Earnings call: VNET Group reports growth in Q1 2024 amid AI boom

Published 05/30/2024, 03:08 PM

VNET

VNET Group, Inc. (NASDAQ: VNET) has announced its financial results for the first quarter of 2024, highlighting a solid performance with significant growth in its wholesale data center business and a strategic focus on high-quality revenue streams. The company has reported a 5.1% increase in net revenue, with a notable 59.1% surge in wholesale revenue. Despite this, retail revenue saw a 7.1% decline.

VNET also provided full-year guidance, projecting net revenue between CNY 7.8 billion and CNY 8 billion, and adjusted EBITDA to be within CNY 2.22 billion to CNY 2.28 billion. The company's ambitious plans are driven by the burgeoning AI industry, which is influencing demand for its high-density power cabinets.

Key Takeaways

VNET Group's wholesale revenue soared by 59.1% to CNY 361 million due to robust core business growth.
Retail revenue dipped by 7.1% to CNY 923.7 million, attributed to the redevelopment of several data centers.
The company's adjusted EBITDA stood at CNY 539.8 million, with a 28.4% margin, while net loss was CNY 187 million.
VNET closed the quarter with CNY 2.1 billion in cash and generated CNY 267.6 million from operating activities.
The company has completed repurchase payments for convertible series notes due in 2026, valued at USD 600 million.
Full-year 2024 guidance anticipates net revenue between CNY 7.8 billion to CNY 8 billion, with adjusted EBITDA ranging from CNY 2.22 billion to CNY 2.28 billion.
Capital expenditure (CapEx) for 2024 is expected to be between CNY 3.7 billion to CNY 4.2 billion, with a delivery plan of 100 to 140 megawatts.

Company Outlook

VNET is targeting high-quality growth by leveraging market opportunities emerging from the AI industry's expansion.
The company is committed to following through on its CapEx goals for 2024, with potential new projects that could enhance these targets.

Bearish Highlights

Retail revenue has experienced a decrease due to the consolidation and redevelopment of data centers.

Bullish Highlights

Strong demand for high-density power cabinets is driven by AI applications across multiple industries, including chip manufacturing and autonomous driving.
VNET's focus on wholesale clients, who generally engage in 2 to 3-year contracts, provides a stable revenue base.

Misses

The company reported a net loss of CNY 187 million for the quarter.
Retail projects have been declining, impacting the overall revenue mix.

Q&A Highlights

Management expects an uptick in retail revenue due to the deployment of high-density power cabinets.
The current ratio of retail to wholesale revenue stands at 2:1, with a cabinet capacity ratio of 5:3.

VNET Group's first quarter results of 2024 reflect a company in transition, focusing on the wholesale IDC sector while navigating challenges in the retail space. The management remains optimistic about capturing growth opportunities presented by the AI revolution, which is expected to drive demand for the company's services. As VNET continues to execute its strategy, investors will be watching closely to see if its focus on high-quality, high-margin revenue streams will translate into sustained profitability and shareholder value.

InvestingPro Insights

VNET Group's recent earnings report has painted a picture of a company experiencing dynamic shifts within its business segments. InvestingPro data and tips provide additional context to these developments. With a market capitalization of $479.04 million, VNET's financial health and stock performance can be assessed through several key metrics.

InvestingPro Data highlights a Price / Book ratio of 0.58 for the last twelve months as of Q4 2023, which indicates that the stock is trading at a low multiple of its book value. This can be a signal to value investors that the company's assets are potentially undervalued in the market. Additionally, the company's revenue growth for the same period was modest at 4.92%, reflecting the growth in its wholesale data center business mentioned in the article.

From the InvestingPro Tips, we learn that VNET operates with a significant debt burden and has been quickly burning through cash. These points are particularly relevant to investors considering the company's plans for capital expenditure and its ability to sustain its ambitious growth targets. Moreover, the stock's high price volatility and the fact that its price often moves in the opposite direction of the market could be important for investors who are considering the timing of their investments in relation to market trends.

