Hello, ladies and gentlemen. Thank you for joining us for the First Quarter 2024 Earnings Conference Call for VNET Group, Inc. Management participating today includes Mr. Gavin Shen, rotating President; Mr. Qiyu Wang, Chief Financial Officer; and Ms. Xinyuan Liu, Investor Relations Director of the company. Please be aware that this conference call is being recorded. I will now hand the call over to our first speaker today, Ms. Xinyuan Liu. Please proceed.

Thank you, operator. Hello, everyone, and welcome to our first quarter 2024 earnings conference call. Our earnings release was distributed earlier today, and you can find a copy on our website as well as on Newswire services. Please note that today's call will contain forward-looking statements made under the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from our current expectations. For detailed discussions of these risks and uncertainties, please refer to our latest annual reports and other documents filed with the SEC. VNET does not undertake any obligation to update any forward-looking statements except as required under applicable law. Please also note that VNET's earnings press release and this conference call includes the disclosure of unaudited GAAP and non-GAAP financial measures. VNET's earnings press release contains a reconciliation of the unaudited non-GAAP measures to the unaudited GAAP measures. As a reminder, this conference is being recorded. In addition, a webcast of this conference call will also be available on our website at ir.vnet.com. Before we start today's presentation, let me briefly introduce Mr. Gavin Shen. Beginning in May 2024, Gavin has undertaken this role of group's rotating President while also serving as the General Manager of the IDC Strategic Business Group. Gavin joined VNET as our Vice President in 2017 and in January 2020, became Senior Vice President, bringing nearly 20 years of business operations management experience, the IT strategic planning, cloud computing and business centers. I will now turn the call over to Gavin. Please go ahead.

Thank you, Xinyuan. Good morning, and good evening, everyone. Thank you for joining our call today. Before diving into our first quarter performance, I'd like to remind you of the improvements that we mentioned in our last call to enhance information transparency and help the public best understand our business. Starting from this quarter, we will report total revenues and operational metrics for our wholesale and retail business separately. Our CFO, Qiyu, will go over the details. Now let's move on to our first quarter initiatives and business progress. Solid first quarter results marked a good start for this year. We continued to execute our effective new cost strategies while pursuing high-quality development; robust operating and financial results once again demonstrate our ability to grow our business by leveraging our cost base to capture evolving demand in the area of AI. Government policies aimed at fostering a favorable market environment are creating more opportunities for us and the IDC industry as a whole. Computing power is widely seen as a crucial component of China's high-quality development, as per the government work report 2024, which calls for strengthening the performance of a nationwide computing power network. The telecom regulator, MIIT, has strengthened policy initiatives to further optimize computing power resource and infrastructure systems. We believe those initiatives will empower us to allocate and manage the data center more efficiently and best meet the huge market demand for high-performance compute power. Additionally, interest in greener computing solutions is on the rise. In April, we signed a strategic cooperation agreement with the local government and Shandong Hi-Speed Holdings to build a green AI supercomputing data center. The three parties will work together to promote digitalization and green development. We are confident our green