Hello, ladies and gentlemen, thank you for standing by for the Fourth Quarter and Full-Year 2022 Earnings Conference Call for VNET Group, Inc. [Operator Instructions] After the management's prepared remarks, there will be a question-and-answer session. Participants from our management include Mr. Jeff Dong, Chief Executive Officer; Mr. Tim Chen, Chief Financial Officer; and Ms. Xinyuan Liu, Investor Relations Director of the company. Please note that today's conference is being recorded.

I will now turn the call over to your first speaker today, Ms. Xinyuan Liu. Please go ahead.

Xinyuan Liu - Director of Investor Relations

Thank you, operator. Hello, everyone, and welcome to our fourth quarter and full-year 2022 earnings conference call. Our earnings release was distributed earlier today and it 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 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 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 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 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, Jeff.

Jeff Dong - Chief Executive Officer

Thank you, Xinyuan. Good morning and good evening, everyone. Thank you for joining our fourth quarter and full-year 2022 earnings conference call. Laden with macroeconomic headwinds and COVID-related disruptions, 2022 was an extraordinary year. Amidst this challenging environment, we delivered solid financial and operational results through excellent execution of our dual-core strategy. We achieved our 2022 delivery target by ending approx. 8,400 self-built cabinets. By the end of the fourth quarter, our total cabinets under management had grown through approx. 87,320 from 78,740 a year-ago.

Meanwhile, cabinets utilized by customers increased sequentially by approx. 2,500 to approx. 48,000 compared to approx. 41,700 a year-ago. Our overall utilization rate was 55%. In addition, our retail MRR per cabinet increased to RMB 9,371 in the fourth quarter, up from RMB 9,287 in the third quarter. We concluded 2022 with the resilient fourth quarter revenue of RMB 1,881 million, an increase of 7.7% year-over-year and adjusted EBITDA of RMB 424 million. For the full year, our revenue grew 14.1% to RMB 7,065 million and adjusted EBITDA increased 6.8% to RMB 1,873 million.

Before we get deeper into our business details for the fourth quarter, I'd like to touch on broader macro climate in China for some context. According to 2023 government work report issued earlier this month, the Central Government set the GDP growth target of around 5% for this year, up from last year's 3%. In addition, the government will continue to accelerate the digital transformation of traditional industries and small and medium-sized enterprises who are also supporting the development of the platform economy. Plus most of the central government rollout plan to build Digital China by 2025, which highlights the country's focus on expanding data resources and improving digital infrastructure.

Encouraged by this supportive measures and positive signals, we expect industry's vitality to gradually recover and business context to rebound. In particular, we believe that Internet giants will play towards our strengths in technology to empower development of the digital economy and unleashing greater demand across markets. As China's leading IDC service provider, we are well-positioned to capture new growth of fintech ahead.

Now, let's take a closer look at our Q4 business update, execution of our dual-core strategy continues to prove strongly effective, both in the wholesale and retail IDC markets. Our wholesale fronts. We continue to gain robust sales momentum with two major orders despite the macro challenges. In the fourth quarter, we extended our wholesale data center services contract with one of our largest existing customers, a leading social platform in China. This extended order will generate capacity of approx. 33-megawatt.

More encouragingly, we recently won the bid to deploy IDC services in multiple phases to support the business expansion for a new customer, one of China's Internet giants. During the first phase, we expect to provide those customer with capacity of over 100-megawatt through our IDC assets located in the Yangtze River Delta region. This collaboration represents a significant development opportunity for us and to our proven track record of providing IDC services to powerhouse companies across China's [Indecipherable] industry.

Moving on to our retail business, we continue to make meaningful progress on our customer base expansion in the fourth quarter, supported by our premium colocation and interconnectivity offerings, as well as our value-added services. We continue to extend our services to existing customers and attract new customers meeting increasing demands from a wide spectrum of industries, including financial services, local services, mobility, online gaming and some traditional industries, in particular, our connectivity services have tapped into a variety of sectors, including public transportation, public call and healthcare, another testament to our industry-leading service capabilities.

Next, I would like to highlight our progress on our high brand call offerings. In the fourth quarter, we successfully facilitated digital transformation for the Mainland China operations of Wilsons [Phonetic], a leading Asian house and beauty retailer. We provide the customer with a one-stop infrastructure as a service or IAAS solution, as well as complete operations and maintenance services for both software and hardware to optimize customers' IT architecture, enhances business reliability and improve operational efficiency. Looking ahead, we will continue to empower our customers' transitions into the evolving digital area by leveraging our IDC asset network and service capabilities.

