Good morning, ladies and gentlemen. Thank you everyone and welcome to 21Vianet Group’s Second Quarter 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. We will be hosting 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.

Steve Zhang, the company's Chief Executive Officer and Mr. Terry Wang, the company's Chief Financial Officer. At this time, I would like now to turn this conference call over to Mr. Steve Zhang..

Good morning and good evening, everyone, and thank you for joining us. It’s my pleasure to address you as a CEO of 21Vianet and we look forward to your involvements with our company. As you are aware, 21Vianet has had event for past year.

During this time, we have strengthened and broadened our senior executive teams, restructured our corporate organization to enable each division to operate more independently, allowing them to adjust and grow with their respective markets more quickly and successfully.

Additionally, we stroke strategic partnerships with several of China’s leading tech and the financial companies enabling us to more comfortably fund our growth going forward. This important actions have positioned us at the forefront of China’s growing cloud adoption and the firmly ever since our China’s internet infrastructure industry.

The exponential growth in data traffic driven by increasing mobile society, growing cloud computing demand, live broadcasting popularity as well as future demands strongly in AR and VR content will certainly continue to drive dramatic growth and demand for our core IDC and the cloud computing capabilities.

Our goal is to expand our leadership in this vitality important cross section of China’s dynamic internet market. Another example of this strategy is that we were recently selected to participate in Tsinghua Holdings' Cornerstone Plan.

The objective of this plan is to coordinate a portfolio of leading edge technology companies’ economically vital areas including telecommunication and renewable energy and providing them with financial and government assistance and facilitating nationwide growth.

By assisting us financially and with land bank reserves, the plan is interesting us to expand our datacenter portfolio and develop hybrid cloud opportunities. The honor to participate in the program, demonstrate our leadership in China’s internet infrastructure sector.

Last month we also extended our strategic corporation agreement with Kingsoft to 2021. This expansion is a great recognition from our strategic partners for the high quality and value of our services which remind the core competitive strength of our business.

Additionally, following the $388 million investment from Tus-Holdings, we have begun mutual sharing managerial expertise as well as resources, innovations and R&D capabilities. Now let me more to our second quarter highlights. Our top line growth remains steady as our core hosting business helped to offside continued softness in the MNS business.

Our core IDC business grew by 19% year-over-year, primarily driven by the steady growth in billable cabinets and the improving utilization rate. Growth for our cloud services remains strong since the solid demand for Microsoft Azure and Officer 365 services and the contributions from the IBM Cloud business.

On the other hand, our MNS business continues to face significant challenges mainly due to the continuing weak land lease pricing environment and the carrier competition. Nonetheless, we expect duration to stabilize in the second half of the year. Now let’s go over each of our core business is more details.

For our core IDC business after a soft first quarter, our cabinet capacity growth was back on track, where we added over 600 self-built cabinets in the second quarter. We see positive momentum is out self-built data centers and the outside is that another large Beijing based datacenter is on track to begin operations during the third quarter.

The utilization rate of our data centers further improved to 76.2% in the second quarter, thanks to solid growth in billable cabinets which helped to drive the top line growth. Our churn rate slightly increased over 1% during the quarter, however, we believe churn rate at our data centers remains fairly low compared to other layers in this industry.

Moving on to our cloud business, this momentum has maintained a healthy direction and the businesses progressing well with steady growth from our existing Microsoft Cloud business, dominated by Azure and Office 365 users as well as new contributions from IMB Cloud business.

It is worth noting that the recent commencement of IBM’s BlueMix in China marked important step in our cooperation with IBM.

Combining our comprehensive portfolio of services already in place and our brand as well as the most trustworthy providers of cloud computing and datacenter service in China, we believe we can further expand our customer base and enhance our product offerings to meet our growing customer demand. Our enterprise VPN business is also doing well.

We are pleased that it has gained increasing interest not only among international customers but also domestic market with increasing cost selling opportunities among our existing customer base and other business units. We hope to further strengthen its position as a leading VPN service provider in the greater China region.

Moving on to our MNS business, net revenue from managed network services again are weak during the second quarter. And the main reason was a declining bandwidth pricing for the whole industry which we have talked about for multiple quarters. However, we estimate the trend will gradually stabilize in the second half on pricing.

To offset this change, we have focused our efforts here improving the cost optimization set. Additionally the restructuring effort within the Aipu business also negatively impacted both the revenues and the margin this quarter.

We are actively managing this optimization process within the Aipu business unit to address some of the challenges in the Last-mile access and in-source stabilization later this year.

To summarize, we are redoubling our efforts to reaccelerate growth in our core business and we’ll continue to invest in this growth areas including our internet data centers, cloud offerings, cross connection capabilities and enterprise VPN services.

As we see great potential we have and believe they will be the key drivers for our company’s continued growth.

