VNET Group Inc (VNET) 2011 Q4 法說會逐字稿

Good morning, ladies and gentlemen. Thank you, everyone, and welcome to 21Vianet Group's fourth-quarter and full-year 2011 earnings conference call. At this time, all participants are in listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference call.

Before we begin, I will read the forward-looking statement. 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 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 or selected events or circumstances after the date of this conference call.

With us today are Josh Chen, 21Vianet co-Founder, Chairman and CEO; Jun Zhang, our Chief Operating Officer; and Mr. Shang-Wen Hsiao, President and CFO of 21Vianet. Following management's prepared remarks, we will conduct a Q&A.

At this point I would now like to turn the conference call over to Josh Chen, 21Vianet's co-Founder, Chairman, and CEO.

Thank you, operator. Good morning and good evening, everybody, and welcome to 21Vianet's fourth-quarter earnings conference call. We are excited to announce that for the full year 2011 and for the first time in our Company's history, we exceeded the RMB1 billion, an annual net revenue milestone.

Our net revenue almost doubled in 2011 from RMB525 million a year ago. Our success in the fourth quarter and for 2011 was led by solid financial and operational results across the board. We believe this (inaudible) performance is a testament to a successful execution of our core strategy of organically and non-organically expanding our Internet infrastructure footprint.

Organically, we will continue to dramatically expand our data center footprint in 2012. Jun Zhang will discuss in detail later. Non-organically, we expect to continue expanding our platform by successfully acquiring and integrating strategic assets similar to our main goal in the two of our acquisitions. We believe this is [potentially] to leverage our financial assets and industry know-how while managing execution risks that started with expanding to meet its increasing demand.

This leads me to our most recent expansion activities -- obtaining 2.3G, especially in Hong Kong. As we announced earlier this month, we won the broadband spectrum with a minimum of required (inaudible) owning $[90] million for a 15-year licensing period. It's also a key policy with local mobile operators and the strategic enhancements. We believe that this initiative is a low-risk, cost-effective means of defending our overall Internet infrastructure platform.

These licenses will allow our partnership to provide base broadband, mobile broadband, or a combination using the 2.3G [spread]. (inaudible) spend a significant amount of expertise to 4.G wireless, provisioning up extremely well for our (inaudible) opportunities in acquiring this spectrum. We are now calling [barriers] to our core [IP] business. We will (inaudible) further our expanding our footprint in hosting and managed network service and will do so in a (inaudible) way which (inaudible) introducing our net distributed execution risks.

Regarding the motivation for this [spectrum] acquisition, 21Vianet's vision has always been to enable the most (inaudible) Internet traffic was our engine to end-users. At the beginning, we wanted to [show at the net] at our [origination] so we built data centers to host servers. Then interconnections and backbone became a part of net, so we (inaudible) network service.

Today all end-users with advantaged markets like Hong Kong are accessing our customers' content to wireless devices, creating a (inaudible) nets on wireless traffic to keep you a clearer understanding that technically of what we are, what you see in terms of data consumption. Circle or cover that worldwide mobile network traffic were increased 18 fold over the next five years, that global mobile data traffic will outpace global fixed data traffic by three times. This is a compounded annual growth rate of 78% from 2011 to 2016.

We have a unique opportunity to help our customers but we know our customers are restricted by their Internet infrastructure or their mobile constraints. By enable greater transmission of Internet data by any device, we will further boost demand for our core Internet data center service throughout Greater China. We want to assure our investors that we are not taking our eye off the ball when it comes to our core hosting and imaging network services.

Now we (inaudible) that are not our core competency. These acquisitions allow us to get our foot in the door of greater opportunity, and to further solidify our position as the leading player in Greater China going into an infrastructure network.

We appreciate your confidence in our execution capabilities and looking forward to demonstrating our continued progress in expanding our opportunities with you all.

With that, I will now turn the call over to our COO, Jung Zhang, for an operational update.

Thank you, Josh, and good morning and good evening, everyone. During this quarter, we continue to accelerate our expansion plan to accommodate customers' growing needs through solid execution and the buildout of additional data standards as well as broadband network integration and expansion.

The (inaudible) in our self-built data centers remains on track with 224 new cabinets added in the fourth quarter, bringing the total of self-built data center cabinets to 4,055 or 52% of 7,816 cabinets in total. The number of cabinets in our partner data centers also grew to 3,761, accounting for about 48% of the total cabinets. We are pleased that as we aggressively expanded our overall capacity to keep up with certain demand, we maintained a stable utilization rate of approximately 80.7% during the quarter.

