Earnings Call
VNET Group, Inc. (VNET)
Earnings Call Transcript - VNET Q4 2021
Operator, Operator
Good morning and good evening, ladies and gentlemen. Thank you and welcome to VNET Group Inc, Fourth Quarter, 2021 Earnings Conference Call. At this time, all participants are in listen-only mode. We will be hosting a question-and-answer session after the management prepared remarks. With us today are Mr. Samuel Shen, Chief Executive Officer and Executive Chairman of Retail IDC. Mr. Tim Chen, Chief Financial Officer, and Ms. Xinyuan Liu, Investor Relations Director of the company. I will now turn the call over to the first speaker today, Ms. Liu, IR Director of VNET Group Inc. Please go ahead, ma'am.
Xinyuan Liu, Investor Relations Director
Hello, everyone. Welcome to our Fourth Quarter 2021 Earnings Conference Call. Our earnings release was distributed earlier today and you can find a copy on our IR website. 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 obligations to update any forward-looking statements, except as required under applicable laws. As a reminder, this conference is being recorded. In addition, a webcast of this conference call will also be available on our IR website at ir.vnet.com. I will now turn the call over to our CEO, Samuel.
Samuel Shen, CEO
Thank you, Xinyuan. Good morning, and good evening, everyone. Thank you for joining our fourth quarter 2021 earnings conference call. We concluded 2021 with strong operating and financial results. Operationally, we successfully achieved this year's delivery target by adding approximately 25,000 cabinets in the fourth year of 2021, including 13,276 cabinets that were delivered in the fourth quarter. Financially, for the full year of 2021, we grew our revenue by 28% and our adjusted EBITDA by 32%. We attribute our achievements to favorable government policies, robust market demand, persistent strategy execution, and methodical service expansion. First, we're pleased to see the favorable government policies continue to provide a strong tailwind to our industry development. Last month, the eastern data, western computing plan was joined and released by China's National Development and Reform Commission, together with three other central regulatory departments. Of the eight national computing UPS, we have already deployed our data centers in Beijing, Cangene, Hoby region, Yangtze River Delta, Greater Bay Area, Chengdu-Chongqing economics circle, and Inner Mongolia autonomous region. In addition, this January, the State Council of China unveiled the first five-year gross plan for the digital economy, highlighting the sector's role in reshaping the global economic structure and rolling out development targets through 2025. The plan laid out measures for operating national infrastructure, bolstering the role of data as a production element, and promoting digital transformation. The plan also gives priority to the development of digital infrastructure as a pillar of achieving digital economic prosperity that will also spur investment and drive overall economic growth. During the fourth quarter, we received orders not only from fair-weather technology companies in the internet sectors but also traditional companies in brick-and-mortar industries that are transforming through digitalization. In addition, we're seeing growing demand in both the wholesale and retail segments. In order to seize this burgeoning market demand, we maintained a laser-sharp focus on executing our dual-core strategy to offer both wholesale and retail IDC services, enabling us to achieve solid operating results. On the cabinet delivery front, we added 13,276 cabinets on a net basis in the fourth quarter to 78,540 cabinets as of December 31st, 2021, despite a myriad of challenges including equipment delivery delays caused by the COVID resurgence in certain regions of China, global chip shortages, and construction difficulties due to excessively cold weather. To meet our annual delivery targets against all odds is a strong testament to our solid execution capabilities, developed on the foundation of our extensive experience in the IDC sectors. These achievements demonstrate our superior capabilities in project management, logistics, as well as suppliers and government relations. In addition, we successfully leveraged our extensive technological expertise to explore extended resources. Turning to our monthly recurring revenue, our retail IDC MRR reached a new high of 9,301 in the fourth quarter, representing 2% year-over-year growth. Our continued growth in MRR is a manifestation of the increasing endorsement from our existing customers. As we continue to improve our service capabilities and reach our one-stop solution offerings, our existing customers expanded their contract scopes accordingly to include more value-added services, such as inter-connectivity, managed services, hybrid cloud services, O&M, and more. We're also making good progress on our utilization rate. Our compound utilization rate increased to 61.6% in the fourth quarter, compared to 59.8% in the previous one. This increase was mainly driven by consistently strong demand from the internet sectors and the digitalization trend in traditional industries, such as financial services, automobile, manufacturing, and local services. The utilization rate for mature cabinets, which consisted of cabinet deliveries prior to and during 2019, was 76.7% compared to 75.5% in the previous quarter. The utilization rate for ramp-up in newly built cabinets, which consisted of cabinet deliveries in 2020 and 2021, was 39.6% compared to 34.7% in the previous quarter. That being said, we do expect to see some seasonal fluctuations in the utilization rates in the first quarter. This is because each year, we reclassify mature web pop in newly built cabinets in the first quarter, and we delivered a large amount of newly-built cabinets in the fourth quarter of last year. On the resource front, we have recently secured new resources, exceeding 20 megawatts in capacity at a premium location in Beijing, and we expect to deliver the cabinets over the next two years in multiple phases. Additionally, we continue to secure more resources in other key cities and surrounding areas on the wholesale business side while maintaining our ramp-up speed and continuing to secure more orders from existing and new customers. Our customers in the internet sectors and cloud