Business context and reporting period
This is 21Vianet Group, Inc.’s audited Form 20-F for the fiscal year ended December 31, 2011, prepared under U.S. GAAP. It is an annual report, not a standalone fourth-quarter filing; the filing text does not provide a clear standalone Q4 income statement or cash-flow value. The company provides carrier-neutral data center hosting and managed network services in China.
At year-end, it operated 63 data centers in 33 cities, with 7,816 cabinets and 55,131 servers; its network had more than 340 points of presence and estimated capacity of 518 Gbps.
Financial performance and position
Unless otherwise noted, figures below are RMB; 2011 U.S. dollar equivalents are shown where useful. Amounts are in millions unless stated.
| Metric | 2011 | 2010 | Change or context |
|---|---|---|---|
| Revenue | 1,020.9 | 525.2 | Up 94.4% |
| Hosting and related services revenue | 614.6 | 374.9 | 60.2% of 2011 revenue |
| Managed network services revenue | 406.3 | 150.3 | Up 170.4%; 39.8% of 2011 revenue |
| Gross profit / margin | 276.6 / 27.1% | 128.3 / 24.4% | Margin improved 2.7 percentage points |
| Operating profit (loss) | 14.9 | (232.8) | 2010 included unusually high share-based compensation |
| Net profit (loss) from continuing operations | 45.9 | (234.7) | 2011 included a 32.7 foreign-exchange gain |
| Net profit attributable to ordinary shareholders | 18.4 | (255.4) | After 27.5 attributable to non-controlling interests |
| Adjusted net profit (non-GAAP) | 170.0 | 59.5 | Supplemental measure; not a substitute for GAAP results |
| Adjusted EBITDA (non-GAAP) | 209.0 | 83.7 | Supplemental measure; excludes specified items |
Revenue growth reflected higher cabinet capacity and customer demand, plus consolidation of acquired managed-network businesses. Cabinet count rose from 5,750 to 7,816; average cabinet utilization was 80.6%, versus 78.8% in 2010. Monthly recurring revenue averaged RMB82.0 million, up from RMB41.9 million. Monthly churn was 0.8%, unchanged from 2009 and below 2010’s 0.9%.
Cash generated from operating activities was RMB166.1 million, compared with RMB81.4 million in 2010. Investing activities used RMB1,268.1 million, including purchases of short-term investments and property and equipment. Financing activities generated RMB1,443.9 million, principally reflecting the IPO.
At December 31, 2011, cash and cash equivalents were RMB410.4 million (US$65.2 million), short-term investments RMB894.5 million (US$142.1 million), and current assets RMB1,551.2 million. Current liabilities were RMB462.5 million; total liabilities were RMB733.2 million. Short-term bank borrowings were RMB100.0 million (US$15.9 million), bearing a weighted-average rate of 6.76%. Capital lease obligations had a carrying value of RMB99.9 million. Shareholders’ equity was RMB1,669.7 million, versus a deficit of RMB709.5 million in 2010, reflecting the IPO, preferred-share conversion and other equity changes.
Capital expenditures were RMB292.8 million in 2011. Contractual obligations totaled RMB1,000.0 million, including short-term borrowings, operating leases, purchase commitments and capital leases. The company reported no plan to pay ordinary-share dividends in the foreseeable future.
Material changes and unusual items
- Revenue nearly doubled, with managed network services growing to 39.8% of revenue. The Managed Network Entities were acquired in full in December 2011 after an initial 51% acquisition in 2010; Gehua was acquired in October 2011.
- Gross margin rose from 24.4% to 27.1%, which management attributed primarily to a greater share of self-built data-center capacity.
- 2010’s RMB277.9 million share-based compensation charge included RMB206.1 million related to fully vested shares issued to Sunrise, owned by the CEO. 2011 share-based compensation was RMB42.0 million. These items materially affect comparisons of operating costs and earnings.
- 2011 included RMB63.2 million of expense from changes in fair value of contingent acquisition consideration, partly offset in reported results by a RMB32.7 million foreign-exchange gain. Acquired-intangible amortization was RMB30.1 million.
- The company completed a US$204.3 million net-proceeds IPO in April 2011 and repurchased 3,022,532 ADSs for approximately US$29.9 million by year-end.
Outlook, risks and contingencies
Management planned to increase cabinets under management from 7,816 at year-end 2011 to more than 13,000 by the end of 2012 and estimated 2012 capital expenditures of approximately RMB537.2 million. It also planned to expand network capacity from 518 Gbps to more than 1,000 Gbps by the end of 2013. Management expected managed-network revenue to increase substantially in 2012, but the filing provides no specific revenue or earnings guidance. Management said IPO proceeds and anticipated operating cash flow should fund expected needs for the foreseeable future.
- Expansion requires substantial investment and depends on financing, suitable sites, power and customer demand; underutilized capacity could pressure margins. The company also relies materially on China Telecom and China Unicom for partnered data centers, bandwidth and fiber.
- Service interruptions, power constraints, cybersecurity incidents, higher telecom or electricity costs, and lease nonrenewals could disrupt operations or increase costs. The company reported no material past service interruptions but identified outages as a significant risk.
- Operations depend on PRC licenses and contractual VIE arrangements. Regulatory interpretation or enforcement could challenge the structure, licensing or ability to operate; PRC currency controls and limits on subsidiary distributions may also constrain access to funds.
- The company disclosed prior internal-control deficiencies and ongoing remediation. Management judged disclosure controls effective, but this annual report included no management assessment or auditor attestation on internal control over financial reporting under the newly public company transition relief. The auditor also noted that its China-based firm was not then subject to PCAOB inspection.
- Unrecognized tax benefits were RMB26.8 million at year-end; the company cited uncertainty around tax positions and PRC tax rules. It also identified potential tax-residency and preferential-tax risks.
- There were RMB419.4 million of bandwidth and cabinet-capacity purchase commitments and RMB211.3 million of equipment and construction commitments. The filing reports no legal proceeding management believed likely to have a significant effect.
- In February 2012, the company won a provisional bid for Hong Kong 2.3 GHz spectrum, with a stated HK$150 million payment/performance-bond requirement. It planned to pursue a local-carrier partnership and had limited experience in this business.
Important facts for investors to verify
- Confirm the audited 2011 GAAP figures and distinguish consolidated net income of RMB45.9 million from RMB18.4 million attributable to ordinary shareholders; review the effect of non-controlling interests and non-GAAP adjustments.
- Assess recurring operating cash generation against the RMB537.2 million 2012 capex plan, the RMB1.0 billion contractual-obligation total, and acquisition-related contingent consideration.
- Verify cabinet utilization, self-built versus partnered capacity, customer demand, and progress toward the 13,000-cabinet and 1,000-Gbps targets.
- Review the assumptions and outcomes for contingent acquisition payments, acquired-intangible amortization, goodwill and impairment testing, and the concentration of suppliers and carrier dependencies.
- Monitor VIE and telecommunications-license developments, tax exposures, PRC restrictions on cash transfers, internal-control remediation, and the status and economics of the Hong Kong spectrum initiative.