Prepared remarks
Hello, ladies and gentlemen. Thank you for standing by for the Second Quarter 2026 Earnings Conference Call for VNET Group, Inc. (Operator instructions). Participants from our management include Mr. Wen Teng, Rotating President; Mr. Peter Zhang, SVP of Operational Finance; Ms. Sharon Liu, Executive Vice President; Ms. Julia Jiang, Senior Manager of Investor Relations of the company; Mr. Ju Ma, Executive Vice President. Please note that today's conference call is being recorded. I will now turn the call over to the first speaker today, Ms. Julia Jiang. Please go ahead.
Thank you, operator. Hello, everyone, and welcome to our Second Quarter 2026 Earnings Conference Call. Our earnings release was distributed earlier today, and you can find a copy on our IR website as well as on newswire services. Please note that today's call will contain forward-looking statements made under the safe harbor provision of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements are subject to risks and uncertainties that may cause the actual results to differ materially from our current expectations. For detailed discussion 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 include the disclosures of unaudited GAAP and non-GAAP financial measures. VNET's earnings press release contains a reconciliation of unaudited non-GAAP measures to the unaudited GAAP measures. A summary presentation which we refer to during this conference call can be viewed and downloaded from our IR website at ir.vnet.com. Next, I'd like to alert you that we will be utilizing text-to-speech technology powered by Neolink.ai to deliver this quarter's prepared remarks by Mr. Wen Teng, our Rotating President; and Mr. Peter Zhang, SVP of Operational Finance. The management team will join the Q&A session in person. Additionally, this conference is being recorded. A webcast of this conference call will also be available on our IR website at ir.vnet.com. Now let's get started with today's presentation. Mr. Teng, please go ahead.
Good morning and good evening, everyone. Thank you for joining our call today. I will start with an overview of our major accomplishments during the second quarter of 2026. We delivered another robust quarter as we continue to capitalize on surging AI-driven demand, leveraging our industry-leading capabilities, strategically located resource reserves and strong execution. In the second quarter, we secured a total of 347 megawatts in new order wins, primarily driven by accelerating growth in our wholesale IDC business, which contributed 345 megawatts, together with the 517 megawatts of orders disclosed in our last quarter earnings results. Our wholesale IDC business has secured a total of 862 megawatts of new orders year-to-date in 2026. As of June 30, 2026, our wholesale capacity in service rose by 49.4% year-over-year to 1,007 megawatts, surpassing 1 gigawatt for the first time. Meanwhile, wholesale capacity utilized by customers grew by 45.5% year-over-year to 744 megawatts, bringing the utilization rate to 73.9%. Our retail IDC business continued to progress smoothly supported by growing AI-driven demand. Retail MRR per cabinet increased to RMB 9,799 in the second quarter, while the retail utilization rate remained stable at 64.5%. On the financial side, our total net revenues increased by 14.2% year-over-year to RMB 2.78 billion for the second quarter. Wholesale revenues remained the key growth driver, reaching RMB 1.10 billion, a year-over-year increase of 29.3%. Our adjusted EBITDA for the second quarter increased by 25.4% year-over-year to RMB 918.3 million, also primarily attributable to the wholesale IDC business. Beyond our operational and financial performance, we made meaningful progress on the following two strategic initiatives during the quarter. First, we continue to advance our strategic collaboration with CATL, a global leader in zero carbon new energy technology. We signed a strategic cooperation agreement to jointly develop a 3-layer integrated compute energy ecosystem. I'll share more details shortly. Second, we continue to strengthen our strategic resource reserves across key regions. By the end of the second quarter, our total capacity exceeded 3.5 gigawatts in the Chinese Mainland. And on top of that, we secured approximately 500 megawatts of overseas resources. Our proactive investments in critical resources provide the flexibility for future capacity expansion, enabling us to capture rising demand. Together, these strategic initiatives further strengthen our competitive position and support our long-term growth. Let me now walk you through our business performance in more detail. Moving on to our new order wins on Slide 5. Our premium reliable services continue to earn customer trust and gain market share. Following our last earnings call, we won a new 345-megawatt wholesale order in the second quarter from a leading cloud service provider for our data center in the Greater Beijing area. This order win reflects growing customer confidence in our high-performance data center capabilities and our ability to support their evolving AI infrastructure requirements. Furthermore, driven by AI-related demand, we secured new retail orders totaling approximately 2 megawatts across multiple retail data centers during the quarter from customers in the IT services, local services and financial services sectors. In aggregate, we secured 4 wholesale orders totaling 862 megawatts year-to-date in 2026, including the 345 megawatts I just mentioned and 517 megawatts we announced last call. We continue to see robust momentum in customer demand with increasing depth and durability. Customers are not only accelerating their near-term capacity deployments, but are also beginning to secure capacity in advance under reservation agreements to support their medium- to long-term expansion