computing industry maintained a healthy pace of development and ramp-up fast to meet their increasing data processing needs. In the fourth quarter, we won a pre-committed order of approximately seven megawatts in capacity from an existing internet customer. Recently, the same customer awarded us a further pre-committed order of approximately 11 megawatts in capacity. We also secured three other orders totaling approximately five megawatts in capacity, two of them were multi-year contracts from our existing customers in the internet and technology sectors respectively, while the third one was a multi-year contract with a state-owned cloud enterprise in the southern and western regions of China. We continue to see increasing demands in our wholesale business and are confident about our future prospects in this segment. Turning to our retail business, the digital transformation trend further fueled our business growth across multiple verticals. We continue to see transfers remain from several industries, including financial services, automobile manufacturing, local services, and IT services. In addition, we also saw increased demand from traditional industries, such as logistics, manufacturing, and construction. For example, several globally renowned companies partnered with us to expand their business in China during the quarter. Demonstrating our strong customer recognition, exceptional operating track record, and superior IDC technologies. These customers include a leading global investment bank, a world-leading credit rating service provider, and a global leader in the premium and luxury car industry. We have now reached over 1,400 IDC customers in total, and they're operating in a wide variety of industries. This growth and diversification of our customer base will help us to mitigate any potential adverse regulatory changes and also serves as a secure foundation for the future development of our dual-core strategy. For our BoomCloud business, we continue to grow the business by providing industry-specific solutions to help our customers improve their operational efficiency and reduce costs. We've been seeing unprecedented supply chain disruptions caused by the COVID-19 pandemic. We decided to proactively develop a solution to help our clients resolve acute pains in their logistics management. In the short term, their product time to market has been significantly affected. We recently initiated a logistics execution system, one of our key SaaS offerings to IDC customers in the automotive industry. This SaaS offering improves support for lean manufacturing with the aim of minimizing lead time and increasing customer satisfaction by fulfilling tailored requirements. The system also provides better warehouse management by synchronizing online and offline orders, enabling direct ordering from manufacturers, eliminating the need for intermediate distributors, allowing manufacturers to produce goods based on the actual needs of customers. During the quarter, Niutron, a new local EV manufacturer, began using our logistics execution system and provided excellent initial feedback. Utilizing our successful execution experience and product development capabilities, we expect to expand our product reach to serve more upstream and downstream industry participants in the automotive industry and expand into various other sectors going forward. Beyond the execution of our strategy, we further explored options to diversify our financing solutions and enhance the resilience of our business. In January, we reached an agreement with Blackstone, the world's largest alternative investment firm. Pursuant to which Blackstone made an additional investment by purchasing U.S. $250 million of our convertible notes. Last December, we signed a master joint venture investment agreement with a sovereign wealth fund. Together, we will form joint ventures to pursue development and investment opportunities in multiple built-to-suit hyper-scale data center projects in China. As a leading data center service provider in the industry, we have always considered sustainable development as a core part of our mission since inception. An ESG strategy is an integral part of our long-term business success. We aim to achieve carbon neutrality and 100% renewable energy by 2030, and we have also committed to a number of ESG initiatives. First of all, we strive to contribute to a sustainable future. We became a signatory of the UN Global Compact in November 2021 and now pledge to consider all 17 UN sustainable development goals in our comprehensive business development. Similarly, in pursuit of increasing the renewable energy ratio in our energy consumption, we successfully signed strategic cooperation agreements with China Huadian Corporation, Shanghai Electric Wind Power Group, and China Southern Power Grid, Energy Efficiency and Clean Energy Co. In addition, as a response to the international initiatives and domestic callings against climate change, we're now examining climate-related risks and opportunities concerning the industry and have recently committed to supporting the taskforce on climate-related financial disclosures, aka TCFD. Last but not least, we continue striving to decrease the PUE of our data centers. The average PUE of our stabilized data center was 1.37 in 2021, notably lower than the industry average. Turning to our capital market initiatives, I would like to take the opportunity to share with you that we are planning a secondary listing on the Hong Kong Stock Exchange. We believe a secondary listing in Hong Kong will provide our shareholders with an additional trading venue while offering them greater protection, amid the evolving regulatory environment. The timing of our contemplated secondary listing is subject to market conditions and regulatory approvals, however. In summary, 2021 was a rewarding year. We maintained consistent execution of our dual-core strategy to achieve sustained growth and also succeeded in meeting our annual target for 2021 by delivering approximately 25,000 cabinets. In consideration of the uncertainties in the macroeconomic environment, we would like to revise our annual cabinet delivery target from 25,000 cabinets to a range of 14,400 to 17,400 cabinets for the year of 2022. With that, I will now turn the call over to Tim. He will discuss our financial results for the quarter and his thoughts on our future growth. Hi Tim.
