Good morning and good evening, ladies and gentleman. Thank you and welcome to 21Vianet Group's First Quarter 2018 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. With us today are Mr.

Alvin Wang, Chief Executive Officer and President; Ms. Sharon Liu, Chief Financial Officer; and Ms. Rene Jiang, Investor Relations Director of the company. I will now turn the call to Mr. Rene Jiang, IRD of 21Vianet to read the safe harbor statement..

Hello everyone. Welcome to our first quarter 2018 earnings call. This call may concern 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.

I will now turn the call over to Mr. Alvin Wang, CEO and President of 21Vianet..

Thank you, Rene. Good morning, good evening everyone. Thank you for joining us for the earnings call today. We started 20018 with outstanding financial and operating performance in the first quarter. Our net revenue for our hosting and related services carried through as a strong momentum this quarter and achieved a 13.3% year-over-year growth.

More importantly, since we completed the divestiture of our MNS business in 2017, our profitability has been improving steadily. During the quarter, we generated an operating income of RMB56.4 million. Our adjusted EBITDA also increased by 95.5% year-over-year to RMB196 million.

This is our testament to how effective we are in executing our growth plans and in improving our operational efficiency. During this quarter, we continued to experience growing demands for more cabinet spaces from our existing customers, including Xiaomi, Momo, China Bank [ph] payments, and [indiscernible].

More importantly utilizing our industrial leading services quality and our competitive advantages in carrier-neutral we have won new customers this quarter including [indiscernible].

As we previously announced in the fourth quarter of 2017, we have entered into an agreement with TUS [ph] for a land parcel in SongJiang, Shanghai, to construct two buildings for data center use. The construction is currently on track.

This will significantly increase our hosting capacity and will also allow us to register our ever-expanding customer base and our growing demand, especially in Tier 1 cities. In addition, the expansion of our data center network will lay a solid foundation for us to pursue future opportunities in wholesale business.

On the Cloud side, we continue to provide world class public Cloud service to Chinese customers. In March 2018, we extended our long-term partnership agreement with Microsoft for Asia and Office 365 Cloud service in China.

With our track record of providing Cloud service in the past for four years, we have established ourselves at industrial leading uniquely qualified and highly reliable public cloud service provider. Furthermore, working with Microsoft, we also launched a new partnership with Adobe in April 2018.

Collaborating with both Microsoft and Adobe they will deliver their world class cloud solutions with globalized and customized usage thesis to our Chinese customers going forward.

As we stand and strengthen out our partnerships with world’s most renowned technology leaders, we will continue to invest more resources into expanding our data center capacity, optimizing our data operations and providing high quality cloud service to our customers in China.

To further strengthen our company to the government the board has appointed Dr. Dr. Li Yao as an independent director and a member of the company’s Compensation Committee. Dr. Li Yao will act as Chairman of the company’s Strategic Advisory Board. Dr.

Li has over 23 years’ experience in finance and investment industry, and currently serves as Chief Investment Officer of Asia for the International Finance Corporation, IFC, of the World Bank Group. Prior to that, he served as Chief Executive Officer of China-ASEAN Capital Advisory Company.

His rich experience and connections in global finance and internet infrastructure industry will further strengthen our capabilities to address high gross wholesales segments of datacenter markets. Overall, we are pleased with the progress that we made in the first quarter.

Moreover, we are likely to see that the acceleration in revenue growth and the profitability improvements as a result of our restructuring in 2017.

As we continue to expand our data center network, establish new global partnership, and improve our operational efficiency we are confident that we will further strengthen our position as industry leading carrier and cloud-neutral service provider in China.

Now, I like to turn the call to Sharon Liu, CFO of our company to give you more details of our financial details..

Thank you, Alvin, and hello everyone. Before I begin, I would like to state that we present non-GAAP matters today. Our non-GAAP results excludes certain non-cash expenses, which are now 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 renminbi at that percent changes our year-over-year unless otherwise stated. In addition, as we divested our loss-making [ph] MMS business by the end of the third quarter 2017 all of our revenues and expenses are now entirely generated by our core hosting and related services.

For the purpose of providing an apples-to-apples comparison, the following remarks we will have excluded revenues and expenses related to the MMS business from our first quarter of 2017 results. We believe this would offer better clarity and insight into the strong performance of our core business.

As Alvin mentioned in his remarks, report is now improving our operational efficiency, while maintaining our strong growing momentum in the first quarter of 2018. Net revenues from this quarter were 800.8 million, an increase of 13.3%, compared to 706.7 million in the prior-year period.

The increase was mainly due to the increased demand for more cabinet capacity and hybrid IT services from the company's new and existing customers. Hosting MRR per cabinet for the first quarter was 7,905 compared to 7,598 in the same period of last year and 7,766 in the first quarter of 2017.

Our adjusted gross profit, which excludes depreciation, amortization and share-based compensation expenses increased by 18.1% to 347.5 million from 294.3 million in the prior year period. [indiscernible] The expansion in adjusted cash gross margin was mainly due to the company's [indiscernible] for exclusion of its efficiency improvements.

