to 21Vianet Group's Third 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 will now 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 third quarter 2019 earnings call. Before we start, please note that 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 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 on our earnings call today.

In the third quarter of 2019, we grew our revenues to RMB981 million and adjusted EBITDA to RMB272.5 million, both of which exceeded the high end of our previous guidance range. Our adjusted EBITDA margin was 27.8% compared to 28.2% in the same period last year.

This growth demonstrates both resilient customer demand and our progress in these three areas. Timely capture of the growing market demand for IDC, continuous refinements of the product portfolio and the value propositions. Prudent expansion of the capacity pipeline in anticipation of the rising demands.

First, [sparking] the current macro headwind, the domestic IDC market is growing rapidly as a result of ongoing demands for hosting and cloud computing. In lines with these trends, recent industry surveys by the IDC Trend Research Centers suggested that more than half of the companies surveyed is either IDC services or long-term investment priority, not subordinates proposed cost control measures.

Some findings validate our own experience in IDC industry, as we have witnessed large scale internet and cloud enterprises and accelerating their expansion of cabinet capacity to better accommodate the surviving internet data traffic and the cloud computing needs.

Meanwhile, recognizing the need to digitalize their operations, sufficient companies are also increasing their demand for scalable and customized IT solutions. To capture these growth trends, and to attract more large-scale clients, we have vastly leveraged our industry leadership, technological know-how, domain expertise and the brand equity.

Our partnership with Alibaba in October 2019, exemplify our industry recommendations and demonstrates our strong value proposition to industry trends. We plan to export additional collaboration opportunities with Alibaba for expansion. We also see potential for replicating such strategic partnership with other large-scale clients going forward.

In addition to obtaining these wholesale clients, we're also refining our IDC offerings to increase our appeal to retail clients. As a result, during the third quarter we were able to provide retail IDC solutions to a diverse group of clients, such as COFCO, China Oil and Foods Corporation, a nationwide state-owned enterprise, and [Fuku] an online retailer traded on NASDAQ.

As more clients adopt our innovative, scalable retail solutions, we have expanded our sales backlog to a record high of around 2,000 retail cabinets by the end of third quarter. In conjunction with serving more wholesale and retail clients, we continued to expand our capacity pipeline in a prudent manner.

Such pipeline expansion is in line with our previously announced three-year growth plan. At the same time, we are maintaining regular dialogues with our clients to try to understand their requirements for datacenters, keep a close ties on the shifting market demands, make solution adjustments in real time, and secure additional orders for cabinets entering our pipeline.

For example, we have received increasing interest from potential industry partners for our Jiangsu Campus products, whose first batch of cabinets will be ready for wholesale customers order by the end of 2020. While we expand pipeline capacity and secure additional partnership, but also carefully monitoring our projects progression and the delivery deadlines to ensure a healthy cabinet utilization rate.

In addition, we continued to reduce the number of reserve partner cabinets and increase our self-base capacity. For our non-IDC business, we've also made solid progress in further developing our product and enhancing our operational capability during the quarter.

Due to our service products adjustments, our retail business experienced a revival. In some ways, we have delivered a strong sales culture performance as we captured the growing market demand for IDC solutions, refined our product offerings and expanded our capacity pipeline in sync with our three-years growth plan.

Moving forward, we shall continue to evaluate our value propositions, establish additional partnerships in a broad range of sectors, and strike a balance between the pace and the utilization rates of our capacity expansion.

We are convinced that we are in the right market at the right time with the right solutions. We have the industry leadership, the experienced team and the domain expertise. We are optimistic about our future and we are confident that we can generate superior, sustainable shareholder value, consistently, going forward.

Now, I would like to turn the call over to Sharon, our CFO, for more financial details.

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 third quarter, we ramped up our cabinet deliveries, fulfilled more client orders, made meaningful progress in several projects, and expanded our sales pipeline. As a result, both our revenue and adjusted EBITDA grew year-over-year, and our balance sheet strengthened at the same time.

During the third quarter, our revenue increased by 12.7% to RMB981 million, exceeding our guidance. Such growth was driven by expanding scope of corporate digitalization across China. As a result, client demand for high-quality and scalable IDC service, such as ours, has received significant growth.