As we discussed before, our cabinet mix continues to shift to rather higher percentage of self-built data centers, which have relatively higher margins than in partnered data centers. Over time our goal remains to be at an optimal mix of 65% self-built and 35% partnered data centers. This will provide continued margin improvement and profitability as well as increased operational independence from carriers.

As we continue to work towards this goal, the mix will [operate] flat to each quarter to accommodate customer demand. We remain committed to further expanding our services and the capacity, as well as streamlining our business operations. Our Beijing, Shanghai, Guangzhou, and [Hangzhou] data centers construction remains on track to be completed this year.

During the quarter, we also enhanced our revenue growth capabilities by further increasing our network service capacity with the closing of our acquisitions for both [Nangho] and [Gehua]. Customers continue to demand the current data transmission capabilities that 21Vianet's network can provide, improving their reliability, stability, and speed for their end-users' network connections.

Looking ahead, we believe that the demand for bandwidth capacity in China remains extremely strong due to several positive secular drivers for the Internet in China including rising mobile Internet traffic, as Josh described; increased consumption of digital content, especially video content; as well as increasing usage of cloud-based services and applications.

At this time, I would like to turn the call over to Mr. Shang-Wen Hsiao, our President and the CFO, who will discuss our financial performance as well as financial forecasts for our recent initiative in greater detail.

Thank you, Jun. Before we start it, I would like to state that we will present non-GAAP measures on today's conference call. All non-GAAP results exclude certain non-cash expenses which are not a part of our core operation. The detail of these expenses may be found in the reconciliation table, including in our earlier release.

Also note that all the financial numbers we are presenting today are in RMB amounts unless otherwise noted.

Now moving on to the detailed financial results. First of all, we are very pleased to share with you our strong financial results. Not only did our revenue growth outperform our expectation, but we were also able to expand adjusted EBITDA margin by 4.6% year-over-year.

Like Josh said, our net revenue for the fourth quarter of 2011 increased by 61% to RMB318.3 million from RMB197.3 million in the fourth quarter of 2010. We continue our strong growth momentum especially quarter-over-quarter, where we grew at 22% to RMB318 million.

Our monthly recurring revenue or MRR defined as the revenue recognized on a fixed and recurring basis each month, one of our core tracking metrics grew to over RMB114.2 million in December 2011 from RMB92.6 million in September 2011. The MRR per cabinet increased to RMB9,700 from RMB9,400 last quarter due to an increased demand for bandwidth, especially in Tier 1 cities.

Going forward, the MRR or cap rate should remain about RMB9,000 per cabinet but may graduate based on the quantity demand of interconnectivity. Our utilization rate remained stable at 80.7% in the fourth quarter of 2011 compared to 81.5% last quarter.

Net revenues from hosting and related service increased by 57.2% to RMB175.2 million in the fourth quarter of 2011 from RMB111.5 million in the fourth quarter of 2010, primarily due to an increase in total cabinets under management in self-built and partnered data centers, attributable to growing customer demand.

Net revenues from managed network service increased 66.6% to RMB143 million in the fourth quarter of 2011, from RMB85.8 million in the fourth quarter of 2010. This increase was primarily driven by network capacity demand for data transmission service. Net revenues from managed network service include the core operating results of Gehua, which generated approximately RMB21.5 million in net revenue during the fourth quarter of 2011.

For the fourth quarter of 2011, adjusted gross profit increased by 70.9% to RMB96 million, from RMB56.2 million in the fourth quarter of 2010. Adjusted gross margin increased to 30.2% compared to 28.5% in the fourth quarter of 2010. The increase in gross profit was primarily due to continued revenue mix shift toward a higher percentage of our new cabinets in our self-built data centers relative to partnered data centers. Cabinets deployed in our self-built data center carried higher gross margin than those in partnered data centers.

Adjusted operating expenses increased to RMB50 million from RMB25.8 million in the prior-year period. As a percentage of net revenue, adjusted operating expenses was 15.7%, an increase from 13.1% in the prior-year period. Most specifically, adjusted sales and marketing expenses increased to approximately RMB24 million, down RMB15 million in the prior-year period, primarily due to expansion of the Company's sales team and service support in line with the increase of the net revenue.

Adjusted general and administrative expenses increased to approximately RMB16.8 million from RMB5.5 million in the prior-year period primarily due to expansion of related headcount and office rental.

Adjusted research and development expenses increased to RMB9.3 million from RMB5.2 million, reflecting our effort to further expand and improve our service offerings.

