Terry Shi Lian Wang
Good day everyone, and thank you for joining us today. We're pleased to win a steady top-line growth in the third quarter with the revenues increasing 19% year-over-year to RMB 924 million, which outperformed midpoint of our revenue guidance. The increase was primarily driven by continued solid growth in our IDC business, elevated demand for company's cloud services, steady growth in our Aipu business, as well as additional contribution from Dermot Entities, which we acquired from DYXnet Group in August 2014. Our revenue growth was partially offset by the continued softness in the managed network services cost by ongoing slumps in bandwidth selling prices in the market. EBITDA came in softer than expected, primarily driven by the higher spending on telecommunication costs and certain equipment sales to Aipu broadband retail customers that generate lower margins. Due to the changes in the competitive landscape in the marketplace, we have started in the third quarter to restructure our business. We have incurred certain restructure charges, which also impacted our EBITDA in the third quarter and likely next few quarters. Looking at our overall business development and the challenges we currently face in the market, a key focus for us going forward is to restructure our business into different business units in order to better serve the continuously evolving increasing specialized market segments. We are evaluating a new organizational structure that separates out colocation, CDN, data center construction and development, enterprise network services, and the consumer access network. We believe this greater level of our autonomy will allow the various units to specialize and optimize in a way to further improve scale, profitability, and operating efficiencies. As we expand our data center footprint, we’ll leverage our strong partnerships with global tech companies. We remain confident in our ability to scale our business both financially and operationally. Now, let's go over each of our core businesses in more detail. In our core IDC business, we increased our total cabinet capacity by nearly 600 in the third quarter, and we accelerated deployment as we close out 2015 and move into 2016, especially in our Southern China data centers. We continue to grow our billable cabinets at a rate faster than our total cabinet capacity, which further boosts our data center utilization rate in the third quarter from 67.5% to 71.8%. Our hosting churn rate also improved from 0.37% to 0.26% in the quarter. Looking at the customer top line, we have secured a few leading domestic and international financial and enterprise customers and are working with others to further strengthen those verticals. Our cloud business also showed impressive progress as demonstrated by strengthening relationships with our global partners. In the third quarter of 2015, we signed a new agreement with UNIS and Microsoft to provide customized hybrid cloud computing solutions and related services to Chinese users. We look forward to further expanding our targeted customer base and the product offerings under this new agreement. Furthermore, our partnership with IBM brought us another important project in the recent quarter. On October 14, we signed an agreement with IBM for Bluemix China landing project. Under the terms of agreement, we will provide infrastructure support and operational services to IBM for Bluemix entry into China market. For our CDN business, we continue to execute on our growth strategy in catching up with the industry leaders. Given some of the recent changes in competitive landscape that could potentially benefit our CDN business, we're refining our growing market strategy in order to catch our opportunity. Meanwhile, it is important to point it out the competition in the CDN market has also pressured our gross margins, and we expect this trend will likely continue in Q4. We're working diligently to optimize our cost structure in light of the continued decline in the bandwidth prices in the market. Our VPN business, which primarily comprises of DYXnet Group that we acquired in 2014 continues to perform well as the second largest enterprise of VPN service provider in the Greater China region. DYXnet continues to attract customer demand as a part of their overall IT spending. We're also working to leverage some of the potential cross-selling opportunities now that DYXnet is part of the much larger platform. Moving on to our MNS business, net revenue from managed network services came in soft, primarily due to the industry-wide decline of selling bandwidth prices and intensified market competition. As we discussed in previous quarters, while Aipu Group continued to perform well, the organic MNS business remains one of the most challenging parts of the overall business. To that end, we will continue our network grooming business process and are restructuring our business to suite the changing market dynamics. In the meantime, we're reviewing our customers' credit against our accounting