plans. As of the end of the second quarter, our reservations stood at 355 megawatts, bringing total orders and reservations to over 1.2 gigawatts. This demonstrates the strength and sustainability of expansion-related demand and provides greater visibility into our future growth and phase delivery schedule. Meanwhile, we have established a well-structured delivery schedule for these orders with approximately 287 megawatts expected to be delivered in 2026, 345 megawatts in 2027 and 230 megawatts in 2028 and beyond. Securing these large-scale orders is a testament to the trust customers place in our execution capabilities and speed to market. These new orders and our disciplined delivery road map enhance the visibility and predictability of our future revenue growth, underpinned by a high-quality base of long-term contracted revenue. Please see Slide 7. As of the end of the quarter, more than 90% of our wholesale IDC revenue was recurring. Our total capacity committed benefits from a favorable maturity profile with minimal near-term expirations and a weighted average remaining lease term of 7 years. These long-term customer commitments provide a predictable and resilient foundation for our sustained revenue growth. The rapid development of AI continues to drive significant growth across the IDC industry. As AI models become increasingly sophisticated and AI applications continue to scale across industries, leading Internet companies, large cloud service providers and AI-native companies are accelerating their investments in high-performance computing infrastructure. On the supply side, the industry is also undergoing a structural shift; increasing power requirements, longer project development cycles and greater construction complexity are concentrating demand among IDC operators with secured power resources, proven large-scale delivery capabilities and the technical expertise to execute complex AI data center projects. With our differentiated resource portfolio, established AI infrastructure capabilities and deep relationships with leading customers, we are well positioned to serve as a trusted infrastructure partner and capture the long-term growth opportunities created by the continued expansion of AI. Now let's delve into our IDC business updates, starting with our wholesale business on Slide 8. Our wholesale business continued to grow with capacity in service increasing by 49.4% year-over-year to 1,007 megawatts, surpassing the 1 gigawatt milestone for the first time. Utilized capacity grew by 45.5% year-over-year to 744 megawatts with a utilization rate of 73.9% mainly attributable to customers' fast move-ins at N-HB Campus 03 and N-OR Campus 01. Our mature capacity utilization rate also reached 92.5%, a relatively high level. Let's turn to Slide 9 for an update on our wholesale capacity growth pipeline. As of June 30, 2026, our wholesale resource capacity totaled over 4 gigawatts, representing an increase of approximately 1.5 gigawatts from the previous quarter, mainly driven by the land bank we secured this quarter. Customer demand remained strong across our capacity portfolio. Capacity in service grew to 1,007 megawatts with 96.3% already committed by customers. Meanwhile, capacity under construction increased to 585 megawatts with a pre-commitment rate of 94.2%, providing strong visibility into future deliveries. Approximately 1.1 gigawatts of this capacity is held for future development, primarily in the Greater Beijing area; the scale and strategic concentration of these resources allow us to expand efficiently and respond flexibly to customer demand. Our newly secured land bank supports approximately 1.4 gigawatts of this capacity with 908 megawatts across key strategic locations in the Chinese Mainland and 478 megawatts in overseas markets, giving us substantial flexibility to support both domestic and international expansion. This diverse resource portfolio not only provides a clear multiyear growth runway, but also reinforces our ability to deliver capacity at scale as AI-driven demand continues to accelerate. Moving to our retail IDC business on Slide 10. Our retail business progressed smoothly in the second quarter. Retail capacity in service was 50,081 cabinets with utilization rate remaining stable at 64.5% as of the end of June. MRR per retail cabinet increased to RMB 9,799 this quarter. Turning to our delivery plan for the following 12 months on Slide 11. We delivered 117 megawatts in the first half of 2026, in line with our delivery plan, which concentrates the majority of the year's deliveries in the second half. We currently have six data centers under construction with five in the Greater Beijing area and one in the Yangtze River Delta. We plan to deliver 585 megawatts of capacity over the next 12 months, around 333 megawatts during the second half of 2026 and around 252 megawatts during the first half of 2027. The majority of these upcoming deliveries will come from our Wulanchabu IDC campus, where we are scaling capacity to support strong and sustained demand from our wholesale customers. This delivery plan provides clear visibility into continued capacity and revenue growth over the coming quarters. Now I'd like to share more on the strategic cooperation agreement with CATL that I mentioned earlier. Please turn to Slide 12. Under the agreement, VNET and CATL will establish a partnership to deepen computing-energy integration by synergistically combining VNET's leadership in large-scale computing infrastructure development and operations with CATL's expertise in zero carbon new energy technologies, with the goal of shaping next-generation digital energy infrastructure globally and leveraging green direct current and direct green power connection technologies. The parties plan to jointly develop a 3-layer integrated compute energy ecosystem