Earnings Call Transcript - VNET Q1 2022

Xinyuan Liu, Investor Relations Director

Thank you, operator. Hello, everyone, and welcome to our first quarter 2022 earnings conference call. Our earnings release was distributed earlier today, and you can find a copy on our IR website as well as on Newswire services. Please note that the discussion today 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 report and other documents filed with the SEC. VNET does not undertake any obligation to update any forward-looking statements, except as required under applicable laws. Please also note that VNET's earnings press release and this conference call include the disclosure of unaudited GAAP financial measures as well as unaudited non-GAAP financial measures. VNET’s earnings press release contains a reconciliation of the unaudited non-GAAP financial 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 Investor Relations website at ir.vnet.com. I will now turn the call over to our CEO, Samuel.

Samuel Shen, CEO

All right. Thank you, Xinyuan. Good morning, and good evening, everyone. Thank you for joining our first quarter 2022 earnings conference call. As we continue executing our dual core growth strategy to grow our reach in the retail and wholesale IDC market, we are pleased to report another solid quarter amid a complex macro environment. From a performance standpoint, we got off to a solid start in fiscal 2022, delivering healthy operational and financial growth in the first quarter. Total cabinets under management increased to approximately 79,000 compared with approximately 56,000 at the end of the first quarter of last year. Cabinets utilized by customers increased to approximately 43,000 compared with approximately 33,500 in the comparable period last year. Our retail MRR per cabinet grew to RMB9,236 in the first quarter compared with RMB9,144 in the same period of 2021. For the first quarter, our revenue grew 18.6% year-over-year, and adjusted EBITDA grew 21.9% year-over-year, both in line with our expectations. The phenomenal rise of a digital economy and a favorable policy landscape, as well as our proven ability to execute our strategy, have all continued to boost our business momentum across each of our business segments. First of all, more supportive policy developments are paving the way for continued progress, reinforcing the positive outlook for the IDC sector and its role in China's digital transformation and technology development. At the most recent meeting of the Central Financial and Economic Affairs Commission held last month, China's central government extended the national initiative to further modernize infrastructure across information technology, logistics, and other industries, aiming to deploy a considerable number of next-generation IT infrastructure facilities, which include supercomputers, cloud, AI platforms, and broadband backbone networks. As one of the service providers to support this major initiative, we are well-positioned to benefit from the fast-growing demand in a more favorable and healthier regulatory environment. Additionally, as the significant national infrastructure advancement initiative, Eastern data and Western Computing was released earlier this year to boost data center computing power across the nation. We continue to see great potential for the expansion of our core business with even more efficient and effective approaches. Before I discuss our business segments in more detail, I'd like to speak about the COVID-19 resurgence in certain key locations and its impact on our operations. The lockdowns and related travel restrictions that were imposed in Shanghai, Beijing, and several cities in Hebei province have impacted some of our customers' moving rates and our progress with respect to the construction of some of our new projects in these areas. Our data centers in the affected areas have continued to operate uninterruptedly throughout the lockdowns, and we truly appreciate each of our on-site employees' efforts to keep things running smoothly. We will continue to closely monitor pandemic developments and together with our teams, we will implement measures to mitigate risk for our operations. Now let's look at the first quarter performance and latest development of our wholesale business. As digitalization is taking place across sectors and geographies, more telecom customers, especially internet players and cloud service providers, are actively expanding their efforts to enhance their data processing and storage capacities to keep up with frontier technology trends and gain competitive edges. Our compelling value proposition, rooted in extensive industry know-how, in-depth resource capabilities, and well-seasoned operation teams, continually enhances the appeal of our wholesale service offerings to leading technology players. During the first quarter, we signed four contracts generating a total of approximately 60 megawatts in capacity, including an extended pre-committed order of approximately 11 megawatts from a leading social platform operator and three orders under multi contracts with two existing customers and one state-owned cloud service provider in China's Southwestern region. We continue to see an increase in demand from our wholesale business, and we're quite optimistic about our future prospects in this segment. Moving