Good morning, and good evening, ladies and gentlemen. Thank you and welcome to 21Vianet Group's Third Quarter 2020 Earnings Conference Call. With us today are Mr. Alvin Wang, Chief Executive Officer and President; Mr. Samuel Shen, Executive Chairman of the Retail IDC Business Group; Ms. Sharon Liu, Chief Financial Officer; and Ms.

Rene Jiang, Investor Relations Director of the company. I'll now turn the call over to your first speaker today, Ms. Rene Jiang, IR Director of 21Vianet. Please go ahead, ma'am..

Thank you, operator. Hello, everyone. Welcome to our third quarter 2020 earnings call. Before we start, please note that 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 entity 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 and good evening everyone. Thank you for joining us on our earnings call today. We are pleased to announce that we achieved strong results once again in the third quarter of 2020.

During the quarter, we grew our revenues to RMB1.25 billion, which was in line with our previous guidance and increased our adjusted EBITDA to RMB368.5 million, exceeding our previous guidance. Additionally, our EBITDA margin also expanded to 29.6% in the third quarter as compared to 27.8% in the same period of 2019.

In terms of cabinet delivery, we delivered more than 7,000 cabinets in the third quarter of 2020. As a result of our steady organic growth and on-track delivery schedule, we have delivered more than 15,000 cabinets in total since the beginning of the year. Beyond our delivery success, we also continued to make headway in our expansion efforts.

During the quarter, for example, we secured two separate resources, both of which are located in the surrounding area of Beijing to the immediate east of the city. Importantly, when completed the combined total IT power of both resources will be around 50 megawatts, helping us to better serve the growing demand for our IDC solutions in the region.

Looking ahead, we expect the first stage of both projects to be completed during the first half of 2021. Moreover, in Jiangsu, we have secured an additional 140 megawatts of IT power to be used in the expansion of our Jiangsu campus.

In fact, this additional megawatt capacity is around three times the current megawatt capacity of our existing Jiangsu Campus, which were built for a leading public cloud company..

Hi, everyone. This is Samuel. Thank you, Alvin. As always, it is a great pleasure to meet and speak with all of you virtually. I'm quite pleased to announce that since joining the company in May, I continue to be inspired on a daily basis by both the effectiveness of our team and the abundance of opportunities in our industry.

To reiterate Alvin's point, we do believe that this new rotating leadership program is quite innovative, and that will help us to better capitalize on increasing opportunities within China's IDC industry.

On a personal note, I look forward to utilizing my own technical background and management experience to further advance our technology, integrate our business groups and maintain consistent dialogue with the investment community going forward. Now let's turn to our market outlook.

Looking ahead, the broader market trends for the IDC industry in China remained very favorable. In fact, the total market for IT outsourcing services in China is expected to reach RMB350 billion by 2024 according to Frost & Sullivan.

Meanwhile, enterprises are seeking flexibility in scaling their demand to control IT-related costs, making the use of third-party data center service providers increasingly attractive.

As measured by total revenues, the total market size of the retail data center services market is expected to grow at a CAGR of 11.9% from 2019 to 2024, reaching RMB32 billion by 2024.

While the total market size of the wholesale data center services market is expected to grow at a CAGR of 21.3% over the same duration, reaching RMB34.1 billion by 2024, again, according to Frost & Sullivan.

As China's IDC industry continue to grow, we will remain committed to the implementation of our dual-core growth strategy, which has delivered strong results since its inception in 2019.

As a reminder, this dual-core strategy is focused on providing high-quality, carrier-neutral and flexible IDC solutions to both retail and wholesale customers throughout China. On the wholesale front, we have found that our hyperscale IDC services continue to be highly attractive to large-scale enterprises.

Meanwhile, on the retail front, we are also observing increasing demand for scalable and modular IDC solutions. In light of the favorable industry growth trends and our own competitive advantages in China's IDC industry, we expect our dual-core growth engine strategy to continue gaining momentum going forward..

