GDS Q3 2023 Earnings Call Transcript

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Provided by Quartr
November 22, 2023

There are 8 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by for GDS Holdings Limited's Third Quarter 2023 Earnings Conference Call. At this time, all participants are in listen only mode. After management's prepared remarks, there will be the question and answer session. Today's conference call is being recorded. I will now turn the call over to your host, Ms.

Operator

Laura Chen, Head of Investor Relations for the company. Please go ahead, Laura.

Speaker 1

Thank you. Hello, everyone. Welcome to the Q3 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.

Speaker 1

Leading today's call is Mr. William Huang, GDS's Founder, Chairman and CEO, who will provide an overview of our business strategy and performance. Mr. Dan Newman, GDS's CFO, will then review the financial and operating results. Ms.

Speaker 1

Jamie Ku, 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.

Speaker 1

As such, the company's results may be materially different from the views expressed today. Further information regarding these and other risks Incertainties is included in accomplished prospectus as filed with the U. S. SEC. The company does not assume any obligation to today's any forward looking statements, except as required under applicable law.

Speaker 1

Please also note that GDS's earnings Press release and this conference call include discussions of unaudited GAAP financial information as well as unaudited non GAAP financial measures. GDS's press release contains a reconciliation of the unaudited non GAAP measures to the unaudited most directly comparable GAAP measures. I will now turn the call over to Gilead's Founder, Chairman and CEO, William Huang. Please go ahead, William.

Speaker 2

Okay. Hello, everyone. This is William. Thank you for joining us on today's call. The number one priority of GDS management is to create value for our Shareholders and drive share price recovery.

Speaker 2

We are pursuing this goal by executing distinct Strategies for our China and International Business. For China, our financial objectives are to grow EBITDA At a steady rate, maintain positive cash flow before financing and deleverage delevered balance sheet. We are getting there by 1st, taking a highly selective approach to new bookings, which match our inventory and come with faster moving rates. 2nd, Delivering the backlog and increasing capacity utilization and setting a high bar for new CapEx To fulfill orders with 1st firm moving schedules. For international, Our financial objectives are to create a second growth engine, which enhances our equity value variation.

Speaker 2

We are leveraging our competitive strength to build a leading presence in regional hub markets, We win landmark commitment from global and the China customers and finance the business independently. Now let's dive into our progress towards achieving these objectives. In 3Q 'twenty three, we won 21,000 square meters or 54 Megawatts of new customer commitments all in China. The 2 largest order were from Internet companies In the live streaming and the short video vertical, which continues to perform strongly, The orders were for additional capacity at our campuses in Longfang, Near Beijing, where they have already deployed the moving periods are faster than Market demand in China has not yet picked up noticeably As large customers still have inventory to absorb, the data center market will recover when this It's a broad basis recovery in the digital economy. We believe that AI demand AI demand wave is coming.

Speaker 2

However, it will take more time for customers to further develop their models And applications adapted to new regulations and solve the chip supply issue. AI will require a lot of data center capacity in Tier 1 markets, which pays to our strength. When this demand starts to materialize in size, we will be very well positioned. Since the launch of our international strategy, new bookings from international have made up 40% of net additional area committed. In order to maintain this success, We are putting a lot of effort into securing attractive resource supply, just like what we did before in China.

Speaker 2

Our gross moving For the Q3 was nearly 21,000 square meters, comprising 17,000 square meters In China and nearly 4,000 square meters international throughout the current phase Of market development, the growth moving for our China data centers has been sustained at a consistent level. Meanwhile, 3Q 'twenty three Was the 1st quarter in which international made a material contribution. We expect the contribution From international to ramp up significantly over the next few quarters. In 3Q 'twenty three, We brought around 23,000 square meters of new capacity into service. 13,000 square meters was at 2 of our campuses in Longfang, China.

Speaker 2

The capacity is 100% committed to a single customer, which is redeploying from other Data centers, the moving period for this new capacity is faster than usual. The remaining 10,000 square meter is the 1st data center at our NTP campus in Johor, Malaysia. This data center is also 100% committed with a moving period of only a few months. In 4Q 2023, we expect to bring another 20,000 square meters into service, Half in China and half international. Once again, all of this new capacity It's 100% committed with fixed moving schedules.

Speaker 2

Turning to Slide 50. We are making good progress in the execution of our international strategy. Starting with Hong Kong. Our first data center, Hong Kong 1, has entered the service and is almost sold out to global and China customers. Our second data center, Hong Kong 2, is under construction.

Speaker 2

During the current quarter, we expect to secure an anchor customer commitment from for Hong Kong 2 More than 15 months ahead of project completion. Moving to Zuho. Our NTP campus has 160 Megawatt of power capacity across the first three phases, Out of which, 96 Megawatt is already committed. In 3Q 2023, We delivered 23 Megawatts, which is already fully revenue generating. Over the next few quarters, We will deliver the remaining 73 megawatts of committed capacity, which will also become fully revenue generating Within a short period of time, while we still have room for expansion at NTP, We have enhanced our resource supply by acquiring land for a second campus in Johan.

Speaker 2

We refer to this new site as Campus Tech Park or KTP. In the first phase of development, KTP will have 100 and 8 Megawatt of power capacity. We are seeing stronger demand for our capacity in Johor from global and the China customers. We are the only player to have 2 complementary locations, both of which are only a few kilometers From Singapore, across these sites, we have secured 2 68 Megawatt of power supply over the next 3 years. This gives us time to market advantage and important considerations as customers Accelerating procurement to meet AI demand.

Speaker 2

Furthermore, we have Already proven our execution capability into whole by deploying our prefab technology, including liquid cooling modules to successfully deliver high scale capacity in just over 1 year. In Singapore, following the award of Power Quota, we are finalizing the Site selection for our 1st data center, we're on track to deliver capacity in 2026. In Indonesia, we are very pleased to finalize a JV agreement with INA, The Indonesia Sovereign Wealth Fund, we believe that INA will be a great partner for us because of Their complementary strengths, unique relationships and value add, the JV is for all of our Investments in Indonesia. We continue to make progress with our first project in Batang. We are working with I and A to put in place the Incentio infrastructure.

Speaker 2

Finally, We are moving forward with the 1st round private equity capital raising for our international vertical. It is going well. I will now pass on to Dan for the financial and operating review.

Speaker 3

Thank you, William. Turning to slide 19. In 3Q 2023, revenue increased by 6.4% And adjusted EBITDA increased by 5.6% year on year. For the quarter on quarter analysis, We've excluded the one time items, which arose in 2Q 2023 as previously disclosed. On this basis, revenue grew by 4.9% and adjusted EBITDA decreased by 1.4% Quarter on quarter, the decrease was mainly due to higher utility costs, which I will come to in a minute.

Speaker 3

Turning to Slide 20. During 3Q 'twenty three, we achieved net additional area utilized of 16,000 square meters. During the past few quarters, our net add has been affected by higher than usual churn, which is mainly due to one customer's redeployment. This will continue into the Q4. However, We are now seeing the impact partly offset by greater contribution from international.

Speaker 3

Monthly service revenue per square meter was RMB2149 in 3Q2023. Compared with the Q3 of 2022, MSR decreased by 4%, in line with our expectations. Turning to Slide 21. Due to the seasonal fluctuations in PUE, We think it makes most sense to look at our margin trends by comparing with the same quarter in the prior year. For 3Q 'twenty three, our adjusted gross profit margin was 49.5% compared with 50.7% in 3Q 2022, a decrease of 1.2 percentage points.

Speaker 3

During 3Q 2023, utility cost as a percentage of revenue was 35.1% compared with 31.6 percent in 3Q 2022, an increase of 3.5 percentage points. This reflects increase in power generation and more recently in power distribution tariffs. However, As you can see, we were able to mitigate some of the impact of higher utility cost with other cost savings. Adjusted EBITDA margin was 44.7% in 3Q 2023, which is only slightly down versus the same quarter of last year. Turning to Slide 22.

Speaker 3

Over the 1st 9 months of 2023, Our China CapEx totaled RMB 3,100,000,000. Our full year guidance was for RMB 3,500,000,000, And we still expect to be within that figure. However, next year, we expect China CapEx to be materially lower at around RMB 2,500,000,000. Over the 1st 9 months of 2023, Our international CapEx was around RMB 2,000,000,000. Given the rapid pace of development in Johor to meet delivery schedules, We expect full year CapEx for international to be around RMB 4,000,000,000 in line with our guidance.

Speaker 3

Our preliminary view is that international CapEx will be RMB 4,000,000,000 or higher next year. On Slide 23, we plan to finance the international business independently. On the equity side, we are undertaking an equity private placement, the proceeds of which will be ring fenced. On the debt side, we're aiming to finance international projects on a non recourse basis. We should therefore look at our financial position in 2 distinct parts, GDF Holdings excluding international, which is in effect LISCO plus the China business and international standalone.

Speaker 3

Over the 1st 9 months of 2023, GDS Holdings excluding international Had negative cash flow before financing of RMB 1,800,000,000. As William mentioned, our objective is to maintain positive cash flow before financing on an organic basis without assuming any asset monetization. Cash flow before financing for this segment was in fact positive in 3Q 2023, But it will take another year or so before it is consistently positive quarter after quarter. International stand alone will have negative cash flow before financing of around RMB 4,000,000,000 this year and potentially a similar amount next year. We can finance this deficit with around 50% equity and 50% debt.

Speaker 3

For the equity requirement, we aim to raise at least US400 $1,000,000 or RMB2.8 million And the current funding around, we've received very strong interest from regional and global investors and expect to close the capital raise in 1Q 2024. Looking at our financing position on Slide 24. At the end of 3Q 2023, our consolidated net debt to last quarter annualized adjusted EBITDA was 8.6 times. Excluding the net debt and negative adjusted EBITDA of International, the multiple was 7.4 times to 5 times. If we continue along the same path, the leverage of GDS Holdings, excluding international, falls to below 6 times within 3 years.

Speaker 3

However, we continue to work on various asset monetization initiatives, including 2 data center funds, the potential CREIT and property sale and leaseback. This could enable us To delever a bit faster. Turning to slide 25. We are showing the loan maturity schedule for the first time with the debt of international separately identified. Over the next couple of years, we have on average RMB 2,700,000,000 per annum of principal repayments, all of which is onshore RMB project loans.

Speaker 3

A large part of this can be refinanced as we have been doing successfully for many years, Although we do intend to use part of our cash balance to pay down some debt where it is prudent and efficient. Turning to Slide 26. We are not changing our formal guidance for FY 2023 revenue, adjusted EBITDA and CapEx. However, we note that FY2023 revenue is tracking to the bottom end of our original guidance range, while FY 2023 adjusted EBITDA is tracking to the top end of the original guidance range. We'd now like to open the call to questions.

Speaker 3

Operator?

Operator

Thank you. If you have more questions, please reenter the queue. Thank you so much. Please standby while we compile the Q and A roster. This will take a few moments.

Operator

And now we're going to take our first question today, And it comes from the line of Jonathan Atkin from RBC. Your line is open. Please ask your question.

Speaker 4

Thank you. I wondered if you could Remind us of your expectations around renewal pricing and renewal spreads inside of China over the coming year, As well as your overall expectations around the pace at which utilization could increase in your existing campuses. Thank you.

Speaker 3

Yes. Thank you, John. I always prefer to address this question in a more holistic way. We have a KPI of MSR per square meter per month, which reflects a number of different factors, including renewal spreads and Changes in the product mix and location. I think this year, we set expectations That it would decline by 4% year on year, which indeed it is doing so.

Speaker 3

I think next year, it will decline by less than that. So that preliminary view is about 2% year on year, which indicates that it's bottoming out. That gives you Some indication of what's happening with renewal spreads, although as I say, it does also reflect a number of other factors. As regards to utilization rate, that will increase gradually. It will take about 3 years to get from where we are today, which is around 71%, 72% to over 80%.

Speaker 3

I think we're across 80% during FY 2026. And then it will take another couple of years to get up into the high 80s.

Speaker 4

If I could just squeeze in additional part of my question. So KTP, is that a different part of Johor? Or is that adjacent To Nusa Jaya, maybe give us a little bit of color there. And then the demand signals in that you're seeing in Indonesia, in Batam, Is the JV constrained to the time or would you look to potentially go elsewhere in Indonesia? Thank you.

Speaker 2

Yes. I think the KTP actually is very close to Singapore as well. I mean, if you look at it, it's around 10 kilometers from our NTP, right? 10 kilometer. So it's a typical, I mean, fit For the a lot of hyperscale guide, which is cloud guide or some hyperscale deployment structure.

Speaker 2

So the good thing and the beautiful thing is that it's very close to simple. Latency is not an issue and also very 10 kilometers away from our current NTP. So this is perfect to can allow a lot of our customer, fit a lot of our customer, The point is IT in Singapore, KTP and MTP. So We are working very close with a lot of potential customers. This structure is perfectly fit their future demand.

Speaker 2

Yes. But tell me, so we have made a lot of progress in terms of construction, and we saw a lot of potential demand On our hand, so currently, we are working on a lot of the potential demand. So we believe this is a sale of the patent is not a big issue for us. So I think now because Bataan has a unique position. Number 1, it's not only serve the region, they also serve Fully recognized by the Indonesia domestic market and also the power Cost is lower than any location in Southeast Asia and potentially the renewable energy We're coming soon to come we will in the future, we will combine renewable energy and low power costs And so more broad region, this is a very unique position for the whole region.

Speaker 2

So we are very confident to get a lot of demand for a bedtime data center. Okay. So INA is a very good partner, as I mentioned. I think the because they are very, very actively to help GDS Set up more advantage in part time and help us to introduce a lot of renewable energy per year In this region and also they help us to find a lot of the potential data center sites In Jakarta as well. So we are very appreciative.

Speaker 2

They are real value added partner. I think in the future, they can add more value In terms of the bring us to the some SOE customer and also the government's So I think we are looking forward to look more closely with INA. Thank you.

Operator

Thank you. Now we're going to take our next question. Just give us a moment. And the next question comes from the line of Yang Liu from Morgan Stanley. Your line is open.

Operator

Please ask your question.

Speaker 5

Thank you. My question is regarding the moving outlook because we see a pretty big Delivery of the overseas project in Q3, should we expect starting from Q4 or maybe Q1 next year, we will see Q on Q improvement of moving speed. Thank you.

Speaker 2

Yes. I think Yan Liu, I think you're right. I mean, we have very good due term with our overseas customer, right? So I think the from the Q4 and the next few quarters, the ramp up is we are very Happy this ramp up speed, right? So I think you will see that the overseas will contribute more, right, in our next year.

Speaker 3

Yes. So in the 3rd quarter, we look net of churn It was 16,000 square meters, which is higher than it's been for last 5 or 6 quarters. Okay. The international started to make a contribution there. I did mention that in the Q4, there will be Another portion in which there is some exceptional churn.

Speaker 3

That's the completion of what we've been talking about Over the last four quarters, nonetheless, I think the net additional area utilized in the Q4, net of that churn will be higher Yes, than what it was in the Q3. And next year, I expect it to be Significantly higher than what it is on a net basis in 2022 3. Yes.

Speaker 5

Thank you. I just want to make sure that the previous single customer churn will And in 4Q this year, right?

Speaker 3

That's right. If I just take this Opportunity just to give some statistics about churn. We talk about it in terms of square meters of area utilized. It's easier to track it that way. We think that our normal churn rate Going forward, we'll be around 4% of area utilized, maybe 4% to 5%, Which I believe is low by global benchmarks.

Speaker 3

In past years, it was 2% to 3%, but given the evolution of our business, it's natural, I think, to expect that to be higher. In the current year, I think the total churn will be around 28,000 to 29,000 square meters, Which is around 7.5%. So it's clearly higher and the difference is What we call exceptional churn, the redeployment is actually the majority of that. Yes, this will happen from time to time, and it can set us back. In the short term, it can affect our growth rate by Small amount.

Speaker 3

But as it so happens, the redeploying customer has placed new orders with us, which are 1.5x, the amount which they've terminated. So in effect, it's 1 step back and 1.5 steps Forward, albeit with a timing difference. Hopefully, That will be complete and we will hopefully revert to just what I described as a normal level of churn.

Speaker 5

Thank you.

Operator

Thank you. Now we're going to take our next question. Just give us a moment. And the next question comes from the line of Frank Louthan from Raymond James. Your line is open.

Operator

Please ask your question.

Speaker 6

Hey, guys. Good morning. This is Rob on for Frank. Are you seeing any demand for liquid cooling based servers? And if so, who pays the extra capital costs required for that?

Speaker 6

Do you guys pay it and adjust Pricing or those the customer contribute some capital? Thank you.

Speaker 2

Yes. I think we are as I just mentioned, we are we deployed it's not first of all, I think the Nickelodeon we already Deployed a couple of years ago in China already, right? We are very familiar with this technology. So we also I just mentioned that we are Deploying our NTP-1, right? So our customer also

Speaker 3

So

Speaker 2

given the future, I think for the AI guys, these were very Normal and but not everybody every AI customer use the reco cooling. It depends the difference customer has different required profile. But number 1, we are very familiar with that. Number 2, I think the cost in terms of cost, it's in our view, It's not significantly different, right, than what we viewed before for the normal case, right? So I think, of course, if costs increase, we definitely will charge from our customers, Which we already got a mutual agreement with our customer.

Speaker 2

So this will not impact any of our return.

Operator

Thank you. Now we're going to take our next question. Just a moment. And the next question comes from the line of Sarah Wang from UBS. Your line is open.

Operator

Please ask your question.

Speaker 7

Thank you for the opportunity. I have a question on overseas business, especially for the Johor campus. Besides China customers, shall we expect meaningful new orders from either international customer, cloud customers or local customers? It's actually given there are a lot of other data center operators announced meaningful pipeline in the region. So how shall we think about the

Speaker 2

So number 1, we are targeting all kind of customer. Our sales team working on domestic demand, international demand and also China demand. So we are we don't care who's customer, customer is customer, Right. So I think but we believe what you call campus 2 campus, Including new future campus KTP, we definitely we are confident to gather the combination of the customer, Just like what we did in Hong Kong already, right? So I think this will not be the issue.

Speaker 2

We will not just We target all, right? So and we believe GDS sales and our product Well, welcomed by the all kind of customer as well. So in terms of the competition, I think, yes, we have We compete with everybody in China for 22 years. We don't afraid of competition, which we like the competition. I think GDS, we will grow from a lot of the competitor, right?

Speaker 2

So I think it's good. And that's why if you we already demonstrate even in a very, very competitive market in China in the last 20 years, We're getting a number one position, right? This is where we are so we are not think about what's our Competently, they can do everything, but we believe we will win in every market.

Speaker 7

Got it. And then is there any additional color on the 12 new bookings for next year? Should we should they be higher than This year, especially given that your core can continue to ramp up?

Speaker 2

You mean international market? Maybe a formal, before?

Speaker 7

Yes, overall and then maybe

Speaker 5

if

Speaker 7

there's additional cover on overseas contribution.

Speaker 3

Yes. Yes. So actually, we take this in 2 parts, right? For China, over quite a few quarters now, we've made it clear that we are not Targeting a high sales volume. We're targeting a particular kind of business, which matches the inventory that we have where there's a fixed moving schedule faster than what we experienced before and of course reasonable Pricing, so we do any amount of business that meets those criteria.

Speaker 3

We don't forecast Any change in China market conditions, our own internal business plan just assumes continuation of the current run rate. We're not crystal ball gazers, so we don't build in any kind of assumptions about changing market Conditions, but of course, we are very well positioned to respond to any change. On the international side, I think the sales next year could be higher than this year. This year, including the 2nd data center in Hong Kong, if we were able to Conclude that presale, pre commitment during the Q4, then the gross bookings for international will be about 20,000 square meters over the course of 2023. And we hope to at least start again next year.

Speaker 3

Yes. The order size has been very large on the international side. So it's hard to predict because Yes, one order can make a huge difference. So it's not a widely dispersed Book of orders, but it's a small number of very large orders.

Speaker 7

Got it. Very clear. Thank you.

Operator

Thank you. And now we're going to take our next question. And the next question comes from the line of Michael Elias from TD Cowen. Your line is open. Please ask your question.

Speaker 6

Great. Thanks for taking the questions. 2, if I may. First, on the demand side, as we think about Mainland China, Would it be possible for you to create or provide a framework for how you're thinking about the evolution of demand in Mainland China? Specifically, you talked earlier about it seems like there are some digestion that's happening in the market.

Speaker 6

But could you talk about your conversations with your With the cloud customers and essentially what it's indicating is driving the slowdown in the demand there. Then my second question would be, As we think about getting ready for the AI opportunity, what is the standard density, power density to which you build your current data centers? And then as part of that, as you consider the AI deals that are on the market, what is the density that those workloads are running at? And to your earlier point, do they require liquid cooling? Any color there would be great.

Speaker 6

Thank you so much.

Speaker 3

First one was about what's holding back demand in China? What's one of the cloud customers?

Speaker 2

Okay. Okay. I think there's a couple of things. The cloud players in China, I think now they adjust their strategy. I mean, they are more pursue quality Of the revenue, I mean, not just the quantity.

Speaker 2

So this is, I think, in the mid term and long term, it's very good for data center per year because historically, The distribution number, including a lot of the stuff like ECN, like network, or they call it integrate That's a crowd. So the number is big, but also it's some system integration. But what I what we know is that those guys Start to focus on the growth and real public cloud computing revenue, Which we believe this is the right strategy and will given the time, they will Growth their revenue properly and will drive the more high quality data center demand in the future. That's what we see that this is a revolution from our customer. So I think this is we'll get in the future, We'll create more healthy data center demand for all the industry.

Speaker 2

This is number 1. On the other hand, I think the AI is a Hot topic in China already for a while. And China already announced a large language Model permission, right? So but still in terms of timing, I think, As I mentioned, it's still a little bit early because the developing schedule is behind the U. S.

Speaker 2

So what we've already seen is the global data center driven by the all the U. S.-based Large language model, this is not happening in China, but it's coming. So I think So still need time, but in China, still have another issue is a supply chain issue in terms of the chips. So I think this need maybe 12 months, maybe 18 months to solve the order issue. So what I expect is this will happen in 1 year or 1 year half, maybe in a big wave.

Speaker 2

The second question is the power density. Of course, I think GDS is always leading the power density product in China. If we look back to 10 years ago, our first data center, we build a travel triple high density than anyone In the market, right. So we are very follow-up to global trend and IT trend. So our Last couple of years, we started to build very high power density.

Speaker 2

Average power density is 8 kw per rack before last couple of years. Now we also increased to 10 to 15 PW per rep, that's average number, Which means we can serve 40 kW per rack is no issue for us. And again, I would say not only per rack power density we increased, also we increased each New campus power total capacity. This is where good we're well positioned to response to all the AI demand in next few years. So we are ready for that.

Speaker 6

Thank you. Very helpful.

Operator

Thank you.

Speaker 1

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

Operator

This concludes this conference call. You may now disconnect your line. Thank you for your participation. Have a good day.

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