VNET Group Inc (VNET) 2014 Q1 法說會逐字稿

Good morning, ladies and gentlemen. Thank you, everyone, and welcome to 21Vianet Group's first quarter 2014 earnings conference call. (Operator Instructions).

Before we begin, I will read the Safe Harbor statement. 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, and 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 for selected events or circumstances after the date of this conference call.

With us today are Mr. Frank Meng, President; Mr. Shang Hsiao, Chief Financial Officer. And joining us for his first time as Vice President of Capital Markets and Business Development is Mr. Eric Chu. Following management's prepared remarks, we will conduct a Q&A.

At this time, I would now like to turn the conference call over to Mr. Frank Meng, 21Vianet's President, for opening remarks.

Thank you, operator. Good morning and good evening, everyone, and welcome to 21Vianet's first quarter 2014 earnings conference call.

We are off to a solid start in 2014, as we continue to focus on growing our core IDC business and cloud services throughout China. Our clear aim is to further solidify our position as the leading integrated Internet infrastructure services provider, offering innovative products and solutions to our customers.

For our core IDC business, we increased our total cabinets to over 15,000 cabinets, with 65% of those cabinets in our self-built datacentres.

We also expect that our partnership with the Foxconn Technology Group will help us hasten our IDC construction, as Foxconn brings strategic advantages, in terms of the resources and capabilities.

In addition, we will be cooperating with Foxconn to develop innovative cloud services, targeting the Chinese market. We are confident we will remain on track to deploy an additional 10,000 cabinets by the end of 2014, bringing our total cabinets to approximately 25,000.

Supported by our expanding core IDC business, we were able to grow our total net revenues during the first quarter, by 34.5% year over year. And while we continued to scale our capacity to meet customers' demands and grow our revenues, we have also increased our marketing efforts in strategic regional markets.

As a result of our continued usage improvements, our utilization rate further increased, to 73.8% from 71.2% last quarter. Moreover, our adjusted EBITDA margin increased to 19.3%, supported by improved utilization rate, a heavier proportion of the higher-margin self-built cabinets in our mix, and incremental contributions from our cloud business.

With our structural shift to more self-built datacentres as well as the expansion of our cloud service offering, we expect our adjusted EBITDA margins to further improve and the utilization rates will remain stable throughout 2014, as we significantly scale our capacity.

In terms of our cloud business, we are pleased with our successful commercial launch of Microsoft's premier cloud services in China. Now Azure and Office 365 services are generally available to all paid customers in China.

The launch of Azure marks the first global public cloud service available for massive commercial adoption in China. Over 6,000 clients have signed up for the services. And over 350 large enterprises have migrated to long-term contracts, including Coca Cola China, CN TV, Samsung Mobile, Siemens, Huawei, and Lenovo.

For the Office 365 services, we have also seen very strong traction in customer adoption, since the full commercial launch on April 15.

Overall, we are pleased to share with you that the early results from both Azure and Office 365 exceeded our internal expectations and the partnership is now contemplating significantly expanding the cloud infrastructure, in order to satisfy strong customer demand.

For the IBM partnership, both of our and IBM teams are diligently working together for the testing and system integration of the private cloud services. We are still committed to the full commercial launch of the services around mid-year in 2014.

We continue to see the importance of the cloud business and recognize it is a driver of long-term growth for our Company. There is strong demand, resulting from the increasing propensity of customers to utilize software and applications, based in the cloud.

And as customers become more familiar with the trusting of our cloud platform, we can capitalize on this trend and continue to provide innovative product offerings and solutions for the ever-changing needs of our customers.

Because of this demand, we expect our revenues from our cloud services and strategic partnerships will generate approximately 10% of the total revenues by the end of 2014.

At this point, I would like to introduce Eric Chu, our Vice President of Capital Markets and Business Development, to go through our financial results. Eric joins us from Canaccord Genuity, where he was previously Vice President of Telecom Services Equity Research. We are very pleased to have Eric joining our team.

