Q2 2025 GDS Holdings Ltd Earnings Call
Laura Chen: Hello, ladies and gentlemen. Thank you for standing by for GDS Holdings Limited's second quarter 2025 earnings conference call. At this time, all participants are in listen-only mode. After management's prepared remarks, there will be a question and answer session. Today's 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.
Speaker #2: Hello, ladies and gentlemen. Thank you for standing by for GDS Holdings Ltd.'s second quarter 2025 earnings conference call. At this time, all participants are in listen-only mode.
Speaker #2: After management's prepared remarks, there will be a question and answer session. Today's conference call is being recorded. I will now turn the call over to your host, Ms. Laura Chen.
Speaker #2: Head of Investor Relations for the company. Please go ahead, Laura.
Brandi Piacente: Thank you. Hello, everyone. Welcome to the second quarter 2025 earnings conference call of GDS Holdings Limited. As 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 investors.gdsservices.com. 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. Daniel Newman, GDS' CFO, will then review the financial and operating results. Before we continue, please note that today's discussion will contain forward-looking statements made under the Fair Harbor Provision of the U.S. Private Business Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and certainties. As such, the company's results may be materially different from the views expressed today.
Speaker #3: Thank you. Hello, everyone. Welcome to the second quarter of 2025 earnings conference call of GDS Holdings Ltd. As the company's results were issued via newswire services earlier today, they are also posted online.
Speaker #3: A summary presentation which will refer to during this conference call can be viewed and downloaded from our IR website at investors.gdsservices.com. Leading today's call is Mr. Wei Huang, GDS founder chairman and CEO, who will provide an overview of our business strategy and performance.
Speaker #3: Mr. Daniel Newman, GDS CFO, will then review the financial and operating results. Before we continue, please note that today's discussion will contain forward-looking statements made under the safe harbor provisions of the US Private Securities Litigation Reform Act of 1995.
Speaker #3: Forward-looking statements involve inherent risks and certainties. As such, the company's results may be materially different from the views expressed today. Further information regarding these and other risk and certainties is included in a conference prospectus as filed with the US SEC.
Brandi Piacente: Further information regarding these and other risks and certainties is included in the company's prospective 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. Please also note that GDS' earnings press release and its press results include discussions of unaudited GAAP financial information, as well as unaudited non-GAAP financial measures. GDS' press release contains a reconciliation of the unaudited and non-GAAP measures to the unaudited most directly comparable GAAP measures. I will now turn the call over to GDS' founder, Chairman, and CEO, William Huang. Please go ahead, William.
Speaker #3: 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 its conference call include discussions of unaudited GAAP financial information.
Speaker #3: As well as unaudited non-GAAP financial measures, the GDS press release contains a reconciliation of the unaudited non-GAAP measures to the unaudited most directly comparable GAAP measures.
Speaker #3: I will now turn the call over to GDS founder chairman and CEO, William Huang. Please go ahead, William.
William Huang: Okay, thank you. Hello, everyone. This is William. Thank you for joining us on today's call. We delivered a solid second quarter, growing revenue by 12.4% and adjusted EBITDA by 11.2% year-on-year. We raised the net proceeds of US $676 million through the issue of convertible bonds and equity in the international capital market, strengthening our vertical balance sheet. More recently, we achieved a significant milestone in our onshore asset monetization strategy with the successful completion of our C-REITs IPO. The units of our C-REITs are now trading on the Shanghai Stock Exchange at an implied cap rate of below 5%. This is a major breakthrough, giving us access to China equity capital market on highly advantageous terms. Our gross moving during Q2 2025 was around 20,000 square meters, which is consistent with the level over the past five quarters. Our utilization rate has continued to climb, reaching 77.5%.
Speaker #4: Okay, thank you. Hello, everyone. This is William. Thank you for joining us on today's call. We delivered a solid second quarter, growing revenue by 12.4% and adjusted EBITDA by 11.2% year-on-year.
Speaker #4: We raised the net proceeds of $676 million through the issue of convertible bonds and equity in the International Capital Market. Strengthening our vertical balance sheet more recently, we achieved a significant milestone in our onshore asset monetization strategy.
Speaker #4: With the successful completion of our C-REITs IPO, the units of our C-REITs are now trading on the Shanghai Stock Exchange at an implied cap rate of below 5%.
Speaker #4: This is a major breakthrough, giving us access to the China equity capital market on highly advantageous terms. Our goals moving forward during Q2 2025 were around 20,000 square meters, which is consistent with the level over the past five quarters.
Speaker #4: Our utilization rate has continued to climb, reaching 77.5%. Moving over the next few quarters, we'll remain solid. Driven by delivery of the 152 megawatts order, which we signed in one Q25.
William Huang: Moving over the next few quarters will remain solid, driven by the delivery of the 152-megawatt order which we signed in Q1 2025. We expect to deliver 35% of our total current backlog in the second half of 2025. In Q2 2025, gross new bookings were 23,000 square meters, mainly from traditional internet and the cloud business, with a good mix of customers and locations. Area demand was relatively quiet due to the uncertainty of chip supply in China. Customers have a number of options across both imported and domestic sourced chips. It's a complicated matrix of performance, technology, availability, and other considerations. We think that it will take some time for customers to decide which way to go. We are very confident about AI-driven demand over the immediate and long term. However, we are still in a period of wait and see.
Speaker #4: We expect to deliver 35% of our total current backlog in the second half of 2025. In Q2 2025, our goal for new bookings was 23,000 square meters, mainly from traditional internet and the cloud business.
Speaker #4: With a good mix of customers and locations, AI demand was relatively quiet due to the uncertainty of chip supply in China. Customers have a number of options across both imported and domestically sourced chips.
Speaker #4: It's a complicated matrix of performance. Technology, availability, and other considerations. We think that it will take some time for customers to decide which way to go.
