VNET Group, Inc. (VNET) Q1 2014 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen. Thank you, everyone, and welcome to 21Vianet Group's First Quarter 2014 Earnings Conference Call. [Operator Instructions] Before we begin, I will read the Safe Harbor statement. This call may contain forward-looking statements made pursuant to the Safe Harbor provisions for the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on management's current expectations and observations that involve known and unknown risks, uncertainties and other factors not under the company's control, which may cause actual results, performance or achievements of the company to be materially different from the results, performance or expectations implied by these forward-looking statements. All forward-looking statements are expressly qualified in their entirety by the cautionary statements, risk factors and details of the company's filings with the SEC. 21Vianet undertakes no duty to revise or update any forward-looking statements for selected events or circumstances after the date of this conference call. With us today are Mr. Frank Meng, President; Mr. Shang Hsiao, Chief Financial Officer; and joining us for his first time as Vice President of Capital Markets and Business Development is Mr. Eric Chu. Following management's prepared remarks, we will conduct the Q&A. At this time, I would now like to turn the conference call over to Mr. Frank Meng, 21Vianet's President, for opening remarks.

Thank you, operator. Good morning, and good evening, everyone, and welcome to 21Vianet's first quarter 2014 earnings conference call. We are off to a solid start in 2014 as we continue to focus on growing our core IDC business and the cloud services throughout China. Our clear aim is to further solidify our position as the leading integrated Internet infrastructure services provider, offering innovative products and solutions to our customers. For our core IDC business, we increased our total cabinets to over 15,000 cabinets with 65% of those cabinets in our self-built data centers. We also expect that our partnership with the Foxconn Technology Group will help us hasten our IDC construction as the Foxconn brings strategic advantages in terms of the resources and capabilities. In addition, we will be cooperating with Foxconn to divest innovative cloud services targeting the Chinese market. We are confident we will remain on track to deploy our additional 10,000 cabinets by the end of 2014, bringing our total cabinets to approximately 25,000. Supported by our expanding core IDC business, we were able to grow our total net revenues during the first quarter by 34.5% year-over-year, and while we continue to fill our capacity to meet customer demand and to grow our revenues, we have also increased our marketing effort in strategic regional markets. As a result of our continued usage improvement, our utilization rate further increased to 73.8% from 71.2% last quarter. Moreover, our adjusted EBITDA margin increased to 19.3%, supported by improved utilization rates, a heavier portion of our higher-margin self-built cabinets in our mix and the incremental contributions from our cloud business. With our structured shift to more self-built data centers as well as the expansion of our cloud service offering, we expect our adjusted EBITDA margins to further improve and the utilization rates will remain stable throughout 2014 as we significantly fill our capacity. In terms of our cloud business, we are pleased with our successful commercial launch of the Microsoft premier cloud services in China. Now Azure and Office 365 services are generally available to all paid customers in China. The launch of the Azure marked the first global public cloud service available for massive commercial adoption in China. Over 6,000 clients have signed up for the services and over 350 large enterprises have migrated to long-term contracts, including Coca-Cola China, CNTV, Samsung mobile, Siemens, Huawei and Lenovo. For the Office 365 services, we have also seen very strong traction in customer adoption since the full commercial launch on April 15. Overall, we are pleased to share with you that the earlier results from both Azure and Office 365 exceeded our internal expectations, and the partnership is now contemplating significantly expanding the cloud infrastructure in order to satisfy strong customer demand. For the IBM partnership, both of our -- and IBM teams are diligently working together for the testing and system integration of the private cloud services. We are still committed to the full commercial launch of the services around the midyear in 2014. We continue to see the importance of the cloud business and to recognize it's a driver of long-term growth for our company. There is strong demand resulting from the increasing propensity of customers to utilize software and the applications based in the cloud. And as customers become more familiar with trusting of our cloud platform, we can capitalize on this trend and continue to provide innovative product offerings and solutions for the ever-changing needs of our customers. Because of this demand, we expect our revenues from our cloud services and the strategic partnerships will generate approximately 10% of the total revenue by the end of 2014. At this point, I would like to introduce Eric Chu, our Vice President of Capital Markets and the Business Developments to go through our financial results. Eric joins us from Canaccord Genuity, where he was previously Vice President of Telecom Services Equity Research. We are very pleased to have Eric join our team.

