Good morning, ladies and gentlemen. Thank you everyone and welcome to 21Vianet Group's Fourth Quarter 2014 Earnings Conference Call. At this time, all participants are in a 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 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 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 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 Mr. Eric Chu, Vice President of Capital Markets and Business Development. Following management's prepared remarks, we will conduct the 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. Good morning and thank you for joining us today. We have a solid fourth quarter, which ended the year for us on a strong note. The progress and the momentum we saw throughout the 2014 demonstrate the strong demand present in China not only for our core IDC business, but also for emerging businesses such as CDN and the cloud services.

We are delighted that this robust demand has led to be continued solid growth of our company. In the past year, despite some of the challenges we faced, we achieved a strong growth in terms of our revenues, profitability and the scale of operations.

As compared to 2013, revenue for the full year 2014 grow by 46.3% to RMB2.88 billion and adjusted EBITDA grow by 52.9% to RMB568.9 million, part of this growth was supported by the expansion of our datacenter infrastructure, which has now amassed, probably should be 21,500 cabinets up 63.3% from a year ago.

Furthermore, we made great progress expanding our CDN service offering and achieved numerous milestones with the commercial launch of the Microsoft public cloud and IBM private cloud services, which will help fuel our growth in the coming years.

We have also completed the strategic acquisition of actual growth, while the industry leaders in the last-mile broadband market entities, while the industry leaders in business VPN markets. We expect these businesses to add value to our company and our shareholders operationally, strategically and financially.

Furthermore, as you have seen in the press release in the fourth quarter, we received a strategic investments from Kingsoft, Xiaomi and Temasek in the amount of nearly US$300 million and part of the share purchase agreement with Kingsoft, the company also signed a business corporation memorandum, which will allow the company to build, operate, maintain and provide technical support for new state-of-the-art based centers.

In addition, the company will also lease at least 5,000 cabinets to Kingsoft over the next three years. Against a backdrop of a strong growth and numerous achievements 2014 can be categorized as the strategy year, one, where we took important steps laying out the strategic roadmap for the company to achieve long-term growth.

Looking ahead, 2015 will be a year of the implementation and execution of our well-crafted growth strategies. First, let's look at our cloud datacenter operations; in 2015 we will increase focus on our IDC business reaching a comprehensive approach in capturing market opportunities with both the retail co-location and the VIP customers.

On one-hand for VIP customers, we are targeting the growing number of the domestic cloud service providers processing up in China's directly evolving incremental landscape to offer basic cabinet services.

As we have seen in the case of Alibaba and Kingsoft, these large deployments could reach a scale of 1,000 cabinets or more in each phase on the long-term agreements. These large cloud providers not only offer incremental demand to our IDC business, but also as more visibility to our recurring business model.

On the other hand, we will further enhance services and offerings to retail co-location customers.

Demand drivers for these key industry verticals such as mobile, online video, social media, ecommerce and the increasing financial institutions remain very robust supported by increased Internet usage and the competition in China and the continued growth of a mobile Internet traffic.

As we further expand our scale and operational capabilities, our goal is to become the most recognized and the trusted brand in China's Internet infrastructure market.

Turning to our cloud computing services, we continued to see strong results from our Microsoft Azure and Office 365 services, which now support over 55,000 enterprise customers including both multinational corporations and a significant number of domestic companies supported by the strong momentum in customer sign-up, we believe our cloud services attract a wide-range of customers, who value the high-quality reliable and the secured features offered by the cloud platforms from Microsoft and IBM.

We will build on to the early success in partnerships with these international cloud service providers and the continued ramp-up service offerings in both public cloud and private cloud markets.

We look forward to expand our market leading position and further penetrate the Chinese cloud-computing markets through cloud infrastructure operated by 21Vianet. So our CDN services, we expect our growth momentum to continue as we further leverage our technical expertise then with the capacity and the specialty in the cloud market.

We look forward to further strengthen our value proposition to online retail customers, one of our most important industry verticals by optimizing delivery in the cost effective manner. Looking at our management network services business, we will continue our network grooming process and adapt our – this model to the evolving market dynamics.

