Operator: Hello, ladies and gentlemen. Thank you for standing by for the First Quarter 2024 Earnings Conference Call for VNET Group, Inc. [Operator Instructions]

Management from -- our management today include Mr. Gavin Shen, rotating President; Mr. Qiyu Wang, Chief Financial Officer; Ms. Xinyuan Liu, Investor Relations Director of the company. Please note that today's conference call is being recorded.

I'll now turn the call over to first speaker today, Ms. Xinyuan Liu. Please go ahead.

Xinyuan Liu: Thank you, operator. Hello, everyone, and welcome to our first quarter 2024 earnings conference call. Our earnings release was distributed earlier today, and you can find a copy on our website as well as on Newswire services.

Please note that today's call will contain forward-looking statements made under the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from our current expectations. For detailed discussions of these risks and uncertainties, please refer to our latest annual reports and other documents filed with the SEC.

VNET does not undertake any obligation to update any forward-looking statements except as required under applicable law. Please also note that VNET's earnings press release and this conference call includes the disclosure of unaudited GAAP and non-GAAP financial measures. VNET's earnings press release contains a reconciliation of the unaudited non-GAAP measures to the unaudited GAAP measures.

As a reminder, this conference is being recorded. In addition, a webcast of this conference call will also be available on our website at ir.vnet.com. Before we start today's presentation, let me briefly introduce Mr. Gavin Shen.

Beginning in May 2024, Gavin has undertaken this role of group's rotating President while also serving as the General Manager of the IDC Strategic Business Group. Gavin joined VNET as our Vice President in 2017 and in January 2020, became Senior Vice President, bringing nearly 20 years of business operations management experience, the IT strategic planning, cloud computing and business centers.

I will now turn the call over to Gavin. Please go ahead.

Gavin Shen: Thank you, Xinyuan. Good morning, and good evening, everyone. Thank you for joining our call today.

Before diving into our first quarter performance, I'd like to remind you of the [ going refinement ] that we mentioned in our last call to enhance information transparency and help the public best understand our business. Starting from this quarter, we will report total revenues and operational metrics for our wholesale and the retail business separately. Our CFO, Qiyu, will go over the details.

Now let's move on to our first quarter initiatives and business progress. Solid first quarter result marked a good start for this year. We continued to execute our effective new cost strategies while pursuing high-quantity development, a robust operating and the financial results once again demonstrate our ability to grow our business by leveraging our cost base to capture even evolving demand in the area of AI.

[ Michael Weiss ], [ the public government policies and mayor ] decide to foster our favorable market environment are creating more [ treatment ] for us and IDC industry as a whole. Computing power is widely seen as the crucial components with China high-quality development per the government work report 2024, which caused for sort of rating the performance of a national-wide computing power network.

The telecom regulator, MIIT, has strengthened policy initiatives to further optimize computing power resource and infrastructure systems are cost relation. We believe those initiatives will empower us to allocate and manage the data center more efficiently and best meet the huge market demand for high-performance compute power. Additionally, interest in greener computing solutions is under rise.

In April, we signed a strategic cooperating agreement with [ Wolantap ] local government and the Shandong Hi-Speed Holdings to build a green AI supercomputing data center class. The 3 parties we work together to promote the digitalization and green development of [ Wolantap ]. We are confident our green data center business were the need with customers and [indiscernible] our market competitiveness as those trades take hold.

While IDC development remains our primary focus, we were keenly aware of how AI-related demand for high-performance computing is reshaping the data center landscape, our quality data centers and the high-density power capabilities enable us to trail high-performance computing solution to seamlessly to meet customers rapidly growing AI needs. By the end of the first quarter, over 90 percentage of our wholesale capacity in service is high-power density. Meanwhile, we continue to see increased AI-driven demand from industries like cheap design, [ automotive, streaming ], financial service [ and logic ] and education.