Our vision is beyond this short term challenges as will continue expanding our datacenter footprint and working closely with our partners in order to deliver first class internet infrastructure services in China to all of our existing and future clients.

We remain fully committed to our cloud neutral, carrier neutral and customer focused value proposition and are confident in our growth potential and the leading position as an internet infrastructure service provider in China. With that, I’d like to turn the call over to Terry, our CFO to go through our financial results.

Terry?.

Thanks Steve. Let me start with the second quarter of 2016 financial results. Before I begin, I would like to state that we would 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 maybe found in reconciliation tables included our press release. Also note that all the financial numbers we are presenting today are RMB and the percentage of change is year-over-year unless otherwise stated. Our revenues for the second quarter of 2016 increased by 5.1% to RMB911 million.

Net revenues from hosting and the related services increased by 19.3% to RMB768 million from RMB644 million in the comparative period of 2015, primarily due to a year-over-year increase in total number of billable cabinets, improved utilization rate, as well as solid growth from cloud and VPN services.

Monthly recurring revenues from cabinets was RMB8,793 in the second quarter of 2016 compared with RMB9,115 in the first quarter of 2016. The decrease in MRR was due to continued bandwidth pricing pressure, as well as higher percentage of billable cabinets and lower MRR markets, which is expect to be temporary.

Net revenues from managed network services were RMB143 million in the second quarter of 2016 compared with RMB223 million in a comparative period in 2015. The decrease was mainly due to the continued industry-wide decline in bandwidth pricing as well as lower revenue contribution from Aipu.

Adjusted gross profit was RMB201million and compared with RMB246 million in the comparative period in 2015. Adjusted gross margin was 22% compared with 28.3% a year ago and 24.5% in the fourth quarter of 2016. A decrease in the gross margin was primarily due to the continued softness in the company’s MNS business.

Adjusted operating expenses increased to RMB330 from RMB209 million in a comparative period in 2015. As a percentage of net revenues, adjusted operating expenses were 34.4% compared with 24.2% a year ago and 25.2% in the first quarter of 2016.

More specifically, sales and marketing expenses increased by 7% to RMB83 million from RMB78 in a comparative period in 2015, partially due to increase of staff cost including cash settlement of stock based compensation expenses.

General and administrative expenses increased by 19.5% to RMB199 million from RMB167 million in a comparative period in 2015, primarily due to onetime bad debt provision of which most of the investment related and the increase in depreciation expenses.

Research and development expenses increased by 2.9% to RMB33 million from RMB32 million in a comparative period in 2015 as we continue to invest our strategic growth area.

Change in fair value of contingent purchase consideration payable was again of RMB50 in the second quarter of 2016 compared with a loss of RMB17 million in a comparative period in 2015. From probability perspective, our adjusted EBITDA for the second quarter of 2016 was RMB15 million compared with RMB149 million in a comparative period in 2015.

A decrease in adjusted EBITDA was primarily due to a combination of a lower gross profit and aggregated onetime expense of RMB60.9 million which include a change of bonus policy and accrual of bad debt provision. Adjusted EBITDA margin for quarter was 1.7% compared with 17.2% a year ago and 12.6% in the first quarter of 2016.

Under the terms and conditions, governing the our 6.875% bonds due 2017 were required to maintain a ratio of adjusted EBITDA to consolidated interest expense of 2.75:1 or higher for the six months period ended June 30, 2016. As a result of decrease in adjusted EBITDA, we were not able to meet this requirement.

However, as mentioned above, the decrease in adjusted EBITDA was primarily attributable to non-recurring factors and onetime expenses, the effect of which we believe to be temporary.

Notwithstanding the above, we intend to amend offer to purchase announced on August 1st, 2016 to include a consent solicitation for waiver from the requirement to meet certain financial ratios under the bonds for the period ended June 30, 2016.

We intend to fund the repurchase of the bond and consent fee, if any, with cash on hand and we currently have sufficient cash to repurchase or redeem the outstanding bonds. Details of the amended offer to purchase the consent solicitation will be announced at a later date.

Adjusted net loss for the second quarter was RMB109 million compared with adjusted net loss of RMB60 million in the comparative period in 2015. Adjusted net margin was negative 12% compared with negative 1.8% a year ago and negative 8.6% in the first quarter of 2016.

Adjusted diluted loss per share for the second quarter of 2016 was RMB0.19 which represents the equivalent of RMB1.14 per ADS. As of June 30, 2016, our cash and cash equivalents and short term investment was RMB3.57 billion equivalent to US$537 million which includes recent development by Tus-Holdings.

For our third quarter guidance, we expect our net revenues to be in the range of RMB900 million to RMB940 million. Adjusted EBITDA expect to be in the range of RMB40 million to RMB60 million. For the full year of 2016, the company now expects our net revenue is to be the range of RMB3.6 billion to RMB 3.6 billion.