Thank you for the kind introduction, Frank, and I'm excited to join the 21Vianet team and look forward to contributing to the growth of the company. Now I will go through our financial details. I'd like to state that we will present non-GAAP measures on today's conference call. Our non-GAAP results exclude certain noncash expenses, which are not a part of our core operations. The details on these expenses may be found in the reconciliation tables included in our earlier release. Also note that all the financial numbers we're presenting today are in RMB amounts unless otherwise noted. Our net revenues for the first quarter of 2014 increased by 34.5% year-over-year to RMB 586 million. Net revenues from hosting and related services increased by 52.8% year-over-year to RMB 404.4 million, primarily due to an increase in total cabinets under management as well as increased demand for the company's CDN services. The MRR per cabinet was RMB 10,753 in first quarter of 2014. That compared to RMB 10,694 in the fourth quarter of 2013. Net revenues for managed network services increased to RMB 181.6 million in the first quarter of 2014. This increase was primarily because of an increase in network capacity demand for data transmission services. For the first quarter of 2014, adjusted gross profit increased by 36.2% to RMB 171.1 million. Adjusted gross margin was 29.2% in the first quarter of 2014 compared with 28.8% in the prior year and 29% in the fourth quarter of 2013. The increase in gross margin was primarily due to an increase in utilization rates and incremental revenue contribution from cloud services. Adjusted operating expenses increased to RMB 109.9 million. As a percentage of net revenue, adjusted operating expenses were 18.8% compared with 18.4% in the prior year period and 18.7% in the fourth quarter of 2013. More specifically, adjusted sales and marketing expenses increased to RMB 39 million from RMB 28.8 million in the prior year period due to the expansion of our sales and service support team and our marketing efforts associated with the launch of Microsoft premier cloud services. Adjusted general and administrative expenses increased to approximately RMB 47.4 million from RMB 36.4 million in the prior year period, primarily due to an increase in headcount, office rental and other expansion-related expenses associated with our effort to expand the cloud computing services offering. Adjusted research and development expenses increased to RMB 23.6 million from RMB 14.7 million, which reflected our effort to further strengthen our research and development capabilities and expand our cloud computing services offerings. The difference between adjusted operating expenses and our higher GAAP total operating expense amount is primarily due to changes in the fair value of contingent purchase consideration payable, which was a loss of RMB 33.9 million, and share-based compensation expense of RMB 130 million -- RMB 137 million. The changes in fair value of contingent purchase consideration payables resulted from an increase in the pricing value of estimated cash and share consideration as of March 31, 2014, associated with our company's past acquisitions. Now from a profitability perspective, adjusted EBITDA for the first quarter of 2014 increased by 40.9% to RMB 112.9 million. Adjusted EBITDA margin for the quarter increased to 19.3% from 18.4% in the prior year period and 18.8% in the fourth quarter of 2013. Our adjusted net profit for the quarter increased to RMB 33 million from RMB 31.1 million in the prior year period. Adjusted net profit margin was 5.6% compared with 7.1% in the prior year period, and 7.5% in fourth quarter of 2013. Adjusted diluted earnings per share for the quarter were RMB 0.08, which represents the equivalent of RMB 0.48 or USD 0.08 per ADS. As of March 31, 2014, our cash and cash equivalents and short-term investments were RMB 2.3 billion, equivalent to USD 370.7 million. Looking at our financial outlook, currently, we expect second quarter of 2014 net revenue to be in the range of RMB 642 million to RMB 658 million, which represents the growth of approximately 38% at the midpoint to the comparable period in 2013. Adjusted EBITDA is expected to be in the range of RMB 132 million to RMB 138 million. Net revenues for the full year 2014 are expected to be in the range of RMB 2.71 billion to RMB 2.85 billion, unchanged from our prior guidance, and representing approximately 40% growth over 2013. For the full year of 2014, adjusted EBITDA is expected to be in the range of RMB 566 million to RMB 595 million, also unchanged from our prior guidance and representing more than 55% growth over 2013. These forecasts reflect the company's current and preliminary view, which is subject to change. This concludes our prepared remarks for today. Operator, we're now ready to take some questions.

[Operator Instructions] Our first question from today comes from the line of Greg Miller of Canaccord.

Can you talk a little bit more about the bookings flow on Microsoft and how that's trending? I would imagine it's got a pretty good idea of what you can do. Do you have a certain percentage already booked, and can you talk about it? And then secondly, I was wondering if there's any sort of update on the potential for commercial carrying in China? It's not something I've been tracking too closely. And I know we've talked about it from time to time, if there are milestones we should be looking for, if you could highlight this space [ph] as well? And then finally, on the R&D being just up a little bit higher than we expected, is that a good run rate we should be -- we should use going forward?

