GDS Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
May 25, 2023

There are 9 speakers on the call.

Operator

Hello, ladies and gentlemen. Thank you for standing by for the GDS Holdings Limited First Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen only mode. After management's prepared remarks, there will be a question and answer session. Today's conference call is being recorded.

Operator

I would now turn the call over to your host, Ms. Laura Chen, Head of Investor Relations for the company. Please go ahead, Laura.

Speaker 1

Thank you. Hello, everyone. Welcome to the Q1 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 which we will refer to during this earnings call can be reviewed 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 and uncertainties is included in the company's prospectus as filed with the U. S. SEC. The company does not assume any obligation to update 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 measure information as well as unaudited non GAAP financial measures. CDA'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 GDS's Founder, Chairman and CEO, William Huang, please go ahead, William.

Speaker 2

Okay. Thank you. Hello, everyone. This is William. Thank you for joining us on today's call.

Speaker 2

Before I review the 1Q 'twenty three results, I would like to take a few minutes to highlight our strategic Priorities

Speaker 3

for the

Speaker 2

next few years. What are we focused on? What are we trying to achieve? These priorities will be benchmark for tracking our ongoing performance. The roots of our business are in Mainland China, but in the past couple of years, we began to expand overseas.

Speaker 2

The two regions in which we now operate, mainly China and international, are at different stages of development. Therefore, we have set different priorities for each region in order to achieve the best outcome for our shareholders. In Mainland China, we have grown our business over 20 years through several distinctive phases to become the leading carrier neutral data center platform. In the most recent phase of growth, as demand from car and Internet took off, Our priority was to win new business. We achieved an unprecedented level of new bookings, Establish the strategic relationships with all the leading customers and increase our market share.

Speaker 2

Our resource strategy was a key success factor. We invested heavily in building up our asset base in all Tier 1 markets in order to fulfill our customer requirements. 5 years ago, we had 20 data centers. Today, we have over 100. We believe it's the largest development program undertaken by any data center company globally.

Speaker 2

In addition to the existing asset base, we secured the land and energy quota to maintain continuous supply and growth for many years to come. Now the market in Mainland China Is going through a period of adjustment. We are in a new phase and we have reset our priorities accordingly. Our number one priority now is to deliver this RMB 6,000,000,000 backlog, which is a result of our past sales success. It is sufficient to drive our revenue growth by over 60% over the next few years.

Speaker 2

Number 2, as we have already won many years of future business, We will be highly selective in pursuing new orders. We will target Opportunities which are strategic, a good fit to our available capacity, Fast moving schedule and adapted financial returns. Number 3, We will prioritize increasing utilization of existing assets. We have a large asset base, both in service and under construction, which is committed by customers, but not yet utilized. As a result, we can deliver the entire backlog with a relatively small amount of incremental CapEx.

Speaker 2

This enables us To achieve our growth targets while reducing annual CapEx to RMB 2,000,000,000 to RMB3 1,000,000,000 going forward. Number 4, We will only initiate new projects if there is committed demand with confirmed moving schedule. We expect most of our new projects will be expansion phases of existing sites. Number 5, building on our success with passive wave of cloud and Internet demand. We will position our products and technology to capture the coming wave of AI applications.

Speaker 2

For international, our priorities are winning new business and the Building Market presents: Number 1, we aim to divest our international business into a second growth engine, which creates significant additional value for GDS shareholders. Number 2, we will anchor and derisk our projects with orders from our home market customers as they expand overseas. Number 3, we will also win significant business from top Global customers, many of which are established relationships in China. Number 4, We will take advantage of our low unit development costs, which comes from our scale, product and the supply chain in China. Number 5, we will build a standalone business in our international holding company headquartered in Singapore, while maximizing synergies with GDS Mainly China.

Speaker 2

In 1Q 'twenty three, our gross new bookings was around 12,000 square meters, split evenly between Mainland China and International. Market demand in Mainland China over the past few quarters has been a bit soft. This is mainly because large customers who committed to a scalable capacity We'll need more time to absorb their inventory. In this environment, As I just explained, we are targeting high quality business, which meets our criteria. A good example

Speaker 3

is the

Speaker 2

4,600 meter or 9 Megawatt order which we won For Shanghai 2018, the customer is a major Chinese financial institution. The pricing is reasonable And the underlying asset is an expansion phase of our existing Tujiang campus. On the international side, we won a 6,400 Square Meters or 26 Megawatts Expansion order from the anchor customer for our campus in Nosajaya, Tech Park, Johor. You may recall that we are already building 3 data center on-site 1 With total IT power capacity of 64 Megawatts, which is fully committed by this customer, We started to construction less than 1 year ago on Greenfields land. We are using our Prefab design and the product shifted directly from China.

Speaker 2

We are incorporating liquid cooling for part of the capacity as required by the customer. Despite the fact that this is our first project in Southeast Asia, We will deliver the 1st fully powered data center on this site in early 3Q23. We estimate that our unit development cost is 20% lower than the local market. The ability to construct so quickly and as much as such a low cost give us compelling competitive advantages as we expand in the region. Our gross moving for the Q1 was around 13 1,000 Square Meter, which is consistent with the level of the past few quarters.

Speaker 2

Our customers are sounding more positive about their business outlook. With new business initiatives and the strategic development, As their business picks up, it will flow through to us 1 or 2 quarters later in terms of faster moving. To adjust to the current environment, we have slowed down our Capacity expansion. In 1Q 'twenty three, we brought 2,700 square meters of new capacity into service. Over the rest of the year, we plan to bring a further 57,000 square meters into service, Split between Mainland China and International, all of this capacity has solid customer commitments and confirmed moving schedules.

Speaker 2

As a result of our efforts to adjust the pace of development, Our utilization rate has gone up from 67% to 72% over the past year. At the same time, our backlog for area in services has come down from 136,000 square meters to 110,000 square meters. Our Mainland China business is going through a 3 year journey to achieve our goals. We are making progress quarter by quarter. We have already done the difficult part, which is Please stay a little patient and watch us deliver.

Speaker 2

Our international business is That's a different story. There is a great market opportunities on our Doorstep and we know how to win. I'm excited about the prospects for us To create second of GDS, before I hand over to Dan, I would like to make a few comments about my personal position. After we published the AGM notice a couple of weeks ago, I acknowledged that investors have a number of concerns. GDS was born out of my vision more than 20 years ago.

Speaker 2

I have built an exceptional team, which has been a major success fact. For me, leading GDS is about much more than just financial gains. It is driven by a passion to create something extraordinary. This dedication remains unwavering, And I assure you that nothing has changed in this regard. I want to take this opportunity To address these concerns and emphasize my commitment to our company, I intend to purchase approximately 1,000,000 ADRs and the possible more over the next 12 months if I'm able to do In addition, if the AGM proposal is a pass, I commit to the sustaining my ownership percentage above the new stretch of home.

Speaker 2

I firmly believe that our current share price does not reflect the true value of our company. I have complete confidence in our ability to enhance our business performance and achieve sustainable growth. Thus create significant value for our shareholders. Now I will pass on to Dan for financial and operating review.

Speaker 4

Thank you, William. I would like to start by talking about our financial objectives, which mirror what William said about our business priorities. For Mainland China, number 1, we target to grow adjusted EBITDA At a mid teens percentage CAGR by delivering the backlog. Number 2, we will become free cash flow positive, by which I mean free cash flow before financing within 3 years. There's already high visibility as to how we will achieve this goal.

Speaker 4

Number 3, we will cap net debt at around current levels and target deleveraging to below 5x net debt to adjusted EBITDA. Number 4, We will monetize assets to the extent required to recycle capital and keep within these financial parameters. And number 5, we will sustain project level unlevered post tax IRRs of 10% to 13% by keeping discipline about new business and resources. For international, 1, we will pursue a low risk investment strategy based on firm pre commitments 2, we will target the same investment returns on a portfolio basis as we do for Mainland China. Number 3, we aim for international to contribute over 10% of our consolidated adjusted EBITDA within 3 years.

Speaker 4

Number 4, we will take a segregated approach to financing, raising external equity and debt on a dedicated basis and not rely on the capital reserves of GDS Holdings. And number 5, lastly, We will create additional value for GDS shareholders in a way which is measurable and helps our share price. Now I'll talk through our financial performance for the quarter. Turning to Slide 20, where we strip out the contribution from equipment sales and the effect of FX changes. In 1Q 2023, Our service revenue grew by 0.2 percent and underlying adjusted EBITDA grew by 6.6% quarter on quarter.

Speaker 4

Turning to Slide 21. Net additional area utilized during the quarter for 6,085 square meters. As we disclosed previously, a large customer Is redeploying around 17,000 square meters from our data centers in Beijing to 2 of our campuses in Lanfang, Hebei province. The move out impacts us for the 1st 3 quarters of this year. Thereafter, the customer will move into the new locations over about 6 quarters.

Speaker 4

In totality, There will be a net increase of area utilized by this customer, but with a timing difference. If we add back the churn in 1Q 2023, the underlying move in rate was similar to previous quarters at around 12,600 square meters. We expect gross additional area utilized To continue at these levels in 2Q and 3Q 2023 and then to step up significantly in 4Q 2023 as we have contracts with fast to move in. Monthly service revenue per square meter was RMB 2,149 in 1Q 2023. We expect MSR to decline by around 4% comparing the final quarter of this year with 4Q 2022.

Speaker 4

Turning to Slide 22. For 1Q 'twenty three, our underlying adjusted gross profit margin was up from the prior quarter by 1.4 percentage points, and our underlying adjusted EBITDA margin was up by 2.8 percentage points. At the GP level, this was mainly due to seasonally lower utility cost. At the EBITDA level, there was also some savings in SG and A. Our profit margins are going to fluctuate over the course of this year.

Speaker 4

Our guidance implied around 45% full year adjusted EBITDA margin at the midpoint, which has not changed. Turning to Slide 23. In 1Q 'twenty three, our organic CapEx in mainline China was around RMB 1,400,000,000 And international CapEx was RMB 600,000,000. Looking at our financing position on Slide 24. At the end of 1Q 'twenty three, our net debt to last quarter annualized adjusted EBITDA ratio was 8.1x.

Speaker 4

If we add back the cumulative investment in international of around RMB5 1,000,000,000 or US700 $1,000,000 The ratio is below 7 times. Our effective interest rate for 1Q 'twenty three dropped to 4.3%. In January of this year, we issued a US580 $1,000,000 CB. As a result, our cash balance increased to RMB10.2 billion or US1.5 billion dollars at the end of the first quarter. In a few days from now, we expect to repurchase US300 $1,000,000 of an existing CV when it is put, which will leave our pro form a cash position at around RMB 8,200,000,000 or US1.2 billion dollars Over the remainder of 2023, we have RMB 2,400,000,000 of project loans to repay.

Speaker 4

We expect to draw down a similar amount of new project loans. Looking further ahead, In 2024, we have RMB3.6 billion of project loans to repay. However, As a result of refinancing, which we are currently working on, we expect to reduce this number to RMB 2,100,000,000. Once again, in 2024, the amount of debt repayment will be more or less equal to the amount of new drawdowns. Looking at our capital structure plan for Mainland China on Slide 25.

Speaker 4

As I mentioned, We target to cap net debt at around current levels over the next 3 years. We will, in effect, finance new investment through a combination of operating cash flow and asset monetization to the extent required. Our operating cash flow will strengthen with higher asset utilization And reduced input VAT as a result of lower CapEx. To give an update on the China Data Center Fund, We have signed the limited partnership agreement with the investor. We're now in the process of refinancing the first project, which we intend to inject into the Fund.

Speaker 4

We expect to receive the net cash proceeds from the Fund of RMB 1,450,000,000 on completion of the first asset injection in the middle of this year. Turning to Slide 26 for international. We currently have 6 data centers under construction, 2 in Hong Kong and 4 in Johor. The portfolio totals over 120 megawatts IT power capacity with over 100 megawatts of customer commitments. The cost to date is around US700 $1,000,000 which we have financed with around US400 $1,000,000 of paid up capital and shareholder loans and around US300 $1,000,000 of external debt.

Speaker 4

We have already put in place long term term loans for all of these projects. As I mentioned previously, we intend to raise additional equity externally either at the project, Country or international HoldCo level. We will pursue these options over the remainder of the year. Turning to Slide 27. We confirm that our guidance for FY 2023 revenue, Adjusted EBITDA and CapEx remain unchanged.

Speaker 4

We'd now like to open the call to questions. Operator, please?

Operator

Thank you. Our first question comes from Gokul Hariharan from JPMorgan. Your line is open.

Speaker 5

Yes. Hi. Thanks, William and Dan for the comments. My question is on the New targets in China in terms of delivering the existing backlog. Could you talk a little bit about what is the Time horizon, is it in the 3 year period that you expect to deliver this backlog?

Speaker 5

And what are you hearing from your existing customers in terms of The ability to shorten the kind of time to move in from contract for some of this Some of the backlog and maybe also if you could talk a little bit about what would be kind of Where would you get to EBITDA margins? Are we going to stay at similar levels for EBITDA margins in the channel business? Or you see a higher level as we We'll do a bit more of a harvest mode for the

Speaker 4

China capacity. Thank you. Yes. Thank you, Gokul. Let me clarify the financial targets.

Speaker 4

So the base year is 2023. And for most of the financial targets, we're talking about 3 years, plus or minus a few quarters. So for the mid teens EBITDA CAGR for free cash flow positive, Deleveraging to below 5x and incidentally net income positive. We're talking about 3 years. For the delivery of the backlog, we didn't put a time frame on that because it's a little bit meaningless as we We'll still have some new booking to be added to that.

Speaker 4

So it's a continuous process of Adding new bookings and delivery. But in this year, I think, on a Net basis, with the churn that we talked about, The net additional area utilized will be around 50,000 square meters. Next year, we expect that number to be probably 20,000 square meters higher than that. It's not that's our business plan base case. You want to talk about In the more short term, what we're seeing moving, William?

Speaker 4

Yes.

Speaker 2

As a Google, I think it's too early to say this will A lot of positive signal will affect today's this year's revenue, but we do see some positive signal from the market. I believe you are aware our largest customer, currently they announced that they will split Call Business. And also we'll copy To list in any market, right? So in next 18 months. And this is very positive for me.

Speaker 2

I think this is and also the cloud China number 1, number 2, number 3 cloud all cut Their price selling price, which is also means they start to pursue market share. It's not like last year or last 2 years to support the business plan. That means very clear signal To pursue market share again. So I think it will definitely will impact to our move in. But So far, I think the whole sentiments have totally changed, but not affect our current it's too early to say affect our current movie.

Speaker 2

But I do believe it will affect our next year or next 2 or 3 years moving schedule. I wish and maybe it's possible They will bring the moving schedule more early.

Speaker 4

I just need to finish off and talk about the EBITDA margin expectation. So I think Once again referring to a 3 year target, I'd say we're looking for at least 2 percentage points higher EBITDA margin than we achieved in FY 2023.

Speaker 5

Got it. That's very clear. Thank you. Thanks, Dan and good luck.

Operator

Thank you. One moment for our next question. We have a question from Jonathan Atkins from RBC. Your line is open.

Speaker 6

Thanks. You talked a little bit about synergies that you'll be getting in your international operations from China and I think you've talked a little bit about shipping some of the equipment into Malaysia. Can you talk a little bit more about whether it's revenue synergies or back office or operating synergies or other Types of benefits that you will get between the core Chinese company and then offshore. And then secondly, I was interested in the demand profiles that you're seeing internationally, Different demand dynamics. I think you've got fairly kind of single threaded demand at least currently in Johor.

Speaker 6

And What does the perspective kind of sales pipeline look like internationally Is it Asian, is it Western customers, maybe a little bit more color on that? Thank you.

Speaker 2

Hey, John, this is William. I think let me talk about the synergy between In Asia's business and mainly China business. I think it's very obvious we can leverage this Our current product and supply chain and customer platform, this is quite unique, which I don't think the other player in this region This kind of advantage. So I think that's why we are very confident based on Our current advantage, we will follow-up our customer. We will follow-up Well, successful product in China, which I think we still very fully well developed the product, Right.

Speaker 2

And also the supply chain is very important as well. And I think because CDS already gathered Reached the points which we always build we're largest builder in the world in the last couple of years. I think this has given us very, very unique position to get in a much cheaper Supply Chain, right?

Speaker 4

Sales pipeline, for example.

Speaker 2

The pipeline, I think, Yes. I think it's now currently it's in the situation that all everybody talk about Southeast Asia, which is true. Southeast Asia has a Huge demand, right? Because if you look at it, a Chinese customer or a U. S.

Speaker 2

Customer, they all announced Big plan in this region. And so this is not just an announcement Based on what's our dialogue between all TDS and all our customer, You do have the real demand in this region. So in terms of pipeline for us, I think We still remain a very strong pipeline from China and also U. S. Customer.

Speaker 2

Again, as we see, we also see some domestic demand.

Speaker 6

Thanks very much.

Operator

We have a question from Frank Louthan from Raymond James. Your line is open.

Speaker 6

Great. Thank you. As you look forward, what percentage of your Installs and sales you think are going to be AI related? And can you characterize the AI demand that you're seeing between the Mainland China business and the international deployments? Thanks.

Speaker 2

Yes. I think number 1, I think in China, I think we see it's a little bit early stage For AI driven demand, right? So but it's happening right now. I think the in China, the big Platform all announced it already announced their AI stuff. And but we think it will impact our new booking maybe 1 year after or 2 year after?

Speaker 2

It's a little bit behind what happened in U. S, but I think it will happen, Right. So this is in China. In all side international business, We have seen some, let's say, new demand Configuration is more AI driven. So let's say, we would I already mentioned in our Southeast Asia Data center, we already implemented liquid cooling stuff.

Speaker 2

This is mainly driven by the GPU type of server. So I think this is mainly for the AI stuff. It's happening in Southeast Asia already.

Speaker 6

All right, great. Thank you very much.

Operator

Thank you. We have a question from Peter Milliken from Deutsche Bank. Your line is open.

Speaker 3

Yes. Hi. Good evening, everybody.

Speaker 7

My question is about the forward sale. When was that first disclosed? Was it in the 2022, 2020 F or had it been announced Previously, because I hadn't heard of it before.

Speaker 4

Peter, it was disclosed at the time Well, it's not one transaction, but they were disclosed at the time when the transactions were done. The Counterparty banks, which incidentally are amongst the largest banks in the world, were required to make Disclosures and duly did so. So that was 100% in line with the legal requirements. At that time, the system employed by the U. S.

Speaker 4

SEC was these disclosures were made In the so called paper filings. And some institutional investors, I think, subscribe to services who search paper filings And yes, access that information. But yes, as we know now, many do not. As a result, I think quite a few institutional investors who just kind of like lying on Bloomberg terminals. We're We're not aware of the disclosure.

Speaker 4

Ironically, in April of this year, the SEC changed their system. So those disclosures would have been made Electronically now and it would have been accessible in the usual way.

Speaker 7

Right. Yes. I'm sure the people who invested in the Secondary listing, I would have liked to have known that. Look, my second question is really about Why you wouldn't have prepared the bonds to be ready for this change of control event potentially? You've had a Few years where you've been aware of this, why weren't you talking to them about changing covenants and rolling debt and things like that?

Speaker 7

Why is it all why does it lead to the sudden point where investors have to make a quick decision on Agreeing to this change of control event.

Speaker 4

Peter, we operate in an environment where we make very extensive disclosures. Yes. Now, our Schools of Association states that if Williams ownership beneficial ownership falls below 5%, then if Class B shares automatically converted to Class A shares. I think everyone's known that as the Risk Factors in our 20 F. And I think since the completion of our Hong Kong IPO, William's shareholding has been just above that threshold, and it could have gone below that threshold For any number of reasons.

Speaker 4

If we'd issued only a relatively small number of shares And the capital rates, for example, his ownership would have gone below that threshold. So I mean, this should be Very clearly understood, right? It's simple disclosure. Yes. We need to make some changes to our articles Subsequent to our Hong Kong IPO is something that all the companies in our category U.

Speaker 4

S. ADR companies with secondary listings had to commit after the Hong Kong IPO to implement certain changes to the articles. And so we felt that it would be Convenient or appropriate to package together all the changes to the articles at the same time in our Annual General Meeting, which Yes, which is what we're proposing to do.

Speaker 7

Got it. Okay. Thank you.

Operator

We have a question from Edison Li with Jefferies Group. Your line is open.

Speaker 3

Thank you for taking my questions. Hi, William and Dan. I have two questions. Number 1 is that one of your objectives At the early part of the PBT, you are trying to shorten the lead time from investment to move into less than 2 years. Is that what is the average period right now?

Speaker 3

And what is your strategy to try to shorten that to less than 2 years? And the second question is about how what percentage of your backlog for area in surface is going to hit that completion of the ramp up period In the next, I would say, let's say, within 2023?

Speaker 4

I missed the second part of the question, sorry.

Speaker 1

How much of the backlog

Speaker 3

The second question is what percentage

Speaker 4

Sure. Thanks, Ed. I'll go first. I think it's a characteristic of Hyperscale business because the order size is very large. Customers need to Pre commit in order for data center companies to develop.

Speaker 4

And Yes, they commit for like an entire data center. But it's pretty much standard for these contracts to Give the customer quite a lot of flexibility over the amount of time that they move in. I think the How service providers because their requirement is for continuous upscale. I think that they, in past, planned furthest ahead. Maybe The resource plan was 3 or even more years ahead of time.

Speaker 4

And they, in our experience, habitually took the longest to move in, right? So the contracts would Give them 2 years and they would actually move in over a 2 year period. Now that has extended to beyond 2 years. The Internet companies, quite often, we would see that They were not placing the orders so far ahead. Very often, the requirement was urgent, Maybe because their business was so dynamic and their forecasting was not so well established.

Speaker 4

And so a key selection criteria would be can you deliver in 6 months' time or can you deliver in 9 months' time. And then While the contract would typically still have a 2 year move in period, I would say, on average, the Internet company has moved in moving faster. Maybe they're moving more like 1 year. So as you know, last year, the mix of our business by Customer segment changed quite a bit. Cloud, which has been, I think, as high as like 70% or More percent of our business is 20% in terms of our new business last year.

Speaker 4

And then Internet was 60% and enterprise

Speaker 2

2020.

Speaker 4

So I think just that change in itself will lead to faster delivery. But if you look at the totality of our backlog of over 200,000 square meters, I think well over 50% of that backlog is cloud. And so that's why we have to work through the delivery of the backlog. But then for the new What we're targeting now, we expect to see a shorter The total lead time from when the order is booked until the service delivery starts and then a shorter moving period.

Speaker 3

That doesn't mean that You are going to ask for a shorter move in period even for the traditional CSP customers? Or do you think you will try to expand Customers in more into the non CSP customers?

Speaker 4

Are we going to try to I guess, between as a contractual term, Yes. It's just on a faster moving period for cloud service provider customers. Yes.

Speaker 2

I just mentioned

Speaker 4

that So your plan Yes. We Sorry, go ahead.

Speaker 2

Yes. I think the Moving past, we expect the of course, the new bookings last year, the new book mainly driven by the Internet comp. I think more fast moving than cloud. But The car business last year is last 2 years is I just mentioned it's paused their business plan, right? But now They boosted their new business plan right now, but I think I hope I wish maybe it will happen possibly they will move more faster start from next year.

Speaker 2

So I think the I'm quite positive for this.

Speaker 3

Sorry, I just need to ask this follow-up. So does it mean that For new contracts with cloud service providers, they will actually ask for less than 2 year move in?

Speaker 2

New contract? No, can't you? I think it's much faster than 2 years. No, can't.

Speaker 4

No, no, no. As I was asking specifically whether The business we do with cloud service providers, we will insist on a fast moving period. Is that right?

Speaker 1

With CSP.

Speaker 2

New contract would be it.

Speaker 4

Yes.

Speaker 2

Yes. I think new contract If we have the new contract, that means they have the real demand. So definitely, they will ask for more ready to move in, right? Otherwise, these still have a lot of inventory, right? If we have the new country from the cloud, that means their demand is Much stronger than they expect.

Speaker 3

So can you tell us What are you going to ask for 1 year, 1.5 year, is there any particular target that you have here?

Speaker 4

As you're asking about the situation that hasn't arisen yet. I mean, we've got More than 50% of our backlog is already the terms already agreed. And if you look at the size of our backlog relative to our annual move in, you So it's at least 3 plus years of new business there, right? So I think we already locked in most of the commercial terms for the next 3 or 4 years, new business. And I think we'll probably see not more than 20% of our new bookings and Will be cloud going forward.

Speaker 3

So I guess that is related to my second question, right, because I want to know what percentage of your backlog For Area and Surface, we'll actually be completing that ramp up period because I want to get a sense as to Whether you are vulnerable to this completion period actually being extended, right, because of the slow movement and how much would that impact You're ready.

Speaker 4

Ed, I think it's simpler. I mean, I provide Some guidance, not formal guidance and direction on what is the annual net add in terms of area utilized. I commented on What we expect to see in 2024 as well. So I'm factoring in what I know bottom up in terms of what's in those contracts What we understand about our customers' intentions is probably A simpler approach is to take my direction because I'm amalgamating all a lot of different factors.

Speaker 3

Right. So would there be situations where because it hits a 2 year ramp up period, so even if the Capital or the square meter utilizes below the committed rate, you will be able to charge The full price or that's certainly going to happen?

Speaker 4

Yes, we are able Yes, that's a commercial decision, right? We are able to charge the full price.

Speaker 2

Yes, that's true.

Operator

We have a question from Yang Liu with Morgan Stanley. Your line is open.

Speaker 4

Thanks for the opportunity.

Speaker 8

I have one question regarding the MSR I think Dan just mentioned that you expect a 4 percentage point drop by the end of this year. I just want to have a better view about how much of that will be driven by The mix change of company's new capacity, I know how much will be driven by potential contracts renew Because I saw in the back section of the presentation, you have around 10% contract about to renew this year. So does this MSR change or what is the assumption of the contract renewal in here behind the MSR drop. Thank you.

Speaker 4

Yes. Once again, this is a bottom up number, which is an amalgamation of The contracts and the backlog, which we expect to deliver and the outcome that we're expecting in terms of pricing On contract renewals and reflected all in the guidance we gave as direction to give on MSR, which It's a 4Q versus 4Q number. And by the way, I'll go further and say in 2024, we think that MSR Decline will be about around 2% to 3%. So it's simpler to Take my direction rather than asking to sort of disaggregate it into all the parts, right? We follow what's happening in the U.

Speaker 4

S. And we see that pricing It is firmer increasing in some Tier 1 markets in the U. S. And in Europe. Yes.

Speaker 4

We're not in that situation yet in China. We think we may be 1 or 2 years behind that. But even at current levels, our projects give us, we think, reasonable returns relative to Cost of capital. And so I think the business is very sound at current levels. And we wait we will wait as the next 1 or 2 years Yes, hope to see the market situation improve slightly somewhat in our favor.

Operator

Thank you. As there are no further questions, I'd like now to turn the call back over to the company for closing remarks.

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 Bye bye.

Operator

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

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Earnings Conference Call
GDS Q1 2023
00:00 / 00:00
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