Finally, I would like to take this opportunity to thank all of our employees. We just celebrated our company's 15-year anniversary, thanks to all your dedication and hard work.

We have come a long way in the past 15 years from China's first-carrier neutral datacenter with a single location to being one of the largest Internet infrastructure provider in China with a massive hosting area network, a vibrant CDN business and industry leading cloud service offering.

We are excited going into 2016 and look forward to executing on our strategies and demonstrating to customers, partners and the investors, our operation has the leading integrated Internet infrastructure services provider. At this point, I would like to turn the call over to Shang, our CFO, to go through our financial results..

Thank you, Frank. Good morning everyone. Now, moving on to our financial results, before I begin I would like to state that we represent non-GAAP measure today. Our non-GAAP results exclude certain non-cash expenses, which are not a part of our core operations.

The detail of these expenses may be found in the reconciliation table included in our earlier release. Also note that all the financial number we are presenting today are in renminbi amounts and percentage changes year-over-year unless otherwise noted. I would first like to briefly highlight on our working capital condition.

During our third quarter call, we said we expect our working capital situation to improve in the fourth quarter and we had indeed seeing steady progress on this front. In regard to our accounts receivable, our day sales outstanding or DSO days was 107 in the second quarter and decreased to 92 days in the third quarter.

Now into fourth quarter these had further improved to 78 days where we have achieved and surpassed our goal of DSO 80 to 90 days earlier than expected. We try to further improve that important metric in 2015. Our net revenue for the fourth quarter of 2014 increased by 56.4% to RMB853.9 million.

Net revenue from hosting and related service increased by 63.8% to RMB596.2 million primarily into an increasing total cabinet under management. Increased demand for the company's CDN and cloud-service as well as the contribution from the acquisition of cloud DTN service provider.

The MRR per cabinet was 10,400 in the fourth quarter of 2014 as compared to 10,433 in the third quarter of 2014; the slight sequential decline in MRR per cabinet was primarily due to the residual effect of the transition to the VAT system.

Net revenue from our management network service increased by 41.6% to RMB257.7 million, this increase was primarily because of contribution from the acquisition of the Aipu Group, which was partially offset by the continued network grooming effort.

Adjusted gross profit increased by 83.4% to RMB290.7 million, adjusted gross margin was 34% compared with 29% in the prior year and 34% in the third quarter of 2014 that increase in adjusted gross margin was primarily due to a higher margin revenue contributing from acquisition as well as Microsoft cloud-service.

Adjusted operating expenses increased to RMB234.4 million as a percentage of net revenue, adjusted operating expenses was 27.5% compared with 18.7% in the prior year period and 25.5% in the third quarter of 2014.

More specifically adjusted sales and marketing expenses increased to RMB93.3 million from RMB41.7 million in the prior year period due to the expansion of our sales and services personnel to support growth and due to the acquisition with higher sales and marketing expenses.

Adjusted general and administrative expenses increased to approximately RMB103.3 million from RMB41.1 million in the prior year period primarily due to increasing account professional fees and hardware expansion related expenses and also due to acquisition in our higher general and administrative expenses.

Adjusted research and development expenses increased to RMB37.8 million from RMB19.2 million, which reflected our effort to further strength our research and development capability and expand our cloud computing and CDN service offering and due to incremental R&D expenses from acquisitions.

The difference between adjusted operating expenses and our higher GAAP total operating expenses amount is primarily due to strength in the fair value of contingent purchase consideration payable which was a loss of RMB44.9 million and share-based compensation expenses of RMB65.1 million the changing to fair value of contingent purchase consideration payable resulted from increased in the present value of estimated cash and share consideration as of December 31, 2014 associated with our company past acquisition.

From a profitability perspective, adjusted EBITDA increased by 55.7% to RMB160.1 million from RMB102.9 million in the comparable period in 2013. Adjusted EBITDA margin was 18.8% compared to 18.8% in the prior year period and 19.8% in the third quarter of 2014.

Our adjusted net profit was RMB7.1 million compared to RMB41 million in the prior year period. Adjusted net profit margin was 0.8% compared with 7.5% in the prior year period and 2.1% in the third quarter of 2014. Adjusted diluted loss per share was RMB0.03, which represent an equivalent of RMB0.18 or US$0.03 per ADS.

