Hello, ladies and gentlemen. Thank you for standing by for the second quarter 2022 earnings conference call for VNET Group, Inc. At this time, all participants are in listen only mode. After the management prepared remarks, there will be a question and answer session. Participants from our management include Mr. Samuel Shen, Chief Executive Officer and Executive Chairman of Retail IDC, Mr. Tim Chen, Chief Financial Officer, and Miss Xinyuan Liu, Investor Relations Director of the company. Please note that today's conference call is being recorded. I'll now turn the call over to the first speaker today, Miss Xinyuan Liu. Please go ahead.
Thank you, operator. Hello, everyone, and welcome to our second 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 our newswire services. Please note that the discussion today will contain forward-looking statements made under the safe harbor provisions of the US 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.
Please also know that VNET's earnings press release and this conference call includes 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 measures to the unaudited GAAP measures. As a reminder, this conference is being recorded. In addition, a web cast 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.
All right. Thank you, Xinyuan. Good morning and good evening, everyone. Thank you for joining our second quarter 2022 earnings conference call. During the second quarter, our focus remained on driving healthy results and delivering high-quality solutions and services to our customers. Our solid growth momentum across our business segments amidst macro challenges clearly reflects the effectiveness of our growth strategy and our strong execution capabilities. On the operations front, total cabinets under management increased to approximately 80,800 by the end of the second quarter, compared with approximately 62,900 one year ago. At the same time, cabinets utilized by customers increased sequentially by approximately 1,500 to 44,500 by the end of the second quarter, compared with approximately 36,600 one year ago.
Accordingly, the overall utilization rate maintained a sequential ramp-up, reaching 55.1% by the end of the second quarter. Our retail MRR per cabinet reached RMB 9,186, showing a healthy increase from the same period last year. On the financial front, we delivered a robust financial performance with a year-over-year growth of 15.2% and 14.5% in revenue and adjusted EBITDA year-over-year, respectively. With the rapid growth of China's digital economy, we, as a leading IDC service providers, are in a good position to benefit from this growth momentum and local government supportive measures. This May, the National Committee of the Chinese People's Political Consultative Conference held a consultative session and called for stronger efforts to boost development of the digital economy across the broad swaths of the industries.
Technological empowerment was highlighted as a vital driver for higher quality economic growth. We believe this will carry immense potential to significantly amplify demand for IDC services. Within this environment, we are confident in our strength and our ability to capture exciting new growth opportunities. Next, let's take a closer look at the business updates, starting with the recovery momentum from the impact of COVID resurgences. Encouragingly, in June, with the gradual easing of COVID-19 related lockdowns and mobility restrictions in Shanghai, Beijing and Hubei Province, we immediately resumed construction on new projects in these areas and have seen move-in rates recovering steadily. Next, a review of our progress in key business segments during the quarter. Our wholesale business made solid progress in the second quarter.
We once again extended our contract with an existing customer, a leading social platform in China, for building its network infrastructure in the northern region of China. This new order will generate a total capacity of approximately 14MW and further demonstrates our value proposition for this business segment. In addition, we recently signed a new contract of approximately 15MW with the leading cloud service providers in China to build its network infrastructure in the Yangtze River Delta region. In the data center for this customer, aside from conventional air cooling, we will also offer liquid cooling solutions, a more sustainable approach that will help reduce PUE and carbon emissions. Moving on to our retail business. Thanks to our diversified customer base, we are pleased to see our retail business growing steadily amid macro challenges.
In the second quarter, we leveraged our technologies and expertise to cater to various vertical needs with a suite of varied services. Existing customer expansion and new customer acquisition both achieved impressive results, driven by a rising digital demand from a wide variety of industries such as local service, automobile, financial services, hardware manufacturing, and online gaming. Looking ahead, we plan to harness our advanced engineering capabilities to enrich our service portfolios, creating more value for our customers and generating more diverse revenue streams. On the Blue Cloud business front, we continue exploring opportunities that will allow us to diversify our industry-specific cloud solutions. During the second quarter, we extended our manufacturing execution system, aka MES, to a leading automotive seating manufacturer in China.