Okay, thank you, Greg. This is Shang. Okay, regarding to the first one, the cloud revenue with the Microsoft. Last quarter, okay, previous quarter, we did mention about it. It's a cloud revenue we booked in front of Microsoft for around somewhere RMB 1.4 million. And in the Q1, okay, first quarter, the revenue we already have -- already received USD 3 million. So it's more than 3 digits gross. And also, okay, this revenue owning from Windows Azure because the company commercialized the Office 365 on April 15. So starting from the second quarter, we received revenue contribution, okay, from the Office 365. And so far so good. And also on the call I think Frank already mentioned, right now, we're already in the process of the increased capacity of the cloud infrastructure. So far, all I can say is looking good. And second thing, regarding to the cross-connect, okay, management, okay, also mentioned about it. We are expecting the Chinese parliament will issue the popin [ph] license either this year or next year. But it from officially the Minister of the MIIT and just come out and say, okay, that's last week. In the second half of this year, China is going to do the trial out, okay, with the popin [ph] business operating by the non-state-owned company or domestic company. So look like the hosting is coming. So we are working on all there. So probably, you guys can expect, okay, sometime next year in this area, okay, popin [ph] license. Remember the popin [ph] license, actually is considered as a basic telecommunication license may open sometime next year. If that happens, like previously, we mentioned, okay, the company gross margin showed a significant improvement and trust in the company, okay, maybe in the certain time should be able to sell the bandwidth. And also, okay, something we cannot do, like a cross-connect [indiscernible], we should be able to allow to engage in such high-margin business, okay.

That sounds fantastic...

And so the final question regarding to the R&D, the company spent a lot of time right now, okay, on the network, okay, to look at one of the most advanced network technologies, something like a cloud network. And we just signed one of the partnership from U.S. company, a carrier and under cloud network business. The company also spent some money, okay, the cloud network related to something we called SDN, okay, software, okay, defined network, okay, that's the major R&D spending we have right now.

Our next question today comes from the line of Colin McCallum of Crédit Suisse.

Two questions from me. First of all, just regarding the rumors about Microsoft in China area that's weak, could you just comment on whether your business, cloud businesses, in any way affected by anything at the moment? And then secondly, just a numbers question. The share-based compensation was obviously quite high in first quarter. Can you comment on the MD&A that it is to do with get granted to management of certain managed network entities? And I think managed network has been struggling a bit, hasn't it? I actually look at the Q-on-Q and year-on-year growth and exclude [indiscernible]. And why would there be larger payments to the part of the business which is not doing quite so well? If you could just explain that, that would be great.

Okay, thank you, Colin. Regarding the first question, yes, the purchasing department of the Central Parliament last week, they announced not to purchase Win 8 from Microsoft for the future government bidding. And based on our discussion with the Chinese parliament as well as Microsoft, we are also -- so many people have been talking about this one. But one might see, if you guys can recall on -- regarding to the Microsoft XP and Microsoft's cloud service 2 months ago and that make Chinese government actually was not that happy, given the past 2 months with XP. So maybe that's one of the reason maybe Chinese government want to stop some of the Microsoft purchase in order for Microsoft, say, [indiscernible] off the XP service market. That's one reason. But probably another angle to look at it, we need to look at our product we sell. For the cloud service, we provide Windows Azure and Office 365. And both service are actually independent from any operating systems. I think with the Office 365, we believe Office 365 can also be used in different operating systems. So it doesn't matter whether or not a customer or Central Government, they are using the Win 8 or something. So it's independent. So in fact, we don't see any major impact within our cloud service. So that's one. And second one, regarding to the share-based compensation we granted. I have to say, that's just a onetime. The broader IPO, I'm talking about before the 2011, the company did an acquisition what we called Mango and we give them the 3 year of the announced schedule. So each year, how much money, how much revenue they achieved, and how profitability achieved, and we will, based on the agreement, to keep into our shares, to keep the shareholder of the Mango to share because our management network service actually, you guys know, was price struggled in the year of the 2013. So the shareholder owning a very, very small portion of the share. So according to our acquisition agreement, after 3 years while why we want to grant a big chunk to the management because after all, the management is the one ask you on everything. And the 3-year already past. So we give them award, okay, and try to motivate the whole team to move them forward. Okay, so that's our main purpose.