Turning to our ESG initiatives, we have always held our long-term commitments and responsibilities to our industry environment and society as a foundation of our ongoing success. Our dedication and hard work are paying off, earning the company broad recognition from global renounced ESG rating agencies. We made great progress in our ESG ratings in 2022, thanks to our continuous efforts in improving our ESG performance. MSCI upgraded us to A rating in December 2022, which represents the highest ranking today in China's Internet service and infrastructure industry.

In addition, our ESG score measured by the S&P Corporate Sustainability Assessment reached 57, ranking in the top 10% among all companies in IT services industry globally. We also submitted a CDP's climate change questionnaire in 2022 and achieved a B grade, which exceeded that of, 96% of participating companies in China. These accomplishments and accolades clearly demonstrates the effectiveness of our ESG strategy whilst affirming our long-term investment value and development prospects.

Moving into 2023, while the economic recovery is still underway and may need time to realize the full rebound, we remain confident in the long-term growth potential of China's market, as well as IDC services industry as a whole. As a result, we set our 2023 delivery cloud in the range of 8,000 to 9,000 cabinets. We believe supportive government policies will accelerate China's digitalization across multiple industries and our proven dual-core growth strategy and industry-leading service capabilities will keep us ahead of the market recovery. We will remain agile as we advocate shifting market dynamics and capitalize our future growth opportunities, creating sustainable and long-term value for our shareholder.

Thank you, everyone. I will now turn the call to our CFO, Tim to discuss our financial performance for the quarter and our business outlook.

Tim Chen - Chief Financial Officer

Thank you, Jeff. Good morning and good evening, everyone. Before we start the detailed discussions 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 fourth quarter of 2022 and in Renminbi terms.

As Jeff just mentioned, we concluded 2022 with resilient operating and financial performance amidst a myriad of external challenges, which speaks to our outstanding execution. Next, let me walk you through our fourth quarter financial results. Unless otherwise specified, the growth rates I will be reviewing are all on a year-over-year basis. In the fourth quarter, our net revenue increased by 7.7% to RMB 1.88 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 businesses as well as the continued growth of our cloud and VPN services.

Gross profit was RMB 328.4 million in the fourth quarter of 2022, representing a decrease of 13.6% from the same period of 2021. Gross margin was 17.5% in the fourth quarter of 2022 compared to 21.8% in the same period of 2021. Adjusted cash gross profit, which excludes depreciation, amortization and share-based compensation expenses was RMB 740.1 million in the fourth quarter of 2022, an increase of 3.7% from the same period of 2021. Adjusted cash gross margin in the fourth quarter of 2022 was 39.4% compared to 40.9% in the same period of 2021.

Adjusted operating expenses, which excludes share-based compensation expenses, compensation for post combination deployment in an acquisition, impairment of loan receivable to potential investee and impairment of long-lived assets were RMB 355.4 million in the fourth quarter of 2022 compared to RMB 273.7 million in the same period of 2021. As a percentage of net revenues, adjusted operating expenses in the fourth quarter of 2022 were 18.9% compared to 15.7% in the same period of 2021.

Adjusted EBITDA in the fourth quarter of 2022 was $424.3 million, representing a decrease of 8.3% from the same period of 2021. Adjusted EBITDA in the fourth quarter of 2022 excluded a reversal of share-based compensation expense of RMB 7.8 million. Adjusted EBITDA margin in the fourth quarter of 2022 was 22.6% compared to 26.5% in the same period of 2021. Our net loss attributable to ordinary shareholders in the fourth quarter of 2022 was RMB 64.2 million compared to a net loss of RMB 27.3 million in the same period of 2021. Basic and diluted loss were both RMB 0.07 per ordinary share and both RMB 0.42 per ADS. Each ADS represents six Class A ordinary shares.

Now turning to our balance sheet. As of December 31, 2022, the aggregate amount of the company's cash, cash equivalents and restricted cash was RMB 2.99 billion. Meanwhile net cash generated from operating activities in the fourth quarter of 2022 was RMB 569.6 million compared to RMB 664 million in the same-period of 2021. Our capex in the fourth quarter of 2022 was RMB 1.21 billion and the total capex for the full-year 2022 was RMB 3.35 billion.

Now moving to our outlook, we expect net revenues for the full-year of 2023 to be in the range of RMB 7,600 million to RMB 7,900 million, representing a year-over-year increase of 7.6% to 11.8%. And adjusted EBITDA to be within range of RMB 2,025 million to RMB 2,125 million, representing a year-over-year increase of 8.1% to 13.5%. Looking forward, we will continue to execute on our dual-core growth strategy and remain focused on our core business as well as higher-quality revenues. In addition, we will continue to explore more capital resources to further strengthen our financial position.