on to our retail business. In the first quarter, our ongoing efforts to advance our value-added service offerings fueled steady growth in orders from both existing and new customers, reaffirming the effectiveness of our strategy and increasing efficiency of our execution. New customer expansion was primarily driven by growing demand from the financial services, e-commerce, automotive, and energy sectors. Also, as we continually enhance our service capabilities and enrich our one-stop service offerings, a large number of existing customers, including internet players, cloud service providers, cross-border e-commerce players, financial service providers and local service online marketplaces continue to expand or upgrade their contracts to procure additional value-added services, spanning a wide spectrum of areas from interconnectivity, bare metal services, and hybrid multi-cloud solutions, in addition to colocation services. Technological innovation is a crucial driver for the business development of our digital services. We just launched a new in-house developed interconnectivity solution that aims to provide all-in-one enterprise connection services built on our innovative SD-WAN technology and backbone network. It also includes an array of cutting-edge features catering to different platforms and hybrid access networks to enable application-aware intelligent routing and network-wide visualization. In addition, we just rolled out Neo Stack, a customer-oriented full-stack cloud native service to empower corporate developers to build and run scaled applications in public, private, and hybrid cloud facilitating digital transformation initiatives. This new product launch also represents our powerful engineering capabilities to enrich our service portfolios, deliver additional values to customers, and diversify our revenue streams. In addition to serving corporate customers across various verticals, we continue to explore opportunities to partner with more state-owned enterprises by leveraging our aptitude for technology and healthy government relationships. Recently, we signed an exclusive partnership agreement with People Data, a subsidiary of People’s Daily Online, an authoritative media platform in China. Under the agreement, as the exclusive partner, VNET will jointly build and operate People Cloud, the cloud platform of People Data, to uphold its role in serving local government and SOE customers' needs for cloud computing. In this regard, we will provide all-around services, including colocation, interconnectivity, cloud platform, cognitive workloads, and industry-specific cloud solutions. On the Blue Cloud business front, we have been actively exploring business opportunities in different vertical industries leveraging our seasoned cloud service operation expertise and through a data long exclusive partnership with Microsoft. More encouragingly, in Q1 2022, we began to offer operations and maintenance services to support the digital business system of Huaneng Power, one of China's largest electric power companies. We will deliver first-class 24/7 O&M services across a wide array of core business systems as well as secure a high visibility architecture for relevant business continuity. The initial feedback we have received from our customers has been remarkable. Our solutions and services not only enable customer systems to run trouble-free, but also optimize their efficiency and performance to better meet business needs, while effectively reducing their operating costs. As this system performance enhancement improves the overall operating efficiency, our customers' overall business management capabilities also grow stronger, which in turn strengthens their competitive advantage. We expect to further expand our specific solution for other sectors. Last but not least, I'd like to reiterate that in a highly dynamic market in which we operate, upholding long-term commitments and responsibilities to our industry, environment, and society is central to our ongoing success. As our industry shifts towards green data center operations and the world comes to embrace sustainable enterprise management, we are committed to building VNET as a positive force for the betterment of society. For more than two decades, we have been committed to advancing a wide range of ESG initiatives within the stakeholder communities we serve. Our 2021 ESG report published in April showcases these initiatives and demonstrates our commitment to integrating sustainability into every aspect of our operations. Some highlights include our carbon neutrality target by 2030, a lower than industry average PUE, and the fact that we are the first data center service providers in China to disclose the third-party verification of our carbon inventory results. As a prominent domestic enterprise and a global industry player, we will continue to lead by example in this aspect. Looking ahead, we will remain dedicated to utilizing our core strengths while continuing to focus on our dual core growth strategy. We expect to capture greater opportunities and fulfill more growing digital demand across wide-ranging verticals as the digital transformation progresses. Thank you, everyone. With that, I will now turn the call over to our CFO, Tim, to discuss our financial performance for the quarter and our business outlook.

