This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk12: Hello, ladies and gentlemen. Thank you for standing by for the GDS Holdings Limited's second quarter 2020 free earnings conference call. At this time, all participants are in listen-only mode. After management prepared remarks, there will be a question and answer session. Today's conference call is being recorded. I would now like to turn the call over to your host, Ms. Laura Chen, Head of Investor Relations for the company. Please go ahead, Laura.
spk02: Hello, everyone. Welcome to the second quarter of 2023 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 investorsgdsservices.com. Leading today's call is Mr. William Huang, GDS founder, chairman, and CEO of who will provide an overview of our business strategy and performance. Mr. Dan Newman, GDS CFO, will then review the financial and operating results. With Jamie Koo, our COO, is also available to answer questions. Before we continue, please note that today's discussion will contain forward-looking statements made under the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, the company's results may be materially different from the views expressed today. Further information regarding these and other risks and certainties is included in a company's prospectus as filed with the US SEC. The company does not assume any obligation to update any forward-looking statements except as required under applicable law. Please also note that GDS earnings press release and this conference call include discussions of unaudited gap financial information, as well as unaudited non-gap financial measures. GDS press release contains a reconciliation of the unaudited non-gap measures to the unaudited most directly comparable gap measures. I'll now turn the call over to GDS founder, chairman, and CEO, Mr. William Huang. Please go ahead, William.
spk09: Thank you. Hello, everyone. This is William. Thank you for joining us on today's call. During the second quarter, we continued to focus on our strategic business objectives. In China, we are selectively targeting new business to give us a shorter book-to-bill cycle. We are prioritizing delivery of the backlog to grow revenue with less capex. We are increasing utilization rates to drive up return on invested capital. We are only initiating new projects based on firmly committed orders, and we are monetizing assets to achieve positive free cash flow as soon as possible. For international, we are developing a second growth engine. We are winning new business from reference China and the global customers. We are leveraging our competitive advantage in cost and speed of execution. We are financing expansion without relying on GDS balance sheet, and we will benchmark variation creation through external funding rounds. By pursuing these objectives, we will strengthen our financial position and unlock value for GDS shareholders. As we review our performance quarter by quarter. We will measure our progress against these targets. Turning to the slide five. In the first half of 2023, our gross additional area committed was around 28,000 square meters, 55% from China and 45% international. In China, new business volumes are down as customers need more time to ramp up. This gives us breathing space to focus on our other priorities while our market leadership position remains as strong as ever. In Southeast Asia, demand is very strong. We have one great new business which lifts us, our growth. For the second half of 2023, we expect gross new booking at a similar level to the first half. Looking further ahead, there's no doubt that demand will rebound in China. Data center supply in tier one markets has been restricted for several years. As demand strengthens, we will be well positioned with our secure pipeline. Turning to slide seven, in 2Q23, we won three notable orders. In Beijing, we won 3,200 square meters or 6.1 megawatt order from a major Chinese financial institution. This used up some of our inventory and comes with a confirmed moving schedule. Outside of Beijing, in Lanfang, we won 3,600 square meters or 8.3 megawatt order from a large internet customer. This is for expansion at a site where the customer has already deployed. In Southeast Asia, we were able to increase power capacity for our Johor data centers, which results in upsizing of an existing order. Turning to slide eight, our growth moving for the second quarter was around 15,000 square meters. This is consistent with the quarterly run rate for the past two years. In the second half of 2023, we will start to see significant moving from international. As a result, our quarterly growth will be higher than in prior quarters. Turning to size 13, we are bringing new capacity into service when customers are ready to move in. In the first half of 2023, we brought 15,000 square meters into service, almost all in China. In the second half of 2023, we will bring another 50,000 square meters into service, 30,000 square meters in China and 20,000 square meters internationally. All of this capacity has confirmed moving schedules. Turning to slide 60, we recently held an opening ceremony to deliver our first data center at the Nusa Jaya Tech Park, Johor. 14 months ago, this was an empty piece of land. Today, you can see three large data centers, one of which is for AI computing, with 70 megawatt of IT power capacity in total. Our ability to deliver so quickly in a new overseas market says a lot about our execution capability. For this project, we use our proprietary prefabricated liquid cooling and power modules. It gives us time to market and development cost advantage, which are critical success factors. in today's market. When we set up in Johor, our vision was to establish the security data center hub to serve the region by integrating Johor, Batam, and Singapore. We are therefore delighted to be selected by the Singapore government alone with three other data center operators for a total of about 80 megawatt new data center capacity in Singapore. Through the pilot data center call for application DCCFA exercise, we are finalizing our development plans and will provide updates in due course. In Bhutan, we continue to make progress with establishing the essential infrastructure for our proposed development. Our international expansion is gaining momentum. I will now pass on to Dan for financial and operating review.
spk07: Thank you, William. Starting on slide 18, in conjunction with our strategic business objectives, we've adopted the following key financial targets. For the China segment, we aim to grow adjusted EBITDA at a mid-teens percentage We are reducing organic capex to an annual level of 2 to 3 billion RMB from next year onwards. We will be free cash flow positive within three years or sooner with the benefits of asset monetization. And we will bring down net debt to adjusted EBITDA to below five times. For the international segment, We will be EBITDA positive next year. Based on our current business plan, international will generate over 15% of consolidated adjusted EBITDA after three years. We are taking a low-risk approach, only investing with the backing of firm customer orders and achieving similar returns to China. We will raise equity capital directly at the international level and project finance on a non-recourse basis. Turning to slide 19, in 2Q23, we grew revenue by 2.6% quarter-on-quarter and adjusted EBITDA by 9.3% quarter-on-quarter. Here in 2Q23, we recognized one-time service revenue of 17.7 million RMB arising from early termination of 3,000 square meters from the backlog and cash reimbursement of 22.1 million RMB from our depository bank. Excluding these two items, revenue was flat and adjusted EBITDA was up 1.1% quarter on quarter. Turning to slide 20, during 1H23, we achieved net additional area utilized of 12,000 square meters. While gross ad was sustained at historic levels, net ad was impacted by a single customer redeploying between our data centers as previously disclosed. This redeployment will continue into the second half of 2023. With contribution from international, we expect net additional area utilized to step up significantly. Monthly service revenue per square meter was 2,170 RMB in 2Q23. Excluding the one-time service revenue arising from early termination, MSR was 2,108 RMB per square meter a decrease of 1.9 percent versus the previous quarter. Comparing 4Q23 to 4Q22, we still expect an MSR decrease of around 4 percent over the course of this year. Turning to slide 21, for 2Q23, our adjusted EBITDA margin was exactly 50 percent. Excluding the one-time service revenue arising from early termination and cash reimbursement, the adjusted EBITDA margin was 47.6%, a small increase from the previous quarter. In 3Q23, we are seeing higher power tariffs and higher power usage in the peak summer months. As a result, our margins will be seasonally impacted in the current quarter before recovering in the fourth quarter. Turning to slide 22, in 1H23, our organic capex in China was 2.2 billion RMB. We expect the full year to be in line with our guidance for 3.5 billion RMB. In 1H23, our international capex was 1.2 billion RMB. In 2H23, our international capex will increase to around 2.8 billion RMB as we deliver 70 megawatts in Johor by January of next year. All of this capacity is billable within a few months of delivery. Looking at our financing position on slide 23, at the end of 2Q23, our net debt to last quarter annualized adjusted EBITDA was 7.7 times. Excluding the debt and negative EBITDA of the international, the multiple was 6.7 times. During QQ23, we repaid 300 million U.S. dollars when a CB was put. As a result, our cash position decreased to 8.2 billion RMB or 1.1 billion US dollars at mid-year. We are still working on the debt refinancing, which is required for the data center fund. When this is finalized, it will raise our cash balance by 1.5 billion RMB. Up to the end of 2023, we provided around $400 million of funding to our international group by way of paid up share capital and shareholder loans. In addition, international had incurred around $400 million of external debt. We now intend moving ahead with the first round private equity capital raise. Turning to slide 24, we confirm that our guidance for FY23 revenue Adacity, Vidar, and CapEx remain unchanged. We'd now like to open the call to questions. Operator, please.