As of December 31, 2014, our cash and cash equivalent and certain investment was RMB1.56 billion equivalent to US$250.7 million.

Pro forma for the equity investment transaction with Kingsoft, Xiaomi and Temasek for a total amount of U$296 million, which closed on January 15, 2015, our cash and cash equivalents and short-term investments total approximating RMB3.4 billion or US$546.7 million.

Looking at our financial outlook, currently, we expect first quarter of 2015 net revenue to be in the range of RMB883 million to RMB925 million which as a mid-point represent growth of approximately 54% for the comparable period in 2014. Adjusted EBITDA is expected to be in the range of RMB162 million to RMB182 million.

Net revenue for the full year 2015 are expected to be in the range of RMB3.91 billion to RMB4.11 billion, which at the mid-point represent approximately 39% growth over 2014. For the full year 2015, adjusted EBITDA is expected to be in the range of RMB760 million to RMB860 million, which at the mid-point represent approximately 45% growth over 2014.

This forecast reflects the company current and preliminary view, which is subject to change. This concludes our prepared remarks for today. Operator, we are now ready to take some questions. Thank you..

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] Your first question comes from the line of Colin McCallum with Credit Suisse. Please ask your question..

Thanks very much for the opportunity. Couple of questions for me, first of all, can you just outline to us what was the fourth quarter cloud revenue as you can split that between IBM and Microsoft that would be helpful.

Also for expectation for cloud revenue for FY 2015, are you effectively baking into your guidance for FY 2015? That's the first two questions.

And the third question, why was the share-based compensation up so much in the fourth quarter, what's the reason for that? And final question is just on the EBITDA guidance and given your acquisitions, it is 45% growth not a relatively conservative looking assumption for your adjusted EBITDA for 2015, are you trying to be conservative or is there something going on in the core business, which is more negative than you expected so that when we had the acquisition, the overall growth is not as much anticipated? Thanks very much, those are the four questions..

Thank you, Colin. This is Shang. For the fourth quarter, the cloud revenue actually was – let me check, RMB9 million from the Microsoft. So it's up brought us totally to nearly RMB25 million for the 2014 from the Microsoft.

And now for the IBM, since we just commercialized in November, so the revenue contribution from the fourth quarter slightly less than US$1 million. And for the outlook, we continue to pay expected from the Microsoft cloud revenue, we expect would be [indiscernible], the revenue for the 2015 from the Microsoft should be somewhere around US$15 million.

And second question, which is regarding to this 65 million –.

Sorry, Shang.

Just before you move on to the second question, so on IBM, what do you expect for 2015?.

At this moment because we just commercialized about 2 to 3 months, for this year 2015, we probably at this moment we cannot give out the guidance for the IBM, okay?.

But, you might have your own – you must have baked something into your own guidance that you have given us for total revenue, you must have an assumption that you baked in there, so can you just tell us what it is?.

Okay. At this moment, we probably only expect, the IBM revenue were less than US$10 million for the year of 2015..

That helps. Thank you..

So that's our current forecast.

And second question regarding to the share-based compensation for RMB65 million, couple of things, the first thing is difficulty for our business, okay, we keep out sales commission to our sales and marketing people, but starting from the pervious quarter, fourth quarter we allow, our sales people they want to paid by cash commission or they want to pay by the company, stock.

So given choice, due to the share price, a lot of the employee actually select to get company share instead of cash, so that's one. And second contribution of that RMB65 million share-based compensation, we acquired DYXnet and Aipu and for certain executive of the company we also plan the stock compensation to them.

That's like a one-time went to them. But, our share-based compensation program is for four years. So that's a two factor. To show it's a one-time share-based compensation would be higher than the normal quota.

And third question, it's regarding to the EBITDA guidance, for the whole year, the EBITDA guidance right now, I think our guidance should be somewhere around 19% of our revenue – 19% of our revenue. We give our sale some cushion over here. I don't want to say it's a conservative.