The main difference between adjusted operating expenses and our higher GAAP total operating expenses (inaudible) is primarily due to the change in the fair value of contingent purchase consideration payable of RMB20 million and share-based compensation of RMB9.9 million. The change in fair value of contingent purchase considerations payable is a non-cash charge, primarily result of an increase in the present value of estimated cash and share consideration as of December 31, 2011, associated with the Company's acquisition of both the Managed Network Entities and Gehua.

For clarification purposes, the fair value of contingent purchase consideration payables amount changed in according with the spot price of the Company as well as the estimates of the future financial performance of Management Network Entities and Gehua, and (inaudible) of 2013, after combination and the (inaudible) purchase consideration based on achievement by the Management Network Entities and Gehua, certain revenue and net profit performance targets in accordance with the sales and purchase agreement for the fiscal year of 2011, 2012, 2013, as well as our [additions].

Adjusted EBITDA for the fourth quarter of 2011 increased by 73% to RMB65.1 million from RMB 37.6 million in the fourth quarter of 2010. Adjusted EBITDA margin for the quarter increased to 20.5%, down 19.1% in the prior-year period. Our adjusted net profit for the fourth quarter of 2011 increased 52.5% to RMB46.3 million from RMB30.4 million in the prior-year period.

Adjusted net margin was 14.6% compared with 15.4% in the prior-year period. Adjusted by these earnings per share for the fourth quarter of 2011 was RMB0.11, which represents the equivalent of RMB0.66 or $0.04 per ADS (sic - see press release).

Due to our IPO on April 21, 2011, the diluted shares for fourth quarter 2011 is based on accounts of weighted average number of the Company's ordinary shares. As of December 31, 2011, the Company had a total of 335.6 million basic shares outstanding or equivalent of 55.9 million ADS outstanding.

As of end of the fourth quarter of 2011, we had completed the share buyback program and had purchased (technical difficulty). As of December 31,2011, the Company's cash and cash equivalents and short-term investment were RMB1.3 billion, equivalent to $207 million; compared to RMB83.3 million as of December 31, 2010.

Accounts receivable [turnover] days or DSO, Days Sales Outstanding, was 41 days, compared to 44 days in the third quarter of 2011, and 43 days in the second quarter of 2011, and full-year 2010 weighted average of [41.6].

Regarding CapEx, in the fourth quarter of 2011, we [built] approximately RMB126.7 million for 2012. We plan to spend RMB537.22 million as CapEx on our infrastructure buildout, due to extremely strong demand for our data center service. The CapEx spending in 2012, also including the additional data center we plan to build in 2012, the detail of the new build will be announced in coming months.

As for the full year of 2011, our net revenue increased by 94.4% to RMB1 billion from RMB525 million in the prior year. Adjusted EBITDA increased by 149.9% to RMB209 million from RMB83.7 million in the prior year. Adjusted EBITDA margin increased to 20.5% from 15.9% in 2010.

Looking at our financial outlook, for the first quarter of 2012, the Company expects net revenue to be in the range of RMB340 million to RMB345 million. Adjusted EBITDA is expected to be in the range of RMB69.5 million to RMB70.5 million. These forecasts reflect the Company's current and preliminary view, which is subject to change.

We believe the strong second-half trend and growth in the China Internet market as well as the infrastructure (inaudible) for our (inaudible) data center service show (inaudible) sustained revenue and earnings growth for our company going forward. Heading into the new year of 2012, we are extremely well-positioned to benefit from not only the significant growth in the Internet usage on multiple devices in China but also from increased demand of reliable interconnectivity from our core [campaign] customer.

This concludes our prepared remarks of today. Operator, we are now ready to take some questions. Thank you.

(Operator Instructions) Chris Larsen, Piper Jaffray.

Good evening. A couple questions for you. First, I wonder if you could talk a little bit about the supply/demand, particularly in the markets where you are bringing on new company-owned facilities. Are you continuing to see very strong demand for space outstripping supply?

Secondly, I wonder if you could just talk about the acquisition environment if -- you know, one of the things you had talked about potentially was buying up some of the smaller data center providers. You've been very active on the bandwidth side and they seem to be very good acquisitions so far, but I wonder if you are seeing anything on the acquisition side for data centers. Thanks.

Thank you, Chris, very good question. The overall demand remains very, very strong. Like I always mention, Internet growth represents nearly two-thirds of the Company growth and we currently continue to see the demand from the beginning of 2012. That's first one.

Second question is acquisition of [Sun] regional data center. Actually we are doing that and right now we are in the process of discussing with several data centers and there are sites that remain like between 500 to 1000 cabinets in their data centers current. They have a very good interconnectivity and also the (inaudible) details in their particular region so we're working on that. Hopefully we can share some of the good news maybe next quarter. Thank you.

