21Vianet Group, Inc. — FY2013 Form 20-F
Reporting period: Fiscal year ended December 31, 2013; the filing is an annual report, not a standalone Q4 report, and does not provide clear fourth-quarter financial results. The company’s financial statements are prepared under U.S. GAAP. Unless stated otherwise, amounts below are RMB millions.
Business context
21Vianet provides data-center hosting, managed network, content delivery and cloud-related services in China. At year-end it managed 14,041 cabinets across 81 data centers and served 2,046 customers. Its China operations are conducted substantially through variable interest entities (VIEs) consolidated under contractual arrangements rather than direct equity ownership.
Financial performance and liquidity
| Metric | FY2013 | FY2012 |
|---|---|---|
| Revenue | 1,966.7 | 1,524.2 |
| Gross profit / margin | 516.9 / 26.3% | 425.7 / 27.9% |
| Operating profit | 41.8 | 80.9 |
| Net income (loss) | (47.0) | 57.7 |
| Net loss attributable to ordinary shareholders | (48.2) | Net income of 56.3 |
| Adjusted EBITDA (non-GAAP) | 365.6 | 294.2 |
| Adjusted net profit (non-GAAP) | 120.5 | 167.3 |
| Cash from operating activities | 64.5 | 173.9 |
Revenue increased 29.0%. Hosting and related services rose 45.3% to RMB1,259.3 million; managed network services rose 7.6% to RMB707.5 million. Cost of revenues grew 32.0%, faster than revenue, and gross margin fell 1.6 percentage points. Operating expenses increased 37.8%; the company cited higher staffing and a RMB55.9 million expense from remeasuring contingent acquisition consideration. Interest expense rose to RMB136.8 million from RMB11.4 million, primarily following new bond and bank borrowing, contributing to the swing to a net loss. Share-based compensation was RMB67.8 million in 2013.
At December 31, cash and cash equivalents were RMB1,458.9 million, short-term investments RMB1,101.8 million, and restricted cash RMB412.1 million in total. Current assets were RMB3,604.3 million versus current liabilities of RMB1,061.4 million. Restricted cash is not freely available. Operating cash generation weakened, while investing activities used RMB1,507.3 million, including purchases of investments and property and equipment.
Total liabilities were RMB3,656.3 million, compared with RMB1,087.6 million a year earlier. Major financing obligations included RMB1,336.5 million of bank and other borrowings, RMB998.5 million of bonds payable, and RMB351.7 million of capital-lease obligations. The RMB1 billion bonds mature in March 2016, carry a 7.875% coupon (9.29% effective rate), and include restrictive covenants. The company also reported a RMB100 million mandatorily redeemable noncontrolling interest.
Material changes and outlook
- Cabinets under management grew from 11,917 to 14,041; average utilization improved from 66.3% to 70.3%, but remained below the 2011 level of 80.6%.
- Hosting services’ share of revenue increased to 64.0%; managed network services’ share declined to 36.0% as hosting grew faster.
- Management planned to expand capacity to 25,000 cabinets by the end of 2014 and estimated 2014 capital expenditure of approximately RMB700 million. It expected to fund investment with cash, operating proceeds and additional borrowing if available.
- Public cloud services began in 2013 through Microsoft; an IBM agreement announced in December 2013 was intended to support private and hybrid cloud services in China in 2014. Management highlighted growth opportunities but also limited cloud-market experience and execution risks.
Risks, contingencies and unusual items
- Expansion requires substantial capital and depends on customer demand, site availability, power, bandwidth and access to financing. Underutilized capacity or higher power, lease or carrier costs could pressure margins.
- China Telecom and China Unicom supply important bandwidth, fiber and partnered data-center capacity and also compete with the company.
- The VIE structure is exposed to uncertainty in PRC law and regulation; substantially all revenue is attributed to consolidated affiliated entities. The company cautions that regulators could challenge the structure or licensing arrangements.
- A short-term bank loan with an outstanding balance of RMB19.6 million was in covenant breach at year-end; the company reported that the breach did not accelerate repayment and was cured by an amendment on March 11, 2014.
- Contractual obligations totaled RMB4,848.2 million, including purchase commitments, leases, borrowings, bonds and capital leases. A separate RMB900 million entrusted borrowing was associated with Asia Cloud Investment, which held a corresponding RMB900 million principal-guaranteed short-term investment.
- In March 2014, the company issued 690,000 ADSs to compensate managers connected with a prior acquisition and expected to record approximately RMB117.2 million of share-based compensation expense. This is a subsequent event, not a FY2013 charge.
- Management reported effective disclosure controls and internal control over financial reporting; the auditor issued unqualified opinions on the financial statements and internal controls. The filing nevertheless describes risks relating to PRC-based auditor inspection and SEC document-access proceedings.
Most important facts for investors to verify
- Whether operating cash flow recovers and the planned expansion can be funded without materially increasing debt or diluting shareholders.
- Actual utilization, margins and customer demand as cabinet capacity expands, including the impact of partnered versus self-built centers.
- Debt maturities, bond covenants, the status of the formerly breached bank covenant, and the terms and economic exposure of the RMB900 million entrusted borrowing.
- Collection of receivables, which rose to RMB610.4 million from RMB293.4 million, and the effect of working-capital needs on cash generation.
- Progress and economics of Microsoft- and IBM-related cloud services, and the performance of acquired businesses and contingent purchase consideration.
- Continuing validity of VIE contracts, telecommunications licenses, and PRC foreign-exchange and dividend-transfer arrangements.