Tim Chen, CFO
Thank you, Samuel. Good morning and good evening, 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 that 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 also note that unless otherwise stated, all the financial numbers we present today are for the fourth quarter of 2021 and in Renminbi terms, while percentage changes are on a year-over-year basis. As Samuel mentioned, our performance in 2021 was characterized by healthy revenue growth and margin expansion, improved operational efficiency, augmented utilization rates, and consistent cabinet capacity deliveries, which proceeded according to schedule despite macro uncertainties. Net revenue in the fourth quarter of 2021 increased to RMB1.75 billion, a 29.4% year-over-year increase from the fourth quarter of 2020. This increase was 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 notable growth in our cloud basis. Gross profit in the fourth quarter of 2021 was $380 million representing a year-over-year increase of 29.1% and a sequential increase of 1.3%. Gross margin in the fourth quarter of 2021 was 21.8% compared to 21.8% in the fourth quarter of 2020, and 24% in the third quarter of 2021. The year-over-year decrease in gross margin or small decrease in gross margin was primarily attributable to the massive delivery of new cabinets, which usually have a ramp-up phase to reach the expected profit level. Adjusted cash gross profit, which excludes depreciation, amortization, and share-based compensation expenses, was $713.8 million in the fourth quarter of 2021, an increase of 22.7% from the fourth quarter of 2020 and 5.8% from the third quarter of 2021. Adjusted cash gross margin for the fourth quarter of 2021 was 40.9% compared to 43.2% in both the fourth quarter of 2020 and third quarter of 2021. Adjusted operating expenses, which exclude share-based compensation expenses, compensation for post-combination employment in acquisitions, impairment of loan receivable to potential investee, and impairment of long-lived assets were $273.7 million in the fourth quarter of 2021, representing an increase of 27% from the fourth quarter of 2020, and 12.2% from the third quarter of 2021. As a percentage of net revenues, adjusted operating expenses in the fourth quarter of 2021 were 15.7% compared to 16% in the same period of 2020, and 15.6% in the third quarter of 2021. Adjusted EBITDA in the fourth quarter of 2021 was RMB 463 million, representing an increase of 18.8% year-over-year from the fourth quarter of 2020, and an increase of 2.8% sequentially from the third quarter of 2021. Adjusted EBITDA in the fourth quarter of 2021 excluded share-based compensation expenses of RMB 253 million. Adjusted EBITDA margin in the fourth quarter of 2021 was 26.5% compared to 28.9% in both the fourth quarter of 2020 and the third quarter of 2021. Our net loss attributable to ordinary shareholders in the fourth quarter of 2021 was RMB 27.3 million compared to a net loss of RMB 1.02 billion in the fourth quarter of 2020 and a net profit of RMB 156.2 million in the third quarter of 2021, basic and diluted loss was 0.030 and 0.28 per ordinary share respectively, and 0.18 and 1.68 per ADS respectively. Each ADS represents six Class A ordinary shares. As for our balance sheet, the aggregate amount of the company's cash, cash equivalents, restricted cash, and short-term investments as of December 31st, 2021, was 1.71 billion, a decrease of 49.8% from December 31st, 2020. Meanwhile, net cash generated from operating activities in the fourth quarter of 2021 was 664 million compared to 283.8 million in the fourth quarter of 2020, and 134 million in the third quarter of 2020. Our CapEx in the fourth quarter of 2021 was 2.2 billion, and the total CapEx for the full year of 2021 was 4 billion. We expect to invest four to five billion in CapEx for both our data center constructions and M&A considerations for the full year of 2022. Looking forward, we will continue to explore various financing solutions, execute diligently on our dual-core growth strategy, increase our customer diversification to cultivate resilience, and further consolidate our position as a leading data center services provider in China. Now, moving to outlook. For the full year of 2022, we anticipate net revenues to be in the range of $7,450 million to $7,750 million, and adjusted EBITDA to be in the range of $1,975 million to $2,125 million. The midpoints of the company's updated estimates imply year-over-year increases of 22.8% and 16.9% in net revenues and adjusted EBITDA respectively. This forecast reflects the company's current and preliminary views on the market and its operational conditions and does not factor in any potential future impacts caused by the COVID pandemic and is subject to change. This concludes our prepared remarks for today. Operator, we're now ready to take questions.