But, somehow, we need some cushion, the cushion is at least towards the beginning of this year, the company actually spent some money try to integrate the Aipu and DYXnet into the operation, so we spend some up to integration costs over there somewhere around RMB10 million to RMB15 million. So somehow that reduced our EBITDA a little bit.

In term of our core business nothing changed. The financial metrics remain in tact. Colin that's my answer to you..

Thank you so much. Helpful thanks..

Thank you..

Your next question comes from the line of James Breen from William Blair. Please ask your question..

Thank you. Can you just give us some comments on the competitive environment for the carrier neutral datacenter space? And then also where you guys are in terms of the carrier business and how that's transpiring in terms of getting carrier approval? Thanks..

Okay. Thank you, Jim. If we do recap IDC report from 2014, current market share is like this, China Telecom have the biggest market share 39%, second one, China Unicom 19%, 21Vianet, right now we have 12.5%. As a number four player, it's still the China net center they have somewhere around 5% of the market share.

And recently, we did see we certain regional player, for example, [Dr. Woon] [ph], they are building datacenter. We also see like a GDS function kind they are building the datacenter. And that's the main player.

For 21Vianet, this is the first time, our number of the cabinet breaks more than 20,000 cabinet, in fact, we already have more than 22,000 cabinet. And it's the guidance we will give it to the market for the previous year is; the company is planning to deploy 7,000 to 9,000 cabinets this year.

What I mean is, it's everything according to our plan by the end of this year, our total number of cabinet would reach at least 30,000 cabinets. If we can execute that successfully, we do believe our market share will continue to increase. That's one thing.

And second point, I want to make is, the company make a price review in the fourth quarter say you know, we got a 1,000 cabinet from the Alibaba, we joined with the China Unicom to offer the service, that's 1000. And we are working on the second phase also with China Unicom and Alibaba, so more cabinet will come.

And also another VIP like Tencent and Baidu, at this moment, they also place more than 1,000 of the cabinet into a open bid to the market, we also in the bidding process.

So demand for the cabinet, I have to say is quite strong and not to mention for certain financial institution, we are starting to see the demand from them that's typical to see previously more and more right now, they are waiting to discuss with 21Vianet to deploy their cabinet with us.

One of the customer, I want to talk about is about a commercial bank. They just order more than 600 cabinets from the company. And that 600 cabinets actually using for the banking operation system before we are going to receive order from the bank for the data storage something like that.

But as I know, we are starting to see the effects that leading to outsourcing their operation system to us. That's quite important for us because the financial institution in China actually is quite big, but of course, most of them they are state-owned related and we are starting to see a demand trend over there.

So that's the competitive environment and the current demand for our cabinet. Okay, Jim..

Great. Thank you very much..

Thank you, Jim..

Your next question comes from the line of Cheng Cheng from Pacific Crest. Please ask your question..

Hi. Thank you. I was wondering if you can give probably some color on utilization or pricing trends for 2015.

And also just looking at more of your retail business, is there anywhere to maybe order or rank kind of different verticals in terms of your expectations for growth next year?.

Okay. Thank you, Cheng Cheng. The utilization rate for the fourth quarter was somewhere around 70.2% or 70.3%. But, you can notice we just deploy more than 3,300 number of the cabinet in the fourth quarter. So utilization rate probably will be a little bit lower in the first quarter of the 2015.

For the full year, since the company plan to deploy additional 7000 to 9000 cabinets, we estimate our utilization rate, should be somewhere between let's say around to mid-60 to the low-70 that show the certain [saturation] [ph] quarter-by-quarter. If you want to take a mid-point that should be somewhere around 68% to 69% across the year.

So that's one. And second thing for the retail business for the past two quarter, it's the strongest vertical contribution from our hosting business actually it's called wireless mobile sector. And like I mentioned before, this vertical two years ago, represent 2% of our total revenue.

By the end of the fourth quarter, this wireless vertical already represent 16% above basis, suddenly they became a biggest driver for our hosting business. The company provides B2B service and those – what I mean is, for those wireless and mobile company actually – those company they provide wireless barrier heavy service.