Speaker #4: We are very confident about AI-driven demand over the mid, medium, and long term. However, we are still in a period of wait and see. We should have a clear view after a few more months.
William Huang: We should have a clear view after a few more months. During this period, we think that the most important thing is for us to be ready to respond, ready in terms of developable capacity and ready in terms of access to capital. On the capacity side, we have around 900 megawatts of power land held for future development in and around tier one markets. We believe the coming waves of AI demand are going to be mainly for inferencing. This kind of demand is latency-sensitive and will require relatively large sites distributed across the tier one markets. For operational reasons, customers will seek to deploy capacity for inferencing within established cloud regions and availability zones. We have multiple sites suitable for AI inferencing around Beijing, Shanghai, and the center. We have undertaken preliminary site preparations so that we can develop with a short lead time.
Speaker #4: During this period, we think that the most important thing is for us to be ready to respond—ready in terms of developable capacity and ready in terms of access to capital.
Speaker #4: On the capacity side, we have around 900 megawatts of power land held for future development in and around Tier 1 markets. We believe the coming waves of AI demand are going to be mainly for inferencing.
Speaker #4: This kind of demand is latency, sensitive, and will require relatively large sites distributed across the Tier 1 markets. For operational reasons, customers will seek to deploy capacity for inferencing within established cloud regions and availability zones.
Speaker #4: We have multiple sites suitable for AI inferencing around Beijing, Shanghai, and Shenzhen. We have undertaken preliminary site preparations so that we can develop with a short lead time.
William Huang: This is an important consideration for customers. We believe there is a good chance that we will develop all of these 900 megawatts and more over the next few years. The issue is only the timing of takeoff. On the financing side, we completed the first-ever data center ABS transaction in China in late March. We then followed this up with the first-ever data center C-REITs IPO in China in August. By pioneering these transactions, we have proven our ability to recycle capital from stabilized data center assets. This comes at the perfect time as we can use the proceeds to fund new investment opportunities. Furthermore, the terms on which we have monetized the asset establish the benchmark for the value of our stabilized asset data center in tier one markets, creating potential to unlock more value for shareholders.
Speaker #4: This is an important consideration for customers. We believe there is a good chance that we will develop all of these 900 megawatts and more over the next few years.
Speaker #4: The issue is only the timing of takeoff. On the financing side, we completed the first-ever data center ABS transaction in China in late March.
Speaker #4: We then followed this up with the first-ever data center REIT IPO in China in August. By pioneering these transactions, we have proven our ability to recycle capital from stabilized data center assets.
Speaker #4: This comes at the perfect time, as we can use the proceeds to fund new investment opportunities. Furthermore, the terms on which we have monetized the asset established a benchmark for the value of our stabilized asset data center in Tier 1 markets.
Speaker #4: Creating potential to unlock more value for shareholders. Our powered land and our monetization vehicles are unique in China and give us a significant competitive advantage as we enter into the AI era.
William Huang: Our power of the land and our monetization vehicles are unique in China and give us significant competitive advantage as we enter into the AI era. Lastly, I would like to share some operation updates for our equity investment in DayOne. In Q2 2025, DayOne added a phenomenal 246 megawatts of new commitments, which bring its total power committed by customers to over 780 megawatts. The new order in Q2 2025 included an anchor customer commitment for its Thailand project. More recently, DayOne announced that it has secured a second campus site in Finland, building on its successful market entry. DayOne is well ahead of schedule to meet the target of 1 gigawatt of total power commitments within three years. I will now pass on to Daniel for the financial and the operating review.
Speaker #4: Lastly, I would like to share some operational updates for our equity investment in Day One. In Q2 2025, Day One added a phenomenal 246 megawatts of new commitments.
Speaker #4: Which brings its total power committed by customers to over 70,080 megawatts. The new order in Q2 2025 included an anchor customer commitment for its Thailand project.
Speaker #4: More recently, Day One announced that it has secured a second campus site in Finland. Building on its successful market entry, Day One is well ahead of schedule to meet the target of 1 gigawatt of total power commitments within three years.
Speaker #4: I will now pass on to Dan for the financial and the operating review.
Daniel Newman: Thank you, William Huang. Starting on slide 13, in Q2 2025, revenue increased by 12.4% year-on-year. This resulted from an increase in total area utilized of 14.1% and a decrease in MSR per square meter of 1.7% as compared with Q2 2024. In Q2 2025, adjusted EBITDA increased by 11.2% year-on-year. Adjusted EBITDA margin for Q2 2025 was 47.3% compared with 47.8% in Q2 2024. Following completion of the data center ABS transaction in late March, we deconsolidated the underlying projects for the whole of Q2 2025. Following completion of the sale of stabilized data centers to the C-REIT in late July, we will deconsolidate these projects during Q2 2025. As we report earnings over the next three to four quarters, the reported revenue and EBITDA growth will be impacted because the comparison will not be apples to apples.
Speaker #5: Thank you, William. Starting on slide 13, in Q2 2025, revenue increased by 12.4% year-on-year. This resulted from an increase in total area utilized of 14.1% and a decrease in MSR per square meter of 1.7% as compared with Q2 2024.
Speaker #5: In Q2 2025, adjusted EBITDA increased by 11.2% year-on-year. Adjusted EBITDA margin for Q2 2025 was 47.3%, compared with 47.8% in Q2 2024. Following the completion of the ABS transaction in late March, we deconsolidated the underlying projects for the whole of Q2 2025.
Speaker #5: Following completion of the sale of stabilized data centers to the C-REIT in late July, we will deconsolidate these projects during Q3 2025. As we report earnings over the next three to four quarters, the reported revenue and EBITDA growth will be impacted because the comparison will not be apples to apples.
Daniel Newman: We estimate that the apparent year-on-year growth rate, without making adjustments to normalize for the asset monetizations, will be about 6 percentage points lower. We will continue to call this out on future earnings calls so that the underlying trend is clear. Starting with Q2 2025, without the data center ABS transaction, the year-on-year adjusted EBITDA growth rate would have been 13.9% as compared with the reported 11.2%. As shown on slide 17, the data center ABS transaction took place on an EV to EBITDA multiple of 13.3 times based on the maximum potential sale proceeds and the projected stabilized EBITDA. This was a good start considering where GDS Holdings Limited is trading as a listed company on NASDAQ and the Hong Kong Stock Exchange. However, for the C-REIT IPO, we achieved an even higher multiple of 16.9 times at the IPO price of 3 RMB per unit.
Speaker #5: We estimate that the apparent year-on-year growth rate, without making adjustments to normalize for the asset monetizations, will be about 6 percentage points lower. We will continue to call this out on future earnings calls so that the underlying trend is clear.
Speaker #5: Starting with Q2 2025, without the ABS transaction, the year-on-year adjusted EBITDA growth rate would have been 13.9% as compared with the reported 11.2%. As shown on slide 17, the ABS transaction took place on an EV to EBITDA multiple of 13.3 times based on the maximum potential sale proceeds and the projected stabilized EBITDA.
Speaker #5: This was a good start considering where GDS is trading as a listed company on Nasdaq and the Hong Kong Stock Exchange. However, for the C-REIT IPO, we achieved an even higher multiple of 16.9 times at the IPO price of 3 RMB per unit.
Daniel Newman: The units started trading on the Shanghai Stock Exchange on the 8th of August. The closing price yesterday was 4.04 RMB per unit, about 35% up from the IPO price. At this level, the C-REIT is trading on 22.8 times the projected 2026 EBITDA disclosed in the offering memorandum. This is close to double the current year trading multiple for GDS Holdings Limited China business after adjusting for the assumed value of our equity investment in DayOne Data Centers Limited on a sum of the parts basis. Under the current C-REIT regulations, we must wait 12 months before undertaking the first post-IPO asset injection.
Speaker #5: The units started trading on the Shanghai Stock Exchange on August 8. The closing price yesterday was 4.04 RMB per unit, about 35% up from the IPO price.
Speaker #5: At this level, the C-REIT is trading at 22.8 times the projected $26 EBITDA disclosed in the offering memorandum. This is close to double the current year trading multiple for GDS's China business after adjusting for the assumed value of our equity investment on day one, on a sum of the parts basis.
Speaker #5: Under the current C-REIT regulations, we must wait 12 months before undertaking the first post-IPO asset injection. We started preparing some candidate assets of various sizes.
Daniel Newman: We started preparing some candidate assets of various sizes to give us the flexibility to dimension the next monetization in accordance with our financial requirements. It is important that we continue to grow and diversify the C-REIT so that it remains a viable option for us to recycle capital when it is in our interest to do so. With the C-REIT platform in place, if we assume that we invest in new projects, ramp up, operate, and monetize after five years at a cap rate in, say, the 5% to 6% range, the return on investment is at a very acceptable level. Turning to slide 18, when we gave CapEx guidance earlier this year, we spoke of 4.8 billion RMB of organic CapEx. There is 500 million RMB net proceeds in the current year from the ABS transaction, resulting in CapEx guidance of 4.3 billion RMB.
Speaker #5: To give us the flexibility to dimension the next monetization in accordance with our financial requirements, it's important that we continue to grow and diversify the C-REIT so that it remains a viable option for us to recycle capital when it is in our interest to do so.
Speaker #5: With the C-REIT platform in place, if we assume that we invest in new projects, ramp up, operate, and monetize after five years, at a cap rate in, say, the 5% to 6% range, the return on investment is at a very acceptable level.
Speaker #5: Turning to slide 18, when we provided CapEx guidance earlier this year, we spoke of RMB 4.8 billion of organic CapEx. That's RMB 500 million in net proceeds for the current year.
Speaker #5: From the ABS transaction, resulting in CapEx guidance of RMB 4.3 billion. We are now deducting a further RMB 1.6 billion net proceeds from the C-REIT transaction.
Daniel Newman: We are now deducting a further 1.6 billion RMB net proceeds from the C-REIT transaction, which was not previously factored in. This brings our CapEx guidance down from 4.3 billion RMB to 2.7 billion RMB. On slide 19, in 2024, we achieved positive cash flow before financing with the benefit of some capital recycling from DayOne Data Centers Limited back to GDS Holdings Limited. In 2025, despite the fact that our organic CapEx is much higher than for the past few years, we expect our cash flow before financing to be close to break-even with a contribution from our asset monetization transactions. Turning to slide 20, during the second quarter, we raised 535 million US dollars through the issue of a seven-year CB with a 2.25% coupon and 35% conversion premium. We also raised 142 million US dollars through a simultaneous follow-on equity offering.
Speaker #5: Which was not previously factored in. This brings our CapEx guidance down from RMB 4.3 billion to RMB 2.7 billion. On slide 19, in 2024, we achieved positive cash flow before financing with a benefit of some capital recycling from day one back to GDS.
Speaker #5: In 2025, despite the fact that our organic CapEx is much higher than for the past few years, we expect our cash flow before financing to be close to break-even, with a contribution from our asset monetization transactions.
Speaker #5: Turning to slide 20, during the second quarter, we raised $535 million USD through the issue of a seven-year convertible bond with a 2.25% coupon and a 35% conversion premium.
Speaker #5: We also raised $142 million USD through a simultaneous follow-on equity offering. One of the main purposes of this capital raise was to enable us to repay short-term debt at holdco level and to either repurchase if possible or potentially redeem a CB issued in 2022 which is currently out of the money and putable in March 2027.
Daniel Newman: One of the main purposes of this capital raise was to enable us to repay short-term debt at Holdco level and to either repurchase, if possible, or potentially redeem a CB issued in 2022, which is currently out of the money and puttable in March 2027. Our net debt to LQA adjusted EBITDA decreased from 6.6 times at the end of Q1 2025 to 6.1 times at the end of Q2 2025. The reduction in consecutive quarters was partly due to the cash proceeds of the ABS, which were received during Q2 2025, and to the cash proceeds of the follow-on equity offering. As shown on slide 21, if we take account of the C-REIT transaction on a pro forma basis, the net debt to LQA adjusted EBITDA ratio will come down to 5.9 times.
Speaker #5: Our net debt to LQA adjusted EBITDA decreased from 6.6 times at the end of Q1 2025 to 6.1 times at the end of Q2 2025.
Speaker #5: The reduction in consecutive quarters was partly due to the cash proceeds of the ABS which were received during two Q25 and to the cash proceeds of the follow-on equity offering.
Speaker #5: As shown on slide 21, if we take into account the C-REIT transaction on a pro forma basis, the net debt to LQA adjusted EBITDA ratio will come down to 5.9 times.
Daniel Newman: If we further adjust for the value of our reinvestment in the ABS and C-REIT listed securities, the ratio will come down to 5.7 times. On slide 22, we have already used part of the proceeds of the offshore capital raise to repay a working capital loan due in 2026. As you can see, we now have three CBs outstanding. As I mentioned, the 2022 CB is out of the money. Hence, we show the maturity based on the potential put in 2027. The liability is covered by cash, which we are holding on reserve. The 2023 CB and the recently issued 2025 CB are both in the money, and hence the maturity is shown based on the final maturity dates in 2030 and 2032, respectively.
Speaker #5: If we further adjust for the value of our reinvestment in the ABS and C-REIT listed securities, the ratio will come down to 5.7 times.
Speaker #5: On slide 22, we have already used part of the proceeds of the offshore capital raise to repay a working capital loan due in 2026.
Speaker #5: As you can see, we now have three CBs outstanding. As I mentioned, the 2022 CB is out of the money. Hence, we show the maturity based on the potential put in 2027.
Speaker #5: The liability is covered by cash we are holding on reserve. The 2023 Convertible Bond and the recently issued 2025 Convertible Bond are both in the money.
Speaker #5: And hence, the maturity is shown based on the final maturity dates in 2030 and 2032, respectively. Turning to slide 23, when we gave guidance earlier this year, we already assumed that the ABS will be deconsolidated in Q2 2025.
Daniel Newman: Turning to slide 23, when we gave guidance earlier this year, we already assumed that the data center ABS will be deconsolidated in Q2 2025. However, the C-REIT transaction, which we completed during late July, was not factored into our 2025 guidance at all. Nonetheless, we are maintaining FY25 revenue and adjusted EBITDA guidance unchanged, notwithstanding the deconsolidation of the C-REIT assets, while we are making mathematical adjustments to CapEx guidance to deduct the C-REIT cash proceeds. Finishing on slide 24, DayOne power utilized jumped from 143 megawatts at the end of the first quarter to 213 megawatts at the end of Q2 2025. This contributed to revenue growth of 244% and adjusted EBITDA growth of 265% year-over-year during the second quarter.
Speaker #5: However, the C-REIT transaction which we completed during late July was not factored into our 2025 guidance at all. Nonetheless, we are maintaining FY25 revenue and adjusted EBITDA guidance unchanged notwithstanding the deconsolidation of the C-REIT assets.
Speaker #5: While we are making mathematical adjustments to CapEx guidance to deduct the C-REIT cash proceeds, finishing on slide 24, day one power utilized jumped from 143 megawatts at the end of the first quarter to 213 megawatts at the end of Q2 2025.
Speaker #5: This contributed to revenue growth of 244% and adjusted EBITDA growth of 265% year-over-year during the second quarter. Considering its fast expansion, including the recently announced second campus in Finland, Day One is currently working on a Series C equity raise.
Daniel Newman: Considering its fast expansion, including the recently announced second campus in Finland, DayOne is currently working on a Series C equity raise. We would now like to open the call to questions. Operator.
Speaker #5: We'd now like to open the call to questions, Operator.
Operator: Thank you, dear participants. As a reminder, if you wish to ask a question, please press star one, one on your telephone keypad and wait for your name to be announced. To withdraw a question, please press star one, one again. Mr. Mell will compile the Q&A roster. This will take a few moments. For the benefit of all participants on today's call, please limit yourself to one question. If you have more questions, please re-enter the queue. Thank you so much for understanding. Now we are going to take our first question. It comes from the line of Yan Liu from Morgan Stanley. Your line is open. Please ask your question.
Speaker #2: Thank you, dear participants. As a reminder, if you wish to ask a question, please press *11 on your telephone keypad and wait for your name to be announced.
Speaker #2: To withdraw a question, please press star one and one again. Please stand by. We'll compile the Q&A roster. This will take a few moments.
Speaker #2: For the benefit of all participants on today's call, please limit yourself to just one question. If you have more questions, please re-enter the queue.
Speaker #2: Thank you so much for understanding. And now we're going to take our first question. It comes from Yan Liu from Morgan Stanley. Your line is open.
Speaker #2: Please ask your question.
Ross Warner: Thanks for the opportunity and the congratulations on the very solid results. I would like to ask about the future strategy in terms of the asset monetization in China after the successful Series C-REITs IPO. In terms of the future injection, does management benchmark the previous set target of five times net debt to EBITDA as a long-term operation target for GDS Holdings Limited leverage? Or are you more keen to go a little bit more aggressive towards the asset-light model to achieve better investment return via the five-year development cycle? How to think about your future strategy here? Thank you.
Speaker #5: Oh, thanks for the opportunity. And congratulations on the very solid result. I would like to ask about the future strategy in terms of asset monetization in China.
Speaker #5: After the successful C-REIT IPO, in terms of future injection, does management benchmark the previous set target of five times net debt to EBITDA as a long-term operational target for GDS leverage?
Speaker #5: Or are you more keen to go a little bit more aggressive towards the asset-light model to achieve better investment returns via the five-year development cycle?
Speaker #5: How to think about your future strategy here? Thank you.
Daniel Newman: Thank you for the question. There are a number of different considerations in the asset monetization strategy. One, of course, is the value at which we can monetize assets. The benchmark which has been established in the data center ABS transaction and then at a higher level in the C-REIT transaction remains far above the level at which GDS shares are trading in the international capital markets. The implication of that is that every asset monetization is highly accretive for our shareholders, and I think that alone would be a strong rationale to monetize assets. Secondly, as we described in the prepared remarks, we feel like we are on the threshold of the start of another growth phase, a multi-year growth phase in this industry, which should present some very good investment opportunities.
Speaker #3: Thank you for the question. There are a number of different considerations. In the asset monetization strategy, one, of course, is the value at which we can monetize assets.
Speaker #3: And the benchmark that has been established in the ABS transaction, and then at a higher level in the C-REIT transaction, remains far above the level at which GDS shares are trading in the international capital markets.
Speaker #3: The implication of that is that every asset monetization is highly accretive for our shareholders. I think that alone would be a strong rationale to monetize assets.
Speaker #3: Secondly, as we described in the prepared remarks, we feel like we are on the threshold of the start of another growth phase—a multi-year growth phase in this industry.
Speaker #3: This should present some very good investment opportunities. The return on investment potentially is enhanced now that we know we will be able to monetize assets at cap rates that are certainly higher than what we used to assume in our internal underwriting case.
Daniel Newman: The return on investment potentially is enhanced now that we know that we will be able to monetize assets at cap rates, which are certainly higher than what we used to assume in our internal underwriting case. The implication is that if we can monetize assets and reinvest, then we can create more value for our shareholders. You mentioned the consolidated net debt to EBITDA ratio. I did check back. I think in 2023, I mentioned that we would target it five times within three years, which would give me about another one year, I think. I think we are approaching that level already. But we are now, as I mentioned, at a stage where some attractive new investment opportunities could present themselves. I do not think it is necessary for us to be too aggressive about deleveraging if those opportunities arise.
Speaker #3: That the implication is that if we can monetize assets and reinvest then we can create more value for our shareholders. You mentioned the consolidated net debt to EBITDA ratio.
Speaker #3: I did check back. I think in 2023 I mentioned that we would target it five times within three years, which would give me about another year, I think.
Speaker #3: I think we're approaching that level already. But we're now, as I mentioned, at a stage where some attractive new investment opportunities could present themselves.
Speaker #3: But I don't think it's necessary for us to be too aggressive about deleveraging if those opportunities arise. They don't arise. Then we monetize on accretive terms and deleveraging will naturally happen.
Daniel Newman: If they do not arise, then we monetize on accretive terms, but deleveraging will naturally happen.
Ross Warner: Thank you. I have another question, if I may, regarding the development of DayOne Data Centers Limited. Given the company's belief that the previous 1 gigawatt targets will be achieved far ahead of schedule, what is the current new target for, for example, by the end of this year or next year in terms of the total area committed or megawatt committed? Thank you.
Speaker #4: Thank you.
Speaker #5: I have another question, if I may, regarding the development of Day One. Given the company's belief that the previous one gigawatt targets will be achieved far ahead of schedule, what are the current new targets for, for example, by the end of this year or next year, in terms of the total area committed or megawatts committed?
Speaker #5: Thank you.
William Huang: I think based on current footprint, we build each growth engine in a different region right now. Finland is a very good example in Europe. In Asia Pacific, we already built up very solid and sustainable growth resources, land bank, and power. Our growth will be very solid in the next few years. In general, we target every year at least 500 megawatts. This is some internal KPI. We are coming to the market at least 300. Internal is 500. That is our word. Now we have a very, very solid base to talk about this kind of number because we are not just growing in one country, one region. We have two regions. In the next couple of quarters, maybe we will enter some new regions as well. That will allow us to talk about more big numbers and more high growth. Thank you very much.
Speaker #4: Yeah, I think based on our current footprint, and we build each growth engine in a different region right now. So Finland is a very good example.
Speaker #4: In Europe, and in Asia, Pacific, we're already built up very solid and sustainable growth resource land bank and the power, right? So our growth will be very solid in the next few years.
Speaker #4: So in general, we target every year let's say at least at let's say 500 megawatts. Yeah, this is some internal KPI. But we are coming to the market at least 300, right?
Speaker #4: Internal is five. That's our. But now we have the very, very solid base to talk about this kind of number because we are not adjusted grow in one country, one region.
Speaker #4: We have the two region and in the next next couple of quarter maybe we will enter some new region as well. So that will allow us can talk about more big number and more high growth.
Speaker #4: Yeah, thank you very much.
Ross Warner: Thank you.
Speaker #5: Thank you.
Operator: Thank you.
Speaker #2: Thank you. Now we're going to take our next question. And the question comes from the line of Sarah Wang from UBS. Your line is open.
William Huang: You're very treated.
Operator: Now we are going to take our next question. The question comes to the line of Sarah Wang from UBS. Your line is open. Please ask your question.
Speaker #2: Please ask your question.
Speaker 8: Hi. Thank you for the opportunity to ask a question. Again, congratulations on the solid results. I have one question regarding the customer profile. Given the Q2 growth moving or new orders signed are still quite solid despite all the uncertainties around the U.S. GPU export, may I ask who are the key customers separately for the move-ins and also for the new orders? What kind of workload do we expect for these new orders to carry? Is it mostly CPU or GPU? If it is CPU, is it because the oversupply in the industry has been digested, or if it is GPU, does that mean the domestic substitution has achieved quite meaningful progress so that the supply chain uncertainty going forward should be mitigated? Thank you.
Speaker #3: Hi, thank you for the opportunity to ask a question. And again, congratulations on the solid results. I have one question regarding the customer profile.
Speaker #3: So, given the second quarter growth moving, our new orders signed are still quite solid, despite all the uncertainties around the U.S. GPU export. So, may I ask who the key customers are, separately for the movies and also for the new orders?
Speaker #3: And then what kind of workload do we expect for these new orders to carry? Is it mostly CPU or GPU? And then, like, if it's CPU, is it because the oversupply in the industry has been digested?
Speaker #3: Or if it's GPU, does that mean the domestic substitution has achieved quite meaningful progress? So that the supply chain uncertainty going forward should be mitigated.
Speaker #3: Thank you.
Ross Warner: Customer profile. Ask some further on the workloads.
Speaker #4: Customer profile, right?
Speaker #5: Customer profile and the workloads.
William Huang: I think the first question about customer profile, as I just mentioned, there is a traditional internet company plus a cloud service provider. This is some new order which we get this year. In terms of workload, there is both GPU type and traditional CPU cloud growth as well. I think this is quite a hybrid.
Speaker #4: Yeah, I think the first question about customer profile, as I just mentioned, is that there's a traditional internet company plus a cloud service provider. And also, this is some new order which we got this year.
Speaker #4: Right? And in terms of workload, there's both. I think GPU type and traditional CPU cloud growth as well. So I think this is quite a hybrid, right?
Speaker 8: I see. Maybe a quick follow-up on the demand side. Do we see any signs of price increase or MSR increase in the industry? The reason I am asking is because I saw in Q2, the MSR decline continued to narrow year-on-year and even increase quarter on quarter. If we assume the contract length is maybe five years on average, that means the contracts renewed this year were mostly signed five years ago, that was when the industry MSR or industry rental price was peaked in 2020 or 2021. As we renew the contracts this year, we still maintain a stable MSR. What is the key reason behind? Thank you.
Speaker #3: I see. Maybe a quick follow-up on the demand side. Do we see any signs of price increase or MSR increase in the industry? The reason I'm asking is because I saw in second quarter the MSR decline continued to narrow year on year and even like increased quarter on quarter.
Speaker #3: But if we assume the contract length is maybe five years on average, meaning the contract renewed this year, or was mostly signed five years ago, that was when the industry MSR or industry rental price peaked in 2020 or 2021.
Speaker #3: As we renew the contract this year, we still maintain a stable MSR. So, what's the key reason behind that? Thank you.
Ross Warner: First of all, let's talk about the market price. It's been stable since, you know, the middle of last year, which is quite satisfactory. As I mentioned in my prepared remarks, if we evaluate new investment using a five-year cycle from inception to exit, and even if we use exit cap rates, which are aiming quite a bit off from where our data center ABS and C-REIT transactions were done, we can generate a very acceptable return. I think that's important because there's many industries in China which are suffering in an inflationary environment. The economics of our business remains very solid. The MSR, I know, Sarah, because you asked quite a few times in previous earnings calls, the MSR reduction is partly a reflection of the reduction in the market price. We're talking about on a light-for-light basis, but it's also due to a change in the mix.
Speaker #4: First of all, let's just talk about the market price. It's been stable since, say, the middle of last year, which is quite satisfactory. As I mentioned, you might prepare remarks if we evaluate new investment using a kind of five-year cycle from inception to exit.
Speaker #4: And even if we use exit cap rates, which are aiming quite a bit off from where our ABS and C-REIT transactions were done, we can generate a very acceptable return.
Speaker #4: I think that's important because there are many industries in China that are suffering in this inflationary environment. So, the economics of our business remains very solid.
Speaker #4: The MSRs, I know Sarah could you asked quite a few times in previous earnings calls. The MSR reduction is partly a reflection of the reduction in the market price.
Speaker #4: We're talking about on a like-for-like basis, but it's also due to a change in mix. If you go back five years, at that point, most of our new business was coming from edge-of-town sites.
Ross Warner: If you go back five years, at that point, most of our new business was coming from edge-of-town sites, Langfang, now Beijing, and Changshu, Taichang around Shanghai. Those were the early years for that kind of large edge-of-town campus. There was a significant price differential as there was a significant development cost differential as compared with our sort of downtown co-location data centers. The MSR is not purely an indication of the reduction in market price. It also reflects the change in the location mix. Over the next couple of years, we'll continue to see our MSR decline. Most of it is due to the price reset of contracts. Like you say, you gave an example five years ago. Five years ago, 2020, 2021, the market price had already come down. I think in 2021 and 2022, it came down further.
Speaker #4: Langfang, Mount Beijing, and Changshu Taichang around Shanghai. And those were relatively early years for that kind of large edge of town campus. And there was a significant price differential as there was a significant development cost.
Speaker #4: Differential as compared with our sort of downtown co-location data centers. So the MSR is not purely an indication of the reduction in market price.
Speaker #4: It's also an reflect the change in the location mix. Over the next couple of years, we'll continue to see our MSR decline most of it is due to the price reset of contracts like that you say you gave an example five years ago.
Speaker #4: Five years ago, in 2020 and 2021, the market price had already come down. And again, in 2021 and 2022, it came down further. So we can calculate bottom up on our own contract portfolio.
Ross Warner: We can calculate bottom up on our own contract portfolio. We know a pretty good idea of what the dilution is going to be from price reset over the next couple of years. That will get reflected in our MSR. The MSR will continue to decline by a few percent if we take a quarter compared with the same quarter of the prior year. It will continue to decline by low single-digits percent for the next couple of years. Beyond that, I think we'll start to see much reduced drag, and our growth rate will then reflect quite purely the volume growth in our business.
Speaker #4: We have a pretty good idea of what the dilution is going to be from price reset over the next couple of years. And then that will be reflected in our MSR.
Speaker #4: So the MSR will continue to decline by a few percent if we take a quarter compared with the same quarter of the prior year.
Speaker #4: It will continue to decline by no single-digit percent for the next couple of years. Beyond that, I think we'll start to see much reduced drag.
Speaker #4: And our growth rate will then reflect quite purely the volume growth in our business.
Speaker 8: Got it. Thank you.
Speaker #3: Got it. Thank you.
Operator: Thank you. Now we are going to take our next question. Just give us a moment. The question comes to the line of Frank Wilson from Raymond James and Associates. Your line is open. Please ask your question.
Speaker #2: Thank you. Now we're going to take our next question. Just give us a moment. And the question comes to line of Frank Lawson from Raymond James and Associates.
Speaker #2: Your line is open. Please ask your question.
Speaker 9: Great. Thank you. With the Series C round that you are looking at, are you still considering a broader public offering for DayOne Data Centers Limited in 2026? I think you have talked about it in the past. Can you break out some of the growth in DayOne Data Centers Limited between Southeast Asia and Finland or any other EU sites that you are considering? Thanks.
Speaker #6: Great. Thank you. With the Series C round that you're looking at, are you still considering a broader public offering for day one in 2026, which I think you've talked about in the past?
Speaker #6: And then can you break out some of the growth in day one between Southeast Asia and then Finland or any other EU sites that you're considering?
Speaker #6: Thanks.
Ross Warner: Frank, I think it's a shareholder's plan to have an IPO at DayOne Data Centers Limited from GDS's perspective. In particular, it is because we would like to be able to have the opportunity to distribute the shares to our shareholders. It remains the case that we target to have an IPO within 18 months. Series C, we didn't anticipate that there would be another equity round pre-IPO, but the performance of DayOne Data Centers Limited has far exceeded our expectations. It's been phenomenal, and that's what's driving the Series C. I can't rule out there will be other capital raises before the IPO. DayOne Data Centers Limited has a plan to do some mezzanine debt as well, and that's still the case. These pre-IPO rounds are a function of the success that the business is having. Your second question, I can answer that too.
Speaker #4: Yeah, Frank, I think it's the shareholders' plan to have an IPO on Day One from a GDS perspective. In particular, it's because we would like to have the opportunity to distribute the shares to our shareholders.
Speaker #4: It remains the case that we target have an IPO within 18 months. Series C, we didn't anticipate that there would be another equity round pre-IPO.
Speaker #4: But the performance of Day One has far exceeded our expectations. It's been phenomenal, and that's what's driving the Series C. I mean, I can't rule out that there will be other capital raises before the IPO.
Speaker #4: Day one has a plan to do some mezzanine debt as well. And that's still the case. So these pre-IPO rounds are a function of the success of the business is having.
Speaker #4: Yeah, so second question. I can answer that if you'd like. Yeah.
Ross Warner: You asked to break out Europe. So far, our European presence is in Finland, in the Helsinki area. We have a first campus for which we obtained an anchor customer commitment. It's, I don't want to be too precise, but it's well over 100 megawatt commitment. I expect that we will build on that quite quickly in terms of getting follow-on commitments. The strategy at DayOne Data Centers Limited is to be a pioneer in creating new markets. It's not easy to do that. DayOne Data Centers Limited has done it multiple times now, working with different customers in close collaboration to de-risk our market entry. That gives us the opportunity to build on that base. I think that Finland is a very attractive location for data center operations because of the access to renewable energy, the competitive power tariff, and a very supportive operating environment.
Speaker #5: Yeah.
Speaker #4: Yeah, you asked to break out Europe. So so far, our European presence is in Finland. In the Helsinki area. And we have a first campus for which we obtained an anchor customer commitment.
Speaker #4: And it's, I don't want to be too precise, but it's well over 100 megawatts commitment. I expect that we will build on that quite quickly in terms of getting follow-on commitments.
Speaker #4: The strategy of Day One is to be a pioneer in creating new markets. It's not easy to do that. Day One has done it multiple times now.
Speaker #4: Working with different customers in close collaboration to de-risk our market entry. And then that gives us the opportunity to build on that base. We think that Finland is a very attractive location for data center operations.
Speaker #4: Because of the access to renewable energy, the competitive power tariff, very supporting operating environments. So what you see is just the foundations now in a de-risk market entry secured resource through expansion.
Ross Warner: What you see is just the foundations now in a de-risk market entry, a secured resource for expansion, and the opportunity to add significantly to that.
Speaker #4: And the opportunity to add significantly to that.
Speaker 9: Okay. Great. Thank you.
Speaker #6: Okay, great. Thank you.
Operator: Thank you. Now we are going to take our next question. The question comes to the line of Edison Lee from Jefferies. Your line is open. Please ask your question.
Speaker #2: Thank you. Now we're going to take our next question. And the question comes from line of Edison Lee from Jefferies. Your line is open.
Speaker #2: Please ask your question.
Speaker 10: Thank you for taking my question. My first question is on DayOne Data Centers Limited. You have roughly 780 megawatt converted power. Would you be able to give us some color as to the split between Chinese customers and U.S. customers on that 783 megawatt? I think your long-term objective previously mentioned was 50/50, right? I just want to know the progress on that.
Speaker #4: Thank you for taking my question. My first question is on day one. You have roughly 780 megawatt committed power. Would you be able to give us some color as to the split between Chinese customers and US customers on that 783 megawatt?
Speaker #4: I think your long-term objective previously mentioned was 50/50, right? So I just want to know the progress on that. I I think frankly speaking, the current I think it's percentage-wise not significant improvement.
William Huang: I think, frankly speaking, the current, I think it's percentage-wise, not a significant improvement, but it's because it's a very early stage, right? The last couple of quarters, we experienced this situation because every time we will write some key customers, their demand and the tool type to build our business. Sooner or later, we say that the diversity of our customers is always our direction, right? I think this will change maybe in the next two or three years, right? It will change the whole profile. I think currently, like percentage-wise, I think I do not remember what the exact number, maybe it's 30, 70, right? So 30 from the international customer, 70 from, let's say, Chinese customer, but their overseas business.
