Good morning, ladies and gentlemen. Thank you everyone and welcome to 21Vianet Group's Second Quarter 2015 Earnings Conference Call. At this time, all participants are in a listen-only mode. I would also like to mention that due to the pending "going-private" transaction there will be no Q&A session at the end of the 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 is Mr.
Terry Wang, 21Vianet’s Chief Financial Officer. At this time, I would now like to turn the conference call over to Mr. Wang..
Good morning and thank you for joining us today. And first of all, I am very excited to join the Company's management team as Chief Financial Officer and look forward to working closely with everyone in the organization during the next phase of 21Vianet’s growth.
Similar to prior quarters, before going over operating details, I would like to first spend a few minutes to discuss a couple of market dynamics that we are seeing in the Internet infrastructure segment we serve.
First, new broadband trial licenses; as we discussed last quarter, the central government has set a goal to issue 100 new broadband trial licenses targeting RMB10 billion total investments and expand the numbers of total trial cities to 30 by year end of 2015.
During the quarter, we have seen some of those new licenses already being issued not only to existing broadband service providers, but also to emerging broadband high-speed. Meanwhile, some of our domestic peers equipped with cheaper capital resources continue to be aggressive in promotional activities, especially in the network related businesses.
As this market is further deregulated, we believe more broadband IP and the capital will continue to enter this market introducing incremental competition in last-mile broadband access market. Second, improving network efficiencies.
From a network design perspective, we’re seeing the number of national network access points or NAPs continues increase from original three with traffic in the process of gradually working to some other new NAPs, although it will take time to develop China’s massive Internet traffic even longer to make a meaningful improvement in overall network efficiencies.
We believe that we are moving in a right direction with the national broadband plan and the continued push by the government to improve China’s network quality. We are seeing the average internet transmission speeds continues to increase and average bandwidth cost further declined.
In the backlog of this industry changes, we continue to see both challenges and opportunities. In a short-term, new broadband licenses improving network efficiencies have resulted in the lower bandwidth prices, which have negatively impacted our network bandwidth related businesses, such as MMS and to lesser extent Aipu and the CDN.
However, in the longer-term, we believe these changes are necessary components of a transformation to our more advanced purely based Internet infrastructure system.
As we continue to adjust our strategies, operations, and organization structure in light of this transformation, we believe that we are well-positioned to benefit and capitalize a more attractive opportunities over time. Now let’s move on to operating results.
We are pleased to report another quarter of steady growth as evidenced by total revenues growing by 31.7% year-over-year and adjusted EBITDA by 13.2%.
At the same time, we had another quarter of strong momentum in data center and cabinet sales, boosted data center utilization rate by 2.5 percent points to 67.5% and maintain a lower 0.37% hosting churn rate. This data points demonstrate the strong value of our Internet infrastructure offerings as well as the operational strength of our IDC business.
Looking at our IDC business more closely, demand remained strong for our core IDC offerings as we had another quarter of strong capital sales, which exceeded 800 similar to prior quarter’s data centers in Beijing such as M6 and [indiscernible] continued to witness a strongest leasing trend, although we also started to see meaningful sell through improvement in [indiscernible] data center.
However, we note that we experienced continued headwinds in MRR as we ramp up the new data centers with relatively lower MRR, and we manage it through industry-wide decline in bandwidth prices, another challenge as we encountered.
However, the delays in cabinets construction, primarily due to additional time required for higher power density cabinets at a couple of locations. Our operations team are actively working with external parties and looking for ways to streamline the processes to improve operating efficiencies. Now let's look at our cloud enabler services.
During the quarter, we continued to make progress by attracting both large customers as well as smaller WebDirect customers and both Windows Azure and Office 365 offerings. Following some of the promotional activities, we are now in the process of converting some of the trial customers into regular paying customers.
In addition, we have signed a strategic partnership agreement with AvePoint, Microsoft global solutions partner to expand service offerings beyond Azure and Office 365 to our customers. Although our second quarter cloud revenues did not record a growth rate as strong as first quarter, we note that the year-over-year growth rates still exceeded 50%.
Overall, we are happy with the performance of our cloud enabler business, which continues to execute well under the partnership agreement with Microsoft. Moving on to our CDN business. After seasonally soft first quarter, this business began to show signs of recovery in second quarter when we achieved more than 60% sequential growth rate.
However, some projects have been pushed into the second half of 2015. This additional momentum, we expect our CDN business to continue to grow steadily through the rest of the year.
For our MNS business as we have mentioned earlier and in prior quarters, we continue to face secular headwinds in this space mostly due to industry-wide pricing decline and the greater competition. To that extent, we will continue our network grooming process and adapt our business model to changing market dynamics.
For both our CDN and MNS businesses we have been focusing on organizational transitioning. In a short-term, this has led to temporarily greater costs.
However, through optimizing our organizational structure and increasing efficiency, we are confident that we can better control costs and nurture this segment to achieve strong and sustainable growth in the future. Second quarter was not without its challenges.
Our total revenues came in below our own expectations primarily due to changing market dynamics, as we discussed earlier such as declining bandwidth prices, higher competition in certain markets, and a shift in customer needs.
In addition, as a result of the softened revenue and the incremental expenses required in operations, our gross margins were negatively impacting the quarter. During the quarter, we also have some one-time costs associated with the organizational transition, which put additional pressure in our margins.
To address these challenges, we are working tirelessly to enhance operational efficiency in a way that maximizes revenues and minimizes expenses. To that extent we are in a process of putting additional measures of both incentives and accountability with our operations team at various business units.
Going forward, we will continue to strengthen our organizational structure and invest in core gross opportunities in order to reaccelerate growth and improve overall profitability in future period as we fine-tune our cost structure to make disciplined investments and expanding our core offerings in an increasingly sophisticated and value driven market.