Adjusted operating expenses were 167.2 million, an increase of 5% [ph] from 154.1 million in the prior year period. As a percentage of the net revenue, adjusted operating expenses were reduced to 20.9% from control measures that we implemented.

As a result of our improved operational efficiencies, our adjusted EBITDA increased by 28.3% to 196 million from 152.7 million in the prior year period. Adjusted EBITDA margin increased to 24.5%, compared to 21.6% in the prior year period. Our net profit has increased to 34.7 million, compared to a net loss of 160.8 million in the same period of 2017.

Diluted profit per share was $0.05 in the first quarter of 2018, which represents the equivalent of $0.30 per ADS. Each ADS represents six ordinary shares. Turning to our cash flow and balance sheet, we generated 95.9 million of a positive cash flow from operating activities during the first quarter.

In addition, our cash and cash equivalents and certain investments were 2.38 billion at the end of March 2018. We are confident that our healthy cash provision will support our accelerated organic growth and enable us to take new initiatives and seek market opportunities as they appear. Now, let me provide you with our guidance.

For the second quarter of 2018, we expected net revenues to be in the range of 810 million to 813 million, adjusted EBITDA is expected to be in the range of 200 million to 220 million. Finally, we reiterate our full-year guidance.

We are confident that we will be able to further improve our topline performance and operational efficiency to meet the growing market demand in the quarters ahead. This concludes our prepared remarks for today. Operator, we are now ready to take questions..

Thank you, Sharon. [Operator Instructions] Your first question comes from the line of Yang Liu from Morgan Stanley. Please ask your question..

Thanks for the opportunity to ask questions. I have three questions here.

The first one, I think 21Vianet appears have some new retail datacenters supply in the past six months, could management talk about the demand for the new capacity so far and the pricing trend? The second question is, what is the utilization for self-built datacenters and partner datacenters? We understand that self-built datacenter needs some time to ramp up utilization, but how about the situation for the partner cabinets.

The third question is among the expense items, we see R&D has some Q-on-Q decline compared with stable as SG&A. What is the outlook for your R&D expense going forward? Thank you..

Thank you, Yang. I will answer your questions related to our price, which is hosting MRR. Right, our hosting MRR increased by 139, compared with the last quarter, however we believe that our MRR is quite stable, as it is a blended [ph] rate, which includes different products and customer mix.

As we have different products such as the colocation high-density cabinets, as well as other IT services which will command different MRRs. In the first foreseeable future, we estimate MRR trend will remain stable. It will be in the range of 7,700 to 7,900 with the little fluctuations.

And for your question two is related to related to the utilization rate. In this quarter, our utilization rate is 70% and the primary datacenters utilization rate will be higher around 80%, while the self-built data center utilization rate is below 70% as we delivered two data centers by the end of last year.

And for the R&D declines, it is kind of related to the spin-off with MRR service where restructure and [indiscernible] accounts for certain engineers. But as a percentage of revenue, our R&D expenses will be stable in the future..

Okay, thank you..

Thank you..

[Operator Instructions] Your next question comes from the line of [indiscernible] from QS Optimal Selection. Please ask the question..

Hi good morning management, congratulations on the results. I have two questions.

One is related to your previously announced management incentive plan, are we still on track on that, can you shed some light on the progress? Secondly, I would like to ask about your wholesale data center incentives, given that you have some cash on your balance sheet, I’m just wondering if you could make maybe shift wholesale data center related CapEx trends with us? Thank you..

Hello, this is Alvin here. Thank you for your questions Hans [ph]. Let me address your question regarding incentive plan.

As we previously communicated, the company has approved so-called performance-based stock units plan to cover the management team and the key talents in the company, and currently this plan is on-track already, so we already identified the key personnel's in the past first batch for this plan.

And we have seen the culture where we will communicate to within each individual and finalize the order process regarding that process. Regarding your second question, for wholesale. For sure that wholesale in data center business is growing quite faster and even higher – the growth rate is higher than retail.

And since 21Vianet has limited resources in the past two years to three years. So, it takes time to have other projects ready for our retail customers, for our wholesale customers. So, we are still in the process regarding the project preparation, and also, we have commercial negotiation with one of our leading customers here in China.

So, we – in the foreseeable future we expect we will have some projects landed, but it is, the timeline that we cannot give the detail information.

And regarding CapEx, since wholesale projects are very big for each individual project, so it will – we will have project by project as planned – and CapEx plan; so, at this moment I can't give you a detailed plan regarding our CapEx for wholesale projects. Thank you..

Thank you..

[Operator Instructions] There are no further questions at this time. I would now like to hand the conference back to management. Please continue..

Thank you all once again for joining the call today. If you have any further questions, please contact our investor relations at ir.21vianet.com. Thank you..

Ladies and gentlemen, we have reached the end of our conference call. Thank you all for joining us today. You may now disconnect..