As an industry pioneer, we are exploring AI data center, AIDC, development and actively upgrading our computing power infrastructure to capture market opportunities. AI workload require massive computing power enforcing our transition for CPU-based to GPU-based infrastructure, [ apart from a few ] top Internet enterprise and AI technology enterprise with [ savage ] GPU resource of their own, most small and midsized enterprise we are outsourcing this upgrade given the high cost limited channels and other challenges in purchasing GPU infrastructure outright. AIDCs can meet enterprise computing power needs while minimize their capital investment, a significant advantage in the current environment.

Now let me go through some updates on the IDC front. We continued to win new orders for both wholesale and retail business during the quarter. On the wholesale side, as we mentioned on our last call, we secured a new order from one of extreme exciting clients for approximately 15-megawatt scheduled to be completed within 2024. We also won an order of approximately 2.5 megawatts in our data center in their Yangtze River Delta region for new customer, one of China's largest strong companies.

On the retail side, we continued to attract new customers in financial service, local service and manufacturing and deepen exciting relationships. Notably, we won a new order of [ a positive ] 1.5 megawatts in our data center in the Greater Beijing area for an exciting customer, a leading player in local service sector.

Moving to our long IDC business, we also made progress with our VPN service. Our wholly owned subsidiary DYX-led has successfully expanded its global network carriers with a new Points-of-Presence established in Dubai in the first quarter and in [ source carrier in Mexico ] more recently. The new PoPs broadened our VPN service global network coverage over our VPN service and the new PoPs will provide enterprise customers with comprehensive and integrated network cloud security service, enable them to capitalize on emerging markets and global expansion opportunities.

Turning now to our ESG performance. In April, we issued our first annual ESG report declaring in [ Company 2023 Works and Progress Sustainability ] include [ ratified carbon inventory ] results. During 2023, we continued to execute our shared sustainability system and achieved various performance across employee diversity and equity. We power engagement and efficient energy consumption. We also highlighted achievements such as our average annual power usage efficiency of 1.29. Our total grade power purchase of about [ 56.9 kilowatt hours ] during the year and an increase in our percentage of female employees in our management position to 31 percentage.

Moving forward, we will remain dedicated to integrating ESG-based practice company-wide, advancing the coordinated development of green economy and the digital economy driving sustainability and creating value for our stakeholders and our associates.

To conclude, our solid first quarter performance underscores our cost in a broad and growing area of innovative IDC service, outstanding high-power density development capabilities and our low year and expanding customer base. Looking ahead, we will continue to drive our new core business strategy and pursue high-quality goals while advising the development of China's digital economy. Thank you, everyone.

I will now turn the call over to Qiyu to discuss more about our operating and financial performance.

Qiyu Wang: Thank you, Gavin. Good morning, and good evening, everyone. Before we start the detailed discussion of our first quarter performance, please note that, as Gavin just mentioned, we have enhanced our disclosures with more detailed operational and financial metrics starting this quarter. We believe these new metrics will provide shareholders with greater insight into our business.

Specifically, beginning in the first quarter of 2024, our IDC business was subdivided into wholesale IDC business and the retail IDC business based on the nature and scale of our data center projects. Prior to 2024, the subdivision was based on the types of customer contracts. You may find a detailed list of all wholesale projects in our IR presentation for this quarter. Accordingly, for operating metrics, we have presented them by retail and wholesale separately.

For the wholesale business, the metrics are mirrored in terms of power capacity instead of cabinets, which we believe will more meaningfully reflect our business development. In additional, our wholesale capacity is present across 3 different states, including in service and their construction and held for future development which we believe will provide a clear and more comprehensive picture of our wholesale capacity, boosting the high-growth potential of our wholesale business. For financial metrics, we have subdivided our net revenue into revenues from IDC business, which includes retail revenues and wholesale revenues and revenue from non-IDC business, which consists of our cloud and VPN business.

Now let's move on to our first quarter results. Please also note that, unless otherwise stated, all the financials we present today are for the first quarter of 2024 and are in renminbi terms. Furthermore, all the growth rates and revenue are on a year-over-year basis. We kick off 2024 with solid operating and financial results.

Our wholesale IDC business continued to gain momentum, driven by rapid customer movements. Capacity in service was 332 megawatts as of the end of first quarter. Capacity utilized by customers increased by 17 megawatts to 236 megawatts in the first quarter, primarily driven by increased demand for the customer in N-OR06, N-HB03 and E-JS03 data center.

As a result, the utilization rate of wholesale capacity improved to the 71% with the utilization rate for mature capacity reaching around 95% and the ramp-up capacity reaching around 34%. In addition, the capacity under construction was 139 megawatts with pre-commitment rate of around 75% and the capacity health for future development was 557 megawatts.

For our retail business, capacity in service was around 52,000 cabinets remaining flat compared to last quarter, with utilization rates stable at 64% and with the utilization rate for mature capacity reaching around 73%. MRR for retail cabinets was CNY 8,742 in the first quarter compared to CNY 8,759 for last quarter and CNY 8,874 for the same period last year.

Moving on our financial performance. We remain the focus on high-quality revenue business, and our efforts continue to generate positive outcomes, our net revenue increased by 5.1% to CNY 1.9 billion, mainly driven by the continued growth of our core business.

To highlight, our wholesale revenue increased by 59.1% to CNY 361 million, mainly contributed by E-JS Campus 01 Phase 1, and E-JS Campus 02, E-JS Campus 02 B, N-HB03 and E-JS03 data centers. On the other hand, retail revenue decreased by 7.1% to CNY 923.7 million, mainly due to our consolidation and redevelopment of several data centers since the second quarter of 2023. Adjusted EBITDA was CNY 539.8 million with adjusted EBITDA margin of 28.4%. Net loss attributable of VNET was CNY 187 million.

Turning to our balance sheet. At the end of first quarter, the total amount of the company's cash and cash equivalents, restricted cash was CNY 2.1 billion. Meanwhile, net cash generated from operating achieved was CNY 267.6 million. Our CapEx was CNY 971.3 million.

For updates on our financing, as we mentioned last quarter, on February 1, 2024, we completed the repurchase payments relating to our convertible senior notes due 2026 in the total principal amount of USD 600 million. In the current capital market environment, this strategic move reflects our resilient business fundamentals and our commitment to long-term sustainable development.

Now moving to our full year guidance for 2024, we expect net revenue to be in the range of CNY 7.8 billion to CNY 8 billion, representing a year-over-year increase of 5.2% to 7.9% and adjusted EBITDA to be in the range of CNY 2.22 billion to CNY 2.28 billion, representing a year-over-year increase of 8.9% to 11.8%. This unchanged from our previous guidance.

Given the last market conditions, we have increased our delivered plan to 100 to 140 megawatts from previously stated 100 to 120 megawatts. CapEx is expected to be in the range of CNY 3.7 billion to CNY 4.2 billion. This is unchanged from our previous guidance and may further increase according to market conditions.

Looking ahead, our focus which remain on high-quality growth, we will continue to execute our effective due care strategy and further enhance our core capabilities to capture market opportunities driven by the AI boom.

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

Operator: [Operator Instructions] The first question comes from Edison Lee from Jefferies.

Yu Lee: Thank you management for the presentation and a very good disclosure. I have 3 questions. Number one is about the definition of retail and wholesale. I think a lot of investors would like to know what exactly the definition is because the retail MRR that you are presenting today for historical numbers are actually lower than previously disclosed. So that's why I would like to get a clarification on the definition.

Number two is on operating cash flow. Can you comment why 1Q '24 operating cash flow is so much lower than 1Q '23? And number three is on your retail cabinet redevelopment. Can you tell us how many cabinets are actually being affected by the redevelopment? And what will be the outcome of the redevelopment? Does it mean that these cabinets will actually become wholesale or they will also be still for retail and with much higher power? So can you explain that?

So let me repeat in Chinese. [Foreign Language]

Qiyu Wang: Okay. Thank you, Edison. I'll answer the question in Mandarin and let the translator help me to translate to English. [Foreign Language]

Unknown Attendee: [Interpreted] Thank you for the question a lot, and I want to share with you more information to boost up the information transparency of the company as well as for the purpose of net capital market, a better understanding of our business development, starting from quarter 1 of 2024, we began to add a new disclosure metrics as well as new indicators. For instance, according to the revenue we have classified them into 3 major classes, including wholesale, retail and non-IDC. At the same time, we've also added a new business indicators for the wholesale, including the operational with in-service as a hashtag, and we also put under construction as held for the future development megawatts for your better understanding.