We believe we are well-positioned to continue to fortify our position as a leading Internet infrastructure service provider. Now moving on to our financial results, before I begin, I would like to state that we present non-GAAP measures today. Our non-GAAP results exclude certain non-cash expenses, which are not a part of our core operations.
The details of these expenses may be found in the reconciliation tables included in our earlier release. Also note that all the financial numbers we are presenting today are in RMB amounts and percentage change is year-over-year unless otherwise noted. Our revenues for the second quarter 2015 increased by 31.7%, to RMB866.8 million.
Net revenues from hosting and related services increased by 37.9% to RMB643.7 million primarily due to contributions from acquisitions and increase in the total number of cabinets under management as well as year-over-year increase in demand for Company's cloud and CDN services, partially offset by the transition to a Value Added Tax system.
The MRR per cabinets was RMB9,872 in the second quarter of 2015, as compared to RMB10,031 in the first quarter of 2015.
The sequential decline in MRR per cabinet was primarily due to strong sales of new cabinets, some of which use lower power and bandwidth during the initial ramp up and due to higher contributions from cabinets outside of Beijing, which carry a relatively lower MRR. Net revenues from management network services increased by 16.7% to RMB223.1 million.
This increase was primarily because of the contributions from acquisitions, which was partially offset by industry-wide decline in bandwidth prices and transition to a VAT system. Adjusted gross profit increased by 24.2% to RMB245.7 million.
Adjusted gross margin was 28.3%, compared with 30.1% in the prior year period and 31.7% in the first quarter of 2015.
The year-over-year and quarter-over-quarter decreases in adjusted gross margin was primarily due to the continued softness in the MNS business and higher spending in telecom and electricity costs and the incremental expenses due to organizational transitions.
Adjusted operating expenses increased to RMB209.5 million as a percentage of net revenue adjusted operating expenses were 24.2%, compared with 20.2% in the prior year period and 24.3% in the first quarter of 2015.
More specifically, adjusted sales and marketing expenses increased to RMB74.7 million from RMB56.6 million in the prior year period due to increase in the number of sales and service personnel in company’s overall business and acquisitions of the businesses with higher sales and marketing expenses.
Adjusted general and administrative expenses increased to RMB97 million from RMB51.8 million in the prior year period, primarily due to increased headcount associated with the growth in the company’s overall business acquisitions with higher general and administrative expenses and incremental expenses related to organizational transitions.
Adjusted research and development expenses increased to RMB30.1 million from RMB24.4 million, which reflected our efforts to further strengthen our research and development capabilities and expand our cloud computing and CDN service offerings.
The difference between adjusted operating expenses and our high GAAP total operating expense amount is primarily due to changes in the fair value of contingent purchase consideration payable, which was a loss of RMB16.6 million and share-based compensation expenses of RMB67.5 million.
The changes in the fair value of contingent purchase consideration payable resulted from an increase in the present value of estimated cash and share consideration as of June 30, 2015 associated with our Company’s past acquisitions.
From a profitability perspective, adjusted EBITDA increased by 13.2% to RMB149.4 million from RMB132 million in the comparative period in 2014. Adjusted EBITDA margin was 17.2%, compared to 20.1% in the prior year period and 19.4% in the first quarter of 2015.
Our adjusted net loss was RMB16 million compared to adjusted net profit of RMB23.2 million in the prior year period. Adjusted net margin was negative 1.8% compared with positive 3.5% in the prior year period and positive 2.2% in the first quarter of 2015.
Adjusted diluted loss per share was RMB0.02, which represents the equivalent of 0.12 per RMB or US$0.02 per ADS. As of June 30, 2015 our cash and cash equivalents and short-term investment were RMB2.91 billion, equivalent to US$469.9 million. Now, I will discuss our updated financial outlook.
Currently, we expect the third quarter of 2015 net revenues to be in the range of RMB900 million to RMB940 million, which at the midpoint represents growth of approximately 18% from comparative period in 2014.
Adjusted EBITDA expected to be in the range of RMB146 million to RMB166 million, which at the midpoint represents growth of approximately 1% from the comparative period in 2014. We have updated our full-year outlook to reflect a softer than expected the first half of 2015 results and some of the changing industry dynamics.
Currently net revenues from the full-year 2015 are expected to be in the range of RMB3.58 billion to RMB3.68 billion revised from a prior guidance of RMB3.9 billion to RMB4.1 billion. The revised guidance from 2015 net revenues and midpoint represents approximately 26% growth over 2014.
For the full-year 2015, adjusted EBITDA is expected to be in the range of RMB620 million to RMB660 million revised from prior expectation of RMB760 million to RMB860 million. The revised expectation for 2015 adjusted EBITDA at the midpoint represents approximately 15% growth over 2014.
And this forecasts reflect the Company’s current and preliminary review, which is subjected to change.
Lastly, I want to remind the investors of some of the recent developments for 21Vianet as was announced in June 10, 2015 the Company received the non-binding “going private” proposal from Josh Sheng Chen, Chairman of the Board and Chief Executive Officer of the Company, Kingsoft Corporation and Tsinghua Unigroup International.
This transaction is currently the consideration since receiving the offer of the Company's Board of Directors has formed a special committee to review and evaluate the proposal and has repaying the financial and the legal advisors in conjunction with the ongoing transaction.
As previously mentioned due to the pending “going private” transaction we are not hosting a Q&A session on this call today. This concludes our prepared remarks and thank you for joining our call today. And now we’ll like to conclude the call. Thanks. End of Q&A.
Thank you very much sir. Ladies and gentlemen, that does conclude the conference for today. Thank you for your participation. You may all disconnect..