data center business will meet customer needs and enhance our market competitiveness. While IDC development remains our primary focus, we are keenly aware of how AI-related demand for high-performance computing is reshaping the data center landscape. Our quality data centers and high-density power capabilities enable us to tailor high-performance computing solutions to seamlessly meet customers' rapidly growing AI needs. By the end of the first quarter, over 90% of our wholesale capacity in service is high-power density. Meanwhile, we continue to see increased AI-driven demand from industries like chip design, automotive, streaming, financial services, and education. As an industry pioneer, we are exploring AI data center development and actively upgrading our computing infrastructure to capture market opportunities. AI workloads require massive computing power, necessitating our transition from CPU-based to GPU-based infrastructure. Apart from a few top internet and AI technology enterprises with substantial GPU resources, most small and midsized enterprises are outsourcing this upgrade given the high costs and challenges in purchasing GPU infrastructure outright. AIDCs can meet enterprise computing power needs while minimizing their capital investment, a significant advantage in the current environment. Now let me go through some updates on the IDC front. We continued to win new orders for both wholesale and retail business during the quarter. On the wholesale side, as we mentioned on our last call, we secured a new order from an exciting client for approximately 15 megawatts scheduled to be completed within 2024. We also won a 2.5-megawatt order in our data center in the Yangtze River Delta region for a new customer, one of China's largest companies. On the retail side, we continued to attract new customers in financial services, local services, and manufacturing while deepening existing relationships. Notably, we won a new order of 1.5 megawatts in our data center in the Greater Beijing area for an exciting customer, a leading player in the local service sector. Moving to our long IDC business, we also made progress with our VPN service. Our wholly owned subsidiary DYX-led successfully expanded its global network carriers with new Points of Presence established in Dubai in the first quarter and in Mexico more recently. The new PoPs broaden our VPN service global network coverage and will provide enterprise customers with comprehensive and integrated network cloud security services, enabling them to capitalize on emerging markets and global expansion opportunities. Turning now to our ESG performance. In April, we issued our first annual ESG report declaring our 2023 works and progress in sustainability, including a carbon inventory results. During 2023, we continued to execute our shared sustainability system and achieved various performance across employee diversity and equity, energy consumption efficiency, and more. We also highlighted achievements such as our average annual power usage efficiency of 1.29. Our total grade power purchase was about 56.9 kilowatt hours during the year, and an increase in the percentage of female employees in management positions to 31%. Moving forward, we will remain dedicated to integrating ESG-based practices company-wide, advancing the coordinated development of the green economy and the digital economy, driving sustainability and creating value for our stakeholders and associates. To conclude, our solid first quarter performance underscores our growth in a broad and growing area of innovative IDC services, outstanding high-power density development capabilities, and our expanding customer base. Looking ahead, we will continue to drive our new core business strategy and pursue high-quality goals while advancing the development of China's digital economy. Thank you, everyone. I will now turn the call over to Qiyu to discuss more about our operating and financial performance.

