21Vianet Group, Inc. :VNET-US: Earnings Analysis: Q2, 2017 By the Numbers : September 5, 2017

21Vianet Group, Inc. reports financial results for the quarter ended June 30, 2017.

We analyze the earnings along side the following peers of 21Vianet Group, Inc. – Internap Corporation, Interxion Holding N.V., Equinix, Inc., Cardtronics plc Class A and Baidu, Inc. Sponsored ADR Class A (INAP-US, INXN-US, EQIX-US, CATM-US and BIDU-US) that have also reported for this period.

Highlights

  • Gross margins widened from 18.98% to 21.39% compared to the same period last year, operating (EBITDA) margins now 11.04% from 2.52%.
  • Year-on-year change in operating cash flow of 227.68% is about the same as the change in earnings, likely no significant movement in accruals or reserves.
  • Earnings growth from operating margin improvements as well as one-time items.

The table below shows the preliminary results and recent trends for key metrics such as revenues and net income growth:

2017-06-30 2017-03-31 2016-12-31 2016-09-30 2016-06-30
Relevant Numbers (Quarterly)
Revenues (mil) 128.6 125.33 131.13 145.18 138.63
Revenue Growth (%YOY) -7.23 -5.08 -14.62 -0.81 -0.83
Earnings (mil) -14.17 -14.51 -64.54 -20.09 -14.76
Earnings Growth (%YOY) 4 33.66 -233 -104.14 36.95
Net Margin (%) -11.02 -11.57 -49.22 -13.84 -10.65
EPS N/A -0.13 -0.6 -0.18 -0.16
Return on Equity (%) -1.46 -1.48 -6.22 -1.93 -1.85
Return on Assets (%) -3.22 -3.25 -13.84 -4.12 -3.31

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Earnings Growth Analysis

The company’s earnings growth was influenced by year-on-year improvement in gross margins from 18.98% to 21.39% as well as better cost controls. As a result, operating margins (EBITDA margins) rose from 2.52% to 11.04% compared to the same period last year. For comparison, gross margins were 20.93% and EBITDA margins were 11.13% in the last reporting period.

Gross Margin Versus EBITDA Margin

Quadrant label definitions. Hover to know more

Differentiated; Low Cost, Commodity; Low Cost, Commodity; High Cost, Differentiated; High Cost

Gross Margin Trend

Companies sometimes sacrifice improvements in revenues and margins in order to extend friendlier terms to customers and vendors. Capital Cube probes for such activity by comparing the changes in gross margins with any changes in working capital. If the gross margins improved without a worsening of working capital, it is possible that the company’s performance is a result of truly delivering in the marketplace and not simply an accounting prop-up using the balance sheet.

Gross Margin History
Working Capital Days History

VNET-US‘s improvement in gross margin has been accompanied by an improvement in its balance sheet as well. This suggests that gross margin improvements are likely from operating decisions and not accounting gimmicks. Its working capital days have declined to 56.25 days from 81.68 days for the same period last year.

Gross Margin Versus Working Capital Days

Quadrant label definitions. Hover to know more

Customer Financed, Cash Starved, Supplier Financed, Cash Rich

Cash Versus Earnings – Sustainable Performance?

It is important to examine a company�s cash versus earnings numbers to gauge whether its performance is sustainable.

VNET-US‘s change in operating cash flow of 227.68% compared to the same period last year is about the same as its change in earnings this period. Additionally, this change in operating cash flow is about average among its peer group. This suggests that the company did not use accruals or reserves to manage earnings this period, and that, all else being equal, the earnings number is sustainable.

Operating Cash Flow Growth Versus Earnings Growth

Quadrant label definitions. Hover to know more

Cash Flow based Earnings, Likely Non-cash Earnings, Low Cash Flow Base, Likely Undeclared Earnings

Margins

The company’s earnings growth has also been influenced by the following factors: (1) Improvements in operating (EBIT) margins from -15.69% to -9.29% and (2) one-time items. The company’s pretax margins are now -14.22% compared to -17.74% for the same period last year.

EBIT Margin Versus PreTax Margin

Quadrant label definitions. Hover to know more

Operation driven Earnings, One-time Favorables, Low Earnings Base, One-time Unfavorables
EBIT Margin History
PreTax Margin History

Access our Ratings and Scores for 21Vianet Group, Inc.

Company Profile

21Vianet Group, Inc. engages in the provision of carrier-neutral internet data center services. The company also provides hosting and related services; managed network services; cloud infrastructure services; and content delivery network services. The hosting and related services include managed hosting services, interconnectivity services, and value-added services. The managed network services included hosting area network services and BroadEx route optimization. The cloud infrastructure services allow businesses to run their applications over the internet rather than having an information technology infrastructure. The content delivery network services offers solutions to their data connection needs. The company was founded by Sheng Chen and Jun Zhang in 1999 and is headquartered in Beijing, China.

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