21Vianet : 4Q 2020 Earnings Call - Transcript

REFINITIV STREETEVENTS

EDITED TRANSCRIPT

Q4 2020 21Vianet Group Inc Earnings Call

EVENT DATE/TIME: MARCH 24, 2021 / 12:30AM GMT

REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us

1

©2021 Refinitiv. All rights reserved. Republication or redistribution of Refinitiv content, including by framing or similar means, is prohibited without the prior written consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies.

MARCH 24, 2021 / 12:30AM GMT, Q4 2020 21Vianet Group Inc Earnings Call

CORPORATE PARTICIPANTS

Rene Jiang 21Vianet Group, Inc. - IR Director

Xiao Liu 21Vianet Group, Inc. - Group CFO & President of IDC Large Custom Business Group

Samuel Shen 21Vianet Group, Inc. - Group CEO & Executive Chairman of Retail IDC Business Group

CONFERENCE CALL PARTICIPANTS

Chris Ko DBS Bank Ltd., Research Division - Analyst

Ethan Zhang Nomura Securities Co. Ltd., Research Division - Analyst

Hongjie Li China International Capital Corporation Limited, Research Division - Associate

John Choi Daiwa Securities Co. Ltd., Research Division - Head of Hong Kong & China Internet and Regional Head of Small/Mid Cap James Wang UBS Investment Bank, Research Division - Analyst

Kyna Wong Crédit Suisse AG, Research Division - Associate

Tina Hou Goldman Sachs Group, Inc., Research Division - Equity Analyst Yang Liu Morgan Stanley, Research Division - Research Associate Arthur Lai Citigroup Inc., Research Division - Director & Analyst Edison Lee Jefferies LLC, Research Division - Equity Analyst

PRESENTATION

Operator

Good morning, and good evening, ladies and gentlemen. Thank you, and welcome to 21Vianet Group's Fourth Quarter 2020 Earnings Conference Call. With us today are Mr. Samuel Shen, Chief Executive Officer and Executive Chairman of Retail IDC; 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 Vianet. Please go ahead, ma'am.

Rene Jiang 21Vianet Group, Inc. - IR Director

Thank you, operator. Hello, everyone. Welcome to our fourth quarter and full year 2020 earnings call.

Before we start, please note that this call may contain forward-looking statements made pursuant to the safe harbor provisions of 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. Samuel Shen, CEO of 21Vianet.

Samuel Shen 21Vianet Group, Inc. - Group CEO & Executive Chairman of Retail IDC Business Group

All right. Thank you, Rene. Good morning, and good evening, everyone. Thank you for joining us on our earnings call today. During the fourth quarter of 2020, we exceeded our previous guidance range and grew our net revenues by 28.6% to RMB 1.35 billion from RMB 1.05 billion a year ago.

In addition, we expanded our adjusted EBITDA margin to 28.9% from 25.2% and grew our adjusted EBITDA to RMB 389.8 million from RMB 263.8 million during comparable periods. We attribute such solid results to robust market demand, methodical resource expansion, meticulous customer services and strong sales momentum.

2020 was an extraordinary year as we encountered both unprecedented challenges and tremendous opportunities. The challenges brought on by COVID-19 were certainly exceptional. Yet, out of a heap of challenges blossomed the robust demand for data center services. Since the pandemic outbreak, we have witnessed substantial change in both consumer behaviors and corporate mentalities.

REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us

2

©2021 Refinitiv. All rights reserved. Republication or redistribution of Refinitiv content, including by framing or similar means, is prohibited without the prior written consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies.

MARCH 24, 2021 / 12:30AM GMT, Q4 2020 21Vianet Group Inc Earnings Call

Some of those changes were transitory, while others are permanent.

We believe that the migration towards online entertainment, e-commerce, mobile computing, remote collaboration and digitized services are permanent, thus filling the tremendous demand for IDC services. In addition, favorable government policies are also accelerating the digitization trend, which in turn are further stimulating the market demand for our solutions and services.

To satisfy such growing market demand, we have been proactively expanding our capacity and resources. As of December 31, 2020, our capacity reached 53,553 cabinets in total, 93% of which were self-built and the remaining 7% of which were partnered.

In the fourth quarter, we added 2,077 cabinets on a net basis. Our compound capacity utilization rate was 60.4% during the fourth quarter, among which our utilization rate was 77.8% for mature IDCs and 31.7% for ramp-up in newly built IDCs.

As we envision unabated market demand for the foreseeable future, we have proactively expanded our resources. During the fourth quarter, we acquired a data center in Beijing with approximately 2,000 ready-to-use cabinets already under commitment to a public cloud customer. Such additional capacity should enable us to better serve large enterprise customers who continue to locate their mission-critical data processing operations in Tier 1 cities to achieve ultra-low latency. The requirements and preferences of these large enterprises limit the potential locations of their data centers to within a 100 kilometers radius from metropolitan areas.