Thank you, Gavin. Good morning, and good evening, everyone. Before we start the detailed discussion of our first quarter performance, please note that, as Gavin just mentioned, we have enhanced our disclosures with more detailed operational and financial metrics starting this quarter. We believe these new metrics will provide shareholders with greater insight into our business. Specifically, beginning in the first quarter of 2024, our IDC business was subdivided into wholesale IDC business and retail IDC business based on the nature and scale of our data center projects. Prior to 2024, the subdivision was based on the types of customer contracts. You may find a detailed list of all wholesale projects in our IR presentation for this quarter. Accordingly, for operating metrics, we have presented them by retail and wholesale separately. For the wholesale business, the metrics are mirrored in terms of power capacity instead of cabinets, which we believe will more meaningfully reflect our business development. Additionally, our wholesale capacity is presented across three different states, including in service, under construction, and held for future development, which we believe will provide a clear and more comprehensive picture of our wholesale capacity, boosting the high-growth potential of our wholesale business. For financial metrics, we have subdivided our net revenue into revenues from IDC business, which includes both retail revenues and wholesale revenues, and revenue from non-IDC business, which consists of our cloud and VPN business. Now let's move on to our first quarter results. Please also note that unless otherwise stated, all the financials we present today are for the first quarter of 2024 and are in renminbi terms. Furthermore, all the growth rates and revenues are on a year-over-year basis. We kicked off 2024 with solid operating and financial results. Our wholesale IDC business continued to gain momentum, driven by rapid customer movements. Capacity in service was 332 megawatts at the end of the first quarter. Capacity utilized by customers increased by 17 megawatts to 236 megawatts in the first quarter, primarily driven by demand from customers in data centers N-OR06, N-HB03, and E-JS03. As a result, the utilization rate of wholesale capacity improved to 71%, with the utilization rate for mature capacity reaching around 95% and the ramp-up capacity reaching around 34%. In addition, the capacity under construction was 139 megawatts with a pre-commitment rate of around 75% and the capacity held for future development was 557 megawatts. For our retail business, capacity in service was around 52,000 cabinets, remaining flat compared to the last quarter, with utilization rates stable at 64% and the utilization rate for mature capacity reaching around 73%. MRR for retail cabinets was CNY 8,742 in the first quarter compared to CNY 8,759 for last quarter and CNY 8,874 for the same period last year. Moving on to our financial performance, we remain focused on high-quality revenue business, and our efforts continue to generate positive outcomes; our net revenue increased by 5.1% to CNY 1.9 billion, mainly driven by the continued growth of our core business. To highlight, our wholesale revenue increased by 59.1% to CNY 361 million, primarily contributed by E-JS Campus 01 Phase 1, E-JS Campus 02, E-JS Campus 02 B, N-HB03, and E-JS03 data centers. On the other hand, retail revenue decreased by 7.1% to CNY 923.7 million, mainly due to our consolidation and redevelopment of several data centers since the second quarter of 2023. Adjusted EBITDA was CNY 539.8 million with an adjusted EBITDA margin of 28.4%. Net loss attributable to VNET was CNY 187 million. Turning to our balance sheet. At the end of the first quarter, the total amount of the company's cash and cash equivalents, including restricted cash, was CNY 2.1 billion. Meanwhile, net cash generated from operations was CNY 267.6 million, and our CapEx was CNY 971.3 million. For updates on our financing, as we mentioned last quarter, on February 1, 2024, we completed the repurchase payments relating to our convertible senior notes due 2026 in the total principal amount of USD 600 million. In the current capital market environment, this strategic move reflects our resilient business fundamentals and our commitment to long-term sustainable development. Now moving to our full-year guidance for 2024, we expect net revenue to be in the range of CNY 7.8 billion to CNY 8 billion, representing a year-over-year increase of 5.2% to 7.9%, and adjusted EBITDA to be in the range of CNY 2.22 billion to CNY 2.28 billion, representing a year-over-year increase of 8.9% to 11.8%. This is unchanged from our previous guidance. Given the current market conditions, we have increased our delivery plan to 100 to 140 megawatts from the previously stated 100 to 120 megawatts. CapEx is expected to be in the range of CNY 3.7 billion to CNY 4.2 billion. This is unchanged from our previous guidance and may further increase according to market conditions. Looking ahead, our focus remains on high-quality growth; we will continue to execute our effective strategy and further enhance our core capabilities to capture market opportunities driven by the AI boom. This concludes our prepared remarks for today. Operator, we are now ready for questions.