Operator, Operator
Thank you. We will now begin the question-and-answer session. The next question comes from Yang Liu from Morgan Stanley. Please go ahead.
Yang Liu, Analyst
Thank you for the opportunity to ask a question, two questions from my side. The first one is on the amount. We see a downward revision of those three-year new capacity delivery plan for 2022. Could you please update us in terms of the wholesale and retail fleet? And if I remember correctly, previously, 25,000 actually is 80% for wholesale and the scale ratio and 20% for traditional retail business. But once you, the news fleet and the where do we see the downward revision of this amount? The second is for the 2022 margin. We see the new essentially guidance for revenue growth rate is pretty strong but EBITDA undergrowth revenue. What is the reason for that? Is this mainly because of higher utility costs, or if there's any other reason behind that? Thank you.
Samuel Shen, CEO
Do you want to take the question first and then I can chime in later?
Tim Chen, CFO
Absolutely. In terms of the demand outlook, we are looking at a roughly 60/40 split, wholesale versus retail. So the retail does comprise a component of the scale retail. Actually, the downward guide on the cabinets was actually a pro-rata guide, so we're not necessarily saying that there's one segment versus the other segment. And then I guess in terms of the question on the EBITDA versus the revenue growth, we are, as you know, steadily ramping up the wholesale side of the engine, but we also have other business segments. And so some of the other business segments are not EBITDA types of businesses, or they have lower margins, and so that actually is increasing the sort of cost related to those. More importantly, as we also, in our guidance, have factored in the increase in utility cost. That accounts for, let's say, around just under 1% of the decline in margins as well. So I think that's the main drivers, Yang, to your question. I guess in terms of the overall demand outlook, in terms of some of the details, Samuel, I don't know if you wanted to add some color for Yang on the wholesale and retail demand that we've been seeing.
Samuel Shen, CEO
Again, thanks Yang for the questions. I think overall, given the favorable government policy, and also the rise of data sovereignty and plus the additional transformation momentum. Overall, we're still very bullish about our long range of outlook in general. But we also have to understand that there are macro issues that we have to be careful about industry-wise and market-wise. There's also kind of different climate compared to last year, and therefore, company-wise, we want to be only cautious. On one hand, there's a decent priority. On the other hand, there's a resource need that we want to balance, so that's the reason. Overall, business outlook is fantastic, and we're very bullish, but we're taking a cautious approach step-by-step. So I think that's the additional color which I want to add on top of what Tim mentioned earlier. Thank you, Yang.
Tim Chen, CFO
One more point on the question you had on EBITDA. I think what are the other factors that you want to take consideration as well as a fact that we added 13,000 cabinets at the end of 2021 and so we are also factoring drag on the EBITDA when it will take for these cabinets to still ramp up during the course of 2022. So there will be more costs, obviously in the first part of the year until they start ramping up and these are fixed costs with the delivered cabinets.
Yang Liu, Analyst
Thank you, Matt. follow-up in terms of other low-margin business. Is it the culture for Microsoft and also the VPN growing faster or and also other IT service business or something else has some dragging effect on the margin?
Samuel Shen, CEO
I can provide some insights on that. To clarify, this is not a low margin business. It's different from a pure IDC wholesale model, which is focused on EBITDA. Our core business, and enhanced services, are not primarily tied to EBITDA, yet it remains quite healthy, particularly when looking at gross margins. Regarding Microsoft Cloud gross and VPN gross, the market is responding positively to Microsoft Cloud, which encompasses Azure and other dynamics, particularly in the enterprise sector. We are benefiting from their growth as one of their closest operating partners in China. From a numerical standpoint, we continue to see strong double-digit growth year-over-year. As for the VPN you mentioned, it is still viewed as one of the top quality choices for enterprise connections. However, some customers are focused on balancing price and performance, leading some to opt for MTL while others may prefer FDA since we offer both routing options. We are observing rapid growth in the SD-WAN business, also showing high double-digit year-over-year growth. Overall, combined, this presents a very healthy and positive business outlook for us. I hope that answers your question, Yang.
Yang Liu, Analyst
Essential center.
Operator, Operator
Next question comes from Edison Lee of Jefferies. Please go ahead.
Edison Lee, Analyst
Hi. Thank you very much for the presentation. I want to focus on your target for 2022. You gave a range of 14,400 to 17,400 cabinets. I want to know how comparable this number is versus the previous guidance of 25,000 cabinets. Because obviously, wholesale build-out is not based on cabinets, but based on market want. So could you maybe help us understand how we should actually look at this new guidance range versus the previous 25,000? And number two, at the moment do you have any thoughts about 2023, because previously it was a three-year target. And how should investors think about the 2023 situation based on your understanding of demand right now?