spk12: Thank you, sir. To ask a question, you will need to press star 1 and 1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1 and 1 again. Once again, to ask a question, please press star 1 and 1 on your telephone and wait for your name to be announced. To withdraw your question, please press star one and one again. For the benefit of all participants on today's call, please limit yourself to one question. If you have more questions, please re-enter the queue. Thank you.
spk13: We are now going to proceed with our first question. And the questions come from the line of Yang Liu from Morgan Stanley.
spk12: Please ask your question.
spk00: Thanks for the opportunity to ask a question. I have a question related with the international business. Previously, I think you talked a lot in terms of the strategy going in the surrounding area of Singapore. And now you have a power quota or the permit to build a data center inside of Singapore. So what could be the updated strategy for the whole... Southeast Asia development plan, especially what will be the business model for the Singapore data center. And of course, whether you have a plan to spin off the whole international business.
spk09: Okay. Thank you, Yang Li. I think the strategy for Southeast Asia from day one We already have a very, very clear view to build a data center in three major places. One is Singapore, one is Johor, one is Bataan Island. This is, in our view, is a perfect structure for some of the current requirements, even for the future requirements. Because Singapore, as everybody knows, Singapore is a network hub. And a lot of our customers who want to deploy the data center in this region try to get their network in Singapore, network hub, whatever call. But these three, we have also planned to link these three data center areas together. to serve to our customer as a platform. So I think this will give us a lot of advantage in the future compared with other competitors. We are the first one who own the data center in three areas. So this is perfect for our future, let's say, marketing, right? So this is our major focus. It's our core asset to get back in the next five years. But on the other hand, we're also looking for very proactive to looking for some opportunity in Jakarta, KL, and also other countries' opportunity. But again, I say this is what we call a security area will be our focus. in the next five years. And we believe the demand is getting more stronger and stronger. So the future visibility is very, very high. The second question, the spin-off, I think definitely Dan already, last quarter we already introduced it. We will focus on, we will split the business, locate our businesses. One is China portion, one is international. The two market actually is in a different situation. In China, everybody may know that demand in the last two years is a slowdown, but we should echo this situation. So we firm our new strategy to try to push China business moving towards the cash flow positive. and strengthen our financial capability. This is our, we already introduced to the market. That's our business plan in next three years. But on the other hand, since the AI coming in a very big wave, So I think we can leverage our 20 years experience and capability to well catch up this opportunity. So in an international business, we will aim to grow more fast than in China business. So we need more capital, but we don't want to use more of our holding capital to develop the business. So in the next few months, We already started working on that to raise excellent funds to support our international business. We got a lot of the interest from the different private equity so far.
spk00: Thank you.
spk13: We are now going to proceed with our next question. And the questions come from the line of Jonathan Atkin from RBC.
spk12: Please ask your question.
spk05: Thank you, so the financial question and that is just anything to call out in terms of one time impacts through the rest of the year. You had kind of the early termination that we talked about in the script, but anything else that that maybe you could elaborate on between now and year end that would affect 3Q, 4Q, or even next year? And then secondly, related to your Southeast Asia footprint, I wonder if you could maybe provide us an update on the demand trends that you're seeing in Hong Kong. And then in Johor, are you seeing continued potential for upsizing of your footprint based on the existing customer relationship, or could the demand there potentially diversify?
spk07: Thank you. Thank you, John. I'll start with the financial questions. We don't expect more one-time items like we experienced in the second quarter in the second half of this year or beyond so far as we can foresee. If these one-time items are material, we will disclose them to try to establish a normalized number so that we can continue to track a quarter-on-quarter trend as we have done ever since we went public in 2016. William, would you like to talk about demand in Hong Kong? Yeah. the next wave in Jehovah.
spk09: Yeah, I think the demand in Hong Kong still maintains the normal, right? I think the... Every year's growth is around 70 megawatt. This demands from different regions, like from China, also from US, from other domestic customers as well. So this is nothing changed so far. So we are still on track. The market demand supply also no significant change. So still, in terms of supply, also very balanced. So I think the Hong Kong market is still on the very stable growth period. In Johor, if we talk about Johor, what we see is that Johor is more hot for all the data center players, also for all the customers. What we can see is that a lot of the international player, international cloud player, also internet giants, they all show more high interest level into whole. So this has changed a lot, very encouraging us. So our target is definitely not just to follow up our existing customer. We definitely very interested to get some new customer name from the different region to diversify our portfolio, just like what we did in China. Diversification is very important for us, and we are good at that.
spk05: And then lastly, on Singapore, given the tightness of supply and the fact that you are one of only a small number of companies to get the permission to proceed with new data center development, Do you think that you're inclined to do more of a kind of a wholesale hyperscale approach with a smaller number of tenants in order to stabilize the asset quickly once it's developed? Or would you pursue more of a kind of a retail-oriented approach? Do you have any thoughts on that?
spk09: Yeah, so far, I think there's two types of customers that we are interested in. One is who will deploy their assets. IT industry region, industry including Bataan, Singapore, and Johor. This is our first priority to support, which means support our strategy, right? Which I think we already showed this plan to some of our customers. They are very interested. So second priority definitely in Singapore is financial center. which is our, we are very familiar with the financial institutions demand and requirement. So we also aim to sell some to retail customers. For example, like the financial institution, right? We can get a more high margin and a very stable commitment. That's our go-to-market strategy.
spk08: Thank you.
spk12: We are now going to proceed with our next question. And the questions come from . from Raymond James. Please answer your question.
spk01: Great. Thank you. So looking out to your guidance, kind of what does it take to hit the higher end of the range of your guidance? What sort of assumptions are built in there? And if you can kind of break that out between the impact from China and also from the out-of-region business as well. Thanks.
spk07: Thank you very much. Our track record with guidance has been fairly good. Normally the full-year outcome is not deviated far from the midpoint of our guidance range in prior years. It's a recurring revenue business, and the move-in rate is what dictates most of the growth year on year. So as we're already halfway through the year, I think the path that we're on within that guidance is already quite well set. Having said that, in the second half of this year, particularly in the fourth quarter, we're going to have our Johor data centers come into service, and also in China, some of the data centers which are the destination for the customer who is redeploying between our data centers. the move-in rate for those contracts is quite fast. In one case, a few months. In another case, perhaps one year. So even if we assume that the run rate in China remains as it has been, at least the gross additional area utilized has been quite consistent, I think, for about the past 10 quarters. So even if we assume that that remains at the current run rate, and there is no recovery because we can't predict that yet, our growth will pick up because of the additional contribution from these contracts, particularly JAW. So that will happen too late this year to make much difference to financial results this year. clearly it will contribute to higher year-on-year growth next year. So we look forward to that, and obviously we'll reflect that in our guidance for next year when we come out with that.
spk01: Okay, great. Thank you very much.
spk12: We are now going to proceed with our next question. And the questions come from the land of Sarah Wang from UBS. Please ask your question.
spk03: Hi, thank you for the opportunity to ask questions. So I have two questions. The first one is on the potential target of Southeast Asia business. So I see that we are now targeting the overseas business to contribute more than 15% of EBITDA within three years. And then I recall December was around 10% during last earnings release.
spk13: So just wondering if there's any... What's your question?
spk07: We lost the... Hello? Did we lose the connection? Hello? Hello?
spk10: Hello? Can you hear me? Yes, we can now. Can you repeat your question? We just missed it. Sorry.
spk03: Yeah, sure. So I see the target for the overseas business to contribute 15% of EBITDA within three years. And then I recall the number was around 10% during our last earnings call. So I'm just wondering, is this just a simple update because of better visibility, or actually we're being more optimistic? And then what's the key points for us to be more optimistic? This is my first question.
spk07: Thank you. Your observation is correct. We did revise up that. that number moving from 10% to 15% is significant. But in absolute terms, we're not talking about hundreds of millions of dollars. We're talking about tens of millions of dollars higher forecast. And you would have noticed that in the second quarter, we did upsize an existing order in Johor. So that was part of the reason for for doing that. Frankly, I also noticed that some analysts and leading analysts begin to put more focus on international business and try to quantify how significant it can be within the context of GDS Holdings as a whole. So responding to that, try to provide some more disclosure.
spk03: Got it. Thank you. And then my second question is about William. So during last earnings call, I think William had shared his intention to increase the shareholding in GDS. I'm just wondering if there's any update on this. Thank you.
spk09: Yeah, I already bought the 50% of which I commit, right? So I still will continue to execute that.
spk13: Got it. Thank you. We are now going to proceed with our next question.
spk12: And the questions come from from Goldman Sachs. Please ask your question.
spk06: Sure. Thank you, Benjamin, for taking my question. I think my question is regarding the AI demand. I think since last time that we spoke, I think I remember last quarter you mentioned the AI. demand was due in the early stage. Just wondering, given I think we have passed a quarter, three months, or maybe longer, just wondering if management has seen any updates regarding the moving pace from the generative AI demand is really from China. And when we think about the CapEx going forward, could management share any color on what percentage of CapEx will be likely spent on the like high-power density cabinets or transforming the existing cabinets into the high-power density ones. Thank you.
spk09: Okay. Yeah, in terms of AI demand, I think it's very clear that in the international market, now the current state globally, I mean, data center demand is mainly driven by the AI type of application, right? So this is a very, very clear trend, which is already happening in the U.S., in Asia right now. So this is one part. But if we talk about AI demand in China, I think China, in terms of the model, AI model is a little bit behind the U.S. So I think it is still in a very early stage. But of course, in the media, everybody talks about AI. That's an indication that everybody tries to step in. So I think in terms of how impacted to the data center industry, I think maybe after 12 or 18 months, it will start to impact China data center demand. So in a significant way, in my view, yeah.
spk07: Thank you for the Second part of your question on CapEx, I think if you talk about AI-related CapEx or very high power density capacity, then I think that goes with liquid cooling. So really, it comes down to what percentage of our CapEx or what percentage of the capacity that we're developing will we deploy liquid cooling? As a matter of fact, we have deployed liquid cooling going back more than two years in China. We've done projects both with what's called cold plate cooling and also full immersion cooling. It's been a relatively small part of what we've done so far in China. In the international expansion, William mentioned that I think in the international market maybe we're seeing the flow through from AI demand come quicker. So a significant part of what we developed in Johor is using cold plate liquid cooling. And we developed a prefabricated cold plate liquid cooling module, which we manufactured in China and shipped to Johor. We talked maybe a bit more generally about the economics. Deploying liquid cooling, the overall unit development cost is slightly higher than if we use more traditional air cooling. But because liquid cooling delivers a lower PUE and a higher power density, It also means that there's more IT power capacity available to sell to the customer and to generate revenue. So you have to take into account these different components. And overall, in terms of total cost of ownership or economic returns to us as the data center operator, we think that liquid cooling will create some cost efficiency where it can be deployed. But so far, we don't think it's going to be a very material change. So I think the last part of your question talked about, I think you referred to installing it in existing data centers. So that's an interesting one because if you look at all the parts and equipment in a data center, some of it is used intensively, like cooling, and some of it is on standby, like power generation. So there's already a replacement cycle for cooling, which typically is every five years. That gives us an in-built opportunity. When we change out the cooling plant and equipment, we can always consider to change the technology as well.
spk09: Yeah, I'll add on a little bit. I think in the last two years, our new design, data center design, is all very high-powered. That means we already have assess the trend in China. So our edge of the town campus design all can fulfill the future AI demand already. This is all the campus which we developed in the last two years, whatever in Shanghai, surrounding Shanghai or Beijing or Shenzhen Guangzhou, all very high power density and high power capacity. So that means we are well positioned to catch up the AI error.
spk06: Great. Thank you for the call. It's very helpful. Thank you.
spk12: As a reminder, to ask a question, please press star 1 and 1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1 and 1 again. Once again, please press star 1 and 1 if you have any questions and wait for your name to be announced. For the benefit of all participants on today's call, please limit yourself to one question. If you have more questions, please re-enter the queue. Thank you. We are now going to proceed with our next question.
spk13: And the questions come from from CICC.
spk12: Please ask your question.
spk14: Hi, management. Thanks for taking my questions. I have questions about the EBITDA margin. Why your one-time service revenue has nearly 100 EBITDA margin? Because this 70 million was fully included in EBITDA. And also, excluding the one-time impact, the second quarter EBITDA margin was still better than the first quarter and the same quarter last year. What's the drivers behind things?
spk08: Thanks for the question.
spk07: I couldn't hear so clearly, so let me try to answer based on what I couldn't make out. I think you asked to begin with why that one-time service revenue contributes to such a significant improvement in the EBITDA. So the reason for that is because it's associated with a termination, which means that There is not a lot of operating cost that goes with that revenue. There is not power consumption and so on, which goes with that revenue. So that revenue has a very high profit margin on an incremental basis. Excluding that revenue, as we did in our disclosures to normalize numbers, set a base for the following quarters, I think the EBITDA margin has fluctuated as always, but it's been in a similar range for a number of quarters. There is more pronounced seasonality now in our business since power tariffs went up. And as we've seen some exceptionally hot summers in China, it has resulted in least a couple of percent, if not more, percentage point difference between our EBITDA margins in winter and summer. So that's visible in our number. But overall, if we take a trend over a number of quarters, I think EBITDA margins are going to remain at quite a similar level to where they are today. I think the most significant negative impact has been the increase in power tariffs in China. It's possible that that will reverse at some point in the future. We don't have any knowledge about that. But we're looking at EBITDA margins, which already reflect that impact, and we expect the margin to improve. only slightly from current levels over the following couple of years.
spk13: Thanks, Neva Cleo. We're now going to proceed with our next question. And the questions come from the line of Michael Elias from TD Cowen.
spk12: Please ask a question.
spk11: Hi, everyone. This is Cooper Bellinger on for Michael Elliott. Thanks for taking my question. I kind of wanted to follow up on the AI discussion earlier. And, you know, given that what we're seeing in the U.S. right now with the incremental AI demand wave and kind of the subsequent shrinking of power supply, I just wanted to hear your thoughts on the upcoming power supply situation and I guess current as well as it relates to both mainland China and international. Thanks.
spk09: I think in the area like Johor, the advantage in Johor is they have a very rich power capacity. in a short-term or mid-term, the power supply will not be the issue, I think, in the mid-term. In China, I think what we know is the tier one market, of course, is challenging in the future. But fortunately for us, as I mentioned, in the last two years, we locked up a lot of the big power capacity and built a very high, designed a very high power density data center. So I think, but what I try to say, in short-term, mid-term, in China, if the wave coming, for everybody is a challenge. But in mid-term, short-term, for us, it's more relaxed for that. But in the Johor side, I think we got almost 50% of the power allocation in Johor so far. So I think we are moving more ahead than any player in the Johor area.
spk08: Okay, great. Thank you.
spk13: Thank you once again for joining us today.
spk02: If you have further questions, please feel free to contact GDS Investor Relations through the contact information on our website or the Peersanti Group Investor Relations. See you next time. Bye-bye.
spk13: This country's...
Disclaimer