I will just give you a couple of companies name, one is Momo, it's a mobile social network, and they are big customer for us. We also have [UCAV] [ph]. We also have a certain gaming company like Pogo China and as well as [indiscernible] that's two biggest multi-gaming company in China. And we also have a certain research – mobile research customer.

So all those customer are after a strong demand for our vertical. But so that's one vertical, but beside this one, we are starting to see already our estimation vertical for financial institution in the company we have already mentioned about total commercial bank.

Currently, we are also having discussion with the Bank of China and China Merchant Bank not to mention we already have city commercial bank. So in the year of 2015, we should see more bank to contribute our cabinet growth. Okay, Cheng Cheng..

Okay, great. Thank you..

Thank you..

Your next question comes from the line of Kai Qian from CICC. Please ask your question..

Good morning Josh, Frank and Shang. And this is Kai from CICC. And I have three questions. The first one, you already spoke on the share-based compensation in the 2015, this is my first question. The second question, you mentioned guidance for cabinet incremental in 2015, so around maybe 7,000 to 9,000.

And can you please give some of the corridor for example each quarter in this year. And the third question is about the cabinet service with Xiaomi and Kingsoft, so any color from this and maybe some cabinet or business with Kingsoft or Xiaomi this year. This is my question. Thank you..

Thank you, [Sheng Tang] [ph]. For the first question, share-based compensation, we still expect the share-based compensation for quarter should be somewhere around RMB25 million for the 2015, so RMB25 million per quarter.

And second one, second question is regarding [indiscernible] of the cabinet and for the first quarter, right now, we show we are scheduled to deploy somewhere around 500 cabinet. For the second quarter, we are scheduled to deploy somewhere around 2300 cabinet.

Then to the real subject, nearly 5,000 cabinet, with 2,500 cabinet in Q3 and 25000 [sic] 2500 cabinet in Q4. So somewhere around goes to 8000 cabinet. So it's -- after the first quarter should be quite even out per quarter.

And third question regarding to the Kingsoft and Xiaomi, total investment, we already legally closed on January 15, so it's a deal already closed. Right now the company spend a lot of time with Kingsoft and Xiaomi to work on the number of the cabinet to be deployed into 2015 and as well as 2016 and 2017.

And you guys know cabinet actually would be for the cloud service from Xiaomi mobile phone. I think the Xiaomi mobile phone want to build something like Apple in U.S., we call [iPhone] [ph], so the same thing – similar thing will be deployed for the Xiaomi mobile phone.

So through the mobile phone crowd because of Xiaomi, it's a outsourcing, software in cloud service to Kingsoft. So Kingsoft will be the company okay to order the cabinet from the company and actually they are the investor for this thing too. So it's a correlated for Xiaomi mobile phone, so it's actual – at this moment we are still working on it.

We still cannot be sure how many cabinet that would be deployed in 2015. So that's some color for the Xiaomi and Kingsoft. Okay, Sheng Tang..

Okay. Thank you so much..

Thank you..

Your question comes from the line of Leping Huang from Nomura. Please ask your question..

Thank you for taking my question.

First question is about the regulation progress of the deregulation in the ergo industrial, so end of last year, I think the MIT regulator, the fixed line, broadband, wholesale to private company and I think you have Aipu, which I think overlap, what is impacting you, or do you expect any further deregulation on the detailed like the direct peer or this deregulation or how do you expect, is the first question.

And the second question, do you have rough breakdown about the how much cabinet for the new commitment this year given by yourself, how is through your partner with Unicom or the Unicom/Telecom? Thank you..

Okay. Thank you, Leping. For the first question, yes, MIT is actually continued to deregulate it. Based on the news from the MIT and they are going to grant license for 1 metropolitan area network. So also based on the news, they expect license will be granted sometime in May this year. Hopefully that would be the case.

And for 21Vianet as well as our acquired company Aipu, we all apply to the license and we remain very competent of Aipu in 21Vianet. We will be in the first batch to receive the license. The question is, how many cities where recovered by the new license, so of course, we are many city as allocated by MIT as possible. So at this moment, we don't know.