Tim Chen, CFO

Thank you very much, Samuel. Good morning, and good evening, everyone. Before we start the detailed discussion of our financials, 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 may be found in the reconciliation tables included in our earnings press release. Please also note that unless otherwise stated, all the financials we present today are for the first quarter of 2022 in renminbi terms. First, we're pleased to have achieved solid results on our top line and adjusted EBITDA in the first quarter, in line with our expectations. The sequential decrease in revenue was mainly due to seasonality, given that the first quarter is typically not a strong period for our business because of the Chinese New Year. In addition, our move-in rate was also impacted by lockdowns. Our robust financial performance against a backdrop of macro fluctuations reflects our continued efforts to further expand our service offerings, diversify our customer base, and invest in our core capabilities. Next, let me walk you through our first-quarter financial results. Unless otherwise specified, the growth rates I will be reviewing are all on a year-over-year basis. In the first quarter, our net revenue increased by 18.6% to RMB1.65 billion from the same period last year, mainly due to increased customer demand for our highly scalable carrier and cloud-neutral IDC solutions from both wholesale and retail IDC customers as well as the continued growth of our cloud business. Gross profit was RMB355.5 million in the first quarter of 2022, representing an increase of 10% from the same period of 2021. Gross margin was 21.6% in the first quarter of 2022 compared to 23.3% in the same period of 2021. Adjusted cash gross profit, which excludes depreciation, amortization, and share-based compensation expenses, was RMB684.8 million in the first quarter of 2022, an increase of 13.1% from the same period of 2021. Adjusted cash gross margin in the first quarter of 2022 was 41.6% as compared to 43.6% in the same period of 2021. Adjusted operating expenses, which exclude share-based compensation expenses and compensation for combined employment in an acquisition, was RMB200.8 million in the first quarter of 2022, representing a decrease of 5.5% from the same period of 2021. As a percentage of net revenues, adjusted operating expenses in the first quarter of 2022 was 12.2% compared to 15.3% in the same period of 2021. Adjusted EBITDA in the first quarter of 2022 was RMB506.2 million, representing an increase of 21.9% from the same period of 2021. Adjusted EBITDA in the first quarter of 2022 excluded share-based compensation expenses of RMB43.2 million. Adjusted EBITDA margin in the first quarter of 2022 was 30.8% compared to 29.9% in the same period of 2021. Our net profit attributable to ordinary shareholders in the first quarter of 2022 was RMB90.7 million compared to a net loss of RMB84.7 million in the same period of 2021. Basic and diluted profit was RMB0.1 and RMB0.03 per ordinary share, respectively, and RMB0.6 and RMB0.18 per ADS, respectively. Each ADS represents six Class A ordinary shares. As for our balance sheet, the aggregate amount of the company's cash and cash equivalents, restricted cash, and short-term investments as of March 31, 2022, was RMB3.36 billion. Meanwhile, net cash generated from operating activities in the first quarter of 2022 was RMB482.6 million compared to RMB274.5 million in the same period of 2021. Our CapEx in the first quarter of 2022 was RMB1 billion. Looking ahead, we remain committed to investing in our core capabilities to advance our dual-core growth strategy, broaden the spectrum of our services, increase customer diversification, and tap into the long-term potential of digital economy development in China. Moving to outlook. For the full year of 2022, our outlook remains unchanged from the previously provided estimates. We anticipate net revenues to be in the range of RMB7,450 million to RMB7,750 million and adjusted EBITDA to be in the range of RMB1,975 million to RMB2,125 million. This forecast reflects the company's current and preliminary views on the market and its operational conditions, which do not factor any potential future impacts caused by the COVID-19 pandemic and are subject to change.

Operator, Operator

Thank you. We will now begin the question-and-answer session. Our first question will come from Yang Liu at Morgan Stanley. Please go ahead.

Yang Liu, Analyst

Thanks for the follow-up, Xinyuan Liu. Two major questions here. The first one is on the COVID impact. Could management update us in terms of what percentage of your data centers are dealing with the ongoing lockdown issue? And in terms of the second quarter moving, should we expect even lower than the first quarter given both Shanghai and Beijing have some issues and perhaps also Wuhan? And also for the new capacity construction, whether the lockdown will delay the new capacity delivery, and of course, whether that will bring some CapEx savings this year? So that is the overall impact question — COVID-impact question. And the second one is on the demand. We saw a new line in the disclosure that is utilized cabinets. I think that is a pretty important metric the market is monitoring. Could management disclose what is the number at the end of last year? And what is the expected growth or expected increase for the full year 2022 based on the current demand profile?

Samuel Shen, CEO

Thank you, Yang. This is Samuel. Let me take the first part of your question regarding the lockdown impact. First of all, the lockdowns and related travel restrictions imposed in Shanghai, recently in Beijing, and in several cities in Hebei province have impacted some of our customers' moving rates and our progress with respect to the construction of some of the new projects. Separately, we're also seeing some industries like automotive are slowing down their plant expansion due to supply chain issues. That being said, we will continue to monitor the situation, working with customers and partners to figure out the appropriate measures to mitigate potential risks for business operations. Based on what we have seen so far and our assumptions regarding how different cities incrementally loosen restrictions on business and individuals, like what we have seen in Shanghai, we hope to see improvements in the coming months. We expect our Q2 revenue to probably grow mid-teens year-over-year and EBITDA to grow low-single digits, perhaps year-over-year. Having said that, we are going to do everything possible to accelerate once the situation improves. Tim, do you want to add any comments?

Tim Chen, CFO

Yeah, sure. Let me tackle the point about the whole capacity delivery. In our original plans, the deliveries were targeted for the back end of the year. Once the control measures are eased, we will do our very best to have the construction catch up. The original plan was to have it occur in the second half of the year. So I believe there is at least a greater chance for that to happen. Regarding the second part of your question, Yang, at the end of 2021, we had around just over 41,000 cabinets, specifically 41,700 cabinets. So you can sort of calculate the quarter-on-quarter increase in the number of cabinets. As for the full year, we can provide more specifics, but at this point, we are still in the middle of a slow ramp-up due to the COVID measures that Samuel mentioned earlier. We remain optimistic regarding the full year ramp-up based on customer needs for a quick ramp. However, the extent of the ramp-up will depend on how long these measures remain in place in the Shanghai and Beijing areas.

Yang Liu, Analyst

Thank you.

Operator, Operator

Our next question will come from Edison Lee at Jefferies. Please go ahead.

Edison Lee, Analyst

Thank you. Hi, management. Number one is more on the financial side. So why was the 1Q '22 revenue lower than 4Q '21? Because I imagine that could have to do with the cloud business or the VPN business. Can you elaborate a little bit more on that? And then on Q2, since we are already at the end of May, right? I think you commented that maybe it will be worse than 1Q. So does it mean that you remain very confident that the second half will make up for that? And whether that recovery is realistic based on your assessment right now? The last question is about Hina Group’s privatization offer because the company has not made any official comments on it. Is it possible for you to share some insight into what the Board has been discussing in terms of that privatization offer? Thank you.

Tim Chen, CFO

Sure, let me take that incrementally and then I'll have Samuel add additional context. Regarding the revenue side, we have a situation in the fourth quarter compared to the first quarter where there are one-off events in the fourth quarter, especially tied to annual e-commerce events that lead to increased revenues from those customers, which don’t repeat in the first quarter. So that is the primary driver of the difference. Looking ahead to the second quarter and the ability for customers to ramp up, I see that headwinds remain. However, the feedback from our customers shows their desire to ramp up. We will have greater insight as we move through the year about how quickly we can respond to that pending on the easing of restrictions. Last question regarding the offer: As we've told the market, we would provide updates as and when it becomes appropriate. Currently, there have been no decisions taken by the board that we can disclose to the market.

Samuel Shen, CEO

Probably only a few things to add on what Tim mentioned. Last year, we acquired a company called Tencent Cloud, which provided solutions and platforms to enterprise customers. Their business also has seasonality; it tends to be stronger in the second half of the year. In addition to one-off projects affecting the retail sector, we have some business elements that can be more bottom-heavy, which sheds additional light on the revenue differences.

Edison Lee, Analyst

Okay. Can I quickly follow up on the privatization offer? I understand the board is still discussing that. Could you share a little bit more regarding whether the board is waiting for more information from the bidder or considering alternatives? Is the board discussing with the bidder? Any additional color you can share would be appreciated.

Tim Chen, CFO

At this moment, we have no further details to share. However, we will provide updates as and when there is something we can disclose to the market.

Edison Lee, Analyst

Okay. That’s great. Thank you.

Operator, Operator

Our next question comes from Hongjie Li from CICC. Please go ahead.

Hongjie Li, Analyst

Hi, management. I have two questions. The first one is about the People Cloud, as recently the People Cloud launch has also participated. I was curious about what the company thinks about such a business. The second question is on the R&D expense ratio, which slightly increased to around 4% in the first quarter. Could management share the current R&D expenses? Thank you.

Samuel Shen, CEO

Tim, how about I take the first one and then you can cover the second question that Hongjie has. Regarding the partnership with People Cloud, it is true that we just signed an exclusive strategic partnership agreement with People Data. For those who may know it better, People Data is a subsidiary of People's Daily Online, which is an authoritative media platform in China. Under the agreement, as an exclusive partner, VNET will jointly build and operate People Cloud. We aim to target the People Cloud as the platform serving local government and SOE customers' specific cloud computing needs. We will provide a comprehensive range of services from colocation, interconnectivity, bare metal services, cloud platforms, cognitive workloads, and industry-specific cloud solutions. This partnership is still in the early stage, and we are working together on the product roadmap. However, it demonstrates our strong government relationships and ability to partner with leading state enterprises. Regarding R&D expenses, let me pass that to Tim.

Tim Chen, CFO

Thank you, Samuel. I’ll address the question about R&D costs. Your inquiry relates to our investment focus, which links back to what's in our press release and what Samuel mentioned earlier regarding new products and solutions. The new SD-WAN interconnectivity solution is one of them, primarily offered to our retail enterprise customers. I would say that the R&D expenses will likely remain at these levels, but part of it is actually a recategorization; some costs previously classified under different departments have now been categorized as R&D. So overall costs are not increasing, it's just a reclassification in terms of what we recognize as R&D.

Hongjie Li, Analyst

Thank you.

Operator, Operator

Our next question comes from Albert Hung at JPMorgan. Please go ahead.

Albert Hung, Analyst

Yeah. Thank you, management team. My first question is still about the second half. If I heard you right, your commentary for the second quarter suggests only 5% sequential growth. If you want to achieve full-year guidance, you probably need more than 25% growth in the second half. I understand there should be some seasonality in the second half based on historical trends, typically mid to high-teens. So with macro headwinds and enterprise spending slowed down, may I ask why you are so bullish on the second half demand outlook? Are there any leading indicators such as new bookings? Could you share any feedback on your discussions with new customers? My second question relates to the new wholesale customer wins since the first quarter. Can you provide the moving rate outlook for the new customer, and is there any pricing difference between the new orders and the existing ones? Thank you.

Tim Chen, CFO

Albert, let me take the first part of that, and Samuel may want to chime in. In terms of the second half outlook, there are leading indicators such as customer feedback demonstrating their desire to ramp up. The current constraint is the measures imposed by the government that prevent customers from fully utilizing data centers, but we are quite confident that once these are eased, customer demand is likely to surge based on prior occurrences. However, if these measures are extended indefinitely, we’ll need to reassess what that means for the third and fourth quarters and the full year. Your second question was whether there was any pricing or moving rate difference between new and existing customers — no, they reflect similar terms in pricing to existing contracts.

Albert Hung, Analyst

Understood. For a follow-up on the moving rate, I understand there might be some constraints in Shanghai and Beijing. But did you see any separation in moving rates in other regions because customers may be cautious due to potential lockdowns?

Samuel Shen, CEO

Yes, if I look back, I would say the Shanghai region lockdown does impact customers' moving rates. However, as I have stated earlier, the lockdown and travel restrictions create negative impacts, but I believe this will not be long-term. Currently, when we look at regions like Chongqing and Xi’an, we are not seeing that level of impact. While COVID-19 has introduced headwinds, customers' digital transformation efforts continue to accelerate. Therefore, we remain cautiously optimistic. Overall, I think the major city's focus on achieving societal zero COVID will lead to better conditions, and the impact will be short-lived.

Albert Hung, Analyst

Thank you. I’ll come back in the queue.

Operator, Operator

Our next question comes from Clive Cheung at Credit Suisse. Please go ahead.

Clive Cheung, Analyst

Hi, management. Thank you for taking my question. My first question is regarding wholesale demand as a follow-up. As we’re seeing some slowdown in the cloud business, in traditional wholesale customers, such as some recent reports, how should we expect this to impact our wholesale outlook, particularly in the second half post-COVID impact? My second question is about potential pricing or margin impact as we have seen over the last two quarters, we’ve acquired SOE orders or government-related customers. Would this impact our margin profile at all? Thank you.

Samuel Shen, CEO

This is Samuel. I’m happy to take your questions, and Tim can add additional color. From a wholesale segment point of view, we tend to focus on cloud service providers and large internet companies, especially those requiring data centers for storage. Analysts may express concerns regarding government support for the internet sector; however, I believe the Chinese government remains committed to supporting this area due to its contributions to the economy over the last twenty years. Regulatory risks have increased for certain internet segments, but we’ve seen both headwinds and tailwinds. As for pricing competition, we are not currently seeing a material difference from past quarters. It’s reasonable to assume that, due to the pandemic, customers could become more cost-sensitive as economic conditions evolve. However, I don't foresee large impacts on our pricing structure.

Tim Chen, CFO

To clarify, regarding margin impacts from state-owned enterprises or government contracts, it's still early to determine any overarching trend since we're only getting our first orders now. However, these customers are likely to engage us across a range of services, maintaining overall pricing that's comparable to our existing contracts.

Clive Cheung, Analyst

Okay. Thank you.

Operator, Operator

Our next question comes from Sara Wang at UBS. Please go ahead.

Sara Wang, Analyst

Hi. Thank you for the opportunity to ask questions. I have two questions. First is still on demand. Just a quick follow-up on the previous question on demand. So is it right to say that on the wholesale side, we are still seeing orders from the Internet sector? And how about the retail side? Do we see any change in the verticals of our customer mix, such as certain industries growing faster than others when it comes to new orders? Second question is on the People Cloud. Why did People Data choose VNET over other third-party IDC providers or SOE Telco IDC services? Thank you.

Samuel Shen, CEO

Thank you, Sara, for the questions. From the retail momentum, if you look at the first quarter this year, our top five verticals remain the same, including IT services, financial services, telecommunications, local life, and entertainment. Nothing particularly changed. From a momentum point of view, we've seen strong year-over-year double-digit growth. We're well-resourced to meet customer demand. Additionally, we notice customers increasingly looking for full-stack services beyond just colocation, indicated by their preference for a single partner capable of comprehensive offerings. Regarding your second question, we have communicated to the industry that dedicated cloud systems are likely to become mainstream in China. Public clouds have their advantages, but they also have limitations, and the same goes for private clouds. In China's regulated economy, data sovereignty and privacy concerns are increasingly pertinent. Therefore, based on our track record and comprehensive service offerings, People Data performed due diligence and selected VNET as their exclusive partner. We are honored by this opportunity and excited to report progress later.

Ethan Zhang, Analyst

Good morning, team and Samuel. I have two questions. The first is regarding the margin trend. I noticed the first quarter adjusted EBITDA margin improved by around 4% compared to Q4. What was the main driver behind this and what is the margin trend anticipated in Q2 and the second half given the ongoing COVID lockdowns in China? The second question is a follow-on regarding People Cloud. I understand that we could provide private or hyper-cloud solutions to SOE customers, but how would our People Cloud service compare with our previous retail and wholesale customers in terms of contract size and price level, as well as margins? Thank you.

Tim Chen, CFO

Let me take the first question regarding margins. As noted in our earnings release, the margin increase in Q1 was driven primarily by cost control, along with lower top-line revenues. That being said, as we look forward to the full year, we expect margins to remain in line with prior expectations. There may be incremental costs brought in by the lockdown measures, yet we also anticipate increased revenues once customers are back in the data centers. Ultimately, both aspects will impact margin expectations. Samuel, do you want to speak to how the People Cloud compares in terms of contracts and margins?

Samuel Shen, CEO

Certainly. Beyond the points I've made earlier, I would emphasize that hybrid multi-cloud solutions are becoming the norm in China. This partnership with People Cloud serves as validation for the importance of dedicated cloud solutions. Public cloud services often incur variable costs and limited customization, while private cloud offerings can be costlier with limited user accessibility. ThePeople Data partnership highlights our commitment to specialized offerings tailored to meet regulatory frameworks and specific enterprise needs within our economy.

Guohan Wang, Analyst

Thanks for management. It's Guohan from Daiwa Capital Markets. So my first question is regarding your pipeline. I think there is no material change in our current pipeline compared to last quarter. However, we also see a low end of the range at approximately around 13,000. Based on current market demand dynamics, do we have any key performance indicators, such as pre-commitment rates to determine the capacity we need to inject based on the real situation in the second half? That's my first question. The second one is a question about customer diversification. I see we've made progress in non-Internet sectors like finance. We are discussing new energy and other sectors. Can you provide more insight into the penetration strategies for SOEs and other sectors in the future to mitigate negative impacts from Internet factors?

Tim Chen, CFO

Let me tackle the first question on our pipeline. The lack of material change is due, in part, to the construction progress we have in our plans. There are delays, so we remain optimistic about finishing up within our yearly targets. We monitor both construction and customer feedback closely to prepare for shifts in demand and capacity. The second question regarding the customer diversification — Samuel, do you want to cover that?

Samuel Shen, CEO

Certainly, Guohan. Historically, our revenue has been driven by major sectors like IT services, financial services, and telecommunications, accounting for around 80% of our revenue. However, we are now focused on enhancing inroads with state-owned enterprises. The acquisition of Tencent Cloud last year has created synergies, particularly with financial institutions which also support state enterprises. The partnership with People Data is a vital step in this direction. We are excited about our potential to leverage technology partnerships to facilitate growth within the state-owned sectors.

Operator, Operator

Thank you, ladies and gentlemen. That does conclude our conference for today. Thank you for your participation. You may now disconnect your lines.