During the third quarter of 2019, our hosting MRR per cabinet improved to RMB8,711 as of September 30, 2019. We operated and managed a total of 32,116 cabinets, which included 27,267 self-built and 4,849 partnered cabinets. Our utilization rates in the third quarter was 66.2%.

Adjusted cash gross profit which excludes depreciation, amortization and share based compensation expenses was RMB396.7 million in the third quarter of 2019, compared to RMB391.9 million in the same period last year.

Our adjusted cash gross margin was 40.4%, compared to 35% in the third quarter of 2018. The year-over-year decline in margins was due to the introduction of certain lower margin product offering, high rents and utility costs, as well as the delivery of additional pipeline capacity.

Adjusted operating expenses which excludes share based compensation expenses and changes in the fair value of contingent purchase consideration payables, decreased to RMB146.2 million from RMB162.9 million in the same period of 2018. As a percentage of net revenues, adjusted operating expenses decreased to 14.9% from 18.7% in the same period of 2018.

Adjust EBITDA grew by 11.1% to RMB272.5 million, exceeding our previous guidance range. Adjusted EBITDA margins decreased slightly to 27.8% from 28.2% in the same period of 2018, due to the delivery of additional capacity.

Net loss attributable to ordinary shares was RMB69.5 million, basic and diluted profit was RMB0.10 per ordinary shares and RMB0.60 per ADS, respectively. Each ADS represents six ordinary shares.

Moving on to our balance sheet and liquidity. At the end of the third quarter, our debt-to-assets ratio was 61.2%. And our debt-to-adjusted EBITDA ratio was 3.1. Our net cash generated from operating activities was RMB103 million during the third quarter.

As of September 30, 2019, we maintained an [abundable] cash position of RMB2.94 billion, which services as a solid foundation for us to capture additional growth opportunities and expand our clients base to a broader range of industries.

Looking forward, we expect net revenue for the third quarter of 2019 to be in the range of RMB1.03 billion to RMB1.05 billion, and adjusted range of RMB245 million to RMB265 million.

For the full year of 2019, we now expect the net revenues to be in the range of RMB3.771 billion to RMB3.791 billion, and adjusted EBITDA to be in the range of RMB1.033 billion to 1.053 billion.

This forecast reflects our current and preliminary view on the market and operational conditions, which are subject to change.

This concludes our prepared remarks for today. Operator, we are now ready to take questions.

Question-and-Answer Session

Operator

Thank you, Sharon. [Operator Instructions] Your first question comes from the line of Rex Wu from Jefferies. Please ask your question.

Rex Wu

So I'll ask three, first. So, number one, we see this quarter we added 1,500 new cabinets, self-built cabinets, and you mentioned about 2,000 backlog. So, based on the guidance of 6,000 new cabinets for the full year, we still need to deliver about, like, 4,500 new cabinets. So, are you still reiterating the new cabinets targets?

And second, the utilization is still maintained at 66%. So, which region is below the average and how do you plan to improve? And number three is, can you talk more about the upcoming wholesale pipeline for 2020?

Alvin Wang

Your first question regarding the capacity, in the new added capacity in 2019; actually, in the fourth quarter this year, we will deliver another 4,000 plus new cabinets. So, we are confident to deliver the capacity according to our guidance for this year's new capacity expansion target.

And secondly, regarding the utilization rate; we are currently see - we'll see strong demands from our customers across the regions. But still that we see in some regions, especially Tier 2 cities, we see the customer demands are lower than average. So, that's the current situation. But still as we see in the Tier 1 cities, we will see very strong demand. That's why we - as we said before, that we have 2,000 cabinets backlog, so mainly in Tier 1 cities.

And for 2020 wholesale targets, we now have very strong engagements with all the top public cloud players across China. So, we are confident to secure further products in addition to current two deals with two major public cloud players this year.

Operator

Your next question comes from the line of Camille Xu from Morgan Stanley. Please ask your question.

Camille Xu

I have only one question about the financials. I see the G&A expenses decline accelerated to about 25% year-on-year this quarter, which I think is a good signal for efficiency improvement. So, I just would like to know, is there any more fat to cut here? And what is the expected run rate for the G&A expense going forward?

