GDS Holdings Limited
Q3 2017 Earnings Call Transcript

Published: 12 Nov 2017

[Operator:]

Hello ladies and gentlemen. Thank you for standing by for GDS Holdings Limited’s 3Q17 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 3Q17 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. A few days ago, we celebrated the 1-year anniversary of our IPO on NASDAQ. I am pleased to say that over the past year we have delivered everything that we said we would, and more. I am also pleased for all our shareholders to see that our share price is now trading well above the IPO price. In 3Q17 we continued to make significant progress across all aspects of our business and further strengthened our market leadership position. Starting with the financial highlights on Slide 4. We grew service revenue by over 58 percent year-on-year driven by a 47 percent increase in total area utilized over the period. Delivery of the backlog accelerated in 3Q17, with the addition of over 8,000 square meters of revenue-generating space – by far our highest addition in a single quarter. We realized further operating leverage, with Adjusted EBITDA growing by over 70 percent year-on-year and our adjusted EBITDA margin reaching 31.5 percent, compared with 26.2 percent in the same period last year. At the same time, we continued to add significantly to our customer contracts, signing up over 6,000 square meters (net) of new commitments in 3Q17. As shown on Slide 5, our total area committed grew to over 82,000 square meters, 41 percent higher than 1 year ago. Over the first three quarters of this year, we have added over 21,000 square meters (net) of new customer commitments worth over $100 million dollars in terms of annual recurring revenue when fully delivered. This sales achievement is ahead of our expectations at the beginning of the year. It reflects a booming market and the strength of our strategic positioning which has given us a consistently high win rate. We have significant sales pipeline which we are converting in 4Q17 and, with the addition of this new business, we expect to end the year well ahead of last year’s achievement of $120 million dollars of new bookings. While we are growing at record rates, we have been able to maintain a stable average selling price and we expect to achieve returns on new investment in line with historical levels. We are also successfully renewing contracts each quarter with industry-high retention rates. Churn was again only 0.1 percent in 3Q17. This reflects our high operating standards and high degree of customer satisfaction. Pricing on renewals is generally at similar levels to previous contracts. Turning to Slide 6. We continue to develop our customer franchise along two tracks

[Daniel Newman:]