We do expect the license to major city, particularly Beijing, Shanghai and Guangzhou and that's major last-mile in the metropolitan area it may come out from. So that's currently, so maybe when we go into the second quarter we can talk about more. We are in the process of doing license application. So right now, its target remains..

So in your – this year's guidance, how much CapEx or how much revenue growth you already budget I guess depending on the license, how many you get, I guess the growth and the CapEx were allowed, so much you already budgeting this year's guidance..

For the CapEx maybe talk about the CapEx, so you can give me an opportunity to talk on that. Because the first one, when we say we are going to deploy 7000 to 9000 cabinet, so that CapEx – our cabinet should be somewhere around 800 to 900.

That's what hosting, datacenter and for the last-mile, let's make assumption over here, if Aipu gets a license the company probably will spend at least in the initial let's say six months, we probably somewhere around RMB60 million for the CapEx. And the other RMB30 million would be generated by Aipu sale.

Aipu's sale actually again suppose RMB30 million to RMB50 million CapEx spending. So we did have a book, some of the CapEx, like I say depend on how many city will be covered on this one. So the CapEx will be somewhere around RMB15 million to RMB18 million for this metropolitan area network and last-mile..

Okay, yes. Thank you..

And for the second question, the number of cabinet, we just mentioned at this stage let be point this 8,000 cabinet that 90% of those cabinet will be sale-bill, only 10% will be [indiscernible]..

Thank you..

Thank you..

Your next question comes from the line of John Choi from Daiwa. Please ask your question..

Good morning guys. Thanks for taking my question. I have few questions. First of all, could you elaborate a bit more on your pricing trend on your cabinets because you noticed on the fourth quarter that it came down slightly sequentially and you did – you guys did face due to the residual effect on the VAT.

But, can you elaborate a little bit more and what do you guys see as we go into the first quarter and second quarter this year? That's my first question. My second question on your adjusted operating expenses, as you may know it went quite bit last year.

So as we go into 2015, do you think this is going to be the new trend, or should we expect something more of a economy of scale kicking in and lastly, a little bit of housekeeping question is, in terms of their bandwidth cost, can you let us know how much are you paying in terms of percentage cost due to revenue or absolute amount and I just want to be confirm whether the bandwidth reselling revenues are under the hosting related service.

Thanks..

Okay. Thank you, John. For the question regarding to the MRR per cabinet, for the fourth quarter we have 10,400 compared to 10,433 in Q3. Couple of things, I want to talk about it. For the retail, we expect it's MRR per cabinet remain stable across the year, so the MRR should be somewhere between 10,000 to 10,500 or 10,600 for the rest of the year.

That's for the retail. For the VIP program, which is a new program, the customer like Alibaba maybe for VIP customer, later would be for the Kingsoft and Xiaomi because the number of the cabinet, they are older and so over there, we may take-out certain discount, so the pricing over there would be different forms in retail.

I just want to say for the retail customer – for the retail customer typically the bandwidth represents someway around 20% to 25% of our MRR. If we say 10,400, MRR per cabinet, it's the bandwidth then we should see the MRR per cabinet improves the bandwidth revenue with the forecast should be somewhere around 8000 to 8500.

That's 1700 to 2000 that should be bandwidth related revenue. So for the future VIP customer maybe continue over there, then if we go like Alibaba for those big VAT, when we provide a service, we will provide with China Telecom Unicom.

Within both China Unicom for Alibaba, we will provide the bandwidth and the company actually would just provide the company. By doing that MRR per cabinet maybe lower – maybe lower because it excludes the bandwidth.

But in the other way, the gross margin for those MRR would be higher because bandwidth costs typically represent less gross margin for us. So these model, we call VAT, we are starting from this year. Once we deployed it and a number of the VIP customer cabinet become more. Then we would do a separate magic one for retail, one for the VIP customer.

Like I said, VIP customer typically there would be two forms of bandwidth revenue, so with slower MRR revenue but with higher gross margin.

And also for the VIP customer, I just want to talk about it, utilization rate for the VIP customer is going to be very, very high because typically would be more than 1000 cabinet per holder from those big company. Okay, John that's pricing and also for the bandwidth cost I mentioned to you.

