VNET Group, Inc. (NASDAQ:VNET) Q4 2023 Earnings Call Transcript March 28, 2024
VNET Group, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Hello, ladies and gentlemen. Welcome, and thank you for standing by for the Fourth Quarter and Full Year 2023 Earnings Conference Call for VNET Group, Inc. [Operator Instructions]. Our participants from our management team includes: Mr. Jeff Dong, Chief Executive Officer; 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. And I will now turn the call over to the first speaker today, Ms. Xinyuan Liu. Please go ahead.
Xinyuan Liu: Thank you, operator. Hello, everyone, and welcome to our Fourth Quarter and Full Year 2023 Earnings Conference Call. Our earnings release was distributed earlier today, and you can find a copy on our IR 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 report and other documents filed with the SEC. VNET does not undertake any obligation to update any forward-looking statements, except as required under applicable laws.
Please also note that VNET’s earnings press release and this conference call include 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 IR website at ir.vnet.com. I will now turn the call over to our CEO, Jeff.
Jie Dong: Thank you, Xinyuan. Good morning, and good evening, everyone. Thank you for joining our call today. I’d like to begin by providing an overview of our fourth quarter and full year 2023 performance. We ended 2023 on a solid note that made the steady economic recovery, demonstrating effective execution of our dual-core growth strategy. We meet our 2023 delivery targets with 8,321 self-built cabinets delivered during the year. As of year-end 2023, we had grown our total cabinets under management to approximate 93,600 compared with approximately 87,300 a year ago. The number of utilized cabinets increased by 2,827 to 55,235 in the fourth quarter, driving our overall utilization rate to 59% compared with 55% a year ago. Our Retail IDC MRR per cabinet remained stable in the fourth quarter at RMB 9,477.
In terms of our financial performance, we continue to focus on high-quality revenues during the quarter, driving our net revenues to RMB 1.9 billion as well as a 3.8% year-over-year increase in our adjusted EBITDA to RMB 440.2 million. Turning to our full year performance. Our net revenues increased by 4.9% year-over-year to RMB 7.41 billion, and adjusted EBITDA grew by 8.9% year-over-year to RMB 2.04 billion. Our robust operational and financial performance reflects our effective strategy and strong execution, as well as our ability to grow our business by skillfully leveraging market trends and the supportive policy environment. According to this year’s government work report, China is increasing its efforts to promote the innovative development of the digital economy, specifically the report call for policy support for the digital economies, high-quality development, and stated channel will set about the development and application of big data and artificial intelligence, launched the AI plus initiative and build world-class digital industry clusters.
We believe these initiatives and goals will further drive market demand for high-quality data centers and premium IDC services. As a leading IDC service provider, VNET is strategically positioned to capitalize on these emerging opportunities through our comprehensive operational strength across marketing and services as well as operations and maintenance. Next, I’d like to share our fourth quarter business updates. We are excited to see AI-driven demand from our customer continue to climb, especially computing power demand for training large language models. Among our wholesale customers, those in the short video industries are actively developing and integrating AI functions, require massive high-performance computing power to enhance their content creation capabilities and business operations.
In our retail business, demand is also increasing steadily from customers in industries, including autonomous driving, local services and virtual reality where large language models are widely deployed for business. Our high-performance data centers empower us to fulfill various AI-driven demand with innovative solutions. Moving on to our wholesale business. We extended our impressive delivery track record to our wholesale customers with timely, high-quality deliveries of approximately 109 megawatts for the full year. These deliveries have not only solidified our reliability, but also boosted customer satisfaction. Of particular note is the rapid ramp-up period we have delivered to leading wholesale customers for several of our projects moving periods were much faster than initially anticipated.
Furthermore, we recently secured a new order from one of our existing customers, a leading cloud service provider in China. The new order is approximately 50 megawatts in one of our projects in the Yangtze river delta region and is scheduled for completion in 2024. Once again, this new order showcases our long-term customer loyalty and our industry-leading service capabilities. Our retail business remained resilient during the quarter, attracting new customers across mobility, cloud service, AI and the IT service industry. We also extended contracts with loyal existing customers in finance, local services, autonomous driving and gaming, demand remains solid. On value-added service front, our full stack one-stop innovative Bare Metal as-a-service solution based on AI technologies continue to win customers, including one of China’s leading providers of energy-efficient computing solutions for smart mobility.
This customer’s demand for computing power is a surge and rapidly due to growing adoption of advanced driver assistance systems and the autonomous driving technology in the mobility industry. Our innovative Bare Metal as-a-service solution provides secure and flexible computing power resources to support the customer intelligence, driving simulation training and the LLM operation, empowering the customers’ future growth. Turning now to our recent ESG performance, our commitment to sustainability once again won recognition from global leading ESG rating agencies in 2023. Early in VNET, A rating from MSCI for the second consecutive year, this represents the highest ranking awarded today in China’s Internet Service & Infrastructure industry, distinguishing us among our peers.
In addition, our company scored 53 in the 2023 S&P Global Corporate Sustainability Assessment, ranking the highest among China’s IT Services industry and in the top 11% in the industry globally. Looking ahead, we will remain steadfast in our perceive of ESG excellence, embracing and promoting a green future industry-wide. Before I conclude, I’d like to share some meaningful progress we made on our refinancing projects. In late December 2023, VNET — we completed the USD299 million strategic investment from Shandong Hi-Speed Holdings Group to further strengthen our balance sheet. We have also established a partnership with Shandong Hi-Speed Holdings who cooperatively explore new opportunities in renewable energies amid the booming computing power demand driven by AI development.
