Good morning and good evening, ladies and gentlemen. Thank you and welcome to 21Vianet Group’s Fourth 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 after management's prepared remarks. 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 any 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 the conference over to Mr. Steve Zhang. Please proceed..

Thank you. Good morning and good evening, everyone. Thank you for joining us for the earnings call today. Looking back on 2016, it has been an eventful year for the company, wonder [ph] with full of many changes and the new opportunities.

From the investment by Tus-Holdings to the introduction of IBM Bluemix Services in China to the joint venture with Warburg Pincus, those events show the resilience and the resolve of the company that has experienced certain challenges. But it’s striving to optimize operations and capitalize our new growth opportunities.

Despite the headwinds we faced in our managed network service business, we’re still able to expand our core IDC, cloud and the VPN businesses. Looking into 2017, I am excited for all the new initiatives we have planned.

And with the dramatic growth in public cloud adoption, will strive capture all the immerging hybrid cloud and the interconnection opportunities. Now moving on, I would like to touch up on the strategic restructuring of our business, mainly the joint venture with Warburg Pincus and the restructuring of our business lines.

Most recently, we signed an investment agreement with Warburg Pincus that expands up on the strategic agreement that was previously announced. The framework of the deal remains mostly unchanged as we finalize the details of the joint corporate.

We are still planning on building a digital real estate platform which aims to add 80,000 to 100,000 cabinets within the next five to seven years. I will also like to reemphasis the numerous benefits of this deal to 21Vianet.

Firstly, this deal provides us with an entry point into the wholesale datacenter market in which we’ll focus on customized data centers for large enterprise customers.

As the datacenter industry is transforming very quickly toward such specialization, this segment of the market expect to grow significantly in the upcoming years and we’ll be well positioned to capture the growth in this area.

Also now that our core retail focused collocation and the cloud services will be supplemented with customized wholesales datacenter services will be able to offer our customers more complete and the expanded selections of service offerings.

Secondly, this deal will allow us to reduce our CapEx as this spending will be shared with Warburg Pincus for future buildups.

With their expertise in the real estate industry’s strong financing channels and the Warb’s international resources combined with 21Vianet’s deep industry experiencing datacenter operations, it is only a matter of time before we begin capturing this new growth opportunities.

Furthermore, significant reductions in CapEx also enable us to focus more our asset light business which will put more emphasis on going forward. Additionally, we have initiated our restructuring of our business lines into two independent segments. One segment will be called IDC and the cloud business, which includes IDC, cloud and the VPN services.

Through this strategic restructuring, we’ll put more focus on our core IDC business and deploy more resources to enhance our hybrid IT service offerings. Our strong partnerships with public cloud providers allow us to provide our customers a more complete package of interconnection and the hybrid cloud services.

At the same time, our strong expertise and technology advantage in cloud and data centers enable us to meet customers’ need for secure and reliable private cloud solutions. As such, we’re well positioned to provide hybrid IT services that encompass all customer needs.

The other segments will be called networks business, which will incorporates out managed network services and Aipu business as well as CDN services going forward.

Our focus here is to optimize our network business by boosting revenue and the reducing expenses will consistently make improvements to this business that will enhance operating efficiency and ultimately have a positive impact on the company’s profitability.

In addition, this restructuring will also give a clear picture of our operations one that makes sense intuitively to shareholders and investors so that we can make more accurate valuations of our different business lines as well as properly benchmark us against industry best practices. Now taking a closer look at our IDC business.

During the fourth quarter of 2016, we added over 300 cabinets in our self-built date centers. And the total cabinets under management increased to 26,380 cabinets.

Our hosting churn rate declined to 0.55% in the fourth quarter of 2016 as compared with 0.95% in the previous quarter, which further demonstrate a strong relationship we have with our IDC customers.

Our strong pipeline of cabinets are for our self-built data centers and their eventual deployment will enhance our monthly recurring revenues and reignite our top line growth while pushing us through margin expansion. Moving on the cloud.

In the fourth quarter of 2016, our cloud business has maintained its growth trajectory which was mainly attributable to the robust results from our partnership with Microsoft and IBM.

During Microsoft’s Marketing Ignite event in December, we launched Power BI, a cloud service which utilizes business data analytics and provides customers with a tool to gain more insight into their business operations.

Going forward, as our partners Microsoft and IBM continue adding additional cloud services, we expand our wide array of cloud solutions and build up on our cloud neutral platform.

Lastly, we still with this pricing pressure and the intense competition in our traditional MNS and the CDN businesses, where we are seeing signs of price stabilization that go well for the rest of 2017 and which we expect to hope is a recovery of our network business.

Going forward, we’ll continue to restructure our overall business by fine tuning our CapEx structure, running aforementioned two business lines independently, improving our operating leverage and providing customers with more value-added services, such as hybrid cloud solutions.

With the evolving Internet landscape in China and the strong demand for Internet traffic, computing the storage, we believe we are able to solidify our position as a leading Internet infrastructure service provider and meet the needs of our customers. With that I would like to turn the call over to Terry, our CFO to go through our financial results.

Terry?.

Thanks Steve. First of all, I am pleased to announce that we met our fourth quarter and full year guidance for both top line and revenues and adjusted EBITDA. Now let me start with our fourth quarter 2016 financial results. Before I begin, I would like to state that we will 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 in 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.

In 2016, our total revenues increased to RMB3.64 billion driven by 14.2% year-over-year increase in revenues from our hosting and related business. Our net revenues for the fourth quarter were RMB901 million as compared with RMB983 million in the comparative period that in 2015. The decrease was primarily due to decrease in M&A revenues.

Net revenues from hosting and the related services increased by 5% to RMB790 million in the fourth quarter of 2016 from RMB755 million in the comparative period in 2015, primarily due to an increase in total number of a billable cabinet, partially offset by a lower utilization rate and MRR, or monthly recurring revenue, per cabinet.

Our monthly recurring revenue per cabinet for the fourth quarter was RMB8,490 compared with RMB8,696 in the third quarter of 2016. The decrease in monthly revenue per cabinet was mainly attributed to the continued bandwidth pricing pressure.

Net revenues from managed network services were RMB111 million in the fourth quarter of 2016 as compared with RMB229 million in the comparative period 2016. The decrease was primarily due to a RMB107 million decrease in Aipu revenues which was driven by intensified competition.

Adjusted gross profit was RMB223 million in the fourth quarter of 2016 compared with RMB264 million in the prior period. Adjusted gross margin was 24.7% in the fourth quarter of 2016 compared with 26.9% in the prior period and 23.2% in the third quarter of 2016.

The year-over-year decrease in gross margin was primarily due to the continued softening if our MNS business. Adjusted operating expenses were RMB310 million compared to RMB267 million in the prior period. As percentage of revenues, adjusted operating expenses were 34% compared with 27% in the prior period and 30% in the third quarter of 2016.

Sales and marketing expenses were RMB92 million in the fourth quarter as compared with RMB102 million in the comparative period in 2015. The decrease was primarily driven by decreased agency fees. General and administrative expenses were RMB187 million in the fourth quarter of 2016 compared with RMB141 million in the comparative period in 2015.

The increase was primarily driven by increase of staff cost. Research and development expenses were RMB38 million in the fourth quarter of 2016 as compared with RMB42 million in the comparative period of 2015. Our adjusted EBITDA for the fourth quarter of 2016 were RMB52 million as compared with RMB102 million in the prior period.

The decrease was primarily due to the increased inclusion of our RMB47 million bad debt provision. Adjusted EBITDA margin for the fourth quarter of 2016 was 5.8% compared with 10.4% in the prior period and 7% in the third quarter of 2016.

Adjusted EBITDA for the fourth quarter of 2016 excludes share based compensation expenses of RMB57 million and the changes in the fair value of contingent purchase consideration payable, which was again of RMB67 million.

Adjusted net loss for the fourth quarter of 2016 was RMB66 million as compared with adjusted net loss of RMB29 million in the prior period. Adjusted net margin in the fourth quarter of 2016 was negative 7.3%, as compared with negative 3% in the period and negative 8.7% in the third quarter of 2016.

Adjusted diluted loss per share for the fourth quarter of 2016 was RMB0.08 which represents equivalence of RMB0.08 per ADS. I’d like to mention that because Aipu has been underperforming recently due to intensified competition, we incurred a one-time asset impairment expense of RMB390 million which was included operating expenses.

This has no impact on our core business and our adjusted EBITDA was not affected by the write down. As of December 31st, 2016, our cash and cash equivalents and the short-term investment were RMB1.58 billion equivalent to US$227 million.

Now, let me provide you with what guidance for the first quarter of 2017, we expect the net revenue to be in a range of RMB820 million to RMB880 million. Adjusted EBITDA is expected to be in the range of RMB65 million to RMB85million.

For the full year of 2017, the company now expects net revenues to be in the range of RMB3.7 billion to RMB3.9 billion. Adjusted EBITDA for the full year of 2017 is expected to be in the range of RMB420 million to RMB460 million. This forecast reflects the company’s current and preliminary view, which may be subject to change.

Finally, I’d like to add, the beginning next quarter, we will be including segment reporting for our revenues in our financial statement and we may make changes to our operating matrix of disclosure.

As Steve mentioned earlier, our business line have being separated into IDC and the cloud business and network business which are operating independently. We’re now considered as two separate businesses with the different budgets. Our financial system will be updated to reflect this change accordingly. This concludes our prepared remarks for today.

Operator, we’re now ready to take questions..

Thank you. [Operator Instructions] And our first question comes from Yong Liu from Morgan Stanley. Please ask your question. Hello, Yong Liu, your line is open for your question. Please ask..

Hi, hello. I have three questions here. The first one is, could you please provide the CapEx guidance and the number of cabinets you know to plan to add in 2017, and what percentage could you shared by the Warburg Pincus JV? And the second question is we noticed that you recognized bad debt provision of RMB45 million in the last quarter 2016.

Could you please share about the future schedule on these items, how much bad debt left or on schedule? The third is, given the new run of tariff reduction managed by the government particularly you mention the broadband access fee for SMEs.

Do you expect another round of significant price cut ahead versus some stabilization you’ve observed recently? That’s all my questions. Thank you..

Thank you, Liu. Let me answer the first two questions. I think Steve might answer the third question. The CapEx we planned for this year 2017 as part some of the - round about as we have a two business line and could get close to RMB600 million.

So the Warburg Pincus and is what we have a four datacenter that Zhang mentioned with and we have the CapEx in there, but what’s in for new project which is not included in this CapEx for this year. I think that pretty much of that our cash and given the cash plan and will well support our financial need for the CapEx for this year.

The second question about debt, about the bad debt and last year given that very volatile that the market given the competition and the pricing pressure that we have experienced quite a heavy and bad debt provision.

But this year we think given that the projection and the market, we see stabilize in pricing pressure and the measures were taken to handle the competition. And we believe the bad debt for this year provision where we are much less than last year.

So that was all pretty much should be related to the account receivables that were related to major customers. Overall the pretty pick out, picking out in last year. But this year, and if you look at the ageing that we cut down to about from early year, early above that close to 90 days now down to the 70 days.

I think this year we’re going to have a very good cash projection for ourselves in related to accounts receivables..

Hello, this is Steve. I want to - before answer your third question, I want to add that for your first question.

For 2017 right now in the process of the construction, we have roughly 3,500 cabinets in the construction process and we haven’t - we are still working with Warburg Pincus on the new build out which are now which doesn’t include this 3,500 cabinets. And for our total CapEx as Terry mentioned is roughly around RMB600 million.

And in the future I think Warburg Pincus will share roughly RMB100 million for those CapEx for the existing projects. And your third questions, talk about the new tariff reduction. I noticed that in primer lease report, it was mostly referring to the mobile roaming charges. And for the broadband, I think the prices are already low enough.

I think the pricing right now in China is probably the lowest pricing gin all Asia region, it’s very competitive that’s why we are already experiencing some challenges in Aipu business..

Okay. Thank you..

[Operator Instructions] And our next question comes from Yong Liu from Morgan Stanley. Please ask your question..

Sorry, just one follow-up question. Is the bad debt provision related with your acquired Aipu or other acquired business or is it related with the core IDC business? Thank you..

Okay, thank you, Liu. The bad debt we’ve written down and not related to Aipu this time and not related the IDC customers, it’s only related to MNS customers. And we do have Aipu impairment assessment valuation that we put into in our early release that’s related to the assets impairment as assessment..

Got it. Thank you..

Thank you..

[Operator Instructions] And then next question comes from Tien Doe from GIC. Please ask your question..

Hi, thank you for the opportunity to ask some questions. You said that you’re seeing some stabilization in the CDN business after pretty aggressive pricing pressure last year. Could you give some more details on that I found that a little surprising, I thought price aggression was still pretty harsh in that business currently.

The second question is just going forward long term, your thoughts on the number of cabinets that you can add on a regular basis going forward we have in previous years you’ve had fairly optimistic cabinet expansion numbers which you’ve never met.

Going forward, what you think would be a reasonable assumption on that on those numbers of cabinets? And I’m sorry if I miss, this RMB392 million impairment of long-lived assets, what was that due to and is there likely to be any figure for that going forward? Thank you..

Yeah. I can answer your first two questions. First for the cabinets, they without right now under our construction, we hope to finish in the first three quarters; we have about 3500 cabinets in the process of being built out. And that doesn’t include anything our joint venture with Warburg Pincus.

And as we are finished the closing of the joint venture with Warburg Pincus, we are very actively starting the organization structure build up and out business plan for this year. And I think for the long term, we want this joint venture to provide roughly 5,000 to 10,000 cabinets a year going forward.

Your second question was asking about the pricing competition. For our network business, we have two business lines. One is managed network service, which basically we provide bandwidth to ISPs, large ISPs like China Mobile; the cable industries in China for the interconnection.

I think we found in this space the pricing are being stabilized because there are limited supplies in this market. Regarding the CDN business, yes the competition is pretty intense last year. The pricing dropped from over 20 per mec [ph] to roughly 16 to 17.

And recently we are seeing there are still a lot of players in this market but we are trying to also increase our network efficiency to continue to face this challenge. Regarding the RMB390 million impairment, I think Terry will take on that question..

Yeah. RMB390 million impairment is the written down based on our fair value assessment given. Now typically we have, once a year valuation related to our all the assets and that in operation functioning, in terms of the functionality or the performance of the business.

So Aipu last year was you can see that given the competition that arise and the pricing dropped dramatically that China Mobile and other players come into the play and we did facing a tremendous pressure. So our pricing lower and relatively our each coverage getting squeeze.

So given up contacts that we think about the performance as we expected, so we did non-assets of fairly value evaluation, so given that valuation we’d be able to write down RMB390 million on top of our invested assets.

I think that’s fair and that’s give us the warning that for us to keep the assets maintained, the value it is then we have to do improve our business in that area, so that we - and we already have a solid plan for our product this year. I think that’s - we will - this year we will think that we will get some something improved..

Okay.

Just one extra question, with that level of cabinet expansion, what would you hope to keep your utilization rates at?.

Our current utilization rate is roughly 75% for soft built data centers. And I think going forward we want to continue to maintain a utilization rate above 70%..

All right. Okay. Thank you..

[Operator Instructions] And our question comes from Mr. Matthew Heinz from Stifel. Please ask your question, Matthew..

Hi. Thanks for taking the question.

A competitive years in CDN business recently reportedly sold its data center business, I’m just wondering if you were an interested buyer any of those assets, kind of how you view the portfolio and whether you expect any change in the levels of the competition in the IDC landscape under the new ownership with that business?.

You are talking about China cash data center sale?.

That’s correct..

Oh, yeah. Well that data center has been up and running for the last two years. I think it’s just a new ownership change. And I don’t know the new share, new buyers and - but I think it won’t change that much because that data center’s capacity won’t put a much impact on this whole market..

Okay.

And just the first part, was there any interest on behalf of 21Vianet in buying any of those maybe assets that were up for sale?.

Well, we - there are a lot of other supplies as well and definitely we are evaluating some interesting new data centers that are there.

And we want to match that those datacenter with our potential customer needs, because we have a lot of customers and we can get a sense where our customers’ future demands are, so that we will either build out or acquire some of the best location, some best to properties to meet our customers’ demand going forward..

Okay. Thanks taking the questions..

Thank you..

[Operator Instructions] There are no more further questions at this time. I would like to hand the call back to the speakers for any closing remarks. Please go ahead..

Thank you all for joining us today. And I thank you for your interest in 21Vianet. We continue to have more dialogs with other investor community. Thank you..

Ladies and gentlemen, that does conclude our conference today. Thank you for all participating. You may disconnect. Thank you..