Good morning and good evening, ladies and gentleman. Thank you and welcome to 21Vianet Group's Fourth Quarter and Full Year 2017 Earnings Conference Call. At this time all participants are in 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 selected events, or circumstances after the date of this conference call. With us today are Mr.

Steve Zhang, Co-Chief Executive Officer, Mr. Alvin Wang, Co-Chief Executive Officer and President, and Ms. Sharon Liu, Chief Financial Officer. At this time, I would now like to turn this conference call over to Mr. Steve Zhang, Co-CEO of 21Vianet. Please proceed, sir..

Thank you, Operator. Good morning and good evening everyone. Thank you for joining us for the earnings call today. I want to first start by welcoming Alvin to 21Vianet. He has vast experience in the telecom industry, and his expertise will prove invaluable to 21Vianet.

Alvin, would you like to say a couple of words?.

Thank you, Steve. Hello everyone. This is Alvin Wang Shiqi. I am honored and excited to join the 21Vianet management team and talk to you all today.

Having spent over 20 years in the telecom industry and having worked closely with VNET's board for more than a year and a half, I’m looking forward to putting my experience, expertise, and contacts to work inside the Company. At this moment, I’d like to turn the call back over to Steve, to remark on our 4Q and 2017 full year results..

Thank you, Alvin. 2017 was an exciting year for the Company, one that was full of change, but also new opportunities. We were able to restructure the Company by optimizing and then ultimately divesting our loss-making MNS business. We were also able to raise $300 million through a bond offering to support our growing hosting business.

We faced numerous challenges along the way, but were able to maintain our focus on our long-term goals, and come into 2018 revitalized and stronger. Looking forward, I am excited for all the new opportunities in our business.

As public cloud adoption becomes more widespread, our customers are employing more complex IT architectures, utilizing hybrid IT and hybrid cloud infrastructures, which presents us with fantastic growth opportunities. Moving on to our business, we are pleased to report another quarter of solid growth in both our topline and profitability.

For the fourth quarter, revenue for our core hosting and related services business increased by 9%, and adjusted EBIDTA increased by 229%.

For our core business, we increased the number of our self-built cabinets by 2,550 this past quarter, while at the same time decreasing our lower margin partnered cabinets by 894 cabinets, bringing the total cabinets under management to 29,080. Of the 894 reduced partnered cabinets, 570 were removed due to the MNS spinoff.

In anticipation of future market demand and limited prime real estate resources in Tier 1 cities in China, we entered into an agreement with TUS for a land parcel in SongJiang, Shanghai, where two buildings are being planned for data center use.

Upon completion in the middle of 2019, the two buildings are expected to have a capacity of around 3,000 cabinets for our clients in Shanghai. During the fourth quarter of 2017, we expanded our client base, including new relationships with Meitu, Douyu, Tujia, 99Bill and Bohai Life Insurance.

At the same time, we have seen increased demand for cabinet space from our existing clients as well, including Xiaomi, Momo, Huawei, and Lian Jia. On the cloud side, we witnessed the continued migration of China's Internet companies and enterprises from public cloud to hybrid cloud and their rising demand for customized cloud solutions.

To capture this growing demand, we broadened and customized our service offerings to cater to our customers’ specific requirements. For example, we recently entered into a partnership with a global shipbuilding company. The company will build luxury cruise ships for the China market and will require a complex hybrid IT infrastructure for the ships.

21Vianet will provide a mixture of Microsoft cloud services, IDC services, and technical support to the company. The initial term will be for multiple years, with revenue contribution of roughly 24 million.

Together with our unique competitive edge of being carrier- and cloud-neutral, we are well-positioned to capitalize on these opportunities and consolidate our leading position in this blooming Chinese market. We were also able to establish new and exciting partnerships while expanding on old ones during the past year.

For example, we strengthened our cooperation with both AliCloud and Tencent. Cloud by building out direct fiber lines between certain 21Vianet data centers and those of Alibaba and Tencent. This will enable us to offer public cloud connectivity to our customers, as well as assist them in building out their hybrid cloud infrastructure.

Overall, we are pleased with the results of our business restructuring and strategy shifts during the past year. Looking ahead into 2018, we will continue to fully focus on our core business and with our lean, asset-light approach we are confident that we will accelerate our growth and meet the evolving demands of our customers.

As you all are aware, in January this year we promoted Ms. Sharon Liu to the position of Chief Financial Officer. Sharon has been with us for over seven years serving as Vice President of Finance prior to her promotion.

We believe that Sharon’s experience and expertise in Corporate Finance Management, M&A, and Investor Relations will help our team manage our aggressive goals for growth in the years ahead. With that, I would like to turn the call over to Sharon, our CFO, to go through our financial results..

Thank you, Steve, and hello everyone, I’m pleased to talk to you as the CFO of 21Vianet. Before I begin, I’d 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 may be found in the reconciliation tables included in our press release. Please note that all the financial numbers we are presenting today are in RMB and percentage changes are year-over-year, unless otherwise noted.

As Steve mentioned earlier, we completed the divestiture of our MNS business in the third quarter of 2017, which has allowed us to shed an extensive financial burden, improve our cost structure, and focus all our resources on our core business.

As we move toward a leaner business structure, we expect financial and operating metrics to show continued improvement. Now, let me walk you through our fourth quarter 2017 financial highlights. After the MNS Spinoff, our income statement only represents the hosting and related services business.

Net revenues were 766 million, compared to 703 million in the prior year period, excluding the MNS business. The increase was mainly due to the increase in total billable cabinets attributable to growing customer demands on IDC and hybrid IT services.

Hosting MRR per cabinet for the fourth quarter was 7,766, compared to 7,878 in the prior year period and 7,817 in the third quarter. Our adjusted gross profit was 211 million, compared to 222 million in the prior year period, which includes the MNS business. Adjusted gross margin increased to 27.6%, compared to 24.7% in the prior year period.

The margin expansion was primarily due to the company’s execution of cost control strategies. Adjusted operating expenses were 173 million, compared to 310 million in the prior year period. As a percentage of net revenues, adjusted operating expenses were 22.6%, compared to 34.4% in the prior year period.

Sales and marketing expenses improved to 43 million, compared to 92 million in the prior year period. The improvement was mainly due to the MNS spinoff. General and administrative expenses improved to 115 million, compared to 187 million in the prior year period. The improvement was mainly due to the MNS spinoff and a reduction in headcount.

Research and development expenses improved to 29 million compared to 38 million in the prior year period. The improvement was mainly due to the MNS spinoff. In December last year, we also announced the complete divesture of all remaining equity interest in Aipu, and the elimination of the Aipu put option.

This resulted in a non-cash gain of 677 million. However, it is removed from our Adjusted EBITDA. Adjusted EBITDA increased to 171 million, compared to 52 million in the prior year period. Adjusted EBITDA margin increased to 22.3% compared to 5.8% in the prior year period.

Adjusted EBITDA for hosting and related services business was 171 million, compared to 130 million in the prior year period, excluding the MNS business. The increase was primarily due to revenue growth as well as improving cost controls and operating efficiency.

Adjusted net gain improved to 52 million, compared to a loss of 71 million in the prior year period. Adjusted net margin was 6.7%, compared to negative 7.8% in the prior year period. Adjusted diluted gain per share was $0.08, which represents the equivalent of $0.48 cents per ADS. Turning to our cash flow and balance sheet.

We generated 106 million of positive cash flow from operating activities during the fourth quarter. Our cash and cash equivalents and short-term investment were 2.5 billion as of December 31, 2017. Now, let me provide you with our guidance. Our guidance for 2018 will only reflect hosting and related services.

For the first quarter of 2018, we expect net revenues to be in the range of 770 million to 790 million. Adjusted EBITDA is expected to be in the range of 178 million to 190 million. For the full year 2018, we expect net revenues to be in the range of 3.25 billion to 3.35 billion.

Adjusted EBITDA is expected to be in the range of 750 million to 830 million. Now I’d like to hand the call back over to Alvin for closing remarks..

IDC and related services, cloud computing operations and VPN services. In regards to IDC and related services, we view the market as having retail and whole-sale segments. In order to defend our leading position and gain market share in the retail segment, we will continue to increase our supply capacity in Tier 1 and select Tier 2 cities.

We will continuously optimize our operational efficiency. Our increasing Hybrid IT / Cloud capability also gives us competitive advantages and creates greater value for our customers, as well as increasing stickiness.

And for the wholesale market, by leveraging our major stakeholders and strategic partners, we are building up our capabilities and customer base in this segment. We already have numerous whole-sale projects in our pipeline, most of which will come online in 2019.

Also for this year, we’re going to implement Performance-based Stock Units for senior executives and key employees, which will focus on KPIs such as revenue, EBITDA, and share price.

With our re-aligned strategy in place, strong support from major stakeholders, and a fully motivated team, we’re confident and ready to embrace the growth opportunities going forward. This concludes our prepared remarks for today. Operator, we are now ready to take questions..

[Operator Instructions] Our first question comes from Yang Liu from Morgan Stanley. Please go ahead..

Good morning management team thanks for the opportunity to ask questions. I have four questions here, the first I see the company accelerated in the new data center deployment in the fourth quarter last year. But the utilization was held up well at above 75% level.

I would like to ask did you see some improvement at the demand side and a faster ramp up of the utilization. The second question could management team provide more details on 2018 cabinets addition details like a location and a scale, as well as CapEx plan for the new additions.

The third question is I think the 2018 EBITDA guidance implies good sequential improvement of margin and what is the key driver for around two percentage point of uplift, is it due to mix shift to self-built or is it due the better utilization.

The last question is related with restricted cash and prepaid expense I see some changes in fourth quarter balance sheet compared to third quarter. Could please elaborate more on that? Thank you..

I’ll take a shot at the first question. Yes, in the first quarter towards the end of the first quarter we are finished delivering two data center one in Guangzhou, and one in Beijing with capacity roughly 2500 cabinets. And when we calculate our utilization rate, we use our time weighted average to calculate our capacity.

So looking at the utilization rate, the newly added cabinets was now fully reflected when we calculate the utilization rate. And we are basically - expect our utilization rate in the first quarter will drop a little bit because those newly deployed cabinets will be reflected in our first quarter 2018.

And Shiqi you want to talk about the cabinet capacity - the CapEx..

In the coming year that's our overall plan that we will increase our capacity of self plywood cabinets to around 3000 to 4000. The details of these cabinets addition will be fully confirmed during the year because we will see according to the customer demand and also according to the progress of the buildup.

So currently, we don’t have the detail information regarding the locations and the capacity in the east side but overall that we have very strong confidence that we will add the new capacity in Tier 1 and Tier 2 cities in the coming year..

Our CapEx for 2018 will be roughly in the range of 400 million to 500 million. For your third question what's the margin expansion - what’s driving the margin expansion for 2018, number one as you said we are moving towards a more self-built data center in our product mix which have a higher margin.

The second driver will continue to bump up our utilization rate in both our self built data centers, as well as partner data centers to drive the operational efficiency.

Sharon will answer your question about - can you repeat your fourth question about restricted cash?.

As we compared with end of the third quarter last year, I see a drop in both restricted cash and prepaid expense in balance sheet current asset.

So could please elaborate more upon the change here?.

Okay Yang I will answer this question. The prepaid expenses and other current assets in Q3 included the US$100 million bond we signed contract that we will receive the money on October.

So at the end of Q3 the balance was recorded in prepaid expenses and after we get all the US$300 million as company planned, we'll use this receipt from the bond offering to repay 1.6 billion bridge loan in December and this in return freed the same amount restricted cash we had on our balance sheet that’s why our restricted cash jump a lot during Q4..

Sorry for one more question related with management incentive plan. Could you please elaborate more about the potential timing and the structure of the KPI target et cetera.

Thanks, that's my last question?.

