GDS Q2 2023 Earnings Call Transcript

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Provided by Quartr
August 22, 2023

There are 11 speakers on the call.

Operator

Ladies and gentlemen. Thank you for standing by for the GDS Holdings Limited Second Quarter 2023 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.

Operator

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.

Speaker 1

Hello, everyone. Welcome to the Q2 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.

Speaker 1

William Huang, GDS's Founder, Chairman and CEO, who will provide an overview of our business strategy and performance. Mr. Dan Newman, GDI's CFO, will then review the financial and operating results. Ms. Jamie Ku, our COO, is also available to Before we continue, please note that today's discussion will contain forward looking statements made under the safe harbor provisions of the U.

Speaker 1

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 uncertainties is included in the company's prospectus as filed with the U.

Speaker 1

S. 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'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.

Speaker 1

I'll now turn the call over to GBS Founder, Chairman and CEO, Mr. William Huang, please go ahead, William.

Speaker 2

Thank you. Hello, everyone. This is William. Thank you for joining us on today's call. During the Q2, we continued to focus on our strategic business objectives.

Speaker 2

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're only initiating new projects based on Firmly commitment 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.

Speaker 2

We are leveraging our competitive Advantages in cost and speed of execution. We are financing expansion without relying on GDS balance sheet And we will benchmark variations through external By pursuing these objectives, we will strengthen our financial position and unlock Value for TDS shareholders. As we review our performance quarter by quarter, We will measure our progress against these targets. Turning to Slide 5. In the first half of twenty twenty three, our gross additional area committed was around 28,000 square meter, 55% from China and 45% international.

Speaker 2

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 won great new business, which lifts us our growth. For the second half of twenty twenty three, We expect gross new booking at a similar level to the first half.

Speaker 2

Looking further ahead, There is no doubt that demand will rebound in China. Data center supply in Tier 1 markets has been restricted for several years. As demand strengthens, we will be well positioned with our secured pipeline. Turning to Slide 7. In 2Q 'twenty three, we won 3 notable orders.

Speaker 2

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 a 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.

Speaker 2

Turning to Slide 8. Our gross margin for the 2nd quarter was around 15,000 square meters. This is consistent With the quarterly run rate for the past 2 years, in the second half of twenty twenty three, We will start to see significant moving from international. As a result, our quarterly gross adds will be higher than in prior quarters. Turning to Slide 13.

Speaker 2

We are bringing new capacity into service when customers are ready to move in. In the first half of twenty twenty three, we brought 15,000 square meters into service, almost all in China. In the second half of twenty twenty three, we will bring another 50,000 square meters into service, 30,000 square meter in China and 20,000 square meter international. All of this capacity has confirmed moving schedules. Turning to Slide 60.

Speaker 2

We recently held an opening ceremony To deliver our 1st data center at Nosajaya Tech Park, Johor. 14 months ago, This was an empty piece of land. Today, you can see 3 large data centers, One of which is for AI computing, which with 70 megawatt of IT power capacity in total. Our ability to deliver so quickly in the new overseas markets says a lot about our execution capability. For this project, we use our proprietary Prefabricated liquid cooling and power modules.

Speaker 2

It'll give us time to market and the development cost advantage, which are critical success factors in today's market. When we set up in Johan, Our vision was to establish the Seyuri data center hub to serve the region by integrating Johor, Batang and Singapore. We are therefore delighted to be selected by the Singpol government alone with 3 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 Batam, we continue to make progress With establishing the essential infrastructure for our proposed development, Our international expansion is gaining momentum.

Speaker 2

I will now pass on to Dan for financial and operating review.

Speaker 3

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 CAGR. We are reducing organic CapEx to an annual level of RMB 2,000,000,000 to RMB 3,000,000,000 from next year onwards.

Speaker 3

We will be free cash flow positive within 3 years or sooner with the benefits of asset monetization. And we will bring down net debt to adjusted EBITDA to below 5 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 3 years. We are taking a low risk approach, only investing with the backing of firm customer orders and achieving similar returns to China.

Speaker 3

We will raise equity capital directly at the international level And project finance on a nonrecourse basis. Turning to Slide 19. In 2Q 2023, we grew revenue by 2.6% quarter on quarter And adjusted EBITDA by 9.3% quarter on quarter. During 2Q 2023, We recognized onetime service revenue of RMB 70,700,000 arising from early termination of 3,000 square meters from the backlog and cash reimbursement of RMB 22,100,000 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.

Speaker 3

During 1H23, we achieved net additional area utilized of 12,000 square meters. While gross add was sustained at historic levels, net add was impacted by a single customer redeploying between our data centers as previously disclosed. This redeployment will continue into the second half of twenty twenty three. However, With contribution from international, we expect net additional area utilized to step up significantly. Multi service revenue per square meter was RMB 2,170 in 2Q 2023.

Speaker 3

Excluding the one time service revenue arising from early termination, MSR was RMB 2,108 per square meter, a decrease of 1.9% versus the previous quarter. Comparing 4Q 2023 to 4Q 2022, we still expect An MSR decrease of around 4% over the course of this year. Turning to Slide 21. For 2Q 2023, our adjusted EBITDA margin was exactly 50%. 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.

Speaker 3

In 3Q 2023, 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 4th quarter. Turning to Slide 22. In 1H23, our organic CapEx in China was RMB 2,200,000,000. We expect the full year to be in line with our guidance for RMB 3,500,000,000.

Speaker 3

In 1H23, our international CapEx was RMB1.2 billion. In 2H23, our international CapEx will increase to around RMB 2,800,000,000 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 2Q 'twenty three, our net debt to last quarter annualized adjusted EBITDA was 7.7 times.

Speaker 3

Excluding the debt and negative EBITDA of the international, The multiple was 6.7 times. During 2Q 2023, we repaid US300 $1,000,000 when a CB was put. As a result, our cash position decreased to RMB 8,200,000,000 or US1.1 billion dollars at midyear. 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 RMB 1,500,000,000.

Speaker 3

After the end of 2Q 2023, we provided around $400,000,000 of funding to our international group by way of paid up share capital and shareholder loans. In addition, International had occurred around $400,000,000 of external debt. We now intend moving ahead with the 1st round private equity capital raise. Turning to Slide 24. We confirm that our guidance for FY 'twenty three revenue, adjusted EBITDA and CapEx remain unchanged.

Speaker 3

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

Operator

Thank you, If you have more questions, please reenter the queue. Thank you. We are now going to proceed with our first question. And the questions come from the line of Yang Liu from Morgan Stanley. Please ask your question.

Speaker 4

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?

Speaker 4

And of course, whether you have a plan to spin off the whole international business?

Speaker 2

Okay. Thank you, Yang Liu. I think the strategy for Southeast Asia from day 1, We already have very, very clear view to build a data center in 3 major 1 is Singapore, 1 is Johan, 1 is Bakan Island. This is in our view is perfect structure for serve the current Requirement even for the future requirement. 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, the POP, whatever call.

Speaker 2

But these three We have also plan to link these 3 data center area together To serve to our customer as a platform. So I think this is will give us a lot of advantage In the future, compared with other competitors, we are the first one who owns On the data center in 3 areas. So this is perfect for our Future, let's say, marketing, right. So this is our Major focus is our core asset to get better in the next 5 years. But on the other hand, we're also looking for very preemptive to looking for some opportunity in Jakarta, KAO and also other countries opportunity.

Speaker 2

But again, I say This is we call it a security area will be our focus in the next 5 years. And we believe The demand is getting more stronger and stronger. So the future visibility is very, very high. The second question is a spin off. I think definitely, Dan, already last quarter, we already introduced it.

Speaker 2

We will focus on we will split the business to look at our business. 1 is China portion, 1 is international. The 2 market actually is in a different situation. In China, everybody may know that In the last 2 years, it's 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 and that's our business plan in next 3 years.

Speaker 2

But on the other hand, Since the AI coming in a very big way, so I think we have to We can leverage our 20 years experience and capability to catch up well catch up this opportunity. So In the international business, we will aim to grow more fast than in China business. So we needed more capital, but we don't want use more our holding capital to get back 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, yes.

Speaker 4

Thank you.

Operator

We are now going to proceed with our next question. And the questions come from the line of Jonathan Atkin from RBC. Please ask your question.

Speaker 5

Thank you. So I have a 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 Yes, maybe you could elaborate on between now year end that would affect 3Q, 4Q or even next year. And then secondly, Related to your Southeast Asia footprint, I wonder if

Speaker 6

you could maybe provide us

Speaker 5

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?

Speaker 3

Thank you, John. I'll start with the financial Question. So 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 2016. William, do you like to talk about demand in Hong Kong and the next Yes,

Speaker 2

I think the demand in Hong Kong still maintain the normal, right? I think the Every year's growth is around 70 megawatts. This is demand from the Different region, right, from China, also from U. S, from the other domestic customer as well. So it is nothing changed so far.

Speaker 2

So we are still on track, the market demand. Supply also knows a big 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 NUG is more hot For the all the data center players all the data center players, also for the all the customers.

Speaker 2

What we can see is A lot of the international player international cloud player also Internet giants, It all show more high interest level in Johan. So this has changed a lot, very encouraging us. So our target is definitely not just follow-up our customer, existing customer. We are definitely very interested To gather some new customer name from the different region to diversify our portfolio as Just like what we did in China, diversification is very important for us and we are good at that.

Speaker 5

And then lastly on Singapore, given the tightness of supply and the fact that you were 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?

Speaker 2

Yes. So far, we are I think there's 2 types of customers that we are interested. 1 is who will deploy their IT Industry region including Bataan, Singapore and Johor. It 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.

Speaker 2

So second priority Definitely, in Singapore, it's a 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 customer, 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. Thank you.

Operator

We are now going to proceed with our next question. And the questions come from the line of Frank Louthan from Raymond James. Please ask your question.

Speaker 7

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 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.

Speaker 7

Thanks.

Speaker 3

Thanks, 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 Q4, 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. And the move in rate for those contracts is Quite fast.

Speaker 3

In one case, a few months and another case, perhaps 1 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, yes. Our growth will pick up because of the additional contribution from these contracts, Particularly to all. So that will happen too late this year to make much difference to our financial results this year.

Speaker 3

But clearly, it will Contribute to higher year on year growth next year. So we look forward to that and obviously we'll reflect that And our guidance for next year when we come out with that.

Speaker 7

Okay, great. Thank you very much.

Operator

We are now going to proceed with our next question. And the questions come from the line of Sarah Wang from UBS. Please ask your question.

Speaker 8

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 to be more than 15% of EBITDA within 3 years.

Speaker 8

And then I recall December was around 10% during last earnings release. So just wondering if there's any

Speaker 3

We lost the hello? The release of the connection she dropped.

Speaker 8

Can you say is this only a topic? Hello?

Speaker 2

Hello? We missed Hello,

Operator

can you hear me?

Speaker 3

Yes, we can now.

Speaker 2

Can you repeat your question? We just missed it, sorry.

Speaker 8

Yes, sure. So I see the target for the overseas business to contribute 15% of EBITDA within 3 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 are being more optimistic? And then what's the like key like key points for us to be more optimistic.

Speaker 8

This is my first question.

Speaker 3

Yes. Thank you. Your observation is correct. We did revise up That number moving from 10% to 15% is significant, but in absolute We're not talking about 100 of 1,000,000 of dollars. We're talking about tens of 1,000,000 of dollars Higher forecast.

Speaker 3

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 We're 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 the GDS Holdings As a whole. So responding to that, try to provide some more disclosure.

Speaker 8

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.

Speaker 8

Thank you.

Speaker 2

Yes. I already bought the 50% of which I commit, right? So I still will continue to execute that.

Speaker 8

Got it. Thank you.

Operator

We are now going to proceed with our next question. And the questions come from the line of Timasizao from Goldman Sachs. Please ask your question.

Speaker 6

Sure. Thank you, management, for taking my question. So my question is regarding the AI demand. I Since last time that we spoke, I think I remember last quarter you mentioned that the AI driven demand was still in the early stage. Just wondering given I think we have passed a Quarter, 3 months or maybe longer.

Speaker 6

Just wondering if management has seen any updates regarding the moving pace From the Genuity, from the cost of goods in China. And when we think about the CapEx going forward, Could management share any color on what percentage of CapEx will be slightly spent on the high power Density cabinets or transforming the existing cabinets into the power high power density ones. Thank you.

Speaker 2

Okay. Yes, in terms of AI, I mean, I think very clear that in the international market, now Currently, 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 already Happening in the U. S, in Asia right now. So we are this is one part.

Speaker 2

But If we talk about AI demand in China, I think the China in terms of the model AI model is Little bit behind the U. S. So I think it is still in a very early stage. But of course, in the media and Everybody talk up here. That's an indication that everybody try to step in.

Speaker 2

So I think in terms of How impacted to the data center industry? I think they maybe after 12 or 18 months, it will start to Impact China data center demand, so in a significant way in my view, yes.

Speaker 3

The second part of your question on CapEx, I think maybe 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 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 2 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. And for 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.

Speaker 3

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 Chip to Johor. We've 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.

Speaker 3

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 talk about I think you referred to Installing it in existing data centers. Yes. So that's an interesting one because

Speaker 2

if you look at all

Speaker 3

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 5 years. That gives us An inbuilt opportunity as when we change out the cooling plant and equipment, we can always consider To change the technology as well. Yes, I'll add on a little bit.

Speaker 2

I think in the last 2 years, our new design, data center design is all very high power density. That means we already assessed 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 2 years, whatever in Shanghai, surrounding Shanghai or Beijing or Shenzhen Bonsou, All very high power density and high power capacity. So that means we are well positioned to catch up the AI era.

Speaker 6

Great. Thank you for the color. It's very helpful. Thank you.

Operator

We are now going to proceed with our next question. And the questions come from the line of Mingran Lee from CICC. Please ask your question.

Speaker 9

Hi, management. Thanks for taking my questions. I have a question to discuss the EBITDA margin. The first one is Why your one time service revenue has nearly 100 EBITDA margin because this 70,000,000 Portfolio included in EBITDA and also excluding the one time impact, the 2nd quarter EBITDA margin was Still better than the Q1 and the same quarter last year. What's the drivers behind things?

Speaker 3

Thanks for the question. 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 So the reason for that is because It's associated with a termination, which means that there is not a lot of operating cost It goes with that revenue. There is not power consumption and so on which goes with that revenue.

Speaker 3

So that revenue has a very high Profit margin on an incremental basis. Excluding that revenues as we did In our disclosures to normalize numbers set a base for the following quarters. I think the EBITDA margin has fluctuates as always, but it's been in a similar range for a number of quarters. So 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 At least a couple of percent, if not more, percentage point difference between Now EBITDA margins in winter 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.

Speaker 3

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 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 Improved, but only slightly from current levels over the following couple of years.

Speaker 9

Thanks, Nirma.

Operator

We're now going to proceed with our next question. And the questions come from the line of Michael Elias from TD Cowen. Please ask your question.

Speaker 10

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 given that what we're seeing in the U. S.

Speaker 10

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.

Speaker 2

I think in the area like Johan, they have The advantage in Zhuho is they have a rich very rich power capacity. So I think in the short term or mid term, The power supply will not be the issue, I think, in the midterm. In China, I think what Okay. We know it's in a Tier 1 market, of course, it's challenging in the future. Unfortunately, for us, as I mentioned in the last 2 years, we locked up a lot of the Power capacity and build a very high design a very high power density So I think what I try to say in Short term, midterm in China, if the wave coming for everybody is a challenge.

Speaker 2

But in Midterm, short term for us is more relaxed for that. But in Johor side, I think we got almost 50% of the power allocation in Johor So far, so I think we are more ahead than any player in Johan area.

Speaker 1

Thank you once again for joining us today. If you have further questions, please feel free

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