Thank you for the kind introduction, Frank. And I'm excited to join the 21Vianet team, and look forward to contributing to the growth of the Company. Now I will go through our financial details.

I'd like to state that we will present non-GAAP measures on today's conference call. Our non-GAAP result excludes certain non-cash expenses which are not a part of our core operations. The details on these expenses may be found in the reconciliation tables, included in our earnings release.

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

Our net revenues for the first quarter of 2014 increased by 34.5% to RMB586m.

Net revenues from hosting and related services increased by 52.8% year over year, to RMB404.4m, primarily due to an increase in total cabinets under management, as well as increased demand for the Company's CDN services.

The MRR per cabinet was RMB10,753 in first quarter of 2014, as compared to RMB10,694 in the fourth quarter of 2013.

Net revenues from managed network services increased to RMB181.6m in the first quarter of 2014. This increase was primarily because of an increase in network capacity demand for data transmission services.

For the first quarter of 2014, adjusted gross profit increased by 36.2%, to RMB171.1m.

Adjusted gross margin was 29.2% in the first quarter of 2014, compared with 28.8% in the prior year and 29% in the fourth quarter of 2013. The increase in gross margin was primarily due to an increase in utilization rates and incremental revenue contribution from cloud services.

Adjusted operating expenses increased to RMB109.9m. As a percentage of net revenue, adjusted operating expenses were 18.8%, compared with 18.4% in the prior year period and 18.7% in the fourth quarter of 2013.

More specifically, adjusted sales and marketing expenses increased to RMB39m from RMB28.8m in the prior year period, due to expansion of our sales and service support team and our marketing efforts associated with the launch of Microsoft premier cloud services.

Adjusted general and administrative expenses increased to approximately RMB47.4m from RMB36.4m in the prior year period, primarily due to an increase in headcount, office rental and other expansion related expenses, associated with our effort to expand the cloud computing services offering.

Adjusted research and development expenses increased to RMB23.6m from RMB14.7m, which reflected our efforts to further strengthen our research and development capabilities and expand our cloud computing services offering.

The difference between adjusted operating expenses and our higher GAAP total operating expense amount is primarily due to changes in the fair value of contingent purchase consideration payable, which was a loss of RMB33.9m, and share-based compensation expense of RMB137m.

The changes in fair value of contingent purchase consideration payable resulted from an increase in the present value of estimated cash and shared considerations as of March 31, 2014, associated with our Company's past acquisitions.

Now from a profitability perspective, adjusted EBITDA for the first quarter of 2014 increased by 40.9%, to RMB112.9m.

Adjusted EBITDA margin for the quarter increased to 19.3%, from 18.4% in the prior year period and 18.8% in the fourth quarter of 2013.

Our adjusted net profit for the quarter increased to RMB33m from RMB31.1m in the prior year period.

Adjusted net profit margin was 5.6%, compared with 7.1% in the prior year period and 7.5% in fourth quarter of 2013.

Adjusted diluted earnings per share for the quarter were RMB0.08, which represents equivalent of RMB0.48 or $0.08 per ADS.

As of March 31, 2014, our cash and cash equivalents and short-term investments were RMB2.3b, equivalent to $370.7m.

Looking at our financial outlook, currently we expect second quarter 2014 net revenues to be in the range of RMB642m to RMB658m, which represents the growth of approximately 38% at the midpoint, to the comparable period in 2013.

Adjusted EBITDA is expected to be in the range of RMB132m to RMB138m.

Net revenues for the full year 2014 are expected to be in the range of RMB2.71b to RMB2.85b, unchanged from our prior guidance and representing approximately 40% growth over 2013.

For the full year 2014, adjusted EBITDA is expected to be in the range of RMB566m to RMB595m, also unchanged from our prior guidance and representing more than 55% growth over 2013.