Through the delivery of MES, we help the customer manage manufacturing flexibility, improve productivity, and maximize efficiency by deploying digitalization, automation, and new technologies that will provide a real-time workflow visibility, flexibility, and insight into the entire manufacturing operations process from order release to ready for shipment. This system has been successfully implemented across all of our customers' production lines, and we're very pleased with the progress we have made in this area. In the meantime, we are actively accumulating more industry-specific expertise and look forward to tap into greater opportunities in the cloud business industry in the future. Despite macro headwinds, the unprecedented COVID-19 resurgence and lockdowns in the first half of the year, our sustained growth highlighted our excellent business resilience and our ability to capture the rising demand for high-quality IDC services.
However, in the near term, the uncertain economic outlook and threat of COVID-19 outbreaks may bring some short-term challenges to us. While the long-term demand trend is secure, taking into account the short-term challenges of the current slowdown environment and the impact from COVID-related disruptions, we are adjusting our outlook for the full year of 2022 and revising our full-year delivery plan to the range of 9,400-12,400 cabinets from previously provided 14,400-17,400 cabinets. Going forward, we remain focused on our dual-core growth strategy, leveraging our scalable service offerings to drive growth and building our customer base across verticals.
As an industry frontrunner and a fundamental link in China's digitalization change, we will seize the opportunities from the nation's rapidly expanding and evolving digital economy, creating sustainable value for our stakeholders in the long term. Thank you, everyone. With that, I will now turn the call over to our CFO, Tim Chen, to discuss our financial performance for the quarter and our business outlook. Hi, Tim.
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, and 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 second quarter of 2022 and in renminbi terms. For the second quarter, again, we delivered a robust financial performance driven by rising demand from both our wholesale and retail businesses. Our solid financial position gives us a firm foundation to drive a long-term and sustainable growth as we continue to leverage our scalable service offerings and build our customer base across a wider variety of industries.
Next, let me walk you through our second quarter financial results. Unless otherwise specified, the growth rates I will be reviewing are all on a year-over-year basis. In the second quarter, our net revenue increased by 15.2% to RMB 1.72 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 RMB 357.8 million in the second quarter of 2022, roughly flat compared with the same period of 2021. Gross margin was 20.7% in the second quarter of 2022, compared to 24% in the same period of 2021.
Adjusted cash gross profit, which excludes depreciation, amortization, and share-based compensation expenses, was RMB 713.7 million in the second quarter of 2022, an increase of 11.5% from the same period of 2021. Adjusted cash gross margin in the second quarter of 2022 was 41.4%, compared to 42.8% in the same period of 2021. Adjusted operating expenses, which included post-combination employment compensation in an acquisition and impairment of loan receivables to a potential investee, were RMB 250.7 million in the second quarter of 2022, compared to RMB 235.6 million in the same period of 2021.
As a percentage of net revenues, adjusted operating expenses in the second quarter of 2022 were 14.5%, compared to 15.7% in the same period of 2021. Adjusted EBITDA in the second quarter of 2022 was RMB 486.9 million, representing an increase of 14.5% from the same period of 2021. Adjusted EBITDA in the second quarter of 2022 excluded share-based compensation expenses of RMB 47.5 million. Adjusted EBITDA margin in the second quarter of 2022 was 28.2%, compared to 28.4% in the same period of 2021.
Our net loss attributable to ordinary shareholders in the second quarter of 2022 was RMB 377.2 million, compared to a profit or net profit of RMB 455.9 million in the same period of 2021. Basic and diluted loss were both 0.43 per ordinary share and both 2.58 per ADS. Each ADS represents six class A ordinary shares. Turning to our balance sheet. As of June 13th, 2022, the aggregate amount of the company's cash equivalent and restricted cash was RMB 3.62 billion. Meanwhile, net cash generated from operating activities in the second quarter of 2022 was RMB 942.7 million, compared to RMB 314.8 million in the same period of 2021.