Thank you, Samuel and Alvin. Hello, everyone. Before we start our detailed financial discussion, please note that we will present non-GAAP measures today. Our non-GAAP results exclude certain non-cash expenses, which are not part of our core operations. The details of these expenses maybe found in the reconciliation tables included in our press release.

Please note that, unless otherwise stated, all of the financial numbers representing today are for the third quarter of 2020 and are in RMB terms and that percentage changes are on a year-over-year basis.

Although, there was still some degree of uncertainty throughout the macro environment, we delivered strong financial results in the third quarter, maintaining our cabinet delivery schedule, bolstering our operating efficiency and augmenting our utilization rates in turn.

As a result, during the third quarter, our revenues were within our guidance range, while our adjusted EBITDA exceeded the higher end of our guidance range. Revenue in the third quarter increased by 27% to RMB 1.25 billion from RMB 981 million in the same period of 2019.

Such growth was mainly driven by the industry healthy growth, trajectory rate and our ongoing capacity expansion, which enabled us to address the uptick in demand for scalable retail cabinet solutions and carrier-neutral wholesale IDC solutions during the quarter. Retail IDC MRR per cabinet in the third quarter increased to RMB 9,074.

We added around 7,400 new cabinets during the third quarter. As of September 30th, 2020, we operated and managed 51,476 cabinets. Despite, our capacity expansion, compound utilization rate in the third quarter increased to 64.2% from 61.4% in the second quarter of 2020. .

Ladies and gentlemen, we will now begin the question-and-answer session. Currently, our first question comes from the line of Yang Liu from Morgan Stanley. Please ask your question. .

First, I would like to congratulate management for the very strong earnings and the bullish three-year plan. The first question I have is the three-year plan, 25,000 cabinets or 180-megawatt addition per year. I find that these two numbers actually -- I would like to ask you, how should we think about the relation between these two numbers.

If we divide it by -- divided 180 by 25 directly, that means all the new cabinets will be high power density. Is that the case? Or if we then use the 25,000 cabinet number, that means -- and use standard power density, that means the megawatt number will be less than 180.

So could you elaborate more about how to think about the 25,000 versus 180 megawatt? The second question is the split of the new capacity between wholesale and the retail. Previously, I think the management mentioned 40-60 or 50-50 split in terms of the wholesale-retail. And now we are still emphasizing the dual-core growth strategy.

So I would like to ask what should be the right way to think about the split in term of the capacity. And the third question, could you please update us in terms of the new customer on the wholesale front. You mentioned a new cloud customer.

Could you please elaborate more about the future potential from that customer or independent cloud customer in terms of future demand? Thank you..

Hello, this is Alvin. Thank you, Liu Yang, for your questions. Obviously, that you pay a lot of attention and make very good study on our reports and figures. So regarding the 25,000 cabinets and 180-megawatt capacity, let me put it this way.

That going forward in the coming year that we have very strong demand from wholesale customers and scale retail customers, which means that we plan 80% of our capacity will be high-power density, which means that's basically 8-kilowatt per cabinet for 80%, around.

And for the other projects, we expect -- still expect strong demand from high-value retail customers, which means that we will allocate around 20% of our total capacity into that segment. So in that case, that's combined with 80% for 25,000 high-power density and then 20% of our standard, so-called retail cabinets.

We will round up with 180 megawatts for wholesale and retail customers in the coming year. And I think that this is basically that addressed your first two questions. And also for new customers in the retail segment -- in the wholesale segment.

Currently, we have very strong engagements with all the leading customers, both public clouds and also some other leading Internet players as well. And we expect that in the coming quarters, we can secure new customers. And not only the leading Internet players, but also the new top public cloud players as well. Thank you..

Thank you..

Our next question comes from the line Elisa Feng from Jefferies Hong Kong. Please ask your question..