comprising gigawatt-scale compute energy facilities, distributed compute energy networks and a zero carbon token ecosystem by combining our complementary strengths and deepening cooperation across technology, infrastructure and supply chains. We will jointly advance innovation in integrated compute energy systems. Together, we aim to contribute to the next generation of digital energy infrastructure in the intelligent era. Before I conclude, a few words on what lies ahead. This partnership with CATL will further strengthen our core competitiveness and inject new momentum into our future growth. More importantly, it reflects our long-term commitment to becoming a standard setter and industry leader of digital energy infrastructure in the AI era. Building on this strategic cooperation, we plan to lay out our future operating strategy and outlook to the market in the fourth quarter. In conclusion, our second quarter performance reflects continued progress across our business. Looking ahead, we will continue to strengthen our execution capabilities, expand our high-performance, large-scale data centers and strategically invest in resource reserves to enhance our competitive position and capture rising growth opportunities. We remain confident in our growth trajectory and committed to creating sustainable long-term value for our shareholders. Now I will turn the call over to our SVP of Operational Finance, Peter, for further discussion of our operating and financial performance. Thank you, everyone.
Good morning, and good evening, everyone. Before we start the detailed discussion of our financial performance, please note that unless otherwise stated, all the financials we present today are for the second quarter of 2026 and are in renminbi terms. Furthermore, unless otherwise specified, all the growth rates I am reviewing are on a year-over-year basis. In the second quarter, we continue to focus on high-quality development. Our total net revenues increased by 14.2% to RMB 2.78 billion, mainly driven by the rapid growth of our wholesale business. Our adjusted cash gross profit rose by 9.4% to RMB 1.16 billion while our adjusted EBITDA also grew year-over-year by 25.4% to RMB 918.3 million. Adjusted net income reached RMB 7.4 million, marking a turnaround from an adjusted net loss in the same period last year. Let's look more closely at our top line. Wholesale revenues, our key revenue growth driver, increased by 29.3% to RMB 1.10 billion for the second quarter, mainly attributable to activity at the N-HB Campus 03 and N-OR Campus 02A. Wholesale revenue again surpassed retail revenue this quarter, accounting for 39.8% of our total revenue and further underscoring the growing demand for our wholesale service. Retail revenues increased by 9.1% to RMB 1.05 billion for the second quarter. Our non-IDC business revenues increased by 1.1% to RMB 628.4 million for the second quarter. During the second quarter, we maintained solid margins, thanks to ongoing efficiency enhancement initiatives. Our adjusted cash gross margin decreased slightly to 41.8% from 43.6% in the same period last year, primarily attributable to higher utility costs for customers. Our adjusted EBITDA margin rose to 33.0% compared with 30.1% in the same period last year. Moving on to liquidity. We maintained a robust and healthy liquidity. Our net operating cash inflow reached RMB 391.8 million during the first half of 2026, excluding the impact of RMB 389.7 million in income tax related to capital transactions and other one-off items. Net operating cash inflow for the first half would be RMB 781.5 million. Our cash position remains solid with total cash and cash equivalents, restricted cash and short-term investments reaching RMB 7.21 billion as of June 30, 2026. Let's take a look at our debt structure. We maintain our prudent approach to debt management. As of June 30, 2026, our net debt to the adjusted last-quarter annualized EBITDA ratio was 4.6 and total debt to the adjusted last-quarter annualized EBITDA ratio was 6.4, both remaining at healthy levels. Our adjusted last-quarter annualized EBITDA to interest coverage ratio was 5.6. We prioritize long-term debt maturity planning in our debt and strategic management to ensure the security of debt repayment. Currently, the company's short- and medium-term debt maturing in 2026 to 2028 comprises 40.8% of our total debt. Turning to CapEx spending. Our CapEx was RMB 3.55 billion in the first half of 2026, primarily reflecting continued strategic investment in capacity expansion and the construction of our wholesale data center projects. We continue to expect our CapEx for full year 2026 to be in the range of RMB 10 billion to RMB 12 billion, mainly to support our planned delivery of 450 to 500 megawatts in 2026. Now moving to our full year guidance for 2026. As we continue to expect strong demand from our wholesale IDC customers and ongoing operational efficiency gains throughout 2026, our outlook remains unchanged from the previously provided estimates. We reiterate our guidance of total net revenues expected in the range of RMB 11.5 billion to RMB 11.8 billion, a year-over-year increase of 15.6% to 18.6% and adjusted EBITDA in the range of RMB 3.55 billion to RMB 3.75 billion, a year-over-year increase of 19.2% to 25.9%. To sum up, we delivered solid second quarter results, reflecting continued execution strength and meaningful progress across our strategic initiatives. Looking ahead, we will remain focused on strengthening our core capabilities, deepening strategic collaborations and expanding our infrastructure resources to capture the long-term opportunities in the AI era. We are committed to delivering sustainable, high-quality growth and creating long-term value for our shareholders. This concludes our prepared remarks for today. We are now ready to take questions.