Thank you very much.

Vishesh Gupta, JPMorgan.

Thanks for the call. I have actually three or four questions and I will probably start one by one. First around the cabinet net additions in the fourth quarter, not necessarily read but if you look at it self-built data centers were actually lower than partnered. Any the reason for the weakness there?

In line with that, can you also share your CapEx with 3Q '11 and 4Q '11? I kind of missed the point.

Yes, in the first quarter, we increased our more than 400 cabinets, nearly half of that were the self-built and the other half of that come out around partnered. The thing is like this. Like I mentioned, right now we are under construction for the Company data center. The maturity of those cabinets will be available in June after the second quarter of 2012 and then we should see a lot of hosting revenue increase.

Right now we are in a period. We are waiting for our capacity. Even we can see the demand from around the market, the Company just doesn't have the inner capacity to support our customers. So that is one of the ways we do it is we go to the channel telecom (inaudible) to lease additional cabinets, so that's why right now in first quarter like half of that is self-built, another half of that is from the partnered data center.

Okay, in terms of the CapEx, we spent more in the fourth quarter. The total CapEx is RMB120 million and so the total CapEx for 2011 the whole year is somewhere around RMB350 million and so given my earliest conversations, actually the Company right now we already decide to build additional new data centers in Tier 1 cities -- our demand is too strong. We are starting -- we need to starting to build to meet continued strong demand in 2013. Okay, Mr. Gupta?

Okay. Thanks for that. Just one more question in terms of what -- basically is there any upside risk to the initial cabinet buildout guidance for 2012? If there is, what are your expectations on depreciation? Can you expect that to rise heavily starting middle of this year?

Okay, total cabinet right now we plan to have by the end of 2012 the total capacity we reach 13,000 cabinets. That's our goal. 13,000 cabinets compared to what we have, 7800 cabinets. So a lot to buildout will happen in 2012.

And in terms of the depreciation, yes, we will see the increase of the depreciation, so of course then it's a challenge for the management as we continue to maintain a reasonable gross margin as well as good EBITDA numbers.

Okay, if I remember from earlier guidance, we were expecting around 13,000 odd cabinets by 2013, so is this an acceleration process or is this an overall uplift in demand that you are seeing?

Okay, I think that for the 13,000 cabinets we should see a major increase in second quarter and also the last quarter of 2012. That's where we are going to -- that's a plan we are going to deploy a lot of new cabinets, self-built cabinets. It may not be even.

If I can provide a range, let's say we probably were an additional self-built cabinet that is deployed somewhere around 2000 in the second quarter and another 1500 or 2000 in the last quarter of 2012.

Okay, very helpful and just two housekeeping questions from me. Any guidance on the expected tax rate for 2012 and again, any guidance on interest income and interest expense, which actually seems to be moving quite a lot q-on-q?

Right now because of the interest rate changing a lot we are moving the cash for the CapEx so I think maybe on a separate call, we can discuss the [interest rate]. Okay?

Okay and any guidance on tax rate for next year?

The taxes like I mentioned, right now in China the corporate tax rate it's always around 25% even for some of the cities the Company is entitled to 15% is the corporate tax rate due to high-tech [starters] that when we report that to our auditor, auditor normally will just accrue 25%. In reality, even we are only paying 15%.

So for your model, you can continue to put 25% as our tax rate and that's a corporate tax rate, but I think some of our entities they are still enjoying the tax holidays or their tax holidays. That means they have a loss position and a loss carryover and so they don't need to pay the tax. So I would say that overall the effective tax rate in your model, you can put in somewhere around 15% to 18%.

Okay. Very helpful. Thank you.

James Breen, William Blair.

Thank you, just a couple of questions as you build out data centers in the first half and then it sounds like you'll be launching them in the third quarter for revenue. Can you disclose the margin progression throughout the year? I think EBITDA margins have been about the same in second, third, and fourth quarter. Do you think that they will improve in the third quarter of 2012 as some of this build out is completed?

Thank you, James. That's a good question. Okay, actually especially towards the end of the second quarter and also the beginning of the third quarter, when we deploy a lot of cabinets at one time, so that's the time we are going to face a gross margin pressure. And we expect the gross margin at that time during that particular period may be down a little bit as they go down to [28.85]%, 29%. And because they stay the (inaudible) where the cabinet for the deployment you probably utilization rate only have 40%, 50% by that time.

But in lower normal case if we can catch our utilization rate let's say within a quarter or two quarters, then the gross margin will catch up to at least 30% in a very short period of time. So we will say in the beginning of the third quarter of this year, we probably will see some margin pressure at our -- we should be able to pick up the margin in the last quarter of 2012 to beyond 30%.