One more, you talk about operating expenses, for the increase of operation expenses percentage to our revenue right now to somewhere around 27%. One thing is doing the past for four months earlier I mentioned we just spend certain money try to – we can say that's the integration cost. That's one.

And second thing is because we deploy the cabinet right in line – actually more incentive in Hangzhou, Alibaba, Shenzhen another major company. And we are putting more personnel in Hangzhou as well as Shenzhen right now. So increased number of the personnel also contribute to increase other expenses.

Once if we go to the second quarter and third quarter due to this scale, we do have a scalability, I do except okay, the percentage of the operating expense to the revenue where steady to trough. And starting from second quarter, you probably will see somewhere between 23% to 25% and 23% for the third quarter.

If you want to take average for the whole year, I think it should be somewhere around between 24% to 25% when the revenue become bigger scalability will show..

Thank you..

Thank you, John..

Your next question comes from the line of Matthew Heinz from Stifel. Please ask your question..

Hi. Thanks for taking the question.

So the first one is just around the Aipu and Dermot acquisition, those – hope you could detail what the revenue contributions where from those two businesses in 4Q kind of at the poor run rate? And whether profitability is sort of inline with your expectations thus far?.

For the Aipu, the revenues will be somewhere around 110 million and DYXnet should be somewhere around 75 million that's our revenue contribution. For the gross – for the 2015, Aipu currently we expect they can grow somewhere around 15%. That's for the Aipu, last mile features.

And the DYXnet, the higher growth – those should be somewhere around 30% close to 30% for the DYXnet that's current pocket rate for their growth for the 2015.

Okay, Matthew?.

Yes. Thank you.

Just on the profitability of these businesses versus sort of margin whether that's trending inline with your expectations prior to closing deals?.

Yes. We are seeing is consistent. We saw reaching our valuation for the company. And like I mentioned for each company – each company when we acquired them we have a three-year schedule with them.

What I mean is not only what you see and for the next year and the following year – each year their gross margin as well as EBITDA margin should continue to improve based on our announced schedule we said. If we achieve that we pay our evaluation. If they don't achieve evaluation where it would be less and we will pay less.

Okay?.

Okay. That's helpful. Thank you.

And then secondly as a follow-up, I was hoping you could update us on some of the comments you had last quarter regarding the ongoing transformation in the Chinese broadband market? And then also just on the progress you have made thus far in eliminating some of those lower margin contracts in the network business?.

Okay. The China broadband price continue to drop actually q-by-q, we see nearly 30% drop from the pricing. And this trend allowed price already drop to very, very close to somewhere around RMB100,000, but space are only inflammation.

And last quarter, we did mention due to the pricing drop, for certain contract, if we can now make the money, we will terminate those contracts. We terminate some just some not that many contracts. So you see we have a negative growth for somewhere around 3%, 4% compared to the Q3.

But we see the pricing already drop to nearly a pattern because pricing come down to somewhere around 100,000 already. It's not that much to drop. So this quarter when we look at it, we think pretty much with the MMS, the pricing is coming to us stable.

So for the whole year, we do expect our MMS will remain from the revenue side – should remain stable.

Okay, Matthew?.

Okay.

So there is going to be 30% drop in pricing that shows up in the first quarter and then from there throughout 2015, you expect pricing to be somewhat stable just to understand?.

Yes. Because we are estimating the price – the price already dropped to the nearly RMB100,000, so based on our expectations, there won't be not much to drop before, already dropped to RMB100,000 that's a very, very low compared to two to three years ago.

When you look at the bandwidth price that's somewhere around RMB500,000 to RMB600,000 per [indiscernible]. And as I know already chopped 100,000 based on our purchasing price with China Telecom and Unicom. So not much to drop.

So for the MMS for the first quarter, the revenue I have already mentioned, should remain somewhere stable because I have to say to you it's a total consumption of the traffic, actually they are increasing. They are increasing. But due to the pricing drop that's why revenue stable to stay over there.

Okay?.

Okay. Thank you very much..

Thank you..

There are no further questions from the telephone lines. I would now like to turn the conference for your presenters for closing remarks. Thank you and please continue..

Okay. Thank you everyone. Thank you..

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