Adjusted EBITDA for the full year of 2016 is expected to be a range of RMB2.40 million to RMB2.60 million. This forecast reflects the company’s current and a preliminary review which may be subject to change. This concludes our prepared remarks for today. Operator, we’re now ready to take questions. Thank you..

Certainly. Ladies and gentlemen we will now begin the question-and-answer session. [Operator Instructions] Our first question comes from the line of Matthew Heinz from Stifel. Please go ahead..

Thank you. Thanks for taking the questions.

I was hoping you could just elaborate a bit more on the demand trends you’re seeing across the cloud business with kind of the existing base of Microsoft Azure and Office 365 customers as well as the IBM kind of private could business, what kind of growth rates are you seeing in those businesses currently and you know is that something that you expect to accelerate or be sustained from these levels into next year?.

For cloud business, our Microsoft Azure and Office 365 business, we see continuous strength with popularity of cloud as a new infrastructure choice for our customers. We see both strong growth in the Azure business as well as Office 365 business and there are a lot of SME customers in this segment.

For the IBM, BlueMix services, it was just recently became general available in the Chinese market in June. And we’re already seeing a lot of the multinational customers was referred to us by IBM which globally deploying their IT infrastructure on IBM cloud and now they are looking to move it and the copy that to the Chinese market..

Okay. Thank you.

And then just a couple of follow ups if I may, first on the IDC business, should we expect the majority of the cabinet ads that articulated for the rest of the year to be self-built and if so, should we expect some sort of pickup uptake in the MRR per cab going through the second half of the year? And then secondly, I just wanted to get an update on your buyback, it is a fairly substantial chunk of your current market cap and just wondering how that’s progressing, have you already begun the buyback and when do you expect to kind of have the financing in place for the duration of those purchases?.

I will cover the first question. Terry will address the buyback issue. For your first question, the new cabinet expansion, it’s our focus and strategy going forward that will mostly focus on our south field cabinets.

And in the third quarter, we have a large datacenter will be ready and will be a start offering to our customers in Beijing in the third quarter and with another expansion for Shanghai datacenter hopefully to be down in the fourth quarter.

And right now we have large types of projects concurrently going on for our south field data centers in both Beijing for next year as well as the Guangzhou for our first quarter next year..

Hi, this is Terry. Regarding your question about the buyback, you talking about the equity and stock repurchase program and which we announce last quarter - last couple months of about next 12 months and we are willing to contributed US$200 million to do the stock purchase program.

So we right now, and given this pure time and the future growth potential and I think that all stock prices right now we believe in value for to look at the next few quarters as we move continue per sea.

So we’ll do some purchase on the stocks side and we have money on hands already you might have known it, 380 million Tus-Holdings Company and as margin chilled us investment in June and also we generate our operating cash from our own business site and also and project managers and to get the financing bank to give us support our business, so that - and end of the day then we have the cash enough to able to support our repurchase program..

I want to add one more point. We haven’t really started the repurchase program yet because of the trading window was not opening that..

Okay, thank you very much for taking the questions..

The next question comes from the line of Colin McCallum from Credit Suisse. Please go ahead..

Thanks for the opportunity. Just three questions for me.

First of all, is it possible for you to give us the cloud revenue, the magnitude of cloud revenue in second quarter, if possible split between Microsoft and IBM? Secondly, so I can just reiterate how many cabinets you expect to be in place by the end of the year? And then thirdly, obviously the EBITDA margin has come down even more compared with first quarter.

When do you think your adjusted EBITDA margin can get back up to the 19% type level, is that a 2017 type expectation or has something structurally change in your business that you don’t think that sort of EBITDA margin you used to achieve will be achievable again? Thank you..

Okay. I will address the cloud business question and probably Terry can address the EBITDA margin question later on.

When we report our revenue, we don’t report the gross revenue generated by both IBM cloud business and the Microsoft cloud business, we only include the net portion where we can book our revenue because it’s a more like a revenue sharing or as technical service agreement with IBM - at least both IBM and Microsoft..

Sure, sure. I know if the net revenue number I was looking for actually that’s no problem..

Yeah, right, right now, it’s roughly close to 10% our total revenue..

And also I want to add, you’ll have a year-over-year gross rates in related to Microsoft’s to cloud business and we see the trend is well approximately 20% growth year-over-year. So that trend is continuing we see it. Speaking of the EBITDA and as you are –the question you’re raising to, one is the why the second quarter drop versus the first quarter.

I mean we mentioned that the two reasons. One is the our operation terms of the pricing continue to fall because of the bandwidth pricing pressure and so that our gross margin get squeeze compared to the fourth quarter in last year, and last year as well.