Qiyu Wang: [Foreign Language]

Unknown Attendee: [Interpreted] For the first question of the definition of the wholesale and retail, I want to give you a re-explanation as you have already noticed that we have already redefined the 2 terms of wholesale and retail as we did before. Before, we put the major clients, the big customers into the wholesale while the small clients into the retail but now we made a small change to better serve the capital market as well as to boost up information transparency, as I did say.

Right now, in terms of the wholesale, make them into the size of more than 40 megawatts. And in Chinese literally translated into the base-type project. For those projects, they have the potential to expand their capacities in the long run in terms of the land, the buildings as well as the power supply. In most of the cases, those wholesale projects are targeting the major clients and customers. However, we are also selling part of them, a small proportion of them to the middle-sized enterprises and clients. And on the other side, the retail projects, which will be literally translated into the city-type projects located many in the core cities, including Beijing, Shanghai, Guangdong and Shenzhen and sector.

Generally speaking, the total size usually is smaller than 20 megawatts without any potential to stand the capacity of expanding its stacks and cabinets. And for most of the cases, those projects are targeting the small and medium-sized enterprises. But please be noted, we are also offering the retail projects to the major and the big clients as well to satisfy the needs to provide -- to ensure the low latency.

As you have already noted in our numbers that due to the fact that 10% of the committed cabinets have been redeveloped and a small proportion of the retail projects are offering to the larger clients, the MRR is not included. That is why you are seeing the data discrepancy in the disclosed numbers and records.

Qiyu Wang: [Foreign Language]

Unknown Attendee: [Interpreted] And for the question two, you raised a question for why in 2024, Q1, the operational capital was smaller than that of in 2023. Generally speaking, in Q1 of 2024, the company observed a stable and normal cash flow. However, back in 2023, Q1, there were some one-off projects, such as the projects incentivized by the government grants as well as certain payback from the VAT. Those 2 items did not happen in Q1 in ' 24.

Qiyu Wang: [Foreign Language]

Gavin Shen: [Foreign Language]

Unknown Attendee: [Interpreted] For the third question, the question was answered by the CFO. In Q1 2024, the retail database are operating on a stably and normally manner, and you have already observed certain changes. Generally speaking, we would be developing those cabinets from the low-density power cabinets into the high-density power cabinets. In that sense, the total numbers are on the decline. This is due to the purpose of better utilizing the sources to maximizing our capacity to meet the market demands. And in the upcoming months, we will also make a constant adjustment to better meet the market requirements. For instance, according to demand of certain market, we will increase the number and redevelop the new cabinet to better serve the local market.

Operator: Our next question comes from Yang Liu from Morgan Stanley.

Yang Liu: Thanks for the opportunity and great thanks for the more disclosure, which is very helpful to us. I have two questions. The first one is regarding the 3 business growth outlook. I think, clearly, the wholesale will be a key driver and the retail looks like a dragger. Management quantify the growth rate of the 3 business or what is behind the current guidance of around 5% to 8% of full year growth in the 3 business lines? That's my first question.

The second question is G&A expense, we saw is a pretty big increase year-over-year. What is behind that and whether that is a one-off or sustainable?

[Foreign Language]

Qiyu Wang: [Foreign Language]

Unknown Attendee: [Interpreted] Thank you for the question, and I will give you more information about different lines on the revenue side. In light of the wholesale, we maintained a 55% growth. And for the retail, as you have observed, it has remained very flat for the non-IDC 5%.

Qiyu Wang: [Foreign Language]

Unknown Attendee: [Interpreted] And I want to give you more information about the EBITDA. It is -- compared to the revenue, it did a better job for instance, despite the fact that the retail revenue remains very flat, but the EBITDA is growing. It's providing us a better figure due to our strategies on the cost operations and cost controls.