Our CapEx in the second quarter of 2022 was RMB 540.6 million. Now onto our financial outlook. As Samuel mentioned, we face the impact from COVID-related disruptions in the second quarter of 2022 on data center construction and customer moving schedules, and ongoing macroeconomic uncertainties as well. As a result, we adjusted our outlook for 2022. Based on our current estimates, we expect our net revenues to be in the range of RMB 7,250 million-RMB 7,550 million, and adjusted EBITDA to be in a range of RMB 1,800 million-RMB 1,950 million. We always believe opportunities go alongside challenges. The COVID impacts are short-term in nature, and digitalization is rapidly advancing in the wider society.
Looking ahead, we will remain committed to advancing our dual-core growth strategy, broadening the spectrum of our services, increasing customer diversification, and capitalizing on the enormous opportunities presented by a thriving digital economy in China. This concludes our prepared remarks for today. Operator, we are now ready to take questions.
Thank you. We will now begin the question and answer session. To ask a question, please press star one one on your telephone. First question comes from the line of Ethan Zhang from Nomura. Please proceed. Thank you.
Thank you management for letting me ask the first question. I have two questions. The first one is, given the current situation of the electricity suppliers in China, especially the heat wave in Sichuan and surrounding areas, how do you see the trend of the utility cost in the second half of this year and the impact on our EBITDA margin? The second question is regarding the CapEx trends. I remember we guided around RMB 5 billion CapEx for the full year 2022, but during the first half, since that we only completed a limited portion of our CapEx targets.
I just wonder if we maintain the previous guidance on our CapEx spending for this year, and how would be our focus or targets for CapEx spending in the second half of this year? Thank you.
Thank you very much, Ethan. Let me take this first two questions. First in terms of electricity and impact of some of the areas, Sichuan as an example, we do not expect to be a major increase in the electricity tariffs. However, in the areas that are impacted by electricity shortages, not dissimilar to last year and early parts of this year, where some of the data centers would need to switch over to diesel, or we would actually acquire diesel in preparation for potential shortfalls in terms of electricity supply. I think that will show up in the figures for the second half, especially for anything in the affected areas.
As to the CapEx and whether there are any changes to the CapEx guidance, we still expect to spend roughly in a range of RMB 4 billion. That's despite some of the capacity being pushed into 2023. As you know, these constructions do have a longer lead time. There will still be money being spent with regards to the power infrastructure, the buildings and so forth. It will just be slowed down a little bit, but we still expect that it will be for the full year around RMB 4 billion. I hope that answers your questions.
Thank you.
Thank you for the questions. Our next question comes from Edison Lee of Jefferies. Please proceed with your question.
Hi. Morning, Samuel and Tim. Thank you very much for the presentation. I want to see what kind of power cost increases that you are assuming in your new guidance for the second half. Also I want to know for the two new wholesale projects, what is the timing in terms of service launch, and EBITDA contribution? Thanks.
Hi, Edison. Let me talk about the first one first. In terms of the second half, we've assumed small increases in terms of coming from the power side. As you know, some of the power increases already took place in the first half. We do expect a little bit of further increases, but not really in the tier one areas, but I would say the outer areas of the regions. We can go into some of the other details later on. Not you know a very large increase. I think the full year we had given to the market previously was about a 1% margin impact.
I'd say that this moves the needle a little bit in the second half, but nothing that would be very material. Let me pass to Samuel to talk a little bit about the two wholesale wins.
Thanks.
Sure. Thank you, Tim, and also thank you, Edison, for the questions. Regarding the wholesale wins that we announced today, the social platform, it is actually an existing customer, but with a new contract. Basically, a contract signed in the second quarter. Then for another one, which is the public cloud service providers, we're expecting to sign a contract in Q3. We're very pleased because you know spend quite a bit of time working with the customers and finally secure a design win. That's pretty encouraging for us.