Thank you, William. Slide 11 shows our P&L analysis for 3Q17, but in order to better highlight the underlying trends, I will start with the version shown on Slide 12. On a GAAP basis, service revenue grew by 27.6% quarter-on-quarter to Rmb 423.0 million in 3Q17. On a non-GAAP basis, underlying Adjusted NOI grew by 29.6% quarter-on-quarter to Rmb 201.5 million and underlying Adjusted EBITDA grew by 34.4% quarter-on-quarter to Rmb 134.9 million. The underlying Adjusted EBITDA margin was 1.6 percentage points higher at 31.9% in 3Q17 compared with 30.3% in 2Q17. Turning to Slide 13. In 3Q17, there was an increase in area utilized of 8,109 square meters which was the major factor driving higher revenue growth. This increase resulted from accelerated move-in by certain Cloud customers at our SH3, SZ2 and SZ5 facilities, plus the move-in which occurred at the newly in-service BJ2 data center. The average monthly service revenue or MSR per square meter was Rmb 3,031 in 3Q17 compared with Rmb 2,750 in 2Q17. The MSR increase was mainly due to our high addition to area utilized in 3Q17 occurring early in the quarter, driving up the average. We do expect MSR to be sustained at the normalized level in the coming quarters. On Slide 14 we show growth in NOI and EBITDA and margin development over the past 5 quarters. In 3Q17, we achieved an underlying Adjusted NOI margin of 47.6%, which was 0.7 percentage points higher than for 2Q17. To better understand NOI margin development, we can look at the analysis on Slide 15. The pie chart on the left shows the breakdown of our total capacity in service and under construction by stage of development. At the end 3Q17, we had just over 34,000 square meters, or 29.7% of our total capacity which was stabilized. This part of the portfolio was 96.9% committed and 92.7% utilized. Our self-developed stabilized data centers had an NOI margin of around 60% in 3Q17. At the same time, we had over 43,000 square meters, or 37.8% of our total capacity which was in service and still ramping-up. This part of the portfolio was 84.2% committed, but only 43.2% utilized as customers are still moving in. Naturally, these data centers have not yet reached the optimum operating leverage, but based on the customer commitments we can say that they are on a path to the same end result. In summary, as data centers come in to service, it results in a drag on our margins, but over time as the proportion of stabilized data centers increases, the overall margin will improve. On Slide 16, our SG&A (excluding D&A and stock-based compensation) showed an improvement at 15.9% of service revenue, compared with 16.9% in 2Q17. Taken together with the improvement at the operating level, the underlying Adjusted EBITDA margin improved by 1.6 percentage points to 31.9% in 3Q17. Turning to our investment activities. As shown on Slide 17, we paid capex of Rmb 443.7 million in 3Q17. Replacement capex accounted for 2.0% of total quarterly capex, compared with 3.8% in 2Q17. Our total area under construction was 37,478 square meters across 7 sites, out of which 47.9% (i.e. 17,965 square meters) will enter service in 4Q17. We will also have 5,375 sqm from the GZ2 acquisition added to our area in service in 4Q17. Now I would like to update you on the progress of each project which was under construction as of 3Q17. SZ4 Phase 1 has come into service during 4Q17. We already have customers moved in and significant demand in hand. SH4 will come in to service at the end of this year. The capacity is fully allocated to customers with 53.3% already contracted and the rest in progress. BJ3 is one of the projects which we accelerated and has already come into service ahead of schedule in 4Q17. It is 100% committed to a major Cloud service provider. SZ5 Phase 1 entered service in late June, a full quarter ahead of schedule, and is 100% committed and 62.8% utilized. SZ5 Phase 2 is under construction and will enter service in 2018. Phase 2 is reserved for expansion by the anchor customer in Phase 1. SH5 is a new project which we announced in July. We have significant demand from both FSI and Cloud customers and we are considering the allocation to satisfy our customer requirements. SH6 is the 1st of 2 data centers on our new campus in the Waigaoqiao Free Trade Zone. It is about 45% pre-committed by China’s leading online travel company, as we announced previously. The building is under construction pursuant to a build-to-suit lease with a property partner and we will not incur capex until the shell is handed over in the second quarter of next year. CD2 Phase 1 is an expansion project at our Chengdu campus. CD1 is 99.6% committed, with 2 major Cloud customers in the data center. We initiated CD2 to fulfill their demand and expect to obtain pre-commitments shortly. With regard to financing, as shown on Slide 18. At the end of the quarter, our gross debt was Rmb 5.9 billion and our net debt was Rmb 4.8 billion. The ratio of net debt to LQA Adjusted EBITDA was 8.9 times. Pro forma for the $100 million proceeds of the equity issuance to CyrusOne, the ratio would be 7.7 times. We have a Convertible Bond outstanding which was issued in December 2015 and is held by STT and Ping An insurance. The conversion price is $13.40 per ADR. With the rise of our share price, the CB is currently in the money. We have an issuer’s call which can be exercised if the closing price of GDS ADRs is above $16.75 for 10 consecutive trading days. If this condition is met, we intend exercising the call in order to save interest and deleverage. On a pro forma basis, conversion of the CB will reduce our net debt to EBITDA multiple by a further 1.9 times. Combining the CyrusOne proceeds and CB conversion, our net debt to EBITDA multiple would be 5.8 times on a pro forma basis. During 3Q17, we secured Rmb 570 million of new debt facilities, including Rmb 380 million refinancing of existing short-term facilities. Our blended financing cost was 7.4% in 3Q17 compared with 6.9% in 2Q17. Excluding the convertible bond, the cost was 6.8% in 3Q17 versus 6.1% for the prior quarter. The increased financing cost was due to refinancing costs. Looking at the debt maturity chart on the right-hand side, out of Rmb 1.17 billion shown as maturing in 2018, we have now completed over Rmb 700 million refinancing, extending the maturity of this debt, which will be reflected in 4Q17 disclosures. Prior to the investment by CyrusOne, all the projects disclosed as in service and under construction up to the end of 3Q17 are fully funded in terms of equity and debt. What I mean by fully funded is that we have sufficient cash on our balance sheet to fully capitalize these projects and have secured sufficient project finance to take these projects to completion and to deliver the entire backlog. The proceeds from CyrusOne’s investment will enable us to capitalize new projects that we intend taking on over the next few quarters. Under our Articles, Directors may only issue up to 10% of our existing share capital in single transaction or series of transactions during a 12-month period without the prior approval of shareholders. As we have used up most of this capacity with the issue to CyrusOne, we will consider seeking shareholder approval in the near future to raise the ceiling for a period of time. This would enable us to retain flexibility for future share issuance, including capital raising. The company may consider various opportunities to raise capital through the equity and debt capital markets. As shown on Slide 19. At the end of 3Q17, our backlog stood at 32,271 square meters, worth around $155 million in terms of annual recurring revenue, which is equivalent to 60% of our last quarter annualized revenue. Delivery of the backlog provides high visibility for revenue growth. Finally, on Slide 20. At the beginning of this year we provided guidance for FY17 revenue, adjusted EBITDA and capex which we reaffirmed on our last earnings call. We now believe that based on the financials we reported and our current growth rate, we expect our full year performance to be above the midpoint of the range that we originally guided. Accordingly, we are raising the low end of the previous ranges to the mid-point of the previous ranges. The high end remains unchanged. The revised guidance is now RMB1,525 million to RMB1,575 million for revenue and RMB480 million to RMB495 million for Adjusted EBITDA. The top end of the range implies year-on-year growth of 57% in service revenue and 83% in adjusted EBITDA. In order to meet strong demand as reflected in our sales achievement during the year to date, we have initiated new projects at a faster rate than previously expected and accelerated development timelines. Accordingly, we now expect capex for the year ending December 31, 2017 to reach around RMB2.3 billion, as compared with the previously provided level of around RMB1.8 billion. With that I will end the formal part of my presentation. We would now like to open the call to questions. Operator?