We believe our core business will enjoy great synergies with Shandong Hi-Speed Holdings resources and expertise in traditional infrastructure fields. We look forward to collaborating with Shandong Hi-Speed Holdings on the way of green energy initiatives to jointly advance towards our carbon neutrality targets while meeting societies surging demand for digital transformation. Also, on 1st February of this year, we successfully completed the repurchase payment relating to our convertible senior notes due in 2026 in aggregate principal amount of USD 600 million, and made the capital market, this stands as another testament to our resilient business fundamentals as well as our commitment to long-term sustainable development. In conclusion, strong execution of our dual-core strategy for high-quality growth drove our solid performance in 2023, while laying a firm foundation for 2024, addressing the booming AI trend, we’re growing our business alongside the macro environment steady recovery.
We will continue to build on our core capabilities as we head into 2024, fulfilling market demand for secure and premium IDC services and facilitating digital transformation across a weather spectrum of verticals. Our unwavering commitment to our shareholders is to fulfill sustainable growth and generate long-term value. Before I share our delivery projection for 2024, I want to highlight that going forward these projections will be expressed in terms of power capacity instead of number of cabinets. We believe power capacity will more meaningfully reflect our business development given our data centers increasing power density amid the growing AI trend. That said, we expect to deliver 100 to 120 megawatts during 2024. Thank you, everyone. I will now turn the call to Qiyu to discuss our financial performance for the quarter.
Qiyu Wang: Thank you, Jeff. Good morning and good evening, everyone. Before we start the detailed discussion of our financials, please note that we will present non-GAAP measures today. Our non-GAAP results exclude certain noncash expenses, which are not part of our core operations. The details of these expenses may be found in the reconciliation tables, including our earnings press release. Please also note that unless otherwise stated, all the financials we present today are for the fourth quarter and the full year of 2023 and in renminbi terms. Now let me walk you through our fourth quarter and the full year of 2023 financial results. Unless otherwise specified, the growth rates I will be reviewing are all on a year-over-year basis.
We concluded 2023 with solid financial and operating performance, both in line with our guidance. More in currently, our wholesale business continued strong growth momentum. During the year of 2023, we added 109 megawatts of capacity to our wholesale business, growing a year-over-year increase of around 70% in our wholesale revenue. In the fourth quarter, our net revenues increased by 0.9% to RMB 1.9 billion from the same period last year, mainly driven by the continued growth of our core business. Gross profit was RMB 290.9 million in the fourth quarter of 2023, representing a decrease of 11.4% from the same period of 2022. Gross margin was 15.3% in the fourth quarter of 2023 compared to 17.5% in the same period of 2022. The year-over-year decrease was primarily attributable to an increase in depreciation and amortization expenses as additional data center were put into service during the past quarters.
Adjusted cash gross profit, which excludes depreciation, amortization and share-based compensation expenses was RMB 741.7 million in the fourth quarter of 2023, an increase of 0.2% from the same period of 2022. Adjusted cash gross margin in the fourth quarter of 2023 was 39.1% compared to 39.4% in the same period of 2022. Adjusted operating expenses, which exclude share-based compensation expenses, compensation for post-combination employment in the acquisition, allowance of loan receivable, impairment of long-lived assets, and impairment of goodwill were RMB 334.2 million in the fourth quarter of 2023, compared to RMB 355.4 million in the same period of 2022. As a percentage of net revenues, adjusted operating expenses in the fourth quarter of 2023 were 17.6% compared to 18.9% in the same period of 2022.
Adjusted EBITDA in the fourth quarter of 2023 was RMB 440.2 million, representing an increase of 3.8% from the same period of 2022. Adjusted EBITDA margin was 23.2% in the fourth quarter of 2023 compared to 22.6% in the same period of 2022. Our net loss attributable to VNET Group Inc. in the fourth quarter of 2023 was RMB 2.4 billion compared to the net loss of RMB 64.2 million in the same period of 2022. Basic and diluted loss were both RMB 2.65 per ordinary share and both RMB 15.88 per ADS. Each ADS represents 6 Class A ordinary shares. Turning to our balance sheet, as of December 31, 2023, the aggregate amount of the company’s cash and cash equivalents, restricted cash and short-term investments were RMB 5.46 billion. Meanwhile, net cash generated from operating activities in the fourth quarter of 2023 was RMB 730.7 million compared to RMB 407.5 million in the same period of 2022.
Our capital expenditure in the fourth quarter of 2023 was RMB 1.6 billion, and the total CapEx for full year 2023 was RMB 3.58 billion. Now moving to our outlook. We expect our net revenue from the full year of 2024 to be in the range of RMB 7.8 billion to RMB 8 billion, representing a year-over-year increase of 5.2% to 7.9%. And adjusted EBITDA to be in the range of RMB 2.22 billion to RMB 2.28 billion, representing a year-over-year increase of 8.9% to 11.8%. Forecast reflects the company’s current and preliminary views on the market and its operational conditions and is subject to change. Looking into 2024, we will continue to execute our effective dual-core strategy driving high-quality business growth, we believe our solid fundamentals and core strengths position us to capture market opportunities, especially AI-driven demand.
As always, we remain dedicated to creating sustainable value for all our stakeholders. This concludes our prepared remarks for today. Operator, we are now ready to take questions.
Operator: [Operator Instructions]. Our first question comes from Yang Liu of Morgan Stanley.
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