Sorry, Samuel, can you talk about the timing of these contracts coming into service and-
Oh, yes. As I said, the social platform wins, that would be second quarter, this quarter. For public cloud service providers, the contract will be signed in Q3, and then we expect then this to be serviced in the ramp-up starting from the Q4 this year.
Okay.
Edison, both of these, I would say, small or negligible contribution in 2022, but the ramp-ups should be within 2023.
Is the ramp-up period also two years for these two projects?
They should actually be quite quick. Again, contractually, as you know, our customers will sign a commitment, but what we've seen, at least, from the customers that we've just talked about, they can actually ramp up extremely quickly. I would say, at the moment, probably assuming that most of the ramp-up should be within 2023 for these projects.
Okay. Thank you, Tim.
Yeah. Most welcome.
Thank you for the questions. As a reminder, to ask question, please press star one one on your telephone. Next question comes from the line of Alex Wang from Daiwa Capital Markets. Please proceed with your question.
Okay. Thanks, management. For my first question is regarding our pipeline. I understood we cut our capacity addition plan in near term, but I understand our previous guidance, roughly, 17,000 for 2023/2024 capacity addition. Want to have more color on this and do we have any change on that previous guidance? The second thing is about the utilization ramp up. Happy to see a ramp- up acceleration in the existing projects starting from June. Could we get more color on the current utilization rate for existing wholesale projects in service? Given current macro and current situation, wanna have more sense about what's the typical curve for this kind of capacity rates? Normalized utilization rates. Thanks.
Thank you, Alex. Let me take the first question in terms of the pipeline. You're correct. I think previously we had a range from 14,400- 17,400 in terms of the cabinet deliveries in 2022. We did revise down to a range of 9,400- 12,400. You'll see the details that we've included in the IR PPT that will be uploaded to our website. But you know, that is the range of guidance down from the 17,400 that you discussed earlier on. You'll see that you know, the projects that we've taken out again, some of these we expect to take place in 2023.
There's some related to construction slowdowns, and then others related to customer demand being pushed back. Rather than have everything ramped up in terms of delivering the cabinets and then waiting for the customer, we decided to also then match our pace of delivery with the customer requirements as well. Of the second question, maybe I'll pass to Samuel Shen, and he can address that for you.
Yes. In terms of the ramp up for our wholesale customers, what happened is most of the customers, basically from the contract, were committed to have two years to ramp up to hit the 90% or even higher utilization rate. In reality, from our experiences and by talking to the customers, you know, given their business growth, normally, you know, will be within a year, they basically hit the 90% or even higher.
For the two MOU that we talked about today, including the social platform and public cloud service providers, we have a high expectation that can ramp up to, you know, 90% or even higher within a year period of time given the current forecast. Separately, from a retail point of view, we're also seeing a you know kind of momentum from the customer digital transformation trend as well. I would say given even though with the macro conditions a little bit uncertain, but the parts of business is pretty solid in the quarters ahead of time.
Thank you.
The questions. Our next questions comes from the line of Sara Wang from UBS. Please proceed.
Hi, Samuel and team. Thanks for the opportunity to ask a question. I have two questions. First is still on the delivery target, and ask what's the split between wholesale and retail of the delivery target of cabinets? Another question is, what's the magnitude of power tariff increase in second quarter? I noticed that our adjusted EBITDA margin actually stayed relatively stable versus last. Just wondering if there's any other area we can actually save costs to offset the power tariff increase. Thank you.
Hi, Sara. Can you repeat the first part of the question, please, again?
Hi. The first question is, what's the split between wholesale and retail orders of our delivery target?
Okay. Thank you. Let me handle that first question. I'd say that right now the split between the wholesale and retail we're still looking at a similar split of around 60/40. We've talked about again in the past 60/20/60 being the wholesale and retail. We still expect that to be the same in that range, more than half being wholesale related, maybe up to two-thirds being wholesale related. In terms of the power increases, again, the vast majority of the increase that we saw were in the tier one cities. Again, the earlier part of the year, we saw them go up by anywhere from 10%-20% in the tier one cities.