And the other thing is that a onetime for provision related to our new couple of investment and the money that’s - and collectively that’s the issue that we set up probation for that and the other one also the change of bonus policy from the - to get the cash based that’s had a temporarily onetime on the quarter.

So that have impact approximately above 70 million on an EBITDA for the quarter. And the things that are we’re looking for is the gross margin area that’s still effect to either the question of last question mentioned is when we’re going to be come back to 19% or 18% EBITDA we used to be.

And I think that the environment right now in China is very competitive and bandwidth pricing and continue our pressure, everybody has been because as a result of competition. So - and we see the bandwidth pricing continue to fall but same time internal we are made some efforts on this cost control and cost reduction area.

So we believe in next couple of quarters, our gross margin will go up. But you can see that we will - when we will reach 19% or 18% EBITDA I think that we will be in my view and will be next year sometime..

Great, thanks a lot..

Thank you..

The next question comes from the line of Yong Liu from Morgan Stanley. Please go ahead..

Hello. Thanks for the opportunity to ask questions. I have two questions here.

First, could management share with us the cabinet number to be deployed in second half? What is the size your web Beijing new datacenter and what is the size of the one in Shanghai? And seems that third quarter has already passed almost half, could you please update us about the progress in Beijing? And the second question is on the competitive landscape in cloud computing, when noticed that recently AliCloud booked a very strong year-on-year revenue growth and also Amazon formally launched AWS in China.

So I would to hear management understanding about the competitive landscape in the cloud computing in China and with the Microsoft advantage and positioning in this comparative environment? Thanks..

For cabinets growths in the third quarter and the one in Beijing is very housie and we see roughly it will add 2,100 cabinets in a third quarter and with our Shanghai datacenter expansion probably in the fourth quarter with a few hundreds. I think on the cloud front, the cloud adoption is accelerating.

And yeah, recently we noticed Alibaba report a very strong growth and we are also seeing pretty housie growth in the demand from our customers for Microsoft cloud as well as IBM cloud business..

Okay. Thank you..

We have a follow-up question from the line of Matthew Heinz from Stifel. Please go ahead..

Thanks for coming back around. Just following up on the color you gave around EBITDA margins for the balance of the year. So if I look at your second quarter adjusted number adding back to 70 million of onetime charges that approximates to a margin of about 9.5% and the guidance midpoint for 3Q looks seems to correlate to about a 5% EBITDA margin.

I’m just wondering how to square that up with the comments around gross margin improving in the back half and why you see EBITDA margins continuing to decline on a sequential basis in 3Q..

Okay. Good question. We have an operation-wise and have a different business unit in combine. And just be frankly speaking that one of the business unit we think it’s due to rating which is Aipu and that the second half we don’t - we see that even we make some efforts now.

And so - but because of the landscape change and from the carriers that we have some sort of bandwidth and some restrictions from the access to the customers connection so that and our pricing and for user base it’s drop dramatically and from last year and quarter-over-quarter.

For the second half that trend we are seeing is continue, there are margin - gross margin and margin and we are suffer a loss and continuously and use throughout the year.

So that’s why we give them and leave a cushion on that and even we have some measures taking, we do see some of the results, but from conservative point of view I think that and we will take those risk out then that we try to commit our guidance to the methods as much we can.

I think this is - we pick this guidance that we would think the liable to the capital market..

Okay, thank you..

Thank you..

There are no questions at queue. [Operator Instructions] Looks like we have a question from the line of Tina Hu from Goldman Sachs. Please go ahead..

Hi management, thank you very much for the time. I just had a one very quick question.

You mentioned the bandwidth pricing is declining every year, just wondering how much is it declining at?.

Okay. You know for bandwidth, we have different BTP and different bandwidth in the different category. By average from if you look at the number, picking up in the last year and this year and pricing drop approximately 45% already.

And that trend we do stabilized, so of a year our few trend is downwards, another you could see another 10% to 15% fall, so that’s the - on a front of the sales by area.

But in the past and the couple of quarters, the margins gets squeeze as our cost area we need to work on that, so second half we put the lot of efforts to continue to cost reduction associated with this procurement on bandwidth area so that we can expand our gross margin as much we can.

And so that internet as Steve mentioned that that we have restructuring our - the company with the unit and to centralize our procurement capability, so you’d be able to use our bandwidth capacity mostly optimized way, so that they save our cost side so that we can get our margin up next couple of quarters..

Okay, thank you.

Just one quick confirm, you said it was 4% to 5% decline this year or 45%?.

45% from the beginning of the last year up to this point..

Okay, 45%, okay and you see another 10% to 15% this year for the remaining of this year?.

Yes..

Okay, thank you, thank you..

Thank you. Ladies and gentlemen, as there are no further questions that will conclude today’s conference call. Thank you all very much for your attendance. You may all disconnect..

Thank you..