This concludes our prepared remarks for today. Operator, we're now ready to take questions. Thank you.

Question & Answers

Operator

Thank you. At this time, we will conduct a question-and-answer session. [Operator Instructions] Our first question comes from the line of Yang Liu of Morgan Stanley. Please proceed with your question.

Yang Liu - Morgan Stanley - Analyst

Good morning, thanks for the opportunity to ask questions. Two questions from my side. The first one is about moving [Phonetic]. Could management share the color year-to-date, which is moving looks like from your retail and wholesale customer? And what should be the utilization rate by the end of this year if we add another 8,000 to 9,000 cabinet? Yes, that's the first question. And second question is, we are glad to see that the company onboard a new wholesale customer with a pretty big order size. When should we expect the financial contribution will be visible in future? Thank you.

Tim Chen - Chief Financial Officer

Hi, Yang, can you hear me?

Yang Liu - Morgan Stanley - Analyst

Yes, I can.

Tim Chen - Chief Financial Officer

Okay, let me take the second question and then I'll pass back to Jeff and the team on the first question on the ramp-ups. For the new customer that we've announced just now, we're expecting the financial contribution to take place next basically end of this year, early next year. So obviously, it's going to take us time to deliver the cabinet. So, by the time meaningful financial contribution takes place, it's will be 2024. I hope that's helpful.

Let me pass the ramp-up in terms of what we've been seeing in fourth quarter and the first few months of the first quarter to Jeff and team.

Jeff Dong - Chief Executive Officer

Hi, Yang, it's Jeff. We ramp-up - regarding the ramp-up agenda for 2022 will be 55% utilization rates. We expect more for this year and given the - let me give you some colors on the new customers just Tim mentioned. It certainly is actually the large majority of the billable cabinets in Q4. So, we can see as you mentioned, the moving from Internet players is very good and faster we expect from the cloud service providers. Given the contribution to our financials, we see in terms of this contract, we will see by the end of this year, fall over 70-megawatt - next year. So, we see this substantially and logical financial contributions will be come up by the end of this year and early next year.

Yang Liu - Morgan Stanley - Analyst

Thank you.

Operator

[Operator Instructions] Our next question comes from the line of Sara Wang of UBS. Please proceed with your question.

Sara Wang - UBS - Analyst

Hi, thank you for the opportunity to ask question. So, I have one question. So, would management please walk us through the financing plan and also the major cash inflows and outflows for this year, especially given one of the convertible bond might be put for early next year? Thank you.

Tim Chen - Chief Financial Officer

Thanks, Sarah for the question. It's Tim here. With regards to the overall financing plan, we've obviously started already at the end of last year going through the alternatives available to the company. We've seen quite positive news that the public markets are gradually opening up. As to the major sort of inflows and outflows, obviously, the business continues to generate a very healthy operating cash flow. Outflows would be mainly the capex. And at this moment, we're expecting capex to be quite similar to what it was in 2022, which is between RMB 3 billion to RMB 3.5 billion.

However, I would then point out next is that this capex is not all committed or contracted. So, we do have the ability to ratchet it back during the course of the year and we'll do so really for two areas, one is, as we see the customer demand and also the customer requirements in terms delivery dates if they shift, you've seen us also in 2022 adjust during the course of the year as required. And then secondly, obviously is we are planning our overall cash flow for the potential refinancing of the convertible bond that would be in first quarter of 2024. So, that's something that we're keeping a very close eye on. And obviously, looking to the various alternatives. Obviously, given where share prices are for us and our peers, we will be looking mainly at debt and convertible as the main instruments. Also, something that we have already mentioned last year, we continue to work on would be onshore renminbi financings, both in the form of private and public REITs. I hope that answers your question, Sara.

Sara Wang - UBS - Analyst

Thank you. And just a quick follow-up, on the operating cash flow for 2022, it seems to was RMB 2.6 billion. So, how shall we think about the operating cash flow level for 2023? Thank you.

Tim Chen - Chief Financial Officer

Yeah. I would say that, look, the working capital point, Sara will not move very, very much. So, you're looking at underlying EBITDA as a good proxy. So, obviously, we've given some guidance on EBITDA. I think you could use that as a proxy on where directionally we expect operating cash flow to go as well.

Sara Wang - UBS - Analyst

Got it, that's clear. Thank you.