Tim Chen, CFO
Let me take a crack at this. Edison, thanks for the questions. In terms of the comparability between the cabinets provided, I would say it's on a similar basis so we've not changed the basis in terms of disclosing the number of cabinets. You're absolutely correct that the projects which are wholesale-based are higher density cabinets and so naturally, there are fewer cabinets. Now, in terms of the 2023 and looking beyond, I would sort of go back to the end of 2020 when we provided the three-year forward look. In terms of cabinets, it was at the completion of what was an extremely successful year for the industry and for us and our peers in 2020. And clearly with a lot of the regulatory headwinds that we saw in 2021, that changed dramatically and has not fully turned around yet here as we start 2022. So I would say to echo Samuel's earlier comments, we are extremely bullish on the sector, we're extremely bullish on the customer requirements. And if you look at it, there is no reduction in terms of the end-users like ourselves using data, storing data, analyzing data, and so the demand is there. But again, we've taken a more cautious approach for 2022, just given the large number of uncertainties in the macroeconomic environment. We also look to the market and do see slower than expected moves in rates. And so for 2022 and we've guided down, all of these projects to a certain extent, some of these projects could be accelerated, so moved from a 2023 timetable and moved up into 2022. And similarly, if we see a pickup during the course of this year, then we would start the 2023 projects. And therefore, that would lead to a higher number for 2023. But frankly, at March of 2022, based on the outlook, I would say that 2023 should be higher than 2022, but whether we're going back to 25,000 again, I would take 25,000 as an end of 2020 where the market condition was at that time and we're taking a more cautious approach, given the current market conditions and probably don't want to push out a number out this early in the year for something that there is enough visibility on. But again, we can turn on and off the CapEx and therefore, we do expect that we can be quite nimble with regards to 2023. Thank you.
Edison Lee, Analyst
Thank you, Tim. Can I follow up on two other issues. Number one, is that you disclosed that 15 megawatts of new wholesale projects that you signed in 1Q this year and the 11 megawatts you signed in the quarter last year. Is it true that these are all from existing wholesale customers and you did not sign up any brand-new customers in 4Q and 1Q?
Tim Chen, CFO
Samuel, you want to take the first crack at that?
Samuel Shen, CEO
Yeah. Again. Thank you, Edison for the questions. For the 4Q, from a wholesale perspective, we shared about seven megawatts. That was indeed from the existing customers. But something we haven't really said out loud is our scale retail. We also have big wins from scale retail customers in Q4, that was actually Four megawatts, in addition to their previous kind of allocation in contract. For the 1Q, because some of the orders are coming from existing customer. But we do have orders coming from our new customers, public cloud providers, and also the e-commerce platform companies, and also state-owned dedicated clouds and so forth. Again, we still have a few more, I would say, a few more discussions going on. It's hopefully probably in timeframe, where we talk about our Q1 annual release, we could share additional color for our Q1 performance.
Edison Lee, Analyst
Okay. Thank you, Samuel. So the state-owned company, state-owned enterprise cloud service providers, brand new customer; is there right?
Samuel Shen, CEO
Yes.
Edison Lee, Analyst
Okay. Thank you. Sorry. Just one follow-up for Tim on the power costs. You said that once there will be a 1% impact from my understanding is that all the wholesale contracts you do not include power costs. So that's one of the surpass through. So is that 1% point impact coming from retail customers because you have a 1 to 3-year contracts? So that's why you have a time length in terms of passing on power costs.
Tim Chen, CFO
So as of the end of '21, Edison, the large majority of our billable capacity was actually bundled with power, and a big portion of that is yes, the wholesale business was still ramping up, so it's a very small percentage. We do expect that by the end of this year, the sort of unbundled or pass-through proportion will probably increase to, let's say, around 30%. And it is the ramp-up of the wholesale which is one portion, but the second one is the extra power costs being included in the quotation of the renewals, as well as the new retail contracts that we're signing. I think the answer to actually yes to both. It is a rollover of new contracts, but also a ramp-up of the wholesale.
Edison Lee, Analyst
For power cost, are you assuming a 20% increase year-on-year on just on the unit power cost? Okay, I'm not talking about total power cost.
Tim Chen, CFO
Overall, depending on the region, we're expecting between 10% to 20%, so full-year 2021 compared to 2022. And again, that's sort of impact that we're expecting is under 1% to our margins.
Edison Lee, Analyst
Okay. Thank you very much. Yeah, that's it for me.
Tim Chen, CFO
Thank you.