For those interested in a deeper analysis, there are additional InvestingPro Tips available that delve into aspects such as the company's short-term obligations versus liquid assets, its valuation implications on free cash flow yield, and the stock's performance over various time frames. To explore these further insights, visit https://www.investing.com/pro/VNET and consider using the coupon code PRONEWS24 to get an additional 10% off a yearly or biyearly Pro and Pro+ subscription. With 14 more InvestingPro Tips available, investors can gain a comprehensive understanding of VNET's position and prospects.

Full transcript - 21Vianet Group (NASDAQ:VNET) Q1 2024:

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. Now I'll 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 matters. VNET's earnings press release contains a reconciliation of the unaudited non-GAAP measures to the unaudited GAAP matters. 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 [indiscernible] 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.

Sheng Chen: Thank you, Xinyuan. Good morning, and good evening, everyone. Thank you for joining our call today. Before diving into our fourth 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 retail business separately. Our CFO, Qiyu, will go over the details. Now let's move on to our fourth quarter initiatives and business progress. Solid most quarter result marked a good start for this year. We continued to execute our effective due 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 rate to capture involving demand in the area of AI. Michael Wise, the prop government notices and major 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 of China high-quality development per the government work report 2024, which caused for certain the performance of a national-wide computing power network. The telecom regulator, MIIT has strength 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 holding market demand for high-performance compute power. Additionally, interest in greener computing solutions is under rise. In April, we signed a strategic corporation agreement with Wodan tapers local government and Shandong high-speed holdings to build a green AI supercomputing data center class. The 3 parties we work together to promote the digitalization and great development of Wolantap. We are confident our grid data center business were the need with customers and 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 meet customers rapidly growing AI needs. By the end of the fourth 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, auto normal drilling financial service and logic and education. As an industry pioneer, we are exploring AI data center, IDC, 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, a part from a few top Internet enterprise and AI technology enterprise with take 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. AI DCs 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 form. 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 approximately 2.5 megawatts in our data center in their younger driver, delta region for a 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 at 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 leader carries with a new point of presence is established in Dubai in the fourth quarter and in South carry and more recently. The new pops broadened our VPN service global network coverage over our rating 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 Afra,we issued our fourth annual ESG report declaring in company 2023 works and progress tenability include rarified cabo 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 to 2 line our total grade power purchase of about [56.9 hours] during the year and an increase in our percentage of female employees in our manager 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 due core business strategy and pursue high quantity 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 fourth 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 FDC business was subdivided into wholesale IDC business and the retail IDC business based on the neutral 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 fourth quarter results. Please also note that, unless otherwise stated, all the financials we present today are for the fourth 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 serves was 332 megawatts as of the end of first quarter. Capacity utilized by customers increased by 17 megawatts to 236 megawatts in the fourth quarter, primarily driven by increased demand for the customer in [indiscernible] data center. As a result, the utilization rate of wholesale capacity improved to the 71% with the utilization REITs for mature capacity reaching around 95% and ramp up capacity reaching around 34%. In addition, the capacity under construction was 139 megawatts with pre-commitment reach of around 75% and the capacity health of future development was 557 megawatts. For our retail business, capacity in service was around 52,000 commitments 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 8,742 in the fourth quarter compared to 8,759 for last quarter and 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 EHS Compass 01 Phase I and GS Compass has Compass 2B enhancing HB03 and EHanGS03 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 evidence 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 series 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 delivery plan to 100 to 140 megawatts from previously stated 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.

Edison 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 were put to know what exactly the definition is because the retail MR that you are presenting today, 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 companies 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]

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

Xinyuan Liu: 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 a 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 hedge we also put under construction as held for the future development megawatts for your better understanding.

Unidentified Company Representative: [Foreign Language]

Xinyuan Liu: 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 [indiscernible] and retail as we did before. Before, we put the major clients, the big customers into the wholesale where the small clients in a but now we made a small change to better serve the capital market as well as the [indiscernible] 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 classes in the long run in terms of the land, 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 middle sized enterprises and clients. And on the other side, the retail projects, which will be literally translated into the city-type projects located main 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 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 numbers that due to the fact that 10% of the committed cabinets have been redeveloped and a small proportion of the retail products 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.