[Operator:]

[Operator Instructions] We have the first question from the line of Gokul Hariharan. Please ask your question.

[Gokul Hariharan:]

Congrats on the great results William and Dan, and congrats on the CyrusOne deal also, I had a couple of questions, Dan, you did mention about the breakdown of the portfolio by development stage, could you give us some idea about where you expect the EBITDA margins for maybe the area in service and area in stabilized ones and area in service ramping up standard datacenters, roughly -- I don't think you want to give the exact numbers, but if you could give us some rough ranges on that? And the second question I had is, William did refer to some of the projects for a strategic reason looking at some of the non-Tier 1 locations, could you talk about what size this would account for eventually in terms of the overall area under service, is it going to be small, or is it going to be something that's quite big for some of your bigger cloud customers?

[William Huang:]

Dan, maybe you answer this first question?

[Daniel Newman:]

By the way this pie chart can be constructed from the data which is disclosed in the appendix of the presentation. So if we look at the 2 parts of the pie which relate to datacenters and service, "stabilized" refers to datacenters where the utilization rate is above 80%, it happens, currently, to be 92.7%, for that part of the portfolio in aggregate. So that part of the portfolio is pretty close to reaching the highest level attainable in terms of margin. So we never refer to it as EBITDA margin, we refer it to as NOI margin. The NOI margin for that part of the portfolio is around 60%. For the part which is ramping up, it's the aggregate of datacenters at all sorts of different stages, some are EBITDA negative, and some are breakeven and some are on their way closer to reaching stabilization. If we add the red and the gold looking at this pie chart, we add the stabilized and the ramping-up together, the aggregate NOI margin for the area in service is 47%. So that gives you some idea of how much the ramping-up part is dragging down or averaging down the overall. But the area under construction, most of the costs, pre-operating costs are capitalized. We do include in SG&A some start-up costs of a few million RMB and of course there are some other overheads related to new projects. But the area under construction doesn't impact the NOI margin. It only impacts the NOI margin as projects move from under construction to in service.

[William Huang:]

Number one, I think the global market trend has evolved. The whole market mainly driven by the hyper-scale, a cloud player and Internet giants, this is what happened in China already. So in China it's same, I see -- what we can tell is -- to echo this evolution I think the product (inaudible) difference. So we still -- as I said, we still keep the develops -- our focus on develop, our core datacenter in our all the key market, Tier 1 city, this is already -- I don't want to repeat it. To echo the market evolving, I say, we are -- we see some hyper-scale demand is in -- will happen in near future in Tier 2 city and to catch up with this another growth driver, GDS is well prepare to catch up with that. So I think that we can tell in the next couple of years the growth was 2 type of the growths, one is the high performance datacenter which as we already did in last 10 years, another new growth driver will come from the hyper-scale. We don't want to lose this opportunity. But so far we are quite selected to do in Tier 2 city. Our another strategy as I repeated in the last couple of quarters, I say we will not -- we are focused on our Tier 1 city, and we will focus on to follow up our key customer, which is a cloud player, and that therefore it will add GDS in the next few years still maintain the competitive advantage in strategic review. That's my answer. But if you look at -- currently -- let me give you some clear percentage of our business. I just want to say just as thoughts, it's not to say I cannot give you a certain number currently.

[Operator:]

We have the next question from the line of Jonathan Atkin.

[Jonathan Atkin:]

Thanks very much, so I was interested in the guidance change and how much of that reflects inorganic factors, I may've missed it, I think you may've called out the revenue contribution from Guangzhou 2, but if you could maybe just clarify how much of the guidance is organic versus -- organic? And then secondly in the scripts you spoke about obtaining additional resources, land would be an example of that, and can you talk a little bit about the different cities where you have land not yet under development, and therefore it would appear in any of the charts that you provided. You've talked about challenges in the Beijing market in prior calls, but if you could maybe give us a little bit of color around that, that would be helpful.

[Daniel Newman:]

You asked whether the guidance change was related to the acquisition. The answer to that is no. The Guangzhou 2 acquisition has just closed. So we're about 6 weeks from the yearend, so only very short period of time. As it so happens, if you go back to the IPO prospectus, you'll see that we had an MOU for this acquisition some time ago. We thought it might happen earlier, but we waited until certain conditions were right including the redundant power capacity. So we moved ahead when those conditions were met. As relates to area held for future development, I think what we're trying to highlight is that we have projects where you see Phase 1, or Phase 2 even, but we have expansion capacity on those sites. So just to give some examples, in Shenzhen, Shenzhen 4 and Phase 2 is as big as Shenzhen 4 Phase 1. In -- Shanghai 6 is on a site where we have an agreement with the property partner for the build-to-suit lease of 2 datacenters. So the second one which is just dirt on the ground, we've reserved the name Shanghai 7. And in Shanghai 5 we're also in (inaudible) 2 phases. In Chengdu, Chengdu 2 Phase 1 is part of a potentially a much larger construction. And we have land in Kunshan, we have a development agreement for a relatively large site in a very prime location in Beijing. So it's actually quite a lot if you add it all up, and it's very much within our control as to when we activate this. And that is part of what gives us confidence about being able to sustain our sales momentum beyond what you see in terms of what's under construction. But I think the point that William was making which I just want to reemphasize is that the market growth opportunity is bigger than we foresaw and which I think anyone foresaw and we have already taken steps to supplement our resource plan in quite a significant way and that will become apparent over the next few quarters.

[Operator:]

[Operator Instructions] As there are no further questions, I'd like to now turn the call back over to the company for closing remarks.

[Laura Chen:]

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

[Operator:]

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