Our next question today comes from the line of James Breen of William Blair.

Just one. You talked about what you saw previously. You [indiscernible] the revenue for Microsoft this year. Have those estimates changed at all? And then with respect to IBM, I think you said in the call that you expect it to be a launch in the middle of next year. Is that accurate? And what kind of market opportunities after that? And then lastly on the networking side, I think the last quarter and possibly the quarter before, you talked about a little bit of pricing pressure in that space, although buy-ins continue to growth. Can you just talk about the dynamics on the network side of the business?

Okay, thank you, Jim. So first one, for the Microsoft revenue, we can book this year. That target has not been changed. So far, so good. And hopefully we can see the 3 biggest growth quarter-over-quarter for the next couple quarter. But after all, this is a very, very new product being available in China. So we will see. But about the preliminary number and also based on the number of the customer has been signed up with us, look very, very strong. So the guidance has not been changed. So that's #1. Second one is for the IBM. And IBM right now is in the process moving their server into our Beijing Tianjin data center. Look like everything is on schedule. And before we did mention about it. We are looking for -- they can commercialize in July this year, not next year, this year. So it should be 2 months from now. And I don't see the schedule had been changed. So, So far, so good. And the last one is talking about the management network service. Starting from the third quarter last year. Yes, the pricing had been reduced. But if you look at our number, this quarter number compared to the same period of the last year, we still have 6% increase. Of course, if you can see the intent of the volume of the Internet traffic as well as the product we sell, we are selling more product and -- to our customer in order to maintain the increase of the revenue. So that's management work. I also mentioned our management plan to deploy 2 new product into the management network service starting this quarter. One of the services is called the BPM service. The other one we call Last Mile [ph]. The BPM service also based on our contract with IBM. For IBM, they are doing the SCE+. That's a private cloud, and each customer are to be deployed. That was through to VPN to transmit the data and content from our data center and also with the customer data center. So that one, we have to do it, and this is also a good business right now in China. That's a VPN business. We will put those number consolidate into our MNS revenue. The other one is Last Mile [ph]. And like I say, the Chinese government right now is in the process to open the popin [ph] business to the non-state-owned enterprise, okay, and this is a trend. So besides the backbone we have, okay, we also try to put some effort into the Last Mile [ph]. So they [indiscernible] company transmit, it's a data and content for our customer, okay, from our data center can also wait to the end user. And plus our company, one of the biggest spending is to purchase our bandwidths from the China Telecom -- particularly for those last miles. And we can have certain Last Mile [ph] business. Huawei also cut back our bandwidth purchase from the China Telecom and Unicom, okay. Thank you, Jim.

Our next question today comes from the line of Kai Qian of CICC.

And I have two questions. First regarding to the cabinets. And in the Q2, I found that there's a piece of note in the dogged first quarter and how it's going in Q2. And I see the -- and the second question is about the government [indiscernible] and some IDC as a SIM in China are looking at purchasing [indiscernible] by the government. So anything impact from this, so that we [indiscernible].

Okay. Thank you, Kai. Right now -- for the first question, okay, right now we forecast -- we showed somewhere around 2,000 cabinets to be deployed in the second quarter from the 5 different data centers. So the 2,000 cabinets, that's a number we printed for and the other question is regarding to the IDC, ISP new license the Chinese parliament are trying to grant. The situation is like this. At this moment, the Chinese parliament has in fact something we called cloud computing spender. So when you are a company, you want to offer the cloud service, you go to the MIIT. MIIT will ask you to apply for the IDC and ISP license. So I think a couple months ago, Tencent and Alibaba, they did mention about it, okay. They are in the process to apply for IDC and ISP license. But their main purpose is for the cloud computing service. It's not for a digital hosting business and compete with 21Vianet. I give you 2 reasons now why is that the case? And the first one, 21Vianet is clearly neutral. It's important we are customer-neutral. Because they say, if Alibaba -- they say Tencent, they want to offer the hosting service. That's nearly impossible in China because no gaming company were to invest in Tencent data center due to the superiority issue and no [indiscernible] network company. So the customer normally won't put a server into your competitor data center, I think that's the message I wanted to say. And second thing is because we are customer-neutral, I also provide another good news to everyone because our company as well as the China Unicom and Alibaba, we just signed a third-party agreement, and Alibaba will purchase 1,300 -- 1,300 from 21Vianet. So that's located in [indiscernible]. So something like that. The Alibaba may consider in their data center, okay, but such a Mary [ph], okay, for the cloud service and not using a hosting service ---

I just had one follow-up question. How is the utilization rate in the Q2? I mean, [indiscernible] pretty good, and how is it in Q2?