Operator, Operator
Thank you for the question. Our next question comes from the line of Cong Sherry off CICC. Please go ahead.
Cong Sherry, Analyst
Good morning, management. My question is about the definitive plan and you mentioned that 2022 CapEx plans between RMB 4.5 billion. So how much proportion expected to be using M&A opportunities? And do you see the price of IDC projects in the primary market? Show it clean trend this year compared to 2020 and 2021. Thank you.
Tim Chen, CFO
Thank you, Charlotte. I'll address this question, and Samuel can chime in if needed. Regarding the percentage of M&A, looking back at 2021, approximately 30% of that year involved acquisitions related to land power, surface companies, and data center assets. For 2022, with our guidance of four to five billion, we anticipate that M&A could represent about 15% to 30%. This range is broader because some M&A projects are significant in size, leading to a larger potential percentage change depending on their execution. As for IDC project pricing, we're using a benchmark of around 10 times EBITDA pricing. When evaluating projects, we consider not only the cost but also their locations relative to our existing data centers and customer demands. Most of our projects are self-built, focusing on greenfields and brownfields rather than acquiring EBITDA. While we may opportunistically acquire some operational data centers, we believe it's more effective to invest our capital in responding to customer needs and enhancing our offerings. Thank you.
Operator, Operator
Thank you for the questions. Our next question will come from Sarah Wang from UBS. Please ask your question.
Sarah Wang, Analyst
I have two questions. First, is in regarding client demand. So ended the government's new, you see the rest competing initiatives, do we see more intentions from our clients on moving into the back on the matters retail or wholesale clients? And second question is that, I think we have mentioned that 2023 still target should be higher than 2022. Might ask, what are the key assumptions here? What do you think is the key moving factor? So meaning for the 2022 sales target, obviously, you mean either macro, or Internet regulation, or supply chain disruptions. So what other key factor you think is moving our sales target? Thank you.
Samuel Shen, CEO
I want to address the question first and then invite Tim to provide additional insights. Both Tim and I believe that we are very optimistic about the overall market for several reasons. First, the government is implementing favorable policies that are defining and guiding developments in Eastern data and Western computing. Additionally, government automation of data is set to be a crucial factor for future production. Consequently, data sovereignty has become a top priority for every enterprise as they consider cloud optimization. Furthermore, the COVID pandemic has accelerated digital transformation; many enterprises are transitioning from capital expenditures to operating expenses to align with their business growth. They are also continuing to drive cloud optimization. While in the past, this transition may have been a singular positive factor, hybrid multi-cloud solutions are now becoming the new standard, along with the trend of incorporating everything as-a-service. We feel well-positioned with our two-pronged growth strategy, making us very optimistic about the future. We see significant momentum every day. However, we must remain cautious due to macroeconomic factors outside our control, such as the complex situation with China and the emergence of new industry dynamics. Customers are increasingly focused on costs, and there could be a premium that comes from merchant acquisition over a short period. While we are optimistic about the long term, we approach each step with caution. That's the overall perspective, and I’ll now let Tim share additional insights and the careful steps we're taking. Tim, do you want to add any further comments?
Tim Chen, CFO
Absolutely, and I would add to Samuel a dish of dig one layer deeper in terms of both, what would you provide to the market in terms of guidance on cabinets. What's Samuel is talking about in terms of the sort of sales and over then further to your questions around kind of how things look like in terms of the utilization rate assumptions. With the delivery that we've made at the end of last year. Obviously, we do expect there to be a dip in terms of utilization rates, both due to the large number of deliveries, but also each year we then reset the what cabinets are included under maturity to centers, ramp up and so forth. But the desire is also to make sure that we are finding a healthy balance between adding capacity, meeting our customer’s requirements. But also looking at the now and today and seeing where the customers are in terms of ramping up and also where their demands are. And so I think there is the desire to find that balance. And so I think with the reduction in the total number of cabinets, we're also still targeting utilization rates of around 60%. And obviously, to the extent that we see customers ramping up faster than we would speed up the deliveries. And in this case right now, we are taking a more cautious approach because 2022 is not, as I said earlier on, one of the other questions, it's not 2020. And so I think that we do need to find that balance then of making sure we deliver the right number of cabinets to match up with the ramp up and the demands of our end customers.
Operator, Operator
Thank you for the questions. Next questions comes from the line of Clive Cheung of Credit Suisse. Please go ahead.
Clive Cheung, Analyst
Hi, good morning, management. Thank you for taking my question, and congratulations on the results. My first question is regarding margin. For certain existing customers, we have seen an increasing trend in the uptake of more value-added services. If this is indeed a long-term trend, how might it affect our margin, if at all? Thank you.
Samuel Shen, CEO
Okay.