Hi. It's Edison from Jefferies. So I have two questions. Number one is, on the 8,000 cabinets that you are securing from, I think, in the east of Beijing, it seems to be an acquisition of a brownfield project.

Could you please comment on how much you paid for the brownfield project? And what the location of that -- exact location of that capacity is going to be. Number two is, in your 25,000 cabinets per year additional new guidance. I assume that is based on 100% organic growth. If not, yes, please correct me if I'm wrong.

And in addition to organic growth, what sort of acquisition opportunities you are seeing in the market? And can you talk about any prospect of acquisitions in 2021? Thank you..

Thank you, Edison, and this is Alvin, again. Thanks for all of your questions. Regarding our new resources in certain areas of Beijing East, we acquired a least projects with a very reasonable price because this is just, as we call is strong fuel projects. And these two projects are located quite close to Beijing.

Actually, it's the way expect -- some reliance will be available in the next year from Beijing's downtown to these two sites, so which means that we expect it will be very attractive to our leading customers. And all these two projects, we have full approval and also power supply capacity ready.

So we have very strong customer demand engagements already ongoing. And for your question -- second question regarding the gross 25,000 cabinets. Next year, the majority will be our organic growth.

And actually, we are very cautiously optimistic for more acquisition opportunities in the next years, and if we may make any big acquisition, which it will add up beyond this 25,000 cabinets in the next year, if we make a very big acquisition. So that's my question -- my answer. Thank you..

Hi, Alvin, if you don't mind, I want to follow-up with a question about acquisition opportunities in the market.

So, can you share with us your thoughts on where these opportunities are coming from and where the valuation is actually going up? And how would you -- what is your hurdle rate when you evaluate these acquisition opportunities in the market?.

Yes. Actually, talking about the merger and acquisition opportunities, as I said, we are cautiously optimistic since this market is kind of quite -- I would say, that's quite hot. There's a lot of new players, new investors and many of them have very high expectations at this moment. But still that from our side, we have very strong confidence.

We have a very unique competitive advantage from both capital, technical and also cost perspective brand customer acquisition. All these advantages give us a very strong foundation to be the -- to build our very strong position in case of market consolidation.

So, going forward, we have -- from the global market, even -- and also from China markets, we have a very -- firm belief that there will be consolidation going forward. In that case, we will take a very good position there. Thank you..

Okay. Thank you, Alvin..

Our next question comes from the line of James Wang from UBS. Please ask your question..

Good morning, management. I've got two questions, if I may. First question is just regarding the additional capacity that you've obtained for the existing Jiangsu campus.

I just wanted to find out whether you envisaged bringing new tenants to this location or new logos? Or would it be mainly to meet demand for existing customers? And the second question, just around the three-year plan.

So could you please shed the light on the revenue and EBITDA growth outlook in that three year plan or if you can't share the numbers, whether the growth rate per annum will be higher than what you've achieved this year? And whether these targets can be achieved without raising additional equity? Thank you..

Thank you for the question. This is Alvin. Regarding our Jiangsu campus that we are very happy to announce that we secured two additional capacity, which is very large and also that's in our size that we already have secured a leading public cloud customers.

Going forward, we definitely we will serve that customer even better and at the same time that we do have a strong engagement with leading Internet customers and also financial institute that we will add up new customers into that campus going forward..

Hi, James, this is Sharon. I will answer your question two regarding to the three years growth plan, as well as other fundraising plans. I think it is too early to provide the full year guidance for next year or the year beyond. So the company will provide our data outlook in March next year during our Q4 earnings.

But at this moment, I can give you some things from the company for the EBITDA margin. As you know, we just announced that we will deliver at least 25,000 cabinets in 2021. So our EBITDA margin will be under pressure. So next year, the EBITDA margin will be at the same level of the full year of 2020.

But the EBITDA margin will be improved from 2020 and 2022, above 30% and keep the upward trend. And for the financing policy, our policies to reserve enough capital to support our expansion plan. So as you all know that after the follow-on, we have reserved two sides in the surrounding areas of Beijing, and 114 megawatts for the Jiangsu campus.

In the future if we secured more resources, we may consider the fundraising in 2021. Thank you..

Great. Thank you very much..

Our next question comes from the line of Arthur Lai from Citi. Please ask your question..

Thank you. Congrats management on delivering a very good result. And I have two questions. One is, more like housekeeping question. So we noticed that there's a foreign exchange gain this quarter. Can Sharon walk us through how we should think of the math? And then second one is we keep hearing your peers in China.

They mentioned that some of the power grid cannot supply their part in time. Did you see this phenomenon? And also in the future, will that be the near-term bottleneck for the growth? Thank you..

Thank you, Arthur for your question. Regarding to the foreign exchange gain, it was mainly due to the appreciation of RMB, but it is -- it was non-cash and unrealized gain. For your question two Alvin Wang will answer..

Yes, Arthur, thank you for the question. Regarding the delivery, that's always -- we have a lot of challenge, especially given the COVID and some other challenges at this moment. And from our side, we have well-prepared. First, we have a very strong pipeline.

I mean, that we have not only from the long-term perspective, but for the near-term as well as we have a strong pipeline in different locations, for different projects or different target customers as well. And second is we have very strong engineering team and a very strong partnership with our suppliers and partners.

So we have very strong confidence to deliver as our -- according to our schedule. Actually, even though we have very tough environment. We promised to deliver 15,000 cabinets at the beginning of this year. Right now, we expect that we will deliver 70,000 cabinets, including merger and acquisition.

So going forward, we see a lot of challenge, but we still remain very confident to deliver strong results. Thank you..

Thank you..

Our next question comes from the line of Tina Hou from Goldman Sachs. Please ask your question..

Hi, good morning management. Congrats on the very strong result and very strong future year guidance. So my first question is in terms of your 25,000 new cabinet net adds for the next three years, which is obviously a step-up from 2022.

So I'm just wondering where does the additional demand come from, is it from wholesale, I assume? Then, are you seeing this from existing customers or from new customers? And also, how -- actually, how do you base your forecast on, or base your guidance on, is it on already existing demand or orders from your customers? Or is it more from a supply angle? Yes.

So that's my first one..

Thank you, Tina. Thank you for your questions. It's --here it's Alvin. Regarding our capacity that we -- at this moment, we expect more than 25,000 cabinets per year in the coming three years. And we do expect that majority of this capacity will be in the surrounding areas of our Tier 1 cities. Means Beijing, Shanghai and Guangzhou, Shenzhen.

And the second -- and also that we expect that our city type of data center will remain another kind of growth engine for our total business as well. And as regarding the demand that, for sure, we see very strong demand from both wholesale customers and retail customers. And from our perspective, we have very strong confidence.

We will even gain more market share from our existing customers. Namely, the top leading public cloud players and also internet joint.

At the same time, as we will expand our customer base into some new logos and also into some new emerging players, especially, like online streaming, online education, and some other state-owned projects we see very strong demand from them as well. Thank you..

Thank you, Alvin. So, my second question is regarding the current third quarter status.

So, in terms of your current billable cabinets, I'm wondering how much of them are wholesale at this point? And then in terms of your retail business, I see some of your retail peers in China have noticed a slowdown in this segment due to COVID as well as due to more smaller customers going on to public cloud.

So, have you seen also some slowdown in your retail segment as well? Thank you..

So, at this moment, it seems we have a very strong retail operations or a very strong retail customer base. So, at this moment, we feel that there a very big portion -- or majority of our revenue still coming from our retail customers.

And going forward, we expect that wholesale segment will represent very big part of our incremental growth and regarding our retail business, that's for sure that we see a lot of challenges, especially, during the COVID period, but we have a very diversified customer base from different segments.

And we see -- during this period, we see very strong demand from some segments like online education, online streaming, et cetera, and we do see some pressure or weak demand from some of our customers like hotel and retail customers. But still, it's a mix.

Together, we feel -- we remain very confident that we have a very strong customer base, we have very strong product offerings, and we have a strong customer base. Going forward, we see retail part will contribute very, very big value to our total strategy, which we -- which we refer to our so-called dual-core strategy going forward. Thank you..

Thank you very much..

Our next question comes from the line of John Choi from Daiwa Capital Market. Please ask your question..

Good morning, management and thank you for taking my question. I have two questions. So, first of all, I would like to have a better understanding of your three-year plan that you guys mentioned.

So, if you look about the long-term demand right now, I mean, could you kind of, walk us through how you see the pricing magnitude, given that we are seeing a lot of supply coming in the -- these Tier 1 city -- suburbs from your peers as well.

So, do you think you'll be able to manage these pricing both on the wholesale and the retail, given that the supply continues to come on board? And my second question is kind of related to that is can you kind of walk us through how you guys are expecting the -- how the -- let's say, the IDC, MRR and utilization rate will look like in the coming years and how that will affect our EBITDA margin? Thank you..

Okay. So, John, thank you for your questions. I will address your first question, it's regarding three-year gross plan going forward. As we all know that this IDC segment becoming very attractive from both the demand perspective and also from an investment perspective. We do see a lot of new investors, the new players joining the game.

But from our side, we see that very big barrier for new players, especially given the current very tough competition environment. And from our perspective, we do see we have a very strong competitive advantage, even from the price or the profitability perspective. First of all, from the wholesale or even from retail combined perspective.

We do enjoy a very strong economy of scale. We deliver more than 7,000 cabinets this year and we will increase that figure to next level next year, which means that we will be a very big player. We can have very strong brand power towards our suppliers to get better deal as well.

And we have very strong kind of customer acquisition capability, which means that we -- in some cases, we do enjoy kind of some of the price premium in a very good location and towards some of high-value customers as well.

And from retail side, since Samuel joined the team that we put much more efforts to add new capabilities into our retail offerings, which means that our products capability will increase that we will translate into further customer value, which means that we can keep maintain our MRR going forward. Thank you..

Hi, John. Regarding your question two, for the EBITDA trend, I have answered that question before. And regarding to the utilization rate, as we will deliver at least 25,000 cabinets. We expect the compound utilization rate will be at least above 60% in the next three years.

But if you look at the utilization rate performance this year, both our existing data center as well as the new delivery and ramp-up utilization rate increased quarter-over-quarter, which demonstrates our very good customer demand momentum. Thank you..

Our next question comes from the line of Colin McCallum from Credit Suisse. Please ask your question..

Thank you and congratulations on the strong numbers. I just had a couple of questions, most have been answered. One was, any color at all you can give us on what you think the total kind of CapEx requirements might be for that three-year build. That's the first question. And then second question is, just regarding Tsinghua Unigroup.

I read that there is some potential kind of restructuring and some issues there. Maybe difficult for you to comment, but I'd like to know, at least from a Vianet perspective that there's no impact on your ability to function or raise capital or continue to grow? That's the second question.

And then my third question is just on this management issue, which you're categorizing as a kind of rotation, I think was the word you used, Alvin.

When you say rotation, do you mean that there will be different roles that people will take each -- every two years or something? I mean, what exactly do you mean by that, when you say it's a rotation program. I think a few investors would like to understand it a little bit better. Thank you..

Hi, Colin, this is Sharon. Regarding your question about our CapEx, I would see. For the additional 25,000 cabinet each year, the CapEx will be at least about RMB5 billion each year. But if we secure more resources and there are some big acquisitions, the CapEx guidance will be raised from RMB5 billion..

Okay. Colin, thank you for your question. Regarding your second question, it's for sure that we are in a very fast-moving market that we see very dynamic market demands and also that's different kind of momentum from different customer segments.

