GDS Holdings Limited
Q1 2017 Earnings Call Transcript

Published: 9 May 2017

[Operator:]

Hello ladies and gentlemen. Thank you for standing by for GDS Holdings Limited’s First Quarter 2017 Earnings Conference Call. At this time, all participants are in listen-only mode. After management’s prepared remarks, there will be a question-and-answer session. Today’s conference call is being recorded. I will now turn the call over to your host, Ms. Laura Chen, Head of Investor Relations for the Company. Please go ahead, Laura.

[Laura Chen:]

Hello everyone and welcome to the first quarter 2017 earnings conference call of GDS Holdings Limited. The Company’s results were issued via newswire services earlier today and are posted online. A summary presentation, which we will refer to during this conference call, can be viewed and downloaded from our IR website at

[William Huang:]

Hello everyone. Thank you for joining today’s call. In the first quarter of 2017 we continued to make meaningful progress across all aspects of our business and further strengthened our market leadership position. As you can see on Slide 3 we grew total revenue by over 60 percent and Adjusted EBITDA by over 130 percent year-on-year. We invested over $50 million of CapEx to develop the capacity required by our customers. We raised nearly $80 million of debt to ensure that each new project is fully funded. We maintained our strong sales growth momentum, signing up customers for over 7 thousand square meters (net) of new commitments, worth over $35 million in terms of annual recurring revenue. This includes full re-commitment of the area released by a churn customer. I want to highlight that it is a rare case for any company to be able to reallocate such a large amount of area in such a short period. This further proves GDS’s high ability to execute and deliver, as well as the strong market demand. As a result, our total area committed grew to over 68 thousand square meters, 85 percent higher than 1 year ago. We ended the quarter with commitment rates of 90 percent for area in service and 38 percent for area under construction. We continued delivering the backlog, increasing our area utilized to nearly 38 thousand square meters, 58 percent higher than 1 year ago. On the resource side, we enhanced our supply pipeline with the Shenzhen acquisition we announced last quarter of a 10 thousand square meter project under construction. Construction is ahead of schedule and the customer will be moving in Q3, faster than anticipated. In addition, I am pleased to announce today that we have secured a new data center project in Beijing. It will add over 4 thousand square meters of capacity when completed in the first half of 2018. This is a big win for us. Supply in Beijing is quite restricted. Our approval reflects the government’s acknowledgement of our unique industry leadership and deep experience. Clearly, both of these new projects demonstrate our sourcing capabilities. Turning to Slide 4, our impressive sales achievement gives us high visibility to future growth. Quarter after quarter, we continue to execute against our plan, delivering our backlog to customers, and driving revenue and operating income growth. I will leave it to Dan to elaborate on these numbers. Moving on to Slide 5 Before I talk about our sales wins and resource development, I want to update you on what we see happening in the market. As we have said before, we believe China represents the biggest data center opportunity in the world. And we believe GDS is best positioned to capitalize on this growth. In our view, the data center market in China is growing at over 25 percent annually, with Cloud and Internet platform service providers driving around 70 percent of new demand, and cloud being key. So, to understand the data center opportunity, we must first understand how the Cloud is developing in China. Joe Tsai, Executive Vice Chairman of Alibaba, stated that they see Cloud as a $30 billion market opportunity in China, assuming 20 percent of IT spending migrates to Cloud. In 2016, the China market was worth around $1.5 billion. It is still early days, but Cloud adoption has clearly taken off. Alibaba and Tencent reported that their Cloud customers and revenues increased by 2 to 3 times over the past year. Alibaba forecast that the market will grow by 4 times over the next two years. This growth is largely coming from the three internet giants in China – Alibaba, Tencent, and Baidu. They see transformational opportunity in Cloud and related technologies. Each of them has put the Cloud at the center of their strategic development. These three companies have huge influence over the digital economy in China. They are able to leverage their dominant presence in different verticals to drive the development of their Cloud platforms in unique ways. Additionally, there are other giant companies, such as Huawei, which are allocating more and more resource to public Cloud development, and the global hyper-scale players –Microsoft, AWS, and IBM – which are significantly increasing their presence in the China Cloud market. Cloud service providers aggregate demand for data center capacity, but they have different kinds of requirements which they fulfill in different ways. For their performance-sensitive data and applications, which need to be housed in edge data centers close to end-users in the Tier 1 markets, they look to outsource most of their requirement. Why do they outsource? The first reason is because their business is highly dynamic and outsourcing allows them to accelerate their time to market. Secondly, they want to focus their attention on the customer-facing products and services that are critical to their success -- and they recognize that sourcing, designing, building, and operating sophisticated data centers is very complex. Thirdly, their business models appreciate the flexibility of being able to access a secured supply of data center resource, with short lead-time, when they need it from a trusted provider. Demand is running ahead of supply in the key markets. Hence, a lot of new capacity has to be built. As the scale has increased – in terms of space and power – it has become more and more difficult to secure suitable industrial buildings for long-term lease and to obtain sufficient power capacity. Obviously, the market opportunity has attracted more carrier-neutral participants, but we do not see them having a material impact on competition. They develop assets on a case-by-case basis and no competitor has a presence comparable to us across all the Tier 1 markets. No competitor has the combination of expertise, track record and comprehensive set of sustainable advantages that we do. GDS is Best Positioned to Capture This Opportunity We recognized several years ago the strategic importance of capturing demand from Cloud service providers. First, because it represents a large part of the market opportunity and, by serving these high-volume customers, we gain scale advantages. Second, because we believe that access to key Cloud infrastructure platforms located in our data centers is a unique value proposition that will drive the growth of our FSI and large enterprise franchise, and attract more Cloud players, such as SaaS providers. There are only a few hyper-scale Cloud infrastructure players, so there are only a few opportunities to make this a winning strategy. How are we doing? We’ve had great success in capturing this demand. As shown on Slide 6, from almost nothing 3 years ago, Cloud service providers now account for over 50 percent of our total area committed. In the last quarter, we obtained significant new commitments from three of the leading Cloud service providers in China, including a follow-on order from one of the major global players. Our Top 2 customers are now each present in 6 - 8 of our self-developed data centers and in 4 - 5 different markets. We estimate that we house the majority of their incremental IT demand. They consider us as partners in the development of their Cloud business. As we grow in market leadership, we are actively taking steps to deepen relationships with key customers and formalize our partnerships in different ways. Why do we win with Cloud service providers? There are many reasons. First, we have the right kind of data centers – meaning large-scale, high power density, and high efficiency facilities, and they are located in all the right places, so they map to the where our Cloud customers deploy their platforms. Second, we are able to offer them certainty of future supply as a result of our secured expansion pipeline and flexibility to take delivery when they need it. And, third, as Cloud service providers increasingly penetrate the FSI and large enterprise verticals, they see value in co-locating with many of the best names in China who are our existing customers. These attributes are not easily copied and they distinguish GDS from all other carrier-neutral players. Besides the Cloud service providers, in the last quarter we added over 20 new FSI and large enterprise customers, further diversifying our customer base. I would like to highlight a few. First, we signed a large, multi-site order from the leading online securities and fund trading company. Second, we obtained an order for the settlement and clearing platform being established by the central bank to support digital payment service providers. We already house the three leading e-payment platforms in China. We believe this new generation of FSI customers offers a long runway for future expansion. And third, we just recently we won a bid with one of China’s largest online travel providers. Lastly, as we continue to build our ecosystem for both cloud and enterprise customers, we are in the process of obtaining the license and regulatory approval to provide cross connect services in China. We will update the market when more details become available. Secured Resource Supply to Sustain Leadership. In summary, our sales outlook is the strongest it has ever been. The market is growing faster than imagined and customers are looking to us to meet their requirements. This is a golden opportunity for us and we are moving forward full-speed ahead. We have the strategic relationships and we are rapidly adding new customers. Resource supply is the critical input for us to sustain this momentum. As shown on Slide 7 our area in service remains at around 61 thousand square meters, which is almost sold out. With the Shenzhen 5 acquisition, our area under construction increased to just over 35 thousand square meters at quarter end. Out of this total, around 13 thousand square meters is pre-committed and around 21 thousand square meters is available to feed our current sales efforts. The new data center project in Beijing (BJ3) will be included in area under construction in Q2. It is located next to BJ1, which is already 96 percent committed. We are very confident about the marketability of BJ3. Including BJ3, we will have around 25 thousand square meters of area under construction which is not yet committed. 25 thousand square meters is equivalent to about 4 quarters of new bookings at our recent quarterly run rate. We intend supplementing these resources in order to support sales into 2018. We have resource held for future development that we plan to activate, and we have promising prospects in all our markets that we aim to secure, in the next few quarters. Our data center portfolio is shown on Slide 8. 10 of those data centers are in service and 5 are under construction. Before handing over to Dan for the financial review, I would like to highlight the recently announced appointment of Mr. Chang Sun as an Independent Director on our Board. Chang was formerly the Chairman of Warburg Pincus for Asia Pacific. He is one of the most renowned and successful investors in China over the past 20 years. Real estate based businesses have been one of his focus areas. He helped build highly successful businesses in the logistics, hotels, and retailing sectors. He also founded the China Real Estate Developers & Investors Association. GDS is the first and only US public company directorship that he has accepted since moving on from Warburg Pincus. Chang brings a rich investment background and experience and we are delighted to have him join our Board. With that I will now hand the call over to Dan.

[Dan Newman:]

Thank you, William. In this section, I will focus on 4 main areas

[Laura Chen:]

Thank you once again for joining us today. If you have further questions, please feel free to contact GDS’ investor relations through the contact information on our website or The Piacente Group Investor Relations.

[Operator:]

This concludes this conference call. You may now disconnect your line. Thank you. 1