These forecasts reflect the Company's current and preliminary view, which is subject to change.

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

(Operator Instructions). Greg Miller, Canaccord.

Thank you. Good evening, good morning, and thanks for taking the question guys, and a very solid quarter with a great second quarter guidance. That's fantastic. Sounds like that April 15th launch has done everything you thought it would do and then some.

Can you talk a little bit more about the bookings flow on Microsoft and how that's trending? I would imagine you've got a pretty good idea of what you can do. Do you have a certain percentage already booked, and can you talk about it?

And then secondly, I was wondering if there's any sort of update on the potential for commercial [carrying] in China. It's not something I've been tracking too closely. And I know we've talked about it from time to time. If there are milestones we should be looking for, if you could highlight those to us as well.

And then finally, on the R&D being just up a little bit higher than we expected, is that a good run rate we should be -- we should use going forward?

Okay. Thank you, Greg. This is Shang.

Regarding to the first one, the cloud revenues from Microsoft, last quarter -- previous quarter, we did mention about it, the cloud revenue we booked from the Microsoft was around somewhere [RMB124m].

And in the Q1, first quarter, the revenue we already -- has already exceed $3m. So it's more than three digits growth. And also, this revenue is only from the Windows Azure because the Company commercialized the Office 365 on April 15th. So starting from the second quarter, then we will see the revenue contribution from the Office 365. And so far, so good.

And also on the call, I think Frank already mentioned right now we're already in the process of -- to increase the capacity of the cloud infrastructure. So, so far, all I can say it's looking good.

And second thing is regarding to the [cross-connect], management also mentioned about it. We are expecting the Chinese government will issue the open license, either this year or next year. But from the officially the minister, the minister of the [MRIT] just come out and say -- that's last week -- in the second half of this year, China is going to do the [trial out] for the [hosting business] operated by the non-state-owned company or domestic company. So it looks like the hosting is coming.

So we are working on (inaudible), so probably you guys can expect sometime next year, in this area, open license. Remember, that open license actually is considered as a basic telecommunication license -- may open sometime next year.

If that happened, like previously we mentioned, the Company gross margin should have significantly improvement. And plus -- and the Company, maybe in the certain time, should be able to sell the bandwidth. And also, something we cannot do, like a cross-connect before we should be able to allow to engage in such high margin business.

Okay. That sounds fantastic (multiple speakers).

And so your final question, regarding to the R&D, the Company spend a lot of time right now on the network, to look at one of the most advanced network technologies, something like a cloud network. And we just signed one of the partnership from a US company, [Aryaka] and on the cloud network business, the Company also spent some money. The cloud network relates to something we call [SPN], sole player, defined network. That's a major R&D spending we have right now.

Okay. Thank you, Greg.

Thank you.

Colin McCallum, Credit Suisse.

Yes, hi. Thanks for the opportunity. Two questions from me.

First of all, just regarding the rumors about Microsoft in China earlier this week, can you just comment on whether your business (inaudible) businesses in (inaudible) buy anything at the moment?

And then secondly, just a numbers question. The share-based compensation was also quite high in the first quarter. I think you commented in the [MVNA] that it is to do with the granting to management of certain managed network entities. And I think managed network has been struggling a bit, hasn't it, if we look at the Q-on-Q and year-on-year growth. And it's still down a lot. So why would there be larger payments to the part of the business, which is not doing quite so well? If you could explain that, that would be great. Thank you.

Okay. Thank you, Colin.

Regarding the first question, yes, the purchasing department of the central government, last week they announced not to purchase Win 8 from the Microsoft, for the future government bidding. And based on our discussion with the Chinese government as well as the Microsoft, there are also so many different reason in talking about this one.

But one more thing. If you guys can recall, regarding to the Microsoft XP and Microsoft [starts that] service two months ago. And that means the Chinese government actually was not happy during the past two months over the XP. So maybe that's -- one of the reason may be Chinese government want to stop some of the Microsoft purchase, in order for Microsoft's starting of the XP service. That's one reason.