For the Q2, we expect that the utilization rate should be somewhere around 72% to 73%, okay. So that will be down by 1% because the number of the cabinets to be deployed, but we are confident that the utilization rate still can maintain more than 72%.

[Operator Instructions] And our next question today comes from the line of Lingling Hu of Goldman Sachs.

And I have a couple questions. First of all is on the IDC business. Some of the competitors start to build IDC for their customers and adding that in the U.S. and another Internet company as they start to build their own IDC instead of linking a cabinet from -- to a different party. So could you please share some thoughts on this?

Okay. Thank you. So yes, first of all, based on the IDC report right now, the biggest data center service provider in China is China Telecom. China Telecom has 39% market share; #2 is China Unicom. They have a 20% market share. And third one is 21Vianet. We have 12% market share. So the top 2 is state-owned enterprise, and we compete for more than 15 years, okay. And the #4 player, according to the IDC report, actually is ChinaNetCenter. That's a share-listed company. But their market share is only less than 50%, okay, of our current market share. So that's the current market share. In terms of the, say, Internet company, they will build their own data center that's in U.S. like a Google. Yes, in China, same thing happen. The company like a Tencent and Baidu, yes, they are building their own data center. But the purpose, at least, we understand that's mainly for the cloud computing service because that can be evidenced with our revenue with Tencent and Baidu and ARI. Before our revenue, we said, continue to increase. One of the key points to provide the data center service in China is you need to maintain a very, very good network in order to do the interconnectivity. The 21Vianet spent 15 years to build our big network, okay, in order to ARI [ph] our customer transmission. So that provide a lot of value. And even for some of the big companies, they say if they only want to build the data center, if they don't have their own network in terms of the interconnectivity, they still need to do it with the China Telecom or China Unicom. And so that would be some difficulty. So 21Vianet, we still maintain very, very strong competitive edge to offer such service to our customer compared to Internet company.

Next question is about the cloud business. As you mentioned, Tencent and Alibaba also applied for license to deploy their cloud services. So could you just compare your partnership with Microsoft and the cloud services you offer with their cloud services, and how do they differentiate [ph]?

Okay. The first one. Yes, the Tencent and Alibaba, they offer their cloud computing service, but we can only talk about the service. The service we are offering, first part is Windows Azure. Windows Azure provides a computation and storage to our customer. And yes, they compete with the ARI, particularly for ARI cloud, but probably the type of the quality of the cloud still differs because Windows Azure is an open platform, okay. It's a PaaS, platform as a service. At least based on our study, we think the ARI service right now is a more skilled Infrastructure as a Service. That's only based on our own observation. So in terms of the capability of the cloud service, still a big difference. So that's the first part that we have. The second part that we have is called Office 365. This is a software as a service. So in China, if you have to say this is the highest penetration software application available in China and everybody using the Office 365, it's there PowerPoint, Outlook. So on such software as a service right now, not ARI, not Tencent that can provide such service. Of course, we do have some of the small company -- I'm sorry, the -- I have to say they are good company to provide something called a UPS or something like that. And that's still different. Remember, this is an Office application. So far, most of the Chinese people still use such application. So we have confidence with Office 365, particularly in terms of the competition, okay. We should be fine.

I'm sorry, for the last, a housekeeping question. And how is the utilization [ph] rate in your Tier 2 and Tier 3 [indiscernible]?

I'm sorry I cannot hear your question.

I'm sorry. I just wanted to ask how is the utilization rates in your Tier 2 and Tier 3 [indiscernible], compared with the [indiscernible]?

Okay. In Tier 1 city, particularly in Beijing. Beijing utilization rate, we have more than 90%. But a city outside of Beijing -- they'll say go to the southern part of China. Our utilization rate total is only somewhere around 50%, I hope. That's the current situation. So anything we build in Beijing -- Beijing represents 2/3 of our revenue because also Internet concentrate in Beijing. So anything we build before the deployment typically until all the cabinets will be booked. So that's what happened. In southern part, we continue to put in the effort into enterprise market and sell to the, let's say, the bank and the company enterprise. And we continue to making progress in the southern part of China.

Our next question today comes from the line of Gary Yu of Morgan Stanley.

I have 3 questions from my side. First, you tried to apply for the MVNO license with China Mobile, just trying to get a sense of what is the company's strategy in the mobile phase with this MVNO license? The second question is regarding your cabinet buildout in the first quarter. I think you mentioned that we're still comfortable with the 10,000 cabinet buildout for the full year. But in the first quarter, it appears that the self-built cabinet buildout is a bit slow compared with the full year target. Can you share a little bit with more details of what we are planning to do on self-built cabinet buildout and in what locations that we're looking for in both first quarter and second quarter? Last question, a financial question. Just on CapEx, how much did we spend on CapEx in the first quarter?

The first one, MVNO license, in fact, the company, has signed an MVNO partnership agreement with the China Mobile. And the application actually had been submitted to the ministry, MIIT, waiting for the final approval. And so for our strategy side is, sometimes, when the Chinese parliament grants a license, they only grant it once. The next time for them to grant a license could be 10 years later, just like a IDC. Last time granted the IDC license is 8 years ago, 7 to 8 years ago. So in China, pending license related to telecommunications is very, very important. So because such license will give the company the upstream value to determine how we're going to do, and whether or not we're going to do this alone. Assuming the company can be officially get a license from the MIIT, then the company sure picked option to decide whether or not we are going to work on this one or we can work with somebody else or just outsourcing the whole thing with the other company to operate that. The company had not been deciding that because officially, we have not gotten this license. But the good sign is, at least, we can get this license, okay, given the company actual value in the future, assuming we want to get into this business. So that's MVNO. And second one, in the Q1, the company deployed 1,000 cabinets; 2/3 of that cabinets are self-built and more than 300 cabinets actually is our partner. So in Q2, 2,000 cabinets mainly will be passed still from the Beijing. The Q2, first one is Beijing M6, second phase because M6 Phase 1 already reached more than 80% utilization rate. And also Tianjin Phase 2, and I'll give you the number. And also Shenzhen, okay, additional 500 cabinets and also Tianhe, so together at this moment, when we look at the second quarter, 2,000 cabinets deployed because we're already in May, and everything look like on schedule. Again, I want to emphasize that management remains strong confidence to deploy totally 10,000 cabinets this year. In Q1, we already deployed 1,000. Trying to deploy 2,000 in Q2 and 3,000 in Q3; 4,000 in the Q4. That's the current deployment schedule. And the 10,000 cabinets will come out, they're now based on our plan, it's more than 12 data centers. But again, the Beijing cabinet will represent more than 2/3 of the 10,000 cabinets we plan to deploy this year. So that's the answer.

CapEx.

Hey, Gary. Okay, in term of the CapEx, the first quarter under the accrual basis, the total CapEx, the company book it's RMB 179 million, RMB 179 million. In terms of the cash basis after spending, we spent RMB 126 million.

Okay, our next question today comes from the line of Wendy Huang of Standard Chartered.

I have 3 questions. Firstly is regarding the new cabinets launched. So you launched just over 1,000 cabinets in first quarter but on the other hand, you said that you're still on track to launch 10,000 cabinets for the full year. So I wonder, which quarter should we expect the chunky part of this 10,000-cabinet target is actually to be delivered? Second question is regarding your churn rates. I understand that among the top 20 customers, the churn rate is 0, but if we look at the overall churn rate, it has increased from the 1% last quarter to 1.3% this quarter. So who are the customers dropping out in the first quarter? And third question is regarding your Microsoft Office 365 software and services. So what kind of the competition that you're seeing from [indiscernible]. And it seems that they are acquiring lots of the big corporate customers for their [indiscernible]. So what should we expect from the Office 365, and what kind of revenue are you expecting to generate for 2014 and 2015 from these services?

Hey, Wendy, this is Eric. I'll try to take the first question on cabinets and Shang will take the churn rate and the third one. So on cabinets, as we mentioned earlier, so in the first quarter, we did 1,000. The second quarter, we're still very confident in terms of 2,000 new cabinets. That's both self-built as well as partner cabinets in the second quarter. And third quarter and fourth quarter is another 3,000 to 4,000 each. So it's very much back-end loaded for this year. And that's -- if you look back in the last couple of years, that's a -- we kind of saw a similar pattern as well. That's really -- we're trying to match our cabinet deployment schedule in terms of our customer demand because we did talk to many of our customers ahead of time, met with them 1 year ahead of time in terms of their demand, in terms of data center infrastructure needs. So really, our schedule for this year is trying to match our customer demand pattern.