While we are expanding our capacity, we are also implementing strategic initiatives to ensure our capacity environmental sustainability. Such efforts include increasing our renewable energy utilization mix, improving the effectiveness of our power and water usage and reducing our carbon intensity across all of our data centers. To increase the transparency of our corporate sustainability practices, we are currently preparing our initial ESG report and plan to publish it later this year.

Beyond expanding our capacity in a methodical and sustainable manner, we also continued to leverage our flexibility in providing hybrid and multi-cloud infrastructure solutions, which enhance our client services. Witnessing the consumer and corporate behavior changes in 2020, we have taken the proactive and data-driven approach that enabled us to not only measure, forecast and address the unique IDC requirements for individual clients across industries but also strategically plan our resource expansion and optimize our site selection to align our development with our clients' growth trajectory. As a result, we have forged tight bonds with our customers and become an indispensable partner for our clients to cultivate their own evolving ecosystems.

During the fourth quarter, we acquired a new public cloud customer who had started moving in as of the first quarter of 2021. In addition to securing new cloud customers, we also ramp up our engagement with large-scale enterprises. We were able to sign an MOU with a popular content community and social platform company. As of today, we have accumulated wholesale MOU in service or under contract to over 180 megawatts.

We also continued our extensive discussions with an online entertainment company, which is interested in utilizing a portion of our IDC capacity in Shanghai, where its headquarters are located, to support its rapid growth.

In summary, we have accumulated abundant capacity, procured additional resources and forged strong client relationships. With the additional capital raised from our recent convertible bond offering, we are well positioned to capitalize on the robust market demand emerging in the post-pandemic era.

With that, I will turn the call over to Ms. Sharon Liu, our CFO, to review our financial results for the quarter. Sharon?

Xiao Liu 21Vianet Group, Inc. - Group CFO & President of IDC Large Custom Business Group

Thank you, Samuel. 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 noncash expenses, which are not 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, unless otherwise stated, all of the financial numbers we are presenting today are for the fourth quarter of 2020 and are in RMB terms and that percentage changes are on a year-over-year basis.

REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us

3

©2021 Refinitiv. All rights reserved. Republication or redistribution of Refinitiv content, including by framing or similar means, is prohibited without the prior written consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies.

MARCH 24, 2021 / 12:30AM GMT, Q4 2020 21Vianet Group Inc Earnings Call

We concluded 2020 with strong fourth quarter financial results, mainly attributable to our resource expansion capacities on track and efficient cabinet delivery to customers and improved operating efficiency. Our revenues for the fourth quarter and full year of 2020 both exceeded the high end of our guidance ranges, while our adjusted EBITDA for the fourth quarter and full year of 2020 both were within our guidance ranges.

Revenue in the fourth quarter increased by 28.6% to RMB 1.35 billion from RMB 1.05 billion. This increase continued to be driven by the industry ongoing growth as well as our steady capacity expansion, which allowed us to better satisfy the growing demand for a scalable retail cabinet and a carrier-neutral wholesale IDC solutions in the quarter. Retail IDC MRR per cabinet in the fourth quarter increased to RMB 9,131. We added around 2,077 new cabinets during the fourth quarter.

As of December 31, 2020, we operated and managed 53,553 cabinets, recognizing the ongoing growth in customer demand. We also worked to expand our cabinet capacity while remaining focused on maintaining healthy and stable cabinet utilization rates. Our compound utilization rate in the fourth quarter was 60.4%. More specifically, our utilization rate for those mature IDCs delivered prior to 2019 improved to 77.8% compared to 77% in the prior quarter.

Our utilization rate for ramp-up IDC and newly built IDCs were 31.7% compared to 35.9% in the prior quarter. The decrease mainly contributed to a large amount of cabinet delivery at the end of the third quarter.

Adjusted cash gross profit in the fourth quarter, which excludes depreciation, amortization and share-based compensation expenses, was RMB 581.9 million compared to RMB 425.9 million in the same period of 2019. Adjusted cash gross margin was 43.2% compared to 40.6% in the same period of 2019.

Adjusted operating expenses in the fourth quarter, which exclude share-based compensation expenses, impairment of receivables from equity investees and impairment of long-lived assets, were RMB 215.5 million compared to RMB 184.2 million in the same period of 2019. As a percentage of net revenues, adjusted operating expenses in the fourth quarter decreased to 16% from 17.6% in the same period of 2019, demonstrating our improved operating leverage and operating efficiency.

Adjusted EBITDA in the fourth quarter grew by 47.7% to RMB 389.8 million from RMB 263.8 million in the same period of 2019. Adjusted EBITDA margin increased to 28.9% from 25.2% in the same period of 2019.