We factored in the impact to the full year margins. In quarter one, we did have some tax rebates and other income, and that's kind of some of the reasons behind why the margins in the first quarter weren't impacted as much. The second quarter, there were some costs incurred there. Again, we have been quite focused on making sure we help to implement cost controls. We'll continue to do that in third and fourth quarter, but there are going to be, you know, limits to how much we can do to offset increases in our operating costs in general. Hope that helps, Sarah.
Got it. Thank you.
Thank you for the questions. The next question comes from the line of Albert Hung of JP Morgan. Please proceed with your question.
Hi, management team. Thank you for taking my question. My first question is, if I look at the 2022 new guidance, the EBITDA margin imply that second half adjusted EBITDA could be like 22%, which is a multiyear low. Can I know what are the one-off and structural margin drag in second half, and what is drive the margin recovery in the next year? The second question is, the cut in the revenue is mainly driven by wholesale or a broad-based IDC demand weakness. From your point of view, how long did you expect the down cycle will last? Historically, hardware spending will be the leading indicator for IDC. Right now, the hardware spending looks still quite weak in second half. Does that imply first half next year will also see similar slowdown in the IDC? Thank you.
Okay. Thank you, Albert. Let me take the first part of the questions and then maybe Tim can help to chime in with additional context. I think as Tim pointed out, the first quarter of the year, because we did have the tax subsidy and annual reimbursement from the depository bank. By removing the one-time thing, the second quarter margin is pretty much on par. However, with the revised guidance, as you can see our second half EBITDA margin is going to be roughly about a 22% ratio.
I would say in a nutshell, aside from the fact that some of the costs and expense got delayed to the second half due to the COVID outbreak and lockdown in the first half, we're also expecting some of the subpar revenue in the pipeline basically for new retail customer acquisition, as well as some of the increased engineering costs mainly focusing on the investment ahead of a revenue pipeline. That basically impact our EBITDA margin in the second half. A lot of the analysts are asking about the power tariff or even our data center maintenance and upgrade.
I think both electrical and mechanical parts, although not really material per data center, but if we add up, it is still, you know, amount in the P&L. That basically impact the EBITDA ratio in the second half. Are we expecting that will continue going on? We strongly doubt because a lot of the costs are basically impact in the second half. It's more seasonality. We're expecting to have the, you know, improvement in 2023. Tim, do you wanna take on the second question?
Albert Hung, in terms of the, you know, you're asking about how long this will last for. I think Samuel Shen started to address that and kind of will this drag into 2023, in terms of leading indicators. I would say that, you know, in our shifting of some of the capacity deliveries to 2023, alongside or matching with the customer demands, is that, you know, we already see some of the things that they had initially wanted by end of year, being pushed into the sort of first half of 2023. So there is that visibility that customers still intend to require these data centers, but it has been shifted backwards.
In terms of which area we've kind of seen, let's say the slower ramp ups, I would say you know, just given the sheer scale of the ramp-up pace of a wholesale customer versus a retail customer, I would say that it is more on the wholesale side. They are a sort of larger contributor in terms of billable cabinets ramp up. It's not to say that we've not seen a sort of similar slower pace during the times that there were lockdowns in place. We certainly hope that we see less and less of these types of lockdowns in the second half.
Customers can actually resume a more normal pace of ramp up during the rest of this year and into next year.
Thank you.
Questions? Our next question comes from the line of Clive Cheung from Credit Suisse. Please proceed with your question.
Hi. Thank you, management, for taking my question. I have two questions. The first one is regarding wholesale demand. For the move-ins you have seen for the existing customers we have had or existing orders, how, you know, different is that in terms of, you know, months required for ramp up? Is different to our previous expectations, say, previous guidance versus our new guidance? That's number one question. The second question is, the MRR. I see, you know, there is a small decline in new sell MRR for two quarters running, quarter-over-quarter. I was wondering, is there any trends we should pick up here?