Sharon Liu

This is Sharon. I will answer your question regarding to our G&A and operating expenses. You're right. If you are looking at our financial statements, you can see a decline of the adjusted operating expenses, especially the G&A. That was because of our operating efficiency and leverage, as well as the capitalization of certain expenses because we spent more expenditures on the resources funding, as well as the construction. And all the costs was capitalized under construction.

Yes, it is hard for the Company to make the adjusted operating expenses to further decline to below 15%. So, we expect in Q4, the adjusted EBITDA margin will still about 15%. And regarding to our EBITDA margin in Q4, if you are looking at our guidance, the EBITDA margin will face challenge because of the concentrated delivery of new capacity during this quarter.

Operator

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

Stella Li

I have three questions. First, I noticed that the operating cash flow of third quarter is weaker compared to second quarter or compared to last year. So, I'm wondering what's the major reason and what's our expectation for the operating cash flow in fourth quarter?

The second question is, given that we still need to deliver pretty big size of cabinets in the fourth quarter; and also that we revised our CapEx guidance, that means that investing CapEx will be pretty big in fourth quarter; do we have any other fund raising plans? That's the second question.

The third question; I think in the cash flow statement, I noticed there are few several hundred million outflow of investments. I want to know what is that?

Sharon Liu

Regarding to our net operating cash flow, yes, the net operating cash flow will come in lower than last year due to our higher rent expenses, the higher interest payment because we raised new debt financing in the first half of this year and the lower tax refund compared to 2018. And for full year 2019, we expect the net operating cash flow between RMB500 million to RMB600 million.

And your second question is about our future financing plan. Our financing - our long-term financing strategy is to maintain diversified funding portfolios to balance the liquidity and optimize the cost and to support the expansion of our cabinet capacity. So, our future plan is based on our capacity plans; and currently, Company cannot provide any specific plans, our future financing plans.

And your third question is regarding to our cash out of the –

Stella Li

There is payment for investments. Yes, there's RMB320 million outflow for payments for investments; what is that?

Sharon Liu

Yes, it's because we buy some time deposit for the U.S. dollars offshore.

Stella Li

Can I have a follow-up question? Regarding funding plan - let me rephrase the question. Do we have any new bank credit lines or any other source of funding in addition to our existing channel?

Sharon Liu

Yes, of course. From this year, the debt capital market environment in domestic market is - for IDC industry is getting better. We have been discussing with local banks and finance lease institutions for project financings with longer maturity profile and favorable interest rates. And currently, we have just confirmed with one local banks for a project financing for a data center in Shanghai areas. And we will sign the final project financing contract with the bank in the coming month.

Operator

Your next question comes from the line of [Xuan Lee] from CICC. Please ask your question.

Unidentified Analyst

I have two questions. First, I'm hoping that you could add more color on your cooperation with Alibaba; like, how many cabinets will they take in Phase 1, and when do you expect to have a Phase 2 plan announced?

And my second question is that I've seen your MRR per cabinet is stable this quarter. I want to know, will you take any measures to prevent MRR from falling quickly after you enter in the wholesale market?

Alvin Wang

The first one is regarding cooperation with Alibaba Group, at least Alibaba Cloud. So we already signed long-term strategic agreements with AliCloud in one of their database campus in central part of China. And in the Phase 1, we are planning to deliver around more than 20 cabinets - at least 2,000 high power density cabinets.

And actually, it's in the first phase. In the first phase we will formally delivery first half next year. And the second phase already started, we have a very close cooperation with our customers and also our partners, so we will see the projects formally kickoff and all the [companies start work very soon]

And regarding the wholesale MRR, for sure - currently we have no very significant contribution from the wholesale to our top line and bottom line yet. So, after we see the quite significant contribution from the wholesale project, we will consider to separate the report, especially consider MRR and other financial figures as well.

Operator

[Operator Instructions] Your next question is a follow-up question from Rex Wu from Jefferies. Please ask your question.

Rex Wu

So just follow-up, like, Alvin just mentioned that Phase 2 already started; is it just like in the same campus and for the same customer? And how much - like, how many cabinets approximately will it have?

Alvin Wang

That first two project is in the same campus for the same customer. The capacity will be higher than the Phase 1.

Operator

There are no further questions at this time. I'd now like to hand the conference back to the Management. Please continue.

Rene Jiang

Thank you once again for joining the call today. If you have any further questions, please feel free to contact our IR. Thank you.

Operator

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may all disconnect.

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