Questions and answers
We will now begin the question-and-answer session. (Operator instructions). Your first question today comes from Tom Tang with Morgan Stanley.
Congratulations on the very large order win this quarter. So I only have one question. Could you please give us an update on the overall supply and demand situation in our key regions? And is there any updated outlook for the pricing dynamics there? (Question included a foreign language remark.)
Thank you for your question. With regard to demand, we are seeing that overall compute demand is steadily trending up. That is primarily attributable to demand from both AI training and inferencing. According to multiple organizations, the market still offers room for growth with the AI-focused smart computing segment growing particularly fast. Incremental demand is largely driven by leading Internet companies procuring high-capacity, high-density cabinet resources in key regions. In 2026, several major players are expected to issue tenders at the gigawatt level, primarily concentrated within the national hubs under the East Data West Compute initiative. In terms of supply, the national data center capacity continues to expand. However, the industry is showing clear structural mismatches. The aggregate capacity does not always translate into effective supply of high-power smart computing resources, and the sector is currently in a tight equilibrium. The release of effective compute capacity is constrained by power availability, chip supply chains and other real-world bottlenecks. Multiple industry analysts expect this structural imbalance to persist until around 2028. For us, as a top-tier player with end-to-end capabilities, this will definitely create a sustained tailwind. On pricing, existing projects will follow agreed contract rates. For new projects, pricing will factor in peer rates in the same region, construction costs, resource scarcity, the competitive landscape as well as our target returns.
Your next question comes from Timothy Zhao with Goldman Sachs.
I have two questions. One is regarding the move-in pace in the second quarter and quarter-to-date. Could management share any color because I saw the overall wholesale IDC revenue was a little weaker than expected in the second quarter. Was that the reason because of the move-in pace in early quarter and how does that trend into the third quarter? My second question is regarding your CapEx outlook, given the very strong order wins and the very strong order delivery plan over the next couple of years and also you announced an overseas plan. Could you share any color on your CapEx outlook into next year and specifically on the overseas projects? Could you share any color on the timeline for delivery pace and your view on the unit economics? (Question included a foreign language remark.)
I will take your first question regarding the move-in pace of our wholesale customers. We maintained a steady move-in pace in the second quarter, and we expect to sustain that momentum. The move-in pace is a result of multiple factors. In addition to chip supply, there are also factors related to how fast our customers are iterating their models and how fast they are progressing their projects. Overall, we expect to see a faster move-in pace in the second half of this year, marginally higher compared to the first half. We are now in a period where domestically produced chips are quickly ramping up production. The production capacity outlook for the second half of 2026 is clear, and we expect a release of this production capacity, which will push our move-in pace higher.
I will take your second question on CapEx. Essentially, our CapEx is centered around demand as well as our actual deliveries. We normally disclose the full year CapEx for a given year once we have a quantitative delivery target for the whole year. Regarding overseas development, as we have noted, we do have 500 megawatts of reserved resources, and overall we will maintain a prudent approach when it comes to developing these resources. We will follow orders: we need to secure firm orders before developing these resources.
Quick add on the CapEx plan. As Peter mentioned, domestic CapEx will be closely tied to the delivery schedule and the overall unit economics for domestic IDCs. Per-kilowatt economics are stable. As disclosed in our earnings report, we have a strong order pipeline and a high customer retention ratio, which offers us high visibility into CapEx. We have close to 500 megawatts of overseas reserved resources, and we plan to deliver these resources in batches. Given relatively high construction costs overseas, we will strictly control overseas outlays. Initially, we will use our own funds to acquire land, and only when we have obtained firm orders from customers will we start mechanical and electrical fit-out.
Your next question comes from Dailey Lee with Bank of America Securities.
I have two questions. One is a follow-up on the overseas expansion. In this quarter, you secured quite strong resources. Could you update us more about the overseas strategy? For the next two to three years, which countries or areas should be our focus and what is the overall development pipeline and future revenue scale? My second question is about the CATL cooperation. We also made an announcement about cooperation with CATL, our future new shareholder. Could you update us on the transaction with Shandong Hi-Speed, the progress? And could you share more color about the detailed cooperation going forward? (Question included a foreign language remark.)
On our overseas resource development strategy: VNET recently added 500 megawatts of new overseas reserved resources. The key is to stay responsive to our customers when they go overseas, and we will respond to that demand and implement projects overseas. The very first project to be delivered will be in Southeast Asia. While deepening our presence there, we are also evaluating opportunities in the Middle East and Europe to broaden our global footprint. On CATL's investment and collaboration: we have issued a joint press release with CATL and built a full-scale strategic partnership to capture surging AI demand. With the global energy and AI revolutions converging, integration of computing and energy is a key driver for digital growth and decarbonization. Our collaboration will focus on three areas. First, gigawatt-scale computing energy facilities; second, building distributed computing and energy networks; third, building a zero carbon token ecosystem. The goal is to build a national and eventually global network and to become a defining player in digital energy infrastructure for the AI era. We see synergies in this collaboration and will disclose more progress as we achieve definitive milestones, and we will disclose them to the market in a timely manner.
Your next question comes from Sara Wang with UBS.
Again, congratulations on the very strong results. I noticed that the second quarter new booking is very strong, but it's concentrated with one customer. Is there any specific reason behind that? How should we think about customer mix going forward? Do you see potential for sizable order wins from emerging AI leaders? (Question included a foreign language remark.)
Thank you for the question. We signed cumulative 862 megawatts of new orders in the first half, specifically a 510-megawatt order with a leading Internet company and a 345-megawatt order in Q2 with another leading computing enterprise. In terms of customer mix, in addition to deepening collaboration with leading Internet companies and hyperscalers, we are actively expanding our customer base to include AI model companies, high-growth firms in the AI industry and leading companies across various verticals. Going forward, we'll continue to refine the customer mix of our wholesale customers to pursue a more diversified customer base.
Your next question comes from Yiming Li with Citi.
Congratulations to the company again. My question is about the OpEx side. You had very good OpEx performance this quarter. Is this level of cost efficiency sustainable going forward? Does the company have any guidance on the cost side? (Question included a foreign language remark.)
Thank you for the question. Cost reduction has been an ongoing theme for us, and we saw preliminary results in the second quarter. Over the long run, we will leverage economies of scale to reduce overall operational costs. Specifically, we will continue measures like headcount control and maximizing the efficiency of AI tools within the company. We will disclose concrete benefits from these initiatives to the market in a timely manner.
The next question comes from Ethan Zhang.
Congratulations on the results. I have two questions. First, I noted that you added around 1.5 gigawatts of new resources or land bank during the second quarter; around 900 megawatts are domestic. Could you share the locations and more color about power supplies and government approvals? Second, I noted that Q2's cash gross margin declined quarter-over-quarter a bit. Could you elaborate on that? (Question included a foreign language remark.)
Thank you for the question. For the first question, in the second quarter we added 900 megawatts of new resources in China. These are primarily located in Inner Mongolia and East China regions. Over the next three years, we will continue to obtain new resources in Inner Mongolia, particularly the Wulanchabu area.
I'll take your second question on the sequential decline in gross margin. There are two reasons. First, utility usage in the second quarter was significantly higher than in the first quarter because we adopt a pass-through mechanism, which weighed on our gross margin. Second, we had a one-off gain in the first quarter. Together, these two factors contributed to the sequential decline in gross margin.
Your next question comes from Mingran Li with CICC.
Congratulations on the strong results. We noted customer demand remained very strong in the first half of the year, and we currently have approximately 355 megawatts of reserved capacity. Could management share how long it typically takes for reserved capacity to convert into orders? Based on the current pipeline and ongoing discussions, is there potential for additional large-scale capacity utilization in the second half of the year? (Question included a foreign language remark.)
Orders and reserved capacity are typically covered in the same sales agreement. Orders are capacity customers have formally committed to. Reserved capacity is future expansion resources pre-locked at the same site to support their growth. Historically, all customer reservations have converted to firm orders, making this a high-quality backlog with a strong conversion certainty. The actual timing for the 355 megawatts depends on each customer's deployment schedule and will happen in batches as their projects progress. We will disclose actual order conversions in subsequent quarterly reports. Thank you.
Thank you. Ladies and gentlemen, that concludes our conference for today. Thank you for participating. You may now disconnect your lines. Portions of this transcript that were noted as interpreted were spoken by an interpreter present on the live call.