The first question comes from Edison Lee from Jefferies.

Thank you management for the presentation and a very good disclosure. I have three questions. Number one is about the definition of retail and wholesale. I think a lot of investors would like to know what exactly the definition is because the retail MRR that you are presenting today for historical numbers are actually lower than previously disclosed. So that's why I would like to get clarification on the definition. Number two is on operating cash flow. Can you comment why 1Q '24 operating cash flow is so much lower than 1Q '23? And number three is on your retail cabinet redevelopment. Can you tell us how many cabinets are actually being affected by the redevelopment? And what will be the outcome of the redevelopment? Does it mean that these cabinets will actually become wholesale or will they still be for retail and with much higher power? So can you explain that? So let me repeat in Chinese.

Okay. Thank you, Edison. I'll answer the question in Mandarin and let the translator help me to translate to English.

Thank you for the question. I would like to provide more information to enhance the transparency of the company and to help the capital market better understand our business development. Starting in the first quarter of 2024, we will begin to implement new disclosure metrics and indicators. For example, we have categorized our revenue into three main classes: wholesale, retail, and non-IDC. Additionally, we have introduced new business indicators for the wholesale segment, including operational megawatts in service and those under construction, which will be held for future development to provide better clarity.

For the first question about the definition of wholesale and retail, I'd like to clarify that we have redefined these terms. Previously, we categorized major clients as wholesale and small clients as retail. Now, we've made a slight adjustment to enhance our capital market service and improve information transparency. Wholesale projects are now defined as those with a capacity of over 40 megawatts, which we refer to as base-type projects. These projects have the long-term potential for capacity expansion in terms of land, buildings, and power supply and primarily target major clients. However, we also sell a small portion to medium-sized enterprises. In contrast, retail projects, translated as city-type projects, are located in key cities like Beijing, Shanghai, Guangdong, and Shenzhen, usually with sizes less than 20 megawatts and no capacity expansion potential. These projects generally focus on small and medium-sized enterprises, but we also provide retail projects to larger clients to meet their low-latency needs. As you have already noted in our numbers, since 10% of the committed cabinets have been redeveloped and a small proportion of the retail projects are offered to larger clients, the monthly recurring revenue is not included. That is why you are seeing the data discrepancy in the disclosed numbers and records. And for the second question, you asked why the operating cash flow in the first quarter of 2024 was lower than in the first quarter of 2023. Generally, in the first quarter of 2024, the company experienced stable and normal cash flows. However, in the first quarter of 2023, there were some one-time projects, such as those funded by government grants and certain VAT paybacks. These two factors did not occur in the first quarter of 2024.

For the third question, the CFO answered that in Q1 2024, the retail database is functioning in a stable and normal manner, and certain changes have already been observed. Overall, we are transitioning from low-density power cabinets to high-density power cabinets, resulting in a decline in total numbers. This shift is driven by improved resource utilization aimed at maximizing our capacity to meet market demands. In the coming months, we will continue to make adjustments to better align with market requirements. For example, depending on demand in specific markets, we will increase the number and redevelop new cabinets to better serve the local market.

Our next question comes from Yang Liu from Morgan Stanley.

Thanks for the opportunity and great thanks for the more disclosure, which is very helpful to us. I have two questions. The first one is regarding the three business growth outlook. I think, clearly, the wholesale will be a key driver, and the retail looks like a drag. Management, can you quantify the growth rate of the three businesses or what is behind the current guidance of around 5% to 8% of full-year growth in the three business lines? That's my first question. The second question is G&A expense; we saw a pretty big increase year-over-year. What is behind that, and whether that is a one-off or sustainable?

Thank you for the question. I will provide more details about the various revenue streams. In terms of the wholesale business, we achieved a growth rate of 55%. Meanwhile, the retail sector, as you've noticed, has remained relatively flat with a growth rate of about 5% for non-IDC.

I want to give you more information about the EBITDA. Compared to the revenue, it performed better; for instance, even though the retail revenue has remained very flat, the EBITDA is growing, which gives us a better figure due to our strategies on cost operations and cost controls.

For the GM in Q1, I have the following explanations. At the beginning of this year in 2024, the company paid off a significant portion of its debt, and part of that was due to agency service fees, which contributed to the different outcome on the GA. Additionally, there were stock expenditures for the employees.

Our next question comes from the line of Daley Li of Bank of America Securities.

Firstly, it's great to see more disclosure about the segment breakdown. I have two questions. The first one is about the overall demand for China IDC data center market. How does management see the overall demand outlook for this year compared to last? And what kind of clients have been seen with better demand? Can management provide more color? My third question is about the wholesale business. Management discussed the expansion plan for this year earlier. Could management update us on the progress from the clients in the following quarters and for the total expansion target we have?

For the first question, you mentioned the trend of the IDC development. We are collecting business requirements from our clients, particularly from traditional businesses. It is growing steadily, and we are now adapting our capabilities to meet market demands. Many of them have a strong desire to enhance their AI capacities.

At the end of the first quarter of 2024, almost 9% of wholesale requirements are for high-density power cabinets related to AI needs. This strong demand is coming from the chip manufacturing industry, autonomous driving companies, financial services agencies, logistics companies, and educational institutions, all of which have a high demand for developing and using AI-related services.

Now you also raised questions about our potential expanded capacities in 2024 and our plans to do that. Based on our current position, we will adhere to the CapEx plans and targets established previously for 2024. However, we are still in discussions regarding new projects with potential clients, which could enhance our delivery targets. Additionally, we are focusing our plans on various wholesale clients, as we have already established.

You also asked about the wholesale clients for the company. Typically, the contract lasts 2 to 3 years before we can calculate the total fees. However, we are also onboarding new clients, and under the new contracts, the installation of cabinets could be completed within six months.

Seeing no more questions, ladies and gentlemen, that concludes our conference for today. Thank you for participating. You may now disconnect your lines.