Owing to loss of RMB 957.1 million from changes in the fair value of convertible promissory notes during the fourth quarter, our net loss attributable to ordinary shareholders was RMB 1.02 billion in the period compared to net loss attributable to ordinary shareholders of RMB 16.4 million in the fourth quarter of 2019. Basic and diluted loss both were RMB 1.28 per ordinary share and RMB 7.68 per ADS. Each ADS represents 6 ordinary shares.

Moving on to our balance sheet and liquidity. At the end of the fourth quarter, our debt-to-asset ratio was 64.5% after taking out the effect of the changes in the fair value of convertible promissory notes. Our debt to adjusted EBITDA ratio was 3.1. In addition, net cash generated from operating activities in the fourth quarter was RMB 283.8 million.

As of December 31, 2020, we reported a cash position of RMB 3.4 billion.

During the quarter, our efforts to maintain a strong balance sheet and leverage our solid recognition in the capital markets enabled us to further cultivate our future growth prospects. As such, we successfully executed a public offering of convertible notes for an aggregate principal amount of USD 600 million in January. This successful note issuance further demonstrated our acknowledged growth potential, significant brand value and strong investor interest. Going forward, we plan to use the raise to proceed to satisfy our CapEx demands and repay our existing notes that will come due in 2021.

Looking ahead into 2021, we continue to see a number of potential M&A opportunities and regard brownfield sites as a variable supplement to drive organic growth. We plan to continue expanding our IDC business in a prudent and balanced manner while

REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us

4

©2021 Refinitiv. All rights reserved. Republication or redistribution of Refinitiv content, including by framing or similar means, is prohibited without the prior written consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies.

MARCH 24, 2021 / 12:30AM GMT, Q4 2020 21Vianet Group Inc Earnings Call

leveraging our value-added service offerings to cultivate more business opportunities with our existing customers in turn.

Our balance sheet strength will also serve as a significant competitive advantage, enabling us to secure those IDC resources that align with our long-term growth targets, enabling us to capture additional market share and provide us with more customer engagement opportunities in key markets.

In 2020, our total CapEx was RMB 4 billion, including M&A payment during the year. We expect 2021 CapEx to be in the range of RMB 5 billion to RMB 6 billion, including acquisitions that we have bottom up knowledge.

Looking ahead, we expect net revenue for the first quarter of 2021 to be in the range of RMB 1,375 million to RMB 1,395 million and adjusted EBITDA to be in the range of RMB 395 million to RMB 415 million.

For the full year of 2020, we expect net revenues to be in the range of RMB 6.1 billion to RMB 6.3 billion and adjusted EBITDA to be in the range of RMB 1.68 billion to RMB 1.78 billion. This forecast reflects our current and preliminary views on the market and operational conditions, which are subject to change and do not factor in any of the potential impacts that could be caused by the COVID-19 epidemic in the future.

This concludes our prepared remarks for today. Operator, we are now ready to take questions.

QUESTIONS AND ANSWERS

Operator

(Operator Instructions) Our first question comes from the line of Yang Liu from Morgan Stanley.

Yang Liu Morgan Stanley, Research Division - Research Associate

And first, I would like to congratulate you on strong results and new customer addition. My first question is related with this new wholesale customer. You mentioned it is a social and content company. Could you please disclose more in terms of the current demand outlook and the order size (inaudible) and also share about your return profile while serving this customer?

The second question is, I would like to hear management comments on the resource at the edge of town. Is it becoming more and more difficult than before to get resources maybe in Hebei and Jiangsu, et cetera? And will this impact your 3-year expansion plan?

Xiao Liu 21Vianet Group, Inc. - Group CFO & President of IDC Large Custom Business Group

Thank you, Liu Yang. I will take your first question. Regarding to the new logo, actually it's a public cloud service provider in China with amount of 2,000 cabinets. Those MOU will start to move in Q1 this year. And for the returns of these projects, it's still at the company's acceptable level. Thank you.

Samuel Shen 21Vianet Group, Inc. - Group CEO & Executive Chairman of Retail IDC Business Group

Liu Yang, this is Samuel. Good to see you virtually. I'm taking on the second question. You mentioned about probably metropolitan area and surrounding areas as getting a little bit tough to secure the land together with the power quota. And I think the answer is yes. That's a general situation. That being said, because we have been in the industry for almost 25 years, we do have a strong relationship with the government, and we pay a lot of attention on the government's requirements and so on and so forth. If you drill down and double-click on the government's requirements lately, [getting to be tight], especially from the power quota perspective for existing data center, they're asking for better than 1.4; and for new one, they're asking for better than 1.3, in general. And luckily, because we have been in the industry for quite a while and then if you look at our existing data center, actually, our power consumption is actually top tier, I would say so. So both from an expansion point of view and from the acquisition point of view, I think things are pretty much on track from our expectation point of view. So I hope that gives you some of the color.

Operator

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

REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us

5

©2021 Refinitiv. All rights reserved. Republication or redistribution of Refinitiv content, including by framing or similar means, is prohibited without the prior written consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies.