21Vianet Group, Inc. (NASDAQ:VNET) Q2 2021 Earnings Conference Call August 24, 2021 8:00 PM ET Company Participants Xinyuan Liu - Director of Investor Relations Samuel Shen - Chief Executive Officer & Executive Chairman-Retail IDC Tim Chen - Chief Financial Officer Conference Call Participants Camille Xu - Morgan Stanley Edison Lee - Jefferies James Wang - UBS Guohan Wang - Daiwa Clive Cheung - Credit Suisse Arthur Lai - Citi Tina Hou - Goldman Sachs Ethan Zhang - Nomura Operator Good morning and good eveni ...

[Financial & Operational Highlights](index=1&type=section&id=Financial%20%26%20Operational%20Highlights) In Q2 2021, 21Vianet achieved strong YoY growth in net revenues and adjusted EBITDA, expanding capacity to 62,876 cabinets while improving mature IDC utilization to 76.3% Q2 2021 Financial Highlights (YoY Growth) | Metric | Q2 2021 (RMB) | Q2 2020 (RMB) | YoY Growth | | :--- | :--- | :--- | :--- | | Net Revenues | 1.50 billion | 1.14 billion | 30.8% | | Adjusted Cash Gross Profit (non-GAAP) | 640.2 million | 467.6 million | 36.9% | | Adjusted EBITDA (non-GAAP) | 425.1 million | 306.4 million | 38.7% | Q2 2021 Operational Highlights | Metric | Q2 2021 | Q1 2021 | Q2 2020 | | :--- | :--- | :--- | :--- | | Total Cabinets Under Management | 62,876 | 55,926 | 44,050 | | Retail IDC MRR per Cabinet | RMB 9,015 | RMB 9,144 | RMB 8,953 | | Compound Utilization Rate | 59.9% | 61.7% | N/A | | Mature IDCs Utilization Rate | 76.3% | 73.9% | N/A | [Management Commentary](index=1&type=section&id=Management%20Commentary) Management expressed confidence in robust organic growth driven by a dual-core strategy, with Q2 financial results surpassing guidance and strengthening market leadership - CEO Samuel Shen credited the company's dual-core growth engine, diversified customer base, and strong IDC market demand for fueling organic growth in cabinet deliveries[4](index=4&type=chunk) - CFO Tim Chen noted that Q2 net revenues and adjusted EBITDA grew by **30.8%** and **38.7%** YoY respectively, surpassing the company's guidance[4](index=4&type=chunk) [Second Quarter 2021 Financial Results Analysis](index=2&type=section&id=Second%20Quarter%202021%20Financial%20Results%20Analysis) Q2 2021 saw significant YoY revenue and profit growth, with net revenue reaching RMB 1.50 billion and a net profit of RMB 455.9 million, largely due to a fair value gain on convertible notes [Revenue and Gross Profit](index=2&type=section&id=Revenue%20and%20Gross%20Profit) Net revenues grew 30.8% YoY to RMB 1.50 billion, driven by IDC and cloud demand, with gross profit rising 32.0% YoY to RMB 359.5 million and gross margin improving to 24.0% Revenue Performance | Period | Net Revenues (RMB) | YoY Growth | QoQ Growth | | :--- | :--- | :--- | :--- | | Q2 2021 | 1.50 billion | 30.8% | 7.9% | | Q2 2020 | 1.14 billion | - | - | | Q1 2021 | 1.39 billion | - | - | Gross Profit and Margin | Metric | Q2 2021 (RMB) | Q2 2020 (RMB) | Q1 2021 (RMB) | | :--- | :--- | :--- | :--- | | Gross Profit | 359.5 million | 272.3 million | 323.3 million | | Gross Margin | 24.0% | 23.8% | 23.3% | | Adjusted Cash Gross Profit | 640.2 million | 467.6 million | 605.3 million | | Adjusted Cash Gross Margin | 42.8% | 40.9% | 43.6% | [Operating Expenses](index=2&type=section&id=Operating%20Expenses) Total operating expenses were RMB 262.5 million or 17.5% of net revenues, with adjusted operating expenses at 15.7% of net revenues, showing slight improvement YoY Operating Expenses Breakdown (Q2 2021) | Expense Category | Amount (RMB) | | :--- | :--- | | Sales and marketing | 59.6 million | | Research and development | 38.3 million | | General and administrative | 154.2 million | | **Total Operating Expenses** | **262.5 million** | - Adjusted operating expenses as a percentage of net revenues were **15.7%** in Q2 2021, compared to **15.9%** in Q2 2020 and **15.3%** in Q1 2021[9](index=9&type=chunk) [Profitability](index=2&type=section&id=Profitability) Adjusted EBITDA increased 38.7% YoY to RMB 425.1 million with margin expansion, and the company achieved a net profit of RMB 455.9 million, largely due to a fair value gain on convertible notes Adjusted EBITDA Performance | Metric | Q2 2021 (RMB) | Q2 2020 (RMB) | Q1 2021 (RMB) | | :--- | :--- | :--- | :--- | | Adjusted EBITDA | 425.1 million | 306.4 million | 415.1 million | | Adjusted EBITDA Margin | 28.4% | 26.8% | 29.9% | - The company recorded a net profit of **RMB 455.9 million**, compared to a net loss of **RMB 2.12 billion** in Q2 2020. The profit included a fair value gain of **RMB 424.1 million** on convertible promissory notes[11](index=11&type=chunk) Earnings Per Share (EPS) / ADS | Metric | Q2 2021 (RMB) | Q2 2021 (US$) | | :--- | :--- | :--- | | Basic EPS | 0.52 | 0.08 | | Diluted EPS | 0.04 | 0.01 | | Basic ADS | 3.12 | 0.48 | | Diluted ADS | 0.24 | 0.06 | [Financial Position and Cash Flow](index=3&type=section&id=Financial%20Position%20and%20Cash%20Flow) As of June 30, 2021, 21Vianet maintained strong liquidity with RMB 5.03 billion in cash and generated RMB 314.8 million in net cash from operating activities - As of June 30, 2021, the company's cash, cash equivalents, restricted cash, and short-term investments totaled **RMB 5.03 billion** (**US$779.7 million**)[12](index=12&type=chunk) - Net cash generated from operating activities in Q2 2021 was **RMB 314.8 million**, compared to **RMB 161.8 million** in Q2 2020 and **RMB 274.5 million** in Q1 2021[12](index=12&type=chunk)[32](index=32&type=chunk) [Business Outlook](index=3&type=section&id=Business%20Outlook) The company forecasts continued growth for Q3 and raised full-year 2021 guidance, expecting net revenues to grow by 28.4% and adjusted EBITDA by 30.7% at midpoints Q3 2021 Guidance | Metric | Guidance Range (RMB) | | :--- | :--- | | Net Revenues | 1.53 billion to 1.55 billion | | Adjusted EBITDA | 420 million to 440 million | Full Year 2021 Guidance | Metric | Guidance Range (RMB) | Implied YoY Growth (Midpoint) | | :--- | :--- | :--- | | Net Revenues | 6.10 billion to 6.30 billion | 28.4% | | Adjusted EBITDA | 1.68 billion to 1.78 billion | 30.7% | [Appendix: Consolidated Financial Statements](index=6&type=section&id=Appendix%3A%20Consolidated%20Financial%20Statements) The appendix provides unaudited consolidated financial statements for Q2 2021, including Balance Sheets, Statements of Operations, Cash Flows, and GAAP to non-GAAP reconciliations [Consolidated Balance Sheets](index=6&type=section&id=Consolidated%20Balance%20Sheets) As of June 30, 2021, total assets increased to RMB 21.88 billion, supported by cash and property, while total liabilities rose to RMB 14.60 billion, primarily from convertible notes and borrowings Key Balance Sheet Items (in thousands RMB) | Account | June 30, 2021 (in thousands RMB) | Dec 31, 2020 (in thousands RMB) | | :--- | :--- | :--- | | **Total Assets** | **21,883,985** | **19,373,755** | | Cash and cash equivalents | 4,603,653 | 2,710,349 | | Property and equipment, net | 8,473,036 | 8,106,425 | | **Total Liabilities** | **14,600,822** | **12,476,275** | | Convertible promissory notes | 4,732,739 | 3,014,057 | | **Total Shareholders' Equity** | **7,283,163** | **6,897,480** | [Consolidated Statements of Operations](index=8&type=section&id=Consolidated%20Statements%20of%20Operations) For Q2 2021, net revenues were RMB 1.50 billion, leading to a net profit of RMB 460.5 million, a significant improvement from the prior year's loss, driven by a fair value gain on convertible notes Q2 2021 Statement of Operations Summary (in thousands RMB) | Line Item | Q2 2021 (in thousands RMB) | Q2 2020 (in thousands RMB) | | :--- | :--- | :--- | | Net revenues | 1,496,978 | 1,144,061 | | Gross profit | 359,515 | 272,332 | | Operating profit | 97,044 | 78,859 | | Changes in fair value of convertible notes | 424,107 | (1,612,054) | | Net profit (loss) | 460,472 | (1,648,777) | | Net profit (loss) attributable to Company | 455,852 | (1,652,350) | [Reconciliations of GAAP and Non-GAAP Results](index=9&type=section&id=Reconciliations%20of%20GAAP%20and%20Non-GAAP%20Results) This section details the calculation of non-GAAP metrics, showing Adjusted Cash Gross Profit of RMB 640.2 million and Adjusted EBITDA of RMB 425.1 million by adjusting GAAP figures Reconciliation to Adjusted EBITDA for Q2 2021 (in thousands RMB) | Line Item | Amount (in thousands RMB) | | :--- | :--- | | Operating profit | 97,044 | | Plus: depreciation and amortization | 297,738 | | Plus: share-based compensation expenses | 27,507 | | Plus: impairment of loan receivable | 2,816 | | **Adjusted EBITDA** | **425,105** | [Condensed Consolidated Statement of Cash Flows](index=10&type=section&id=Condensed%20Consolidated%20Statement%20of%20Cash%20Flows) In Q2 2021, the company generated RMB 314.8 million from operations, used RMB 522.3 million in investing, and had a net cash outflow of RMB 1.89 billion from financing, ending with RMB 5.02 billion in cash Q2 2021 Cash Flow Summary (in thousands RMB) | Cash Flow Category | Amount (in thousands RMB) | | :--- | :--- | | Net cash generated from operating activities | 314,806 | | Net cash used in investing activities | (522,340) | | Net cash used in financing activities | (1,887,775) | | **Net decrease in cash and equivalents** | **(2,156,214)** |

Financial Data and Key Metrics Changes - The company reported a 27.1% increase in net revenues, reaching RMB1.39 billion compared to RMB1.09 billion in the same period last year [5][17] - Adjusted EBITDA grew by 60% to RMB415.1 million from RMB259.4 million year-over-year, with an adjusted EBITDA margin increasing to 29.9% from 23.8% [19][20] - Gross profit increased by 38.1% to RMB323.3 million, with gross margins rising to 23.3% from 21.5% [18] Business Line Data and Key Metrics Changes - The company saw growth in both wholesale and retail IDC segments, contributing to the overall revenue increase [17] - The compound utilization rate increased to 61.7%, with mature cabinets at 73.9% and ramp-up cabinets at 30.6% [11] Market Data and Key Metrics Changes - The company noted intensified competition in certain geolocations, which may lead to better operational efficiency and customer satisfaction [7] - The demand for IDC services is expected to grow due to trends in remote working, regulatory compliance, and digital transformation [8] Company Strategy and Development Direction - The company is focusing on its dual-core growth engine strategy, combining hyperscale green IDC wholesale solutions with next-generation IDC retail solutions [9] - A new subsidiary brand, Neolink, was launched to capitalize on market opportunities from the government's digital growth initiatives [10] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in the company's ability to navigate headwinds and capitalize on tailwinds in the IDC space [5] - The company anticipates continued growth in net revenues and adjusted EBITDA for the full year of 2021, with guidance reflecting year-over-year increases [22] Other Important Information - The company achieved significant milestones in its ESG initiatives, surpassing industry benchmarks for carbon emissions [13][14] - The company has a strong balance sheet with cash and cash equivalents totaling RMB7.33 billion as of March 31, 2021 [20] Q&A Session Summary Question: Update on competition dynamics in the retail market and outlook for retail pricing - Management expects the Monthly Recurring Revenue (MRR) to remain stable with a slight upward trend as new digital services are adopted [25][27] Question: Details on the N-OR02 project and its customer anchoring - Management confirmed contracts with leading e-commerce and internet companies, indicating positive trends in customer demand [30] Question: Explanation for the drop in mature cabinet utilization - Management clarified that the drop is due to the annual categorization of cabinets and advised looking at year-over-year comparisons for a clearer picture [33] Question: Impact of government policies on new retail IDC capacity in Tier 1 cities - Management acknowledged strict government policies but emphasized their existing data centers meet high standards, positioning them favorably [34][35] Question: Observations on competition and pricing trends across provinces - Management noted that while competition exists, it is not leading to widespread pricing pressure, and they remain confident in their market position [41] Question: Insights on customer demand moderation and retail customer acceleration - Management reported strong demand from financial services and traditional enterprises, indicating a healthy outlook for the year [39] Question: Update on capacity expansion roadmap and ESG initiatives - Management confirmed that they are on track with their capacity expansion goals and are committed to enhancing their ESG efforts [52][54] Question: Customer acquisition strategy and pricing flexibility - Management stated that while they may offer discounts to secure strategic customers, they maintain a cautious approach to pricing overall [57] Question: Strategy regarding Shanghai power quota allocation - Management is actively securing power quotas and remains confident in their ability to meet project demands despite tightened regulations [60][62]

Financial Position - As of December 31, 2020, the company had short-term and long-term borrowings with an aggregate outstanding balance of RMB1,101.3 million (US$168.7 million) and an outstanding principal balance of US$300.0 million for the 2021 Notes payable[369]. - The short-term bank borrowings bore a weighted average interest rate of 4.46% per annum, while long-term borrowings had a weighted average interest rate of 5.61% per annum[369]. - The company had total U.S. dollar-denominated cash and cash equivalents amounting to US$295.9 million as of December 31, 2020[370]. - A hypothetical 10% increase in the exchange rate of the U.S. dollar against the RMB would have resulted in an increase of RMB193.0 million (US$29.6 million) in the value of U.S. dollar-denominated financial assets[370]. - A hypothetical one percentage point decrease in interest rates would have resulted in a decrease of approximately RMB27.6 million (US$4.2 million) in interest expense for the year ended December 31, 2020[369]. Revenue and Proceeds - The company received net proceeds of US$204.3 million from its initial public offering, which were used for data center infrastructure expansion and general corporate purposes[383]. - For the year ended December 31, 2020, the company was entitled to US$1,171,855.02 from the depositary as reimbursement for expenses related to the establishment and maintenance of the ADS program[379]. Internal Control and Audit - The company maintained effective internal control over financial reporting as of December 31, 2020, based on the COSO criteria[386]. - There were no changes in internal controls over financial reporting that materially affected the company during the reporting period[389]. - The company has adopted a code of ethics applicable to directors, officers, employees, and agents, including specific provisions for key executives[389]. - Mr. Sean Shao has been identified as an audit committee financial expert by the board of directors[389]. - The audit committee pre-approves all audit and non-audit services provided by Ernst & Young Hua Ming LLP[390]. - The internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting[388]. - The company acknowledges that internal control limitations may not prevent or detect all misstatements[388]. - The audit was conducted in accordance with PCAOB standards to ensure effective internal control over financial reporting[387]. Audit Fees - The audit fees for the year ended December 31, 2020, amounted to $1,163,000, an increase from $915,000 in 2019[390]. - Audit-related fees for the year ended December 31, 2020, were $854,000, compared to $203,000 in 2019[390]. - Tax fees for the year ended December 31, 2020, were $23,000, slightly up from $19,000 in 2019[390]. Economic Indicators - The annual average percent changes in the consumer price index in China for 2018, 2019, and 2020 were 2.1%, 2.9%, and 2.5%, respectively, indicating stable inflation levels[371]. Currency Management - The company has not used derivative financial instruments to hedge exposure to foreign exchange risk, indicating a straightforward approach to currency management[370].

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