But from another angle to look at it, we need to look at [our product] itself. For the cloud service we are providing Azure and Office 365. And both our service actually are independent from any operating system. Particularly for Office 365, we believe Office 365 can also be used in different operating systems.

So it doesn't matter whether or not the customer or central government, they are using the Win 8 or something. So it's independent, okay? So in fact, we don't see any major impact within our cloud service. Okay. So that's one thing.

Second one, regarding to the share-based compensation we grant, I have to say, that's just a one time. Before the IPO -- I'm talking about before the 2011, the Company did an acquisition what we call Mango. And within the three year of the earn out stage, so each year how much money, how much revenue they achieved and profitability achieved and then we will, based on the agreement to give them the shares -- to give the shareholder of the Mango, the share.

But because our management network service actually -- you guys know it was quite a struggle in the year of the 2013. So the shareholder only get a very, very small portion of the share. So according to the -- our acquisition agreement, after three year we -- why we want to grant a big chunk to the management, because after all, the management is the one who execute on everything. And the three year already passed.

So we give them [award] and try to motivate the whole team to move that forward. So that's the main purpose. Thank you, Colin.

Thank you very much.

James Breen, William Blair.

Thanks for taking the question. Just one.

You talked about what you thought previously in terms of revenue from Microsoft this year. Have those [targets] changed at all?

And then, with respect to IBM, I think you said on the call that you expect the launch in the middle of next year. Is that accurate? And what kind of (inaudible) can you expect for that?

And then lastly, on the networking side, I think the last quarter and possibly the quarter before, you talked about a little bit of pricing pressure in that space, although volumes continued to grow. Can you just talk about the dynamics on the network side of the business? Thanks.

Okay. Thank you, James.

The first one for the Microsoft revenue we can book this year, that target had not been changed. Okay. So far, so good. And hopefully we can see the three digits growth, quarter over quarter, for the next couple quarter. But after all, this is a very, very new product being available in China. But we will see.

But from the preliminary number and also based on the number of the customer who have been signing up with us, it look very, very strong. Okay. So the guidance has not been changed. So that's number one.

Second one is for the IBM. And IBM right now is in the process, okay, of moving their server into our Beijing Daxing datacentre. Look like everything is on schedule. And before, we did mention about it. We are looking for they can commercialize in July this year -- not next year, this year. So it should be two months from now. And I don't see the schedule have been changed. So, so far, so good.

And the last one, it's talking about management network service. Starting from the third quarter last year, yes, the pricing had been reduced. If you look at our number, this quarter number compared to the same period of the last year, we still have 6% increase. Of course, if you can see the in terms of the volume of the Internet traffic, as well as the product we sell, we are selling more product, and to our customer, in order to maintain the increase of the revenue. So that's the management network.

I also mentioned, management is trying to deploy two new product into the management network service, starting from this quarter. One of the service is called the [VPN] service. The other one we call Last Mile. The [VPN] service also based on the -- our contract with IBM, because IBM, they are doing the SCE Plus. That's a private cloud.

And each customer to be deployed, they will through the [VPN] to transmit the data and content from our datacentre all the way to customer datacentre. So that what we have to do. And this is also a good business right now in China. That's the [VPN] business. We will put those number consolidated to our MMS revenues.

The other one is the Last Mile. And like I said, the Chinese government right now is in the process to open the broadband business to the non-state-owned enterprise. And this is the trend. So besides the backbone we have, we also try to put some effort into the Last Mile.

So later on when the Company transmit the data and content for our customer, from our datacentre and all the way to the end user. And plus, our Company, one of the biggest spending is to purchase bandwidth from the China Telecom and Unicom, particularly for those last miles. And if we can have certain last mile business, that will also cut down our bandwidth purchase from the China Telecom and Unicom. Thank you, James.

Okay. Thank you.

Kai Qian, CICC.

Okay, thank you for taking my questions. And I have two questions.

First, regarding to the cabinet and in Q2, and I found that there is additional [1,000] in the first quarter and also in the Q2.

And the second question is about the government [regulating] from the [carrier neutral] internet and some IDC [activity] in the China are (inaudible) by the government. So anything impact from this for Vianet presently?

Okay, thank you, Kai. Right now, for the first question, okay, right now, we forecast, we should get somewhere around 2,000 cabinets to be deployed in the second quarter from the five different data centers. And so the 2,000 cabinets, okay, that is the number we [predicted for that].

And the other question is regarding to the IDC ISP new license, okay, the Chinese government are planning to grant. The situation is like this, okay? Because at this moment, the Chinese government doesn't have something we call cloud computing standard and so when you are a company and you want to offer the cloud service, you go to the MIIT. The MIIT will ask you to apply for the IDC and ISP license.

And so I think a couple of months ago, Tencent and Alibaba, okay, they did mention about it. Okay? They are in the process to apply the IDC and ISP license. So -- but their main purpose is for the cloud-computing service, okay? It's not for the traditional hosting business and compete with 21Vianet.

I'll give you the two rationale why it's not the case. And the first one, 21Vianet is carrier-neutral and most important we are customer neutral. So let's say Alibaba, let's say, Tencent, they want to offer the hosting service, that's nearly impossible in China because no gaming company will put in their server in Tencent's datacentre due to the security issue and no social network company, etc. So the customer, normally, won't put a server, okay, into your competitor's datacentre, okay. I think that is the message I want to say.

And the second thing is because we are customer neutral, and I'll also provide another good news to everyone because our Company as well as the China Unicom and Alibaba, we just signed a three-party agreement. And Alibaba will purchase 1,300 [cabinet] from 21Vianet so that is located in Hangzhou. So something like that, okay, the Alibaba may consider is their datacenter, okay. That's primarily, okay, for the cloud service and not traditional hosting service.

Okay, Qian Kai, thank you.

I have one follow-up question. How is the utilization rates in the Q2. (Inaudible) Q1 is pretty good, and how is Q2?

For the Q2, we expected the utilization rates will be somewhere around 72% to 73%, okay? It probably sounds like a 1% because the number of the cabinet to be deployed, but we are confident that the utilization rate still can maintain more than 72%.

Okay, thank you very much.

Thank you.

(Operator Instructions). Lingling Hu, Goldman Sachs.

Hi, Shang. Congratulations on the good quarter and I have a couple of questions.

First of all is on the IDC business. Some of the competitors are starting to build IDC for their customers and I believe that in the US, now the Internet companies actually start to build their own IDC instead of [renting] the cabinet from the third party. So could you please share some thoughts on this?

Okay, thank you. Okay, so yes, first of all, based on the IDC report right now, the biggest datacentre service provider in China is China Telecom and China Telecom has 39% market share. Number two is China Unicom and they have a 20% market share and the third one is 21Vianet, we have a 12% market share. So you know, the top two is state-owned enterprise and we compete for more than 15 years.

And the number four player, according to the IDC report, actually, is the ChinaNetCenter. That's a Asia listed company but their market share is only less than 50% of our current market share. And so that is the current market share.

And in terms of the Internet company that will build their own datacentre, let's say in the US, like a Google, yes, in China, the same thing happen. The company like a Tencent and Baidu, yes, they are building their own datacentre. But the purpose, at least we understand, that's mainly for the cloud computing service. Because that can be evident by our revenue with Tencent and Baidu (inaudible) because our revenue with them continued to increase, okay?

One of the key point to provide datacentre service in China is you need to maintain a very, very good network in order to do the interconnectivity. The 21Vianet spent 15 years to build a big network, in order to accelerate our customer transmission. And so that provides a lot of value.

And even for some of the big companies, if they only want to build the datacentre, if they don't have their own network in terms of the interconnectivity, they still need to do it with China Telecom or China Unicom and so there will be some difficulty. So 21Vianet, we still maintain very, very strong competitive edge to offer such service to our customer, compared to an Internet company. Okay?

Okay, thanks, Shang.

My next question is about the cloud business. As you mentioned Tencent and Alibaba also applied for a license to deploy their cloud services. And so could you please compare your partnership with Microsoft and the (inaudible) that you offer with their cloud services and [how is it different]?

Okay, on the first one, yes, Tencent and Alibaba, they offer their cloud computing service. But we can only talk about the service, okay. And so the service we are offering, the first product is Window Azure. Window Azure provides the computation and storage, to our customer. And yes, they compete with Ali, particularly for Ali Cloud.

But probably the type of the quality of the cloud are still different. Because Window Azure is an open platform, it's a PaaS platform as a service. At least, based on our study, we think that Ali service is more -- it's still the infrastructure as a service. That is only based on our own observation. So in terms of the capability of the cloud service, there's still, a big difference. So that's the first product we have.

And the second product we have is called Office 365. This is a software as a service. So in China, we have to say this is the highest penetration software application available in China and everybody is using the Office 365, Excel, PowerPoint, Outlook. And so such software as a service, right now, not Ali, not Tencent that can provide such service. Okay? Of course, we do have some of the small company and -- I'm sorry, I have to say they are good company to provide something called [VPS] or something like that. But it's still different.

Just remember, this is an office application that so far, most of the Chinese people still use such application. So we are confident that the Office 365, particularly in terms of the competition, we should be fine.

Thank you for that. Sorry, just a last housekeeping question. How is it that the utilization rate in your (inaudible) cities?

Sorry, I cannot hear your question, okay?

I'm sorry. I just wanted to ask how is the utilization rate in your Tier 2 and Tier 3 cities, compared with [Beijing/Shanghai]?

Okay, right. In Tier 1 cities, particularly in Beijing, the Beijing utilization rate, we have more than 90 percent, okay? But the city outside of the Beijing, let's say we go to the southern part of China, our utilization rate total is only somewhere around 50%, I hope. Okay, that's a current situation.

So anything we build in Beijing, or Beijing represents two-third of our revenue, because all the Internet concentrated in Beijing. So anything we build, before the deployment, typically, all the cabinet will be booked. Okay? So that's what happened.

In the southern part, we continue to put in the effort in the enterprise market and sell to let's say the bank and the Company enterprise. And we continue to making progress in the southern part of China. Okay?

Thank you very much, Shang.

Thank you.

Gary Yu, Morgan Stanley.

Hi, thank you for the opportunity to ask a question. I have three questions from my side.

First, on -- you tried to apply for the MVNO license with China Mobile, just trying to get a sense of what is the Company's strategy in the mobile space with this MVNO license?

The second question is regarding your cabinet-build out in the first quarter. I think you mentioned that you are still comfortable with the 10,000 cabinet build out for the full year. But in the first quarter, it appears that the self-built cabinet build out is still a bit slow compared to the full year target.

Can you share a little bit more details of what we are planning to do on the self-built cabinet build out and in what location that we are looking for in both first quarter and second quarter.

Last question is a financial question just on the CapEx. How much did we spend on CapEx in the first quarter? Thank you.

Okay, the first one, MVNO license okay. In fact, the Company, has signed an MVNO partnership agreement with China Mobile. And the application actually have been submitted to the ministry, MIIT and waiting for the final approval. Okay?

So our strategy is like this. Sometimes when the Chinese government grants a license, they only grant once. Okay? The next time for them to grant a license could be ten years later just like the IDC. The last time they grant the IDC license is eight years ago, seven to eight years ago.

So in China, any license related to telecommunication is very, very important. So because such license will give the Company [option] value to determine, okay, how we are going to do and whether or not we need to do this alone, okay?

Assuming the Company can be officially get a license belonging to MIIT and then the Company still have the option to decide whether or not we are going to work on this one or we can work with somebody else for just outsourcing the whole thing for the other company to operate that.

The Company has not been decide that because officially we have not gotten this license. But the good sign is at least we can get this license, okay? It gives the Company option value in the future, okay, assuming we want to get into this business. So that is MVNO.

And second one, in the Q1, the Company deployed 1,000 cabinets. Two-thirds of that cabinet are self-built and more than 300 cabinet actually is our partner. So in Q2, 2,000 cabinet, mainly it will be (inaudible) by the Beijing. The Q2, the first one is Beijing [N6] second phase, because the [N6] phase one already reached more than 80% utilization rate and also Daxing phase 2. Okay?

And I will give you the number, and also, Shenzhen, additional 500 cabinet and also Qingdao. So together, at this moment, when we look at the second quarter, 2,000 of our cabinet deployed because we're already in May and everything looks like on schedule.

Again, I want to emphasize the management remains strong confidence to deploy totally, 10,000 cabinets this year. In Q1, we already deployed 1,000. We plan to deploy 2,000 in Q2 and 3,000 in Q3, 4,000 in the Q4. Okay? That is the current deploying schedule.

And the 10,000 cabinets will come out, they are not based on our plan. It's more than 12 different datacentre. But again, the Beijing cabinet will represent more than two-thirds of the 10,000 cabinet we plan to deploy this year. Okay, so that's the answer. Thank you, Gary.

And Gary, in terms of the CapEx, in the first quarter, under the accrued basis, the total CapEx the Company booked is RMB179m and in terms of the cash basis, actual spending, we spent RMB126m.

Okay, Gary. Thank you.

Thank you.

Wendy Huang, Standard Chartered.

Thank you. I have three questions.

First is regarding the new cabinet launch. So you launched just over 1,000 cabinets in the first quarter. But on the other hand, you said that you are still on track to launch 10,000 cabinets for the full year. So I wonder which quarter should we expect the chunky part of this 10,000 cabinet target actually to be delivered?

And the same question is regarding your churn rate. I understand that among the top 20 customers, the churn rate is zero. But if we look at the overall churn rate, it has increased from the 1% last quarter to the 1.3% this quarter. So who are the customers dropping out in the first quarter?

And the third question is regarding your Microsoft Office 365 software services. So what kind of competition are you seeing from Kingsoft WPS And it seems that they are acquiring lots of the big corporate customers for their WPS software. And so what should we expect from the Office 365 and what kind of revenue are you expecting to generate for 2014 and 2015 from this service? Thank you.

Hi Wendy, thanks. This is Eric.

I will try to take the first question on cabinets, and then Shang will take the churn rate and the third one.

So on cabinets, as we mentioned earlier, so in the first quarter, we did 1,000. In the second quarter, we are still very confident in terms of 2,000 new cabinets. That's both self-built as well as partner cabinets in the second quarter.

In the third quarter and fourth quarter, it's another 3,000 to 4,000 each. So it's very much backend loaded for this year. And that's --- if you look back in the last couple of years, it's kind of a similar pattern as well.

That's really -- we are trying to match our cabinet deployment schedule in terms of our customer demand because we did talk to many of our customers ahead of time, many of them one year ahead of time in terms of their demand, in terms of datacentre infrastructure needs.

So really, our schedule for this year is trying to match our customer demand pattern.

Okay, first question I had is the churn. And yes, I think our churn went from 1% to 1.25%, okay. That's an increase of 0.25%. [There's] no specific bit company has left us and when we look at some of the small sized company, particularly for Internet company, are actually (inaudible). And let's say, existing customer, normally, they won't have the churn with us. At least they don't have a (inaudible) problem to continue their business.

And so we see some of the Internet related company, small one actually have been -- went out of the business. That creates the churn. Okay? And no particular big company actually have left us. Like I said, top 20 customers remain unchanged in terms of their churn.

And the last question about the competition of the Office 365 and based on Microsoft and 21Vianet, our study, the penetration rate of the Microsoft Office 365 in China actually is more than 98%. Importantly, 98% of the user, they all use Office application.

Yes, after the last year (inaudible) happened, the Chinese parliament did encourage the state-owned enterprise and the central government to use the domestic software. So that's the case.

And I also want to mention in terms of the population based on our study, in China, more than 300m user, they either use Office 365 or they have an interface with Office 365. Interface mean you don't use Office 365 but you will receive Excel or like a PowerPoint from somebody else.

So the population that use this is huge. The [only] thing is, also based on our study, less than 5% of the 300m people who use Microsoft actually, they are paying for the license. And so for the piracy, one of the main job is try to turn those unpaid customers who are using the software license right now and ask them to pay for it, not only for the new version but particularly for the old version.

From the partnership itself, what we can do because once you put the Office 365, so all the new version -- upgrade the new version will be only available on the cloud. But all those Office application, once they are on the cloud, nobody can make such copy.

So somehow that will prevent the piracy of the Office 365, particularly in the new version on this one. So that is what we are trying to do.

But in terms of the compete -- with the WPS right now at least based on the customer we signed and so far, the progress is great. And I also want to mentioned signing up customer with us already exceed more than 10,000 customer on the Office 365. And that customer could be enterprise and also individual, but we actually signed up, they signed up on the platform and they are waiting for us to convert them to become a customer.

The number of the customer and the individual who sign up with Office365 is unbelievable, okay? So it is unbelievable. So we will see -- we believe let's say by the end of this year, after two or three quarter of the running Office application, we should be able to give you the precise particularly on the competition side.

But all I can say is so far, so good, okay? Thank you.

So I just wanted to follow up on that. If you can address the piracy issue through the cloud platform, then how are you going to charge the individual users, especially for those 10,000 customers that already signed up on the platform?

And so I think that recently Kingsoft also kind of started to promote WPS on the mobile handset a lot. Are you actually going to roll out Office 365 to the mobile as well? Thank you.

First of all, Office 365, actually in the US, I believe is already on mobile. Yes, our partnership also do that. So mobile, for example, the mobile, the Office 365 already available in iPad, and also the iPhone, maybe in the process to be available in the iPhone already. And so mobile is that direction, yes that's no doubt, we definitely will go with mobile too. Okay?

And again, and I think our competition with let's say Kingsoft, at this moment, when we look at -- because Office application, after all, you need to -- probably you need to ask yourself, okay, whether or not you will use the Office application or you are using WPS.

I think that is a key issue because at least, from our observation and also on our -- more than 98% of the users still use the Office application in China. And that's all I can say in this moment. Whether or not the competition, I think, it's still early. We probably need to wait two quarters and three quarters to look at it because after all, the Office 365 is only commercialized on April 15.

In terms of the pricing, right now, the individual side, we charge RMB399 per year, RMB399. That's all on the website. You guys can find those numbers. And people who signed or the company, we will offer certain discounts for any individual who signed before or company who signed before the [main service] we offer the 20% discount. But the pricing is RMB399 per license per year. That is about $6 to $8 per license per month which is consistent with the management message during past one year. So we always say between $6 to $8. So that's the current pricing. Okay? Thank you.

Thanks.

Ladies and gentlemen, as there are no further questions, I will now hand the call back to management for closing remarks,

Okay. Thank you, everyone. I also want to say to thank you to our biggest customer called Jingdong. They just did an IPO today in the US market. Congratulations to them. And they are our biggest customer.

So thank you, everyone. We're looking forward to speak with you again in the next quarter earnings. Thank you. Bye-bye.

Ladies and gentlemen, that does conclude our conference for today. Thank you for participating, you may all now disconnect.