Business context and reporting period
21Vianet Group, Inc. (NASDAQ: VNET) filed this Form 20-F for the fiscal year ended December 31, 2015. It is an annual report, not a standalone fourth-quarter filing; the supplied financial results are annual. The company provides carrier-neutral data-center hosting and related services, managed network services, and complementary CDN, VPN, broadband and cloud services, primarily in China. Financial statements are prepared under U.S. GAAP; amounts below are RMB unless indicated.
Financial and operating performance
| Metric | FY2015 | FY2014 |
|---|---|---|
| Net revenue | RMB3,634.4m (US$561.1m), +26.3% | RMB2,876.4m |
| Hosting and related revenue | RMB2,707.4m, +36.7%; 74.5% of revenue | RMB1,980.7m; 68.9% |
| Managed network revenue | RMB926.9m, +3.5%; 25.5% of revenue | RMB895.8m; 31.1% |
| Gross profit / margin | RMB853.8m / 23.5% | RMB810.1m / 28.2% |
| Operating loss / margin | RMB284.2m / 7.8% | RMB114.7m / 4.0% |
| Net loss | RMB401.3m (US$61.9m); attributable to ordinary shareholders: RMB428.1m | RMB328.5m; attributable to ordinary shareholders: RMB348.5m |
| Adjusted net result (non-GAAP) | Loss of RMB10.8m (US$1.7m) | Profit of RMB79.4m |
| Adjusted EBITDA (non-GAAP) | RMB540.4m (US$83.4m) | RMB558.9m |
| Operating cash flow | RMB216.8m (US$33.5m) | RMB325.4m |
| Investing / financing cash flow | Used RMB370.1m / generated RMB1,115.0m | Used RMB2,261.8m / generated RMB1,121.7m |
Revenue expansion reflected cloud demand, acquired businesses and more billable cabinets. Costs grew faster than sales: cost of revenues rose 34.6% to RMB2,780.6m, and gross margin fell as telecommunications spending, data-center depreciation and acquired-intangible amortization increased. Operating expenses were RMB1,146.6m, including a one-time accounts-receivable provision; the filing reports a 2015 doubtful-account provision of RMB30.8m. Share-based compensation was RMB190.0m, versus RMB233.7m in 2014.
Liquidity, debt and capital requirements
At December 31, 2015, cash and cash equivalents were RMB1,685.1m; restricted cash was RMB323.7m in total; and short-term investments were RMB104.9m. Total current assets were RMB3,481.7m against current liabilities of RMB2,821.9m. Cash, restricted cash and short-term investments totaled RMB2,113.7m, although access to funds held in China is subject to currency and distribution controls.
Bank and other borrowings totaled RMB418.2m. Bond principal outstanding was RMB2,264.3m: RMB2,000m of 2017 Bonds at a 6.875% coupon and RMB264.3m of 2016 Bonds, which the filing says were repaid in March 2016. Total liabilities were RMB6,039.3m; capital-lease obligations and mandatorily redeemable interests are additional obligations. FY2015 interest expense was RMB274.2m, compared with RMB232.0m in 2014. Management said working capital and resources were sufficient for current needs and expected liquidity to cover the next 12 months.
Cash capital spending on property and equipment was RMB1,052.3m in 2015. Management estimated 2016 data-center capital expenditure of RMB800m–RMB1,000m. Contractual obligations totaled RMB8,004.7m, including RMB3,422.3m of purchase commitments (of which RMB1,970.7m was due within one year), RMB1,303.4m of capital-lease minimum payments, RMB496.5m of operating leases and RMB2,264.3m of bonds.
Changes, outlook, risks and unusual items
- Operating scale expanded: cabinets under management rose from 21,522 to 23,556, while annual average utilization declined from 71.9% to 69.0%. Hosting churn was 0.2% per month in 2015, compared with 0.6% in 2014.
- Adjusted EBITDA declined despite revenue growth; adjusted net income moved from profit to a small loss. The gap between reported and adjusted results reflects, among other items, share compensation, acquired-intangible amortization and contingent purchase consideration remeasurement.
- Other significant 2015 income items included a RMB72.4m foreign-exchange gain and RMB52.4m gain from an equity-method investment. The company also recorded RMB43.3m of expense from changes in contingent acquisition consideration fair value.
- Management planned further capacity expansion, network investment and growth in cloud, CDN and VPN services. It cautioned that expansion requires substantial resources and could depress utilization or margins if demand, construction, power supply or financing fall short. Managed-network services faced bandwidth-price pressure.
- Key business risks include dependence on China Telecom and China Unicom for bandwidth and partnered facilities; power availability and service outages; competition; acquisition integration and contingent payments; and regulatory uncertainty around telecommunications licenses and the contractual VIE structure. The VIEs generated most revenue, but the company has no direct equity ownership in them.
- A putative U.S. shareholder class action alleging securities-law misstatements remained at a preliminary stage; management could not estimate any loss or range of loss. The company said it would defend the case. The filing also describes a June 2015 preliminary, non-binding proposal to take the company private for US$23 per ADS; the Special Committee was reviewing it, and completion was uncertain.
- The 2017 Bonds contain financial and operational covenants, including restrictions on dividends and additional indebtedness; the company reported compliance as of the filing. Management did not plan to pay dividends in the foreseeable future. The company reported effective disclosure controls and internal control over financial reporting, and the auditor gave an unqualified opinion.
Most important facts for investors to verify
- Reconcile GAAP losses, non-GAAP adjustments and the drivers of the gross-margin decline, including recurring versus one-time credit provisions and acquisition-related costs.
- Review cash conversion and the funding plan for the 2016 capital-spending estimate and RMB3,422.3m of purchase commitments; confirm liquidity is accessible across PRC and offshore entities.
- Confirm post-year-end repayment of the remaining 2016 Bonds, current 2017 Bond covenant headroom and the full debt and lease-service burden.
- Track cabinet utilization, new capacity delivery, power availability, pricing and customer demand, particularly for managed-network and cloud services.
- Check developments in the take-private proposal, shareholder litigation and PRC rules affecting VIE enforceability, licenses and cross-border cash transfers.