Tim Chen, CFO
Go ahead, Samuel. I'll let you start and then I'll add to that.
Samuel Shen, CEO
Thank you for the question, Clive. We are indeed noticing a significant trend among customers in adopting value-added services. From a broad perspective, China's cloud environment differs from the rest of the world, where the main players are AWS, Microsoft, and Google. In China, there are over a dozen cloud service providers. Additionally, issues such as data privacy, transparency, and sovereignty are increasingly important for enterprises, prompting them to consider strategies beyond a single public cloud to potentially adopt a hybrid cloud model. This allows them greater control over their data storage. Furthermore, the COVID-19 pandemic has shifted many companies in China towards an OpEx-driven approach rather than CapEx. As a result, they seek partnerships that provide comprehensive co-location support, networking capabilities, security planning, and flexible payment models while also wanting single-tenant solutions, operations and maintenance, and multi-cloud management services. This presents an opportunity for VNET, which we have recognized and capitalized on. However, the question remains about whether our additional services resemble traditional wholesale data center play focused solely on EBITDA. My answer is likely not, since these service and software capabilities might not have significant amortization or depreciation. Therefore, comparing VNET to IDC peers may not be straightforward. Positively, some of our peers are experiencing strong tailwinds in retail and are shifting their focus there, which somewhat supports our growth strategy. We are pleased with our dual-core growth engine strategy and remain committed to executing it effectively. Tim, do you have any additional thoughts on this?
Tim Chen, CFO
No, I think Samuel you gave a good overview of the types of businesses and the value-added services and how it works. So again, I think we can dive into some of the modeling side on the call back then.
Clive Cheung, Analyst
Yes. Thank you. And my second question is in terms of the security of resources for our 2022 kind of expansion terms, how much of those are now secured and they actually just yet? Thank you.
Tim Chen, CFO
So now, what may we've obviously given out the list of the actual pipeline projects and those are secure. We have included a range this year and that's because in terms of an overall timing, I think people were asking about overall timing. We expect that a large portion of these will be actually at the end of the year, and so we've included from our experience already, the possibility that projects either get shifted into 2023 or pulled up. And so we've included some others, and those are the ones where I think there's uncertainty around the overall timetable from the customer's point-of-view. So overall, yes, we have it secured. It really is a matter of timing in terms of whether it comes in this side of '22 or the other side of 2023. Hope that answers questions.
Operator, Operator
Thank you for the questions. Next question comes from Ethan Zhang from Nomura Securities. Please go ahead.
Ethan Zhang, Analyst
I noticed you mentioned that customers are looking for more value-added services in our retail IDC business. I'm curious about the outlook for our retail monthly recurring revenue for fiscal year 2022 as we move forward. My second question relates to the new IDC projects. I understand that we have some wholesale projects under construction within the electrons economic circle. I'd like your perspective on that. I can see demand in that area, likely due to new market developments. Thank you.
Tim Chen, CFO
And maybe Samuel, I'll take the MRR question and then you went to take the second question.
Samuel Shen, CEO
Sure.
Tim Chen, CFO
You're still looking in terms of MRR and then I'm happy you've sort of asked what the view of our FY22 for is. It will move around quarter-to-quarter as you've seen last year as well. But we do expect that the MRR to stay in the 9 thousand-plus range, and then trending upwards as there are more and more value-added services that we sell to our customers. Obviously, some of the volatility comes around the fact that not all the customers when they first sign on, is taking on the full package of services. And so that's something which the more cabinets we add, if they're more for what I'll call basic service or basic plus one versus a bundled solution of multiple services, I think that's going to affect the MRR, but I think overall our MRR trend, again, we expect to be in a very positive trend going forward. Let me pass to you, Samuel, to interpret the questions around the Chengdu-Chongqing region.
Samuel Shen, CEO
So thank you, Ethan, for the questions. I think earlier this year Kevin has new directional guidance, in terms of Eastern data and also the western computing. So if you look at the eastern data, western computing in Chengdu and Chongqing area has been identified. One of the eight regions, and then that specific region, together with Beijing, Shanghai, Guangzhou, and Shenzhen, we'll see the Tier one city. The four of them are actually defined as to Eastern data. So even though a Chongqing is a little bit kind of West compared to Beijing, Shanghai, Shenzhen from a geo perspective, but that specific area does have a strong need from a business and also market perspective. A lot of the scenarios around, I would say low-latency, high bandwidth, and also no packet loss. So ideally, for a region specialized to provide the Eastern data per se. So that's also one of the areas that we're going to continue to invest, as a matter of fact, one of the projects in our 2022 is to talk about that specific area and we're seeing, I would say, great momentum picked up. If I look back in 2021 versus 2020, that's also one of the areas starting with small but growing fast. So we're very optimistic about the Chengdu and Chongqing areas. So hopefully that addresses your question, Ethan.