Our Board approved the plan restricted stock plan. In turn we call PSU performance stock unit. It will be granted in the next quarter or next two quarters but the performance target associated with this group of performance stock units are mostly EBITDA target, revenue target, as well as future stock price target..

[Operator Instructions] It looks like we have two questions come through before go to closing remarks. Our next question will come from Isaac Lai from China Life. Please go ahead..

Hello management. Congratulations on the result I have a few questions. And the first one is regarding the dividend policy because as the company is on a growth phase or in the past it was also making lots loss [indiscernible]. But going forward is there any change in the dividend policy this is the first question.

And the second one is regarding the higher cash level the company is having. I noted that the company's competitor is like the GDS is adding the flow and quite aggressively. So and the company now is having a very high cash level which is much higher than the CapEx plan in the next one or two years so will there any plan for acquisition.

And the third question is regarding the increase in the short-term and long-term investments on the balance sheet. Can you elaborate a little bit more on these short-term and long-term investments, what are these companies for financial products? So these are the three questions mainly? Thank you..

So your first question is dividend policy, I didn’t hear you quite clearly?.

Yes regarding the future dividend policy?.

Currently our Board doesn’t have any plan to issue any dividend. Going forward at least in the next two years we don’t have any plan for issue any dividend. Your second question is about our CapEx and our cash on our balance sheet.

We still have a pretty aggressive plan to expand our data center capacity because the market is growing quite fast and we are working with our partners like [Huaping] and other partners negotiating and finalizing several projects and we are also the company our self is looking to have a - like I have mentioned roughly 400 million to 500 million CapEx plan this year going forward to build our data center capacity.

What's your third question I didn’t understand..

I’ll answer your third question about short-term and long-term investment. On short-term investment you represented the bank deposit over three months but within one year so the increase was mainly due to our cash management policy and the long-term investment increased was due to our joint venture of Warburg Pincus..

For the second question I know that because the cash level right now is like 2 billion and then the CapEx plan next year is around 400 to 500 million. So is still quite huge cash on balance sheet.

So as you measure the partnerships, so after that partnership will this lead to a maybe more significant change in that cash balance?.

Hello this is Alvin, may I answer your question.

Actually our current CapEx plan doesn’t reflect - only reflects our self built cabinets CapEx in the coming year and actually we have a few wholesale projects ongoing but there is a big uncertainty in terms of timing and in terms of locations and also which means that in the coming years that with our existing cash we will strengthen our wholesale capability which means that the CapEx from wholesale perspective will require very highly investments but we cannot confirm the timing that’s why we didn’t include into current CapEx guidance.

And also for sure we open to any M&A opportunities if we - our assessments reflects if we - after assessments we think that it will be a good deal and it will increase our compatible advantage especially in the Tier 1 and Tier 2 cities. Thank you..

Our next question comes from [Rex Fing from SPQ Asia Capital]. Please go ahead..

I have two questions, first is there are EBITDA target related to your option scheme I mean the management incentive scheme. Second question regarding the M&A and also the wholesale business you were talking about. Can you share with us more about the strategy and the plan there? Thanks..

Yes, as I mentioned our performance stock unit a big weight is put on the EBITDA target we will achieve in the next two to three years. Your second question is about our wholesale and M&A. As Alvin just said, we are working on several projects for the wholesale products.

I think on one end we are discussing with several large customers for the sales pipeline because we will like to secure a letter of intent for those projects.

On the other side, we are ourselves as well as our joint venture as far being are negotiating and finalizing the negotiations with several properties to be converted into our wholesale data centers..

Just a couple of question regarding the EBITDA target.

Is that in line with your quarterly preview, for example is that EBITDA targeting level in your first quarter 2018 EBITDA target or guidance?.

The EBITDA target in our performance stock unit will be multiyear target so it will be higher than our current guidance..

[Operator Instructions] There are no further questions. I will hand back to management for their closing remarks..

Once again thank you all for joining us today. Please don't hesitate to contact us if you have any further questions. We look forward to talking with you in the coming quarters. Thank you..

Thank you..

Thank you. Ladies and gentlemen that does conclude our conference for today. Thank you so much for your attendance. You may all disconnect..