Qiyu Wang: [Foreign Language]

Unknown Attendee: [Interpreted] And for the GM in Q1, I have the explanations as follows. In the beginning of this year, in 2024, the company paid out a large amount of their debt. And out of that, the agency service fees was due to the reasons why you are seeing the different outcome on the GA. The other event was the stock expenditures for the employees.

Operator: Our next question comes from the line of Daley Li of Bank of America Securities.

Huiqun Li: Firstly, it's great to see more disclosure about the segment breakdown. I have 2 questions. The first one is about the overall demand for China IDC data center market. How the management see the overall demand outlook for this year compared to last? And what kind of clients we have seen could have better demand? And could management could give more color?

My third question about the wholesale business. Management earlier discussed the expansion plan for this year. And could management update us the moving progress from the clients in the following quarters and for the total expansion target we have. Maybe let me have a quick translation. [Foreign Language]

Gavin Shen: [Foreign Language]

Unknown Attendee: [Interpreted] For the first question, you raised the trend of the IDC development, and we are collecting the business requirements from our clients, especially from the conventional business. We can say that it was growing stably, and we are now translating our capacities to meet the market demands. For most of them, they have a strong demand to increase their AI capacities.

Gavin Shen: [Foreign Language]

Unknown Attendee: [Interpreted] At the end of the first quarter of 2024, in the wholesale side, almost 9% of the requirements are on the high-density power cabinets demand, which is relating to the AI-related needs. In light of the industries and sectors, this strong demand comes from the chip manufacturing side, the autonomous driving companies, the financial service agencies, the logistic companies as well as educational firms. They have high demand on developing and using the AI-related services.

Gavin Shen: [Foreign Language]

Unknown Attendee: [Interpreted] And now you also raised the questions and comments on our potential expanded capacities in 2024, and our plans to do that. According to our standing now, we will follow the CapEx plan and targets made before, targeting the 2024. However, we are still negotiating new projects with potential clients, and that might improve our targets to deliver. And we are also targeting our plans, many of the wholesale clients as we have already determined.

Gavin Shen: [Foreign Language]

Unknown Attendee: [Interpreted] And you also asked questions about the wholesale clients for the company. As a business-as-usual models, the contract will also -- will last 2 to 3 years before we are going to calculate the total fees. However, we are also signing up new clients, which under that new contract, the installment of cabinets could be finished within half a year.

Operator: Our next question comes from the line of Timothy Zhao from Goldman Sachs.

Timothy Zhao: Great. And also thank you for the more transparent this quarter, which is quite helpful. I have 2 questions here. One is on the, I think, on your full year guidance, I think compared to the first quarter results, I was wondering I think, especially on the top line, I think we are assuming an acceleration in terms of revenue growth for the rest of this year. Just wondering if management can elaborate on what is the key driver and just the breakdown between wholesale, retail IDC and also in the IDC segment, which line could be growing faster in the coming quarters?

And secondly, I think given the more transparent this quarter, I think a follow-up question is -- it sounds like just wondering if management has any target or like a goal in terms of the wholesale versus retail capacity or revenue breakdown by year-end or in the mid-term? And that would be very helpful. Let me quickly translate myself. [Foreign Language]

Qiyu Wang: [Foreign Language]

Unknown Attendee: [Interpreted] The answer is as follows: The wholesale business is a main source of our revenues. As we have already seen in the plan, and we also see that the retail business and the retail projects are declining on a year-over-year basis. However, as we all see that starting from last year Q3, we began the ratification from verification on the retail side to deploy more high-density power cabinets. And by the end of this Q2 and Q3, this ratification may be completed, which will pick up our retail project revenue as well.

Qiyu Wang: [Foreign Language]

Unknown Attendee: [Interpreted] In light of the ratio of the revenues, the retail against the wholesale is standing at 2:1. Still, the revenue from the retail is taking the major proportion from the ratio and the figures. In light of the capacity ratio, the retail and wholesale is approximately standing at 5:3 in light of using the numbers of cabinet to make these calculations.

Operator: Seeing no more questions, ladies and gentlemen, that concludes our conference for today. Thank you for participating. You may now disconnect your lines.