So, which means that from our side, that we keep refine and adjust our business strategy and also our organization accordingly as well. So currently, we have a very clear strategy so called dual-core strategy.

So according to that, we adjust our structure -- organization structure and to better serve our strategy and also to seize the new growth opportunities going forward. And then regarding the rotation program that, I would say that this is a very innovative approach in these markets, especially in the IDC segments.

And also that we have -- since we have a very strong growth momentum, and also that we have very high potential going forward. So which means that we need to have even more kind of capability and talent join the team. So not only from the top management perspective, but also in the entire organization, we introduced so called rotation program as well.

And finally, I would say that two minds' better than one. So why don’t we have more talent to join the team that contributed to our value. Thank you..

Understood. Thanks, everyone. Very clear..

Our last question comes from the line of from CICC. Please ask your question..

Hi, management, and congratulations on such strong results. My first question is for our 140 megawatts in service and MoU for wholesale.

Could you give us more patent on the contracted proportion right now? And the second question is, comparing with our continued improving retail MRR, how is our wholesale MRR level at this moment? And my last question is on the R&D side, what's our focus on the technology of price for our IDC business. Thanks..

Sorry. So we have some voice quality problems. Can you please repeat your first question? Thank you..

Okay. My first question is through our 140 megawatts in service MoU for wholesale. Could you give us more patent on the contracted proportion at this moment? Thanks..

Okay. Sure. We have very strong customer engagement at this moment, both with our existing customers and also our new customers as well as -- at this moment, I can say that, we have very strong customer demands, some commitments and some of so called, pre-commitments.

So I would say that, especially for our wholesale parts, we see very big portion is already covered by these commitments and pre-commitments. And for the retail processing, we -- all our retail capacity located in the Tier 1 cities, we do see a strong customer demand, which means that we are at the first year the utilization rates.

By the end of the first year for this new capacity the utilization rate will reach around 40% of the total capacity. And regarding your second question, the wholesale MRR, obviously the different customers have -- we have different kind of pricing scheme.

And also, we have different locations means that the different price share level in different markets. But I would say that, we do have a market level MRR and also we have in many cases, we do enjoy a price premium because we provide very high quality services. And also, we have very strong customer relationship as well. Thank you..

I’ll hand back now to company’s presenter. Please proceed. Our next question is from the line of Colin Liu from China Renaissance. Please ask your question..

Hi. Good morning management. Thanks for the chance to ask the question. And I just have one on the overall market demand from cloud computing. I've seen your new three-year plan, which demonstrated your strong confidence on the market demands.

However, going into second half this year, we have seen that public cloud industry growth has demonstrated some very clear slowdown in terms of revenue, profit and investor, etcetera, mainly from those public listed -- public cloud listed companies reported numbers.

And their comments and guidance on the overall growth for the next quarter and the next year are less exciting arguably compared with historical trends. So I just want to understand, how you see the overall market demand from cloud computing, particularly public cloud.

And how do you see the opportunity in the near term and the long-term, please?.

Okay. Colin, thank you for your questions, that's regarding the demand from the top customers, especially public cloud players. We do see a very strong performance in the past years that from public cloud players perspective. And we do see that they have very strong growth momentum going forward.

Even -- especially that's given that 5G and also other kinds of new technology coming that like the connected cars, etcetera. So we do expect that they will remain very strong growth. But I agree with you that in some quarters, probably we will see some different growth rates in some players. But overall, we remain very strong -- confident.

And also that we -- from our perspective, we do have a very diversified customer base. We are -- we don't rely on few limited customers, so which means that we -- overall, we still remain very optimistic about all our markets.

So from our perspective, we do see our growth will come from not only the few public cloud players but also some other internet giants, and also state-owned enterprise and also leading financial institutions as well. Thank you..

Thank you, Alvin. Very helpful..

I would now like to hand the conference back to today's presenter. Please continue..

Thank you for joining us today. If you have any follow-up questions, please feel free to contact IR. Have a good day..

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect..