Q3 2023 GDS Holdings Ltd Earnings Call
Okay.
Hello, Ladies and gentlemen, thank you for standing by for GDS Holdings Limited 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.
This conference call is being recorded.
I will now turn the call over to your host Ms. Laura Chen head of Investor Relations for the company. Please go ahead Laura.
Thank you.
Everyone will come to the first quarter 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 this conference call can be viewed and downloaded from our IR website.
The studio services dotcom, beating.
Leading today's call is Mr. William Huang GDS, founder Chairman and CEO, who will provide an overview of our business strategy and performance. Mr. Danielson Guyot CFO will then review the financial and operating results with Jamie Cool Our C. O O is also available to answer questions.
Before we continue please note that today's discussion will contain forward looking statements made under the safe Harbor provisions of the U S. Private Securities Litigation Reform Act of 1995.
Forward looking statements involve inherent risks and uncertainties as such the company's results may be materially different from the views expressed today.
Further information regarding these and other risks and uncertainties. It's included in a complex prospectus as filed with the U S. S E T.
The company does not assume any obligation to update any forward looking statements, except as required under applicable law.
Please also note that <unk> earnings press release, and this conference call include discussions of unaudited GAAP financial information as well as unaudited non-GAAP financial measures GDS press release contains a reconciliation of the unaudited non-GAAP measures to the unaudited most directly comparable GAAP.
I just I will now turn the call over to GDS founder Chairman and CEO William Huang. Please go ahead with them 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.
We are pursuing this goal by executing distinct stress.
Our strategies for our China and the international business.
For China, our financial objectives are to grow EBITDA as a steady rate.
Tim positive cash flow before financing.
And the deleverage delever the balance sheet.
We are getting there by one.
First taking a highly selective approach to new bookings, which match our inventory and it.
With this fast moving rates.
Secondly.
Delivering the backlog and the increasing capacity utilization.
And setting a high bar for new Capex to fulfill orders with first.
Moving schedules.
For international our financial objectives.
<unk>.
Creates a second growth engine, which enhances our equity value variation.
We are leveraging our competitive strengths.
To build a leading presents in regional harbor market.
We landmark commitment from global and the China customers.
And financed the business independently.
Now, let's dive into our whole west towards achieving this uptick the objectives.
In Sri Q 'twenty, three we won 21000 square meters, all 54 megawatts of new customer commitments or in China.
The two largest order where some internet companies in the live streaming and short video vertical which continues to perform strongly.
Orders were for four additional capacity at our campuses in long Fong.
Beijing.
They have already deployed.
The moving periods.
Faster than usual.
Market demand in China has not yet picked up noticeably as large customers do you have inventory to absorb.
The data center market will recover when this is a broad based recovery in the digital economy.
We believe that as the AI demand.
Yeah demand wave is coming however, and it will take more time for customers to further develop the data models and applications.
Adapting to new regulations.
And solve the chip supply issue.
AI will require a lot of data center capacity in tier one markets, which plays to our strengths.
When this demand starts to materialize.
In size.
It will be very well positioned.
Since the launch of our international strategy Neil.
New bookings from international have made up 40% of net additional area committed 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.
Our gross our golf balls moving for the third quarter was nearly 21000 square meters.
Comprising 17000 square meters in China, and the nearly 4000 square meters internationally.
So after the current phase of market development.
Gross moving for our China data centers has been as has been sustained.
Consistent level.
Meanwhile, <unk> 23 was the first quarter in which international made a material contribution.
We expect the contribution from international to ramp up significantly over the next few quarters.
In <unk> 'twenty three we brought around the 23000 square meters of new capacity into service.
Okay.
13000 square meters was at two of our campuses in long Fong China.
The capacity is 100% committed it to a single customer which is to redeploy eating from other data centers, they're moving period for this new capacity is faster than usual.
That remains <unk>.
<unk> thousand square meter is the first the data center at our Mtp's campuses into whole Malaysian.
This data center is also 100% committed with a moving period of only a few months.
In <unk> 'twenty three we expect to bring another 20000 square meters into service half in China and half international.
Once again all of this new capacity is 100% committed with fixed moving schedules.
Turning to slide 15.
We are making good progress in the execution of our international strategy.
Starting with Hong Kong, our first data Center Hong Kong. One has entered the entered a service and is almost sold out of two global and the China customers.
Okay.
Our second data center <unk> two is under construction during.
During the current quarter.
We expect to secure an anchor customer committed commitment from Hong Kong to more than 15 months ahead of project completion.
Moving to drill hole.
And T. P campus has 160 megawatts of power capacity across the first of three phase phases.
Out of which 96 megawatts is already committed.
In <unk> 'twenty, three we delivered 23 megawatt which is already fully and revenue generating.
Over the next few quarters, we will deliver the remaining 73 megawatt of committed capacity, which will also become fully revenue generating within a short period of time.
While we still have room for.
The expansion at NTP.
We have enhanced our us subprime by acquiring land for a second our campus in Joel will.
We refer to this new sites as campus Tech Park.
<unk> <unk>.
In the first phase of development.
Pete will have 100 108 megawatts of power capacity.
We are seeing stronger demand for our capacity into hall from global and the China customers.
We are the only player to have to.
Complementary locations.
Some of which only a few kilometers from Singapore.
These sites, we have secured two.
<unk> hundred 68 megawatt of power supply over the next three years.
This gives us.
Time to market advantage and important considerations as customers are accelerating.
Procurement to meet demand.
Furthermore, we have.
Already proven our execution capability into hall by deploying our prefab technology, including liquid cooling modules to successfully deliver hype scale capacity in just over one year.
In Singapore following the award.
Our quota.
We are finalizing site selection for our first data center, we're on track to deliver capacity in 2026.
In Indonesia, we are very pleased to finalize a JV agreement with <unk>.
The Indonesia sovereign wealth fund we believe.
<unk> will be a great partner for us because of the.
They're complementary.
Stress unique relationships and the value add that.
But Jamie is it for all of our developments in Indonesia, We continue to make progress with our first project in pattern.
We are working with <unk> to put in place the essential infrastructure.
Finally, we are moving forward with the first around private equity capital raising for our international Holdco.
It is going well.
I will now pass on to Dan for the financial and operating review.
Thank you.
Turning to slide 19.
In <unk> 'twenty three revenue increased by six 4% and.
And adjusted EBITDA increased by five 6% year on year.
For the quarter on quarter analysis, we've excluded the onetime items, which arose in <unk> 23 as previously disclosed.
On this basis revenue grew by four 9% and adjusted EBITDA decreased by one 4% quarter on quarter.
The decrease was mainly due to higher utility costs, which I will come through in a minute.
Turning to slide 20.
Gearing <unk> 23.
We achieved net additional area utilized 16000 square meters.
During the past few quarters, our net adds has been affected by higher than usual churn.
Which is mainly due to one customer's redeployment.
This will continue into the fourth quarter. However, we are now seeing the impact partly offset by greater contribution from international.
Monthly service revenue per square meter was RMB 2149, and <unk> 23.
Compared with the third quarter of 2022, MSR decreased by 4% in line with our expectations.
Turning to slide 21.
Due to the seasonal fluctuations in <unk>.
We think it makes most sense to look at our margin trends by comparing with the same quarter in the prior year.
The <unk> 23, our adjusted gross profit margin was 49, 5%.
Compared with 57% in <unk> 'twenty two.
A decrease of one two percentage points.
During the <unk> 23.
To see cost as a percentage of revenue was 35, 1%.
Compared with 31, 6% and three Q 'twenty two.
An increase of three five percentage points.
This reflects increase in power generation and more recently in power distribution tariffs. However.
However, as you can see we were able to mitigate some of the impact of higher utility costs with other cost savings.
Adjusted EBITDA margin was 44, 7% and <unk> 23.
Which is only slightly down versus the same quarter of last year.
Turning to slide 22 over.
Over the first nine months of 2023, now China Capex totaled $3 1 billion RMB.
Our full year guidance was for $3 5 billion RMB and we still expect to be within that figure.
However, next year, we expect China capex to be materially lower at around $2 5 billion RMB.
Over the first nine months of 2023 now international Capex was around 2 billion RMP.
Given the rapid pace of development in Jihad to meet delivery schedules.
We expect full year Capex for international to be around 4 billion RMB in line without guidance.
Our preliminary view is the international Capex will be 4 billion RMB or higher next year.
Uh huh.
On slide 23.
We plan to finance the international business independently.
On the equity side.
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 nonrecourse basis.
We should therefore, we'll look at our financial position in two distinct parts.
<unk> holdings, excluding international which.
Which is in effect Lifeco, plus the China business.
And international stand alone.
Okay.
Over the first nine months of 2023.
<unk> holdings, excluding international.
Negative cash flow before financing of $1 8 billion RMB.
As William mentioned, our objective is to maintain positive cash flow before financing.
Organic basis without assuming any asset monetization.
Cash flow before financing for this segment was in fact positive and <unk> hundred 23.
But it will take another year or so before which is consistently positive quarter after quarter.
International Standalone.
Negative cash flow before financing of around 4 billion RMB this year and potentially a similar amount next year.
We can finance this deficit with around 50% equity and 50% debt.
So the equity requirement, we aim to raise at least $400 million U S dollars or $2 8 billion RMB and the current funding around.
We've received very strong interest from regional and global investors.
And expect to close the capital raise and <unk> 24.
Looking at our financing position on slide 24.
At the end of <unk> 'twenty three.
Our consolidated net debt to last quarter annualized adjusted EBITDA was $8 six times.
Excluding the net debt and negative adjusted EBITDA of international.
The multiple was seven four to five times.
If we continue along the same path.
The leverage of GDS holdings, excluding international falls to below six times within three years.
However, we continue to work on various asset monetization initiatives, including two data center funds.
<unk> C REIT and property sale and leaseback.
This could enable us to delever a bit faster.
Turning to slide 25.
Showing the loan maturity schedule for the first time with a depth of international separately identified.
Over the next couple of years, we have on average $2 7 billion RMB per annum.
Suppose repayments all of which is onshore RMB project loans.
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 pay down some debt, which is prudent and efficient.
Turning to slide 26.
We are not changing our formal guidance for FY2023 revenue adjusted EBITDA and Capex.
Other.
We note the FY2023 revenue is tracking to the bottom end of our original guidance range.
FY2023 adjusted EBITA is tracking to the top end of the original guidance range.
We'd now like to open the call for questions operator.
Yes.
Okay.
Thank you.
Okay.
Yeah participants as a reminder, if you wish to ask a question. Please press star one on your telephone keypad and wait for a name to be announced towards your question. Please press star one again.
For the benefit of all participants on today's call. Please limit yourself to one question.
You have more questions. Please re enter the queue. Thank you. So much please stand by while we compile the Q&A roster. This will take a few moments.
Yeah.
Yes.
And now well go and take our first question today.
And it comes from the line of Jonathan Atkin from RBC. Your line is open. Please ask your question.
Yes.
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.
Hum.
Yes, Thank you John.
I always prefer to address this question in a more holistic way.
We have a <unk> of MSR.
Per square meter per month, which reflects a number of different factors, including renewal spreads.
Changes in the <unk>.
Product mix and location.
I think this year, we set expectations.
It was declined by 4% year on year, which indeed it is doing so I.
I think next year it will decline by less NASA preliminary view is about 2% year on year.
Which indicates that is bottoming out.
That gives you some indication of what's happening with renewal spreads.
As I say it.
It also reflects a number of other factors.
With regards to utilization rates.
That will increase gradually.
It will take about three years to get from where we are today, which is around 70, 172%.
So over 80% I think the cross 80% during.
FY 'twenty six.
And then it will take us another couple of years to get up into the high hiatus.
If I could just squeeze in.
Additional part of my question. So <unk> is that is that a different part of johore or is that adjacent to <unk>. Maybe you can give us a little bit of color. There and then the demand signals and that youre seeing in.
In Indonesia, and Vitol is the JV constraints at the time or would you look to potentially go elsewhere.
In Indonesia. Thank you.
Yes, I think <unk> very close to Singapore, as well I mean that in data. If you look at it is that Ronnie.
10 kilometers from the hour.
NTP right 10 kilometer. So it's a typical I mean fit for a lot of the Hyperscale Guy, which is a crawl guide all summer.
<unk> scale.
<unk> structure so.
Good thing at the beautiful thing and say its fair closer simple latency is not issue and also very.
10 kilometers away from our current MTP. So this is a perfect allowed a lot of our customers fit a lot of our customers deploy that.
Ah.
In Singapore, ATP, and then MTP. So we are where we are.
We are working very close with a lot of potential customer. This structure is perfect fit that future demand.
This is <unk>.
So we made a lot of progress there.
In terms of construction.
We saw a lot of deep potential demand by hand.
So currently we are working on a lot of potential demand. So we believe this is ed.
Sell deeper tenants now the big issue for us So I think.
Because the tenants are unique position number one.
Not only serve the region. They also serve.
Fully recognized by the Indonesia domestic market.
And also the.
Power.
Cost is lower than anyone.
In southeast Asia and potentially.
The renewable energy work.
Coming soon to come but we will in the future we will combine our renewable energy and low power cost and so.
More broad.
Reaching this is a very unique positioning for the whole region. So we are very confident to get a lot of demand.
For.
Todd.
Data center.
Thank you.
Okay.
<unk> is a very good partner.
As I mentioned that.
I think the.
Because they are a very very.
<unk>.
Actively to help GDS.
Set up a set of more advantage in a pattern.
And help us to introduce a lot of that renewable energy per year in this region and also to help us to find that the more find a lot of.
Potential.
Data center.
S sites in Jakarta as well so we're very appreciate that.
Real value added partner I think in the future we can add more value in terms of.
Bringing us to this.
So customer and also the governments.
<unk> demand. So I think we are looking forward to look more closely.
Hey.
Thank you.
Thank you.
Now I will go and take our next question can you give us amendments.
And the next question comes from the line of Yang Liu from Morgan Stanley. Your line is open. Please ask your question.
Yes.
Okay. Thank you my question is regarding the moving our outlook.
First of all waste.
Pretty big.
Yeah.
Delivery of the overseas project in the third quarter.
Should we expect starting from fourth quarter or maybe.
Our first quarter next year.
The Q on Q improvement also.
Moving.
Thank you.
Yes.
Yes, I think.
I think youre right I mean.
We have very good.
Near term with our overseas customer right. So I think.
From the Q.
Q4, and then execute a hotter.
Ramp up pace.
We are very happy this ramp up.
Speak.
So I think it is.
You will see the oversea will contribute more right even for next year.
Yes.
The third quarter.
We look net net of churn.
16000 square meters, which is higher.
Evidence being poor last five or six quarters.
Clearly international started to make a contribution there.
I did mentioned in the fourth quarter.
There will be.
Another quarter in which they have some exceptional churn let's see.
Completion of what we've been talking about over the last four quarters, unless I think the net additional area utilized in the fourth quarter net of that will.
It will be higher.
And what it was in the third quarter.
And next year.
Expect it to be significantly higher than what it is on a net basis in 2023.
Yes.
Great. Thank you I just want to make sure that the.
The previous single customer churn.
<unk> and.
<unk> right.
Yes.
That's right.
Maybe I'll just take this opportunity to sort of give some statistics about.
About churn.
So we talk about it.
And in.
Terms of square meters of area utilized.
Okay.
It's easier to track it that way.
So we think that our normal.
Normal churn rate.
Going forward will be around 4%.
A very utilized maybe 4% to 5%.
Which I believe is low by by global benchmarks.
In past years, it was 2% to 3%, but given the evolution of our businesses.
Not trucking to expect that to be.
Higher.
In the current year.
I think the the total churn will be around.
28, 29000 square meters, which is around 7%.
So it's clearly higher than the differences.
It won't be call exceptional churn.
The redeployment who's actually the majority of that.
Yes, this will happen from time to time.
And it could set us back in the short term it can affect our growth rate.
Small amount.
As it so happens the redeploying customer has.
Placed new orders with us which are.
One five X.
The amount, which they terminated.
In effect since one step back in one and a half steps.
Forward.
With a timing difference.
Hopefully that will be that will be complete and we will hopefully revert to just the <unk>.
Described as a normal level of churn.
Okay.
Great. Thank you.
Thank you.
Okay.
<unk> take our next question.
Can you give us some amendments.
Okay.
And the next question comes from the line of Frank Louthan from Raymond James Your line is open. Please ask your question.
Hey, guys. Good morning, this is rob on for Frank.
Are you seeing any demand for liquid cooling based servers and.
So who pays the extra capital costs required for that.
You guys pay it and adjust the pricing or the customer contribute some capital. Thank you.
Okay.
Yes, I think India, we are.
Just to mention that we deploy.
First of all I think they are putting we're already.
A couple of years ago in China already right. We are very familiar with it is technology. So we also as I just mentioned.
You probably know.
Sure.
MTBE.
One right. So our custom also required.
Requested are required for.
Accordingly.
Given the future I think.
For the AI Guy is it will vary.
Normal and.
But now that everybody.
Our customers use.
<unk> it depends.
That difference customer has different.
The pipe profile, but number one we are very familiar with that and number two I think the cost.
In terms of costs.
In our view it's.
It's not significant difference right.
Uh huh.
What do we build before the normal case right. So I think of course is.
Cost increase with definitely which had from our customers.
Which we already gathered a mutual agreement with our customer. So this is not an impact on our return.
Thank you.
Okay.
Yes.
Now we're going to take our next question.
Just a moment.
And the next question comes from the line of Sara Wang from UBS. Your line is open. Please ask your question.
Thank you for the opportunity.
Question on over 30%.
Lastly for Joe <unk>.
Besides China comes to mind shall we expect meaningful new orders from.
International customer co op customers or local customers.
Exactly.
A lot of other data center operators announce meaningful pipeline the region. So how shall we think about the competition landscape going forward. Thank you.
Number one we are targeting all kind of a customer.
Our sales team are working on.
Mr demand.
International demand and also China demand. So we are we don't care holds customer customer's customer.
So I think.
We believe.
Our <unk>.
Campus to capture it.
Including new future Tempus TTP with definitely we are confident to get to the combination of the customer just Michael.
We did in Hong Kong already so I think that this will not be the issue. We were not we were not just a specific target one kind of customer with target all right. So we believe with <unk> Cel center, our product well welcomed by all kind of customer as well.
So in terms of the competition I think.
We were competing with everybody in China for 22 years.
Our freedoms.
Which we like to compete.
Competition.
<unk>.
Our growth we will grow.
From a lot of the competitors.
So I think it's good.
And that's why.
We already demonstrated even in a very very.
A competitive market in China in the last 20 years, we are getting a number one position is as we are.
So we are not.
We're not thinking about what's our competitive doing what they can do ever see but we believe we will be in every market.
<unk>.
Got it and then.
Is there any additional color on the new bookings for next year, certainly there will be higher than this year.
Especially given that the acquired cabinet continuing to ramp up.
Yes.
International market.
Overall evolve.
So overall and then maybe there's other telecom oversee contribution.
Yes, yes.
Yes.
Take this in two parts right.
China.
Yes.
Quite a few quarters now we've made it clear that we are not targeting a higher sales volume and we're targeting a particular kind of business.
<unk>.
Matches the inventory we have.
Where there is a fix loot and schedule.
Faster than what we've experienced before.
And of course reasonable pricing, so we do any amount of business.
It's those criteria.
We do.
Don't forecast.
Any change in China market conditions.
Total business plan just assumes continuation of the current run rate we're not we're.
We're not crystal ball gazing, so we don't.
Build in any kind of assumptions about <unk>.
Change in market.
Additionally, but of course, we are very well positioned to respond.
Any change on.
On the international side.
I think the sales next year could be higher than this year.
And this year.
Including.
The second data center in Hong Kong, if we are able to concur.
Conclude that presale pre commitment.
During the fourth quarter.
The gross bookings of international will be about 20000 square meters.
Over the course of two.
<unk> 2023.
I think we'd hope to at least start again next year.
The order sizes.
Been very large on the international side, so it's hard to predict because.
One order can make a huge difference.
So.
It's not a widely dispersed.
Book of orders, but.
Small number of very large orders.
Okay.
Okay.
Got it very clear thank you.
Thank you.
Yeah participants as a reminder, if you wish to ask a question. Please press star one on your telephone keypad from the benefit of all participants please limit yourself to one question.
Afterwards, if you would like them are welcome to re enter the queue. Thank you.
And now we'll go and take our next question.
And the next question comes from the line of Michael <unk> from TD Cowen. Your line is open. Please ask your question.
Great. Thanks for taking my questions two if I may 1st on the demand side as we think about mainland China would it be possible for you to create or provide a framework for how youre 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.
You talked about your conversations with your with the cloud customers and essentially what it is indicating.
Driving the slowdown in demand there.
Then my second question would be as we think about getting ready for the AI opportunity. What is the standard density power densities, 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 the earlier point do they require liquid cooling any color there would be great. Thank you so much.
Okay.
Was about.
What's holding back demand in China.
Cloud customers.
<unk>.
Okay, Okay I think.
I think there's a couple of things.
The car players in China.
I think now.
Sure.
<unk>.
Just look at our strategy.
More.
As to quality of the revenue.
Not just the quantity.
So this is I think in the midterm and long term is very good for datacenter because historically.
That disclosure number including a lot of the stuff like CDN network or they call it integrated.
As a couch so the number is big but.
Also you said some system integration, but what I, what we know is as those guys start to focus on the growth and real topic across our computing.
Revenue.
We believe this is the right strategy and the world given the time, we'll they will.
Gross.
Revenue properly and that will drive more high quality data center demand in the future. That's what do we see that then gives us the revolution from from our customer. So I think this is will.
In the future.
It will create more healthy data center demand for all the industry is still number one on other hand I think.
Yes.
In China already.
While.
China already announced.
Larger language.
[laughter] model a permission right.
So but still in terms of timing I think as I mentioned, it's still a little bit early because.
Developing a developing.
Schedule is behind the U S. So what are we already seeing that.
The global data center, driven by the order.
U S based.
The largest language model.
This is not happening in China, but it is coming so I think.
So still need time, but the in China still have another another issue is the supply chain.
In terms of the chips, so I think that this need and maybe 12 months maybe.
18 months to solve the order.
So what I expect is here.
This will happen in one year or one year half.
Maybe in a big wave.
The second question is the power density of course, I think you.
<unk> always leading the power density.
In China.
If we look back to 10 years ago, our first data standards with builder travelers Triple high.
Density than anyone else in the market right. So we are very we're very followup global channel.
So our lost a couple of years, we start to build very high power density average power density is eight kw.
Per rep before lots of couple of years now we also increased to 10% to 15.
Pete.
Jack.
<unk> average number which means we can that 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 camp new campus power total capacity is a real good position, we are well positioned to respond to all of the.
Demand in next few years, so we are ready for that.
Thank you very helpful.
Thank you.
Yes.
As there are no further questions I'd like to now turn the call back over to the company for closing remarks.
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 or the preferred financial communication. Your next time.
This concludes today's conference call you May now disconnect. Your line. Thank you for your participation have a good day.
Okay.
[music].
Okay.
Okay.
[music].
Okay.
Hum.
Okay.
[music].