Should we still, you know, expect them to be broadly in line or, previously we mentioned slightly upwards in the longer term? Thank you. Two questions.
Hi. Thank you, Clive. I would say from a wholesale customer's point of view, you know, basically, I think Tim and I, we talked about, you know, specifically two type of the wholesale customers we're talking to, almost on a weekly basis. The public cloud service providers and social platforms and, especially for, you know, video type of customers, who require a huge storage to store the data. I would say, we're not seeing any difference from their moving rates. Aside from the COVID-19 impact or lockdown impact and so on and so forth, their business continued to grow.
You know, when we talk to them, they proactively, you know, plan their demand forecast and then do the site selection. When we participate and win the bid, you know, it is not just a one-time deal, it is more like lifetime partnership and so on and so forth. Again, from our partnership, we're seeing the similar trend from a moving rate perspective. That's the reason when Tim and I talked about, aside from what contractual say, two years commit to ramp up to 90%, we actually seen the actual results is way more faster than that.
Again, with the two MOU that we talked about today, well, hopefully we're seeing exactly the same trend as we talked about. Tim, do you wanna address the monthly recurring revenue for the retail one?
Yeah, sure. In terms of the monthly recurring revenue, I think the main thing is in quarter-to-quarter, you will see some fluctuation, and that's because the figure there is a total retail-related revenue divided by cabinets. We do expect that these levels will remain around RMB 9,000. Clive, you're absolutely correct in your second part of your statement, which is whether or not we expect this longer-term to trend upwards. I think the answer is definitely yes, and that's gonna be driven by some of the investments that Samuel mentioned earlier on.
The investments on the retail services side, that will then allow us to provide, again, a larger suite of services to the customers and expand then the contribution of the value added services, to the overall MRR. Again, longer term expected to trend up. I think quarter to quarter to quarter, roughly fluctuating around the RMB 9,000 level. Hope that helps.
Thank you very much, Sam and Tim. Thank you.
Thank you for the questions. Our next question comes from the line of Mingran Li of CICC. Please proceed with your question.
Hi, management. Thank you for taking my questions. I have two questions. First one is based on the current wholesale and retail demands. Could you share more about the delivery pipeline and CapEx plan in recent years, like in 2023? My second question is regarding the utility cost. Recently in some regions in China, there is a power supply shortage. Is there any material impact for us? Could you share more detail about the future trends you think of the utility cost and the impact on our margin? Thanks.
Let me take those two questions. In terms of I guess CapEx and delivery plans for 2023, I would say that you know, based on the fact that some of the capacity we had planned for 2022 being shifted into 2023, I would say year-over-year we would expect that the capacity in terms of megawatts will be larger in 2023 as compared to 2022 clearly, as things ramp up again and also as some of the construction delays ease, hopefully as we see a less COVID impact year in 2023. CapEx also, we talked about earlier on that we still expect CapEx spend to be around RMB 4 billion this year.
Next year it likely will be higher than that, as we then continue to build out the capacity, especially with the additional MOU wins. Those will then clearly form part of what we see in terms of the spend for the latter part of this year, but also then into next year in terms of expected future tender wins as well.
The second question in terms of power, again, the cost that we're seeing is largely similar to the last time around, where there were power shortages around China, and these were related to mostly short-term purchases of diesel fuel, and making sure that our data centers continue operating when there was uncertainty in terms of continued power supply from the grid. These are the costs that we expect to see. Again, on a single data center basis, these are not material. If they persist or if they start to spread throughout China, then it will become a larger figure.
At the moment, I think largely covered in what we've already provided to the market in terms of what our views are for the second half and balance of the year. Hope that helps.
Thank you.
Thank you, management, for the answers. Ladies and gentlemen, that concludes our conference for today. Thank you for joining.