Jeff Dong - Chief Executive Officer

Thank you, Sara.

Operator

[Operator Instructions] Our next question comes from the line of Edison Lee of Jefferies. Please proceed with your question.

Edison Lee - Jefferies - Analyst

Okay. Hi, Tim and Jeff, thank you for the presentation. I have two questions. Number one is, on this new customer that you have signed-up for over 100-megawatt, so based on your comment a little bit earlier, I assume that the 3,000 cabinets that you're including in your 2023 guidance is not related to this customer? I just wanted to confirm that. And also, could you give us some color on the pricing and also on the potential for follow-on orders for this particular customer in the same region or in the same data center campus?

And my number two question is, is it possible for you guys to give us an update on your joint-venture IDC fund with the Changzhou Government and in fact, is that being factored into your 2023 guidance or how much of that is being factored into that? Yeah. Thank you.

Tim Chen - Chief Financial Officer

Hi, Edison, let me answer your questions. The first one in terms of new customers, yes it is, we included 3,000 cabinets this year, which is from the first phase of the new customer.

Edison Lee - Jefferies - Analyst

Sorry. Yes, so can I confirm that this 3,000 cabinets will be delivered towards the end of the year. So, that's why the financial contribution in 2023…

Tim Chen - Chief Financial Officer

Edison, that's correct. That's correct. We're expecting that these will be delivered at the very tail-end of the year and so I don't expect at least from my side, any meaningful financial contribution, probably a little bit the very beginning of it, but really the meaningful contribution will be in 2024 first quarter.

Edison Lee - Jefferies - Analyst

All right. Can I also follow-up with just one related question. So, will this 100-megawatt be fully delivered within 2024 or it's going to go into 2025?

Tim Chen - Chief Financial Officer

It's going to be into different phase. Under the first phase will be this year and early next year, we'll deliver like one-third, sorry, two-third and the remaining will be delivered in the next next.

Edison Lee - Jefferies - Analyst

So, it will be completely delivered in 2024?

Tim Chen - Chief Financial Officer

No, no, sorry, the first phase, the first part is going to be from mainly in the 2023 into the early part of '24. But the balance we will need to see whether the customer will give us the heads-up. So, it depends on their move-in rate. If they move-in rate is very, very strong, they may give us an earlier go ahead, in which case, yes, it would be in 2024, but if not, it could actually drag into the outer years.

Edison Lee - Jefferies - Analyst

I'm sorry, I wanted to further clarify because I think that's an important point. So, this 100-megawatt contract, you already started the MOU with the customer.

However, the timing of delivery is that you not specified in the MOU, is this understanding correct?

Tim Chen - Chief Financial Officer

Only, only part of it is specified and the balance is not. The indications that they've given us - yes, correct.

Jeff Dong - Chief Executive Officer

Let me put this way, Edison. We will be fully delivered within the three years for the MOU with the customer.

Edison Lee - Jefferies - Analyst

Okay, and in the same location? Right. All this capacity is at the same location?

Tim Chen - Chief Financial Officer

Yes same location, yes.

Edison Lee - Jefferies - Analyst

Okay, thank you.

Tim Chen - Chief Financial Officer

Yeah, in terms of second question, yes, yes.

Edison Lee - Jefferies - Analyst

Sorry, Jeff, please go ahead.

Tim Chen - Chief Financial Officer

Okay, let me answer your questions in terms of the JV with the Changzhou. We have, we have actually - we recently we signed a IPA in long form [Phonetic] area with one project, which is the largest one from the identified portfolio. The JV has already commenced over RMB 500 million and as a proportion, we also committed the capital. And this long form project will achieve IT scale of about 140-megawatt and also we will be delivering the cabinets more than 17,000 cabinets in total. So, that's what we have done so far and some other projects, we are also closely in discussion with Changzhou. We will ramp-up as soon, probably by the end of this year, including Shenzhen, Dongguan and also in Central Beijing areas.

Edison Lee - Jefferies - Analyst

Thank you. Just a follow-up. So, will this long form project contributing profitability to VNET this year?

Tim Chen - Chief Financial Officer

I wouldn't see it contribute to VNET's financials but we will - it's also divided into the different phase. The Phase 1, Phase 2, has already has customers and we are signing the IPA on the Phase 3 and Phase 4, which is a greenfield project with the full regulatory license. And hopefully, will be delivered by the end of this year and the ramping maybe next year.

Edison Lee - Jefferies - Analyst

Okay, thank you very much.

Operator

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VNET GROUP INC

Q4 2022

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