Then in terms of the EBITDA, since the EBITDA is true 30% of the depreciation and since our EBITDA will remain stable (inaudible) increase, our goal for 2012 EBITDA is to close to reach 21%, maybe 21.85% at the end of the year. That's our goal. Okay?

Thank you and then one follow-up on the customers. Generally who are you seeing as your customer coming? Are they enterprises? Are they the carriers themselves? How is that changing?

Okay, we do have a very good number of the increase on the customer number and we see a lot of the small sized of Internet companies which are in our Company and we also see some of the retailers and local commercial banks starting to use the data center outsourcing service. Right now it's a customer we have our standard around 15 countries, more than 1500 customers right now and more and midsized and small sized companies we can see they are starting to use the data center outsourcing service. Thank you.

Great, thank you.

Chad Bartley, Pacific Crest.

Thank you very much. Just to follow up the customer accounts and that commentary you just gave, was the customer number at the end of Q4 roughly 1500 or is that the count as of roughly today?

Then a follow-up on CapEx, just to be clear, what was the number that you provided for 2012 and then can you talk about the amount related to the wireless initiative? Thank you.

Okay. Thank you, Chad, so I'll give you the exact number of the customers we had at the end of the Q4. The total number is 1,551 customers, 1551, so that's a large increase of the customers. So it is a good thing for the Company and also then the people can see that this strong Internet growth in China. That's question one.

Question two is right now the total CapEx we plan for 2012 is RMB537.2 million and if you guys can recall my discussion with you after the third quarter, the CapEx originally we plan is around RMB300 million in 2012. Okay, we already increased RMB237 million in CapEx.

And (inaudible) of what we are saying is our second expansion data center, we are going to come out another press release probably sometime next week to talk about the second expansion plan, so the size original six new data centers, we're talking about we are going to deploy and we are planning towards the 2013. So two to three data centers where the additional to the six new data centers we are going to build. And next week, we should be able to give you a press release and discuss more. Thank you, Chad?

Thank you, Shang.

James Ratcliffe, Barclays Capital.

Good evening. Thanks for taking the question. A couple if I could. Just generally how do we think about the CapEx and OpEx impacts of the wireless licenses in Hong Kong and the timing for when they see spending associated with those?

Okay, the CapEx, like I discussed earlier, were increased due to the strong demand. Okay, we have to build a number of these -- you know the structuring of our data centers cycle is one year. So we are starting to build additional -- we start six new data centers starting to build for 2013.

In terms of our OpEx, our OpEx actually has remained stable as our income after total amount, that definitely will be increased but -- the revenue increase would be a lot higher than our OpEx increase. The main reason to increase our OpEx is because the data center is there located in different cities in China. So when we build a new data center in each new city, we need to (inaudible) and OpEx in that particular city and sometime we also need to recruit the local salesforce in that particular city. Okay.

So that's OpEx and in terms of the Hong Kong spectrum, we won the bid. Right now we are -- we had a discussion with a local carrier as well as many (inaudible) so we probably need another one month to discussion. Once we have some news, then we definitely will share with you guys. Thank you, James.

Thank you. And could you clarify other things? How much was spent on share repurchase in 2011?

The purchase total, for 2011, the total -- you are talking about the share repurchase?

Yes, is it the RMB168 million (multiple speakers)

Close to $30 million. We -- and the total share pull back is [2.99] million ADS and average per-share price is $9.80.

And one more, I'm not sure I caught it. Did you give a number for the expectation of 2012 capital expenditure?

Yes, for 2012, total CapEx as of right now is forecast to be RMB537.2 million.

RMB530 --?

RMB537 (multiple speakers)

And there's nothing related to the Hong Kong licenses in that?

No, no, nothing related over here. The whole thing is I would say more than 80% for the data construction, the data center construction and 20% is for our existing network expansion.

Got it. Great, thank you.

Chad Bartley, Pacific Crest.

Thank you for allowing me a follow-up question. Shang, I wanted to ask about EBITDA margin. You talked about I think achieving 21% to 21.5% and I wanted to be clear is that for Q4 of 2012 or did you mean that would be toward the full year 2012?

That would be for Q4 2012.

Thank you for clarifying. I appreciate that.

(Operator Instructions). There are no further questions at this time. I would now like to turn the call back to Mr. Shang Hsiao for closing remarks. Thank you. Please go ahead.

Thank you, everyone. I really appreciate. Thank you for your continued support in our Company. I'm looking forward to speaking with you guys soon. Thank you.

Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation. You may all disconnect.