Okay, the first question I had is the churn. Yes, I think our churn has gone 1% to 1.25%. That's an increase of 0.25%. So that no specific big company [indiscernible]. And when we look at some of the small-sized companies, particularly for Internet company, actually, we didn't have interest. And just say existing customer, normally, they won't have the churn with us, at least, they don't have a fresh quarter to continue their business. So we see some of the Internet-related company, small one, actually, had been -- we're not of the business that creates a churn, and no particular big company actually had let us, like I said, top 20 customers we met unchanged in terms of their churn. And the last question about the competition of the Office 365, and based on Microsoft and 21Vianet, we have our study, the penetration rate of the Microsoft Office 365 in China actually is more than 98%. What that mean? 98% of the user they all use Office application. Yes, after the last years, nothing happened. The Chinese parliament did encourage the state-owned enterprise and the central parliament to use a domestic software. So that's a pace [ph]. And I also want to mention in terms of the population based on our strategy, in China, more than 300 million user they either use the Office 365 or they have an interface with Office 365. Interface means we don't use Office 365 but you will receive the Excel or like a PowerPoint from somebody else. So the population usage is huge. But the only thing is also based on our study, less than 5% of the 300 million people use Microsoft, and actually, they are paying for the license. So for the partnership, one of the main job is try to turn those unpaid customer who are using the software license right now, ask them to pay for it not only for the new edition or new version, but particularly for the old version. For all the [ph] partnership, if fail, [ph] we can probably can do because once you put the Office 365. So all the new version, upgraded new version will be only available on the cloud. But all those office application, once they are in the cloud, nobody can making such copy. So somehow that will prevent the piracy of the Office 365, particularly in the new version on this one. So that's what we're trying to do. But in terms of the compete with the UPS, and right now, at least, based on the customer we signed, and so far, the progress is great. And I also want to mention, signing our customer with us already we see more than 10,000 customers on the Office 365. And that customer could be enterprise and also individual. So when it say sign up, they sign up on the platform, and they are waiting for us to convert them to become a customer. The number of the customer and individual sign up with Office 365 is unbelievable, so it's unbelievable. So we will see. They say at the end of this year, after like 2 to 3 quarter of the running Office applications, we should be able to pick the precise, particularly on the competition size, but all I can say is, so far, so good.

I just wanted to follow up on that. If you can address the piracy issue through the cloud platform, then how are you going to charge those individual users, especially for those 10,000 customers that already signed up on the platform? And if so, I think that recently, [indiscernible] kind of started to promote several peers on the mobile handset a lot. So are you actually going to roll out Office 365 to the mobile as well?

Okay. Well, first of all, Office 365 actually in U.S. I believe already on mobile. Yes, our partnerships also do that. So mobile is pretty simple. The mobile -- the Office 365 already available in the iPad and also to iPhone, well, maybe in the process to be available in the iPhone already. So mobile, that direction. Yes, that's no doubt. Definitely, we'll go with mobile, too. But again, like our competition with, let's say, [indiscernible]. At this moment, when we look at the Office application, after all, if you need -- you probably need to ask yourself, okay, whether or not you use the office application or you are using the UPS, I think that's the key issue because, at least from our observation and also more than 98% of the users still use the office application in China. And that's all I can say in this moment. Whether or not the competition, I think it's still early. We probably need to wait 2 quarters and 3 quarters to look at it because, after all, Office 365, it's only commercialized on April 15. In terms of the pricing, right now at the individual side, we charge RMB 399 per fee -- per year, RMB 399, okay? That's all on one side, okay. You guys can find those [indiscernible] in different sides of the company, we will offer certain discount. But for any individual sign before -- or company sign before the main service, we offer the 20% discount. But the pricing is RMB 399 per license per year. That averages USD 6 to USD 8 per license per month, which is consistent with the management message being passed 1 year. So we always say begin USD 6 to USD 8. So that's the current pricing.

Ladies and gentlemen, as there are no further questions, I will now hand the call back to management for closing remarks.

Okay. Thank you, everyone. I also want to say to -- thank you to our biggest customer called Jingdong. They just did their IPO today in the U.S. market. Congratulations to them. They are our biggest customer. So thank you, everyone. We're looking forward to speak with you in next quarter's earnings. Thank you. Bye-bye.

Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may all now disconnect.