policies to assess the account receivables collections. Now I want to discuss our third quarter financial results. Before I begin, I'd like to state that we will present non-GAAP measures today. Our non-GAAP results exclude certain non-cash expenses, which are not a part of core operations. The detail of these expenses maybe found in the reconciliation tables included in our earlier release. Also note that all financial numbers we're presenting today are RMB amounts and the percentage change is year-over-year unless otherwise noted. Our net revenues for the third quarter of 2015 increased by 19% to RMB 924 million. Net revenues from hosting and related services increased by 36% to RMB 696 million from RMB 513 million in the comparative period of 2014, primarily due to the increase in the total number of our billable cabinets under management. MRR per cabinet was RMB 9,900 in the third quarter of 2015 compared to RMB 9,872 in the second quarter of 2015. Net revenues from managed network services were RMB 228 million in the third quarter of 2015 as compared to RMB 265 million in the comparative period of 2014. The decrease was primarily due to the continued decline of bandwidth pricing. Adjusted gross profit was RMB 240 million compared with RMB 265 million in the comparative period in 2014. Adjusted gross margin was 26% compared to 34% in the comparative period in 2014 and 28.3% in the second quarter of 2015. The decrease in gross margin was primarily due to the higher spending on telecommunication services, lower selling bandwidth prices, and some lower margin equipment sales to Aipu customers. Adjusted operating expenses increased to RMB 230 million from RMB 198 million in the comparative period in 2014. As a percentage of net revenue, adjusted operating expenses were 25% compared to 25.5% in the prior year period and 24.2% in the second quarter of 2015. More specifically, sales and marketing expenses increased by 4% to RMB 89 million from RMB 86 million in the comparative period in 2014, primarily due to higher services fee, which were more than offset by lower labor costs as we outsourced some functions to more cost-effective service providers. General and administrative expenses increased by 54% to RMB 139 million from RMB 90 million in the comparative period in 2014, primarily due to expenses associated with the previously issued employee stock options and increased head count associated with the growth in our overall business. Research and development expenses increased by 12% to RMB 35 million from RMB 31 million in the comparative period in 2014, which reflect our efforts to further strengthen our research and development capabilities, and expand our cloud computing and the CDN service offerings. Change in the fair value of our contingent purchase consideration payable was a loss of RMB 0.4 million [ph] million in the third quarter of 2015 compared with a gain of $65 million in the comparative period in 2014. From a profitability perspective, our adjusted EBITDA for the third quarter of 2015 was $122 million compared with $154 million in the comparative period in 2014. Adjusted EBITDA margin for the quarter was 13.2% compared with 19.8% in comparative period in 2014 and 17.2% in the second quarter of 2015. Adjusted net profit for the third quarter was RMB 15 million compared with RMB 16 million in the comparative period in 2014. Adjusted net margin was 1.7% compared with 2.1% in the comparative period in 2014 and negative 1.8% in the second quarter of 2015. Adjusted diluted earnings per share for the third quarter of 2015 was RMB 0.02, which represents the equivalent of RMB 0.12 per ADS. As of September 30, 2015, our cash and cash equivalents and the short-term investments were RMB 1.88 billion, equivalent to $296 million. Now, turning to financial outlook; for the fourth quarter of 2015, the company expects net revenue to be in the range of RMB 960 million to RMB 1 billion, representing approximately 15% year-over-year growth at the midpoint. Adjusted EBITDA is expected to be in the range of RMB 100 million to RMB 120 million, representing approximately 31% year-over-year decline at the midpoint. The year-over-year decline reflects the expected one-time charges in the fourth quarter related to accounts receivable write-off of approximately RMB 30 million. For the full year 2015, the company now expects the net revenue to be in the range of RMB 3.61 billion to RMB 3.65 billion, revised from prior guidance of RMB 3.58 billion to RMB 3.68 billion. At midpoint, this represents approximately 26% top-line growth over 2014. Adjusted EBITDA for the full year 2015 is expected to be in the range of RMB 538 million to RMB 558 million, revised from prior guidance of RMB 620 million to RMB 660 million. This represents approximately 2% decline over 2014 at midpoint. These forecasts reflect the company's current and preliminary review, which is subject to change. This concludes our prepared remarks. Thank you for joining our call today. And we would like to conclude the call. Thanks.