Operator, Operator
Thank you for the question. Next question comes from Albert Hung of JP Morgan. Please go ahead.
Albert Hung, Analyst
Thank you for taking my question. I want to ask, how should we think about the competitive landscape going forward? Because I see two major factors. One, a common new estate, which is in our west computing is driving the customer into the remote areas, while VNET has verticals, each in Tier one seated. Second, one of your competitors forms to focus more on retail business. So I'm wondering how these two factors will affect your competitive landscape in the future. My second question is, could you comment on the latest pricing in wholesale customers as many of the large internet service providers are doing cost reductions. And you also coming down a bit on the future demand outlook. How should we read it as the implication for pricing? Thank you.
Tim Chen, CFO
Let me start. Thanks for the questions. By the way Albert, let me start with the question around sort of the retail side of the business in terms of, I guess you've mentioned one of our peers wants to focus on the retail business. Like this is something which I think VNET has the history, but also has still thought the infrastructure to be able to service the customers' more complicated, actually customer needs of the retail customers. It's not as simple as saying it's a retail customer, but using a colo model to service them. And so we're very confident on the fact that we have a distinct competitive advantage in that. And we show in each of the quarters the ability to not only keep, but also then continues to add the retail customers to our base. But secondly, I think more importantly, this is what Samuel was referring to earlier on is the value-added services. It's not just to sell retail customers colocation service and the whole reason why it is a very attractive proposition for them to come to VNET in the first place is the ability for them to come into a one-stop-shop and a vast range of services. Not having to deal with three, four, or five different vendors of the service. And I think that's a distinct advantage, which also then adds to the stickiness of the customer when people are coming into our data centers. The second part of the question in terms of the customer demand pricing side, maybe Samuel, do you want to give a little bit of color to Albert?
Samuel Shen, CEO
Yes. First of all, it's great to have a dual-core growth engine that helps us balance resources and priorities. While resources are limited, opportunities are endless. As our peer companies shift towards retail to cater to growing end-users, our strategy is evolving. We're indeed witnessing significant market opportunities and momentum in the retail sector. In our IDC business, the wholesale and retail approaches differ; one emphasizes quantity, while the other focuses on quality. The wholesale business provides greater predictability and scale, whereas retail offers healthy margins and stronger customer loyalty. While it's generally easier for a retail business to pivot to wholesale, it's more challenging for wholesale operations to transition to retail due to the need for strong customer relationships, proven track records, networking capabilities, and a comprehensive range of value-added services. The sales structure and compensation packages also differ greatly. Thus, it's not simply about one company wanting to enter retail; every IDC service provider aspires to have a dual-core growth engine. However, this is quite challenging. In time, many companies aim for wholesale business, but during periods of high demand in wholesale, there’s also a tendency to venture into retail. We feel very fortunate to have a balanced strategy. As I mentioned earlier, we are very optimistic about the future, but we are also cautious with each step we take since resources are limited. We want to ensure we optimize for the best possible returns. I hope this provides some additional insight in response to the questions.
Operator, Operator
Thank you. Because of time, we'll now pick the last question from Guohan Wang of Daiwa. Please go ahead.
Guohan Wang, Analyst
Hello. Thank you to management for this opportunity. My first question is about the delivery rates schedule. We are being more cautious regarding the near-term outlook as our capacity addition is more backloaded in 2022. What is our perspective on the ongoing utilization ramp-up for 2022? My second question pertains to the recent progress in movement, particularly in certain areas like Shanghai. What is our view on the impact of competitor delivery in these regions, and how are we expanding our approach to create a more directly supplied customer mix to enhance revenue in Shanghai and Beijing? Thank you.
Tim Chen, CFO
Sure. Let me address the first question. Guohan, thank you for your inquiry. Regarding capacity, I expect that more of the range of cabinets we plan to deliver will be during the latter part of the year. In the next quarter, we will provide clear guidance on how much we expect to deliver in the first half compared to the second half of the year, consistent with last year's experience. Deliveries are anticipated to be more back-ended as we are taking a cautious approach to the speed of new capacity delivery while ensuring we focus on ramping up existing capacity. This leads to the second question about the expected trend in our utilization rate. There will likely be a dip in the early part of the year, followed by a gradual increase throughout the year as ramp-up continues across all our data centers. Samuel, would you like to take the questions about customers moving rates and ramp-up progress?
Samuel Shen, CEO
No, I think you covered that pretty well, so no additional comment from me.
Operator, Operator
Ladies and gentlemen, that concludes our conference call today. Thank you for participating. You may now disconnect your lines.