Speaker #4: But it's because it's a very early stage, right? The last couple of quarters we experienced this situation. Because every time we will write to some key customers.
Speaker #4: Their demand and drive to build our business will change. Sooner or later, we will say that some of our customers always follow our direction, right? I think this will change.
Speaker #4: Maybe in the next two or three years, right? We'll change the whole profile. I think currently, like a percentage-wise, I think I don't remember the exact number.
Speaker #4: Maybe it's 30/70, right? So 30 from the international customer, 70 from let's say Chinese customer. But they are overseas business. Yeah.
Speaker 10: I see. Okay. Thank you. Quick follow-up here on your guidance. You haven't changed your revenue and EBITDA guidance this year. The first half is very strong, right? I am just wondering how we should think about the second half growth based on guidance not being changed.
Speaker #6: I see. Okay, thank you. Quick follow-up here on the guidance. You haven't changed your revenue and EBITDA guidance this year. And the first half is very strong, right?
Speaker #6: So I'm just wondering what we should how we should think about the second half growth based on guidance not being changed.
Ross Warner: For the second half, we have the impact of deconsolidation of the C-REIT. That was not factored into our guidance, our regional guidance at all. We will be deconsolidating the revenue and EBITDA from late July. So that will have a material impact in terms of the EBITDA for those, the five months post-deconsolidation. I am aware that the implied growth rate for the second half is lower than the actual growth rate for the first half. But we did not feel that we should adjust our revenue and adjusted EBITDA guidance at this point in time.
Speaker #4: Well, in the second half, we have the impact of the deconsolidation of the C-REIT. That wasn't factored into our original guidance at all. We will be deconsolidating the revenue and EBITDA from late July.
Speaker #4: That will have a material impact in terms of the EBITDA for those five months post-deconsolidation. Yeah, I'm aware that the implied growth rate for the second half is lower than the actual growth rate for the first half.
Speaker #4: But we didn't feel it was necessary to adjust our revenue and adjusted EBITDA guidance at this point in time.
Speaker 10: Does it mean that it's going to be impacted more by move-in in the second half and also maybe higher depreciation as you deliver more projects into the second half?
Speaker #6: That's it. Does it mean that it's going to be impacted more by moving in the second half and also maybe higher depreciation as you deliver more projects into the second half?
Ross Warner: I think let's see what the growth rates actually are. There's a lot of moving parts, right?
Speaker #4: Well, I think let's see. Let's see what the growth rates actually are. And so there's a lot of moving parts, right?
Speaker 10: Right. Okay. No problem.
Speaker #6: Right. Okay, no problem.
Ross Warner: We made some comments about it.
Speaker #4: Yeah, we made comments about the application.
Operator: Thank you. Now we are going to take our last question for today. It comes to the line of Gokul Hariharan from J.P. Morgan. Your line is open. Please ask your question.
Speaker #2: Thank you. Now we're going to take our last question for today, and it comes from line of Gokul Hariharan from JP Morgan. Your line is open.
Speaker #2: Please ask your question.
Ross Warner: Yeah. Hi, William, Dan, and Laura. Thanks for taking my question. First of all, it looks like you have a fairly back-end loaded delivery schedule this year. Dan, could you outline how that will influence growth probably into next year, given most of this is likely not captured in this year or even early next year? So should we expect that there should be a reacceleration in revenue and EBITDA growth sometime, maybe Q2 or Q3 next year, given you are delivering a lot of capacity in the second half of this year? That is my first question. You are delivering a lot of capacity in the third and fourth quarter of this year. The incremental revenue per square meter for that capacity is below our MSR. It is an edge-of-town capacity.
Speaker #5: Yeah, hi. William. Dan and Laura, thanks for taking my question. First of all, it looks like you have a fairly back-end loaded delivery scheduled this year.
Speaker #5: Dan, could you outline how that will influence growth? Probably into next year given most of this is likely not captured in this year or even early next year.
Speaker #5: So should we expect that there should be a re-acceleration in revenue and EBITDA growth sometime maybe Q3 next year given you're delivering a lot of capacity in the second half of this year?
Speaker #5: That's my first question.
Speaker #4: You are delivering a lot of capacity in the third and fourth quarters of this year. The incremental revenue per square meter for that capacity is below our MSR.
Speaker #4: Its edge of town capacity consists of a couple of large sites that are being developed specifically for AI inferencing, with a very high power density.
Ross Warner: These are a couple of large sites which are being developed specifically for AI inferencing with a very high power density. Maybe the impact of that is not as great as it would be if this was more traditional cloud business. I think we stick by our, call it, high single-digit EBITDA growth year-on-year. We have a backlog that will drive some of that. We also need to have new bookings to drive that. For now, I think the new bookings at a wholesale level is higher than it was in the last few years, but it is not reflecting mega orders like we saw in the first quarter of this year. Until that happens, I think our growth rate will not really accelerate.
Speaker #4: And maybe the impact of that is not as great as it would be if this was a more traditional cloud business. I think we stick by our high-level direction that we're targeting high single-digit EBITDA growth.
Speaker #4: Year on year, we have a backlog that will drive some of that. But we also need to have new bookings to drive that. And for now, I think the new bookings with a healthy level are higher than they were in the last few years.
Speaker #4: But it's not reflecting mega orders like we saw in the first quarter of this year. So until that happens, I think our growth rate won't really accelerate.
Speaker 10: Fantastic. How are the conversations going with customers regarding some of these AI orders? Given the supply situation, I think it definitely seems a little bit more optimistic in Q3 compared to what it was in Q2. Are you seeing a lot more interest from customers? Is the sticking point still your certainty of availability of chips, or are there any other factors like the AI inferencing workloads related demand is going to come a little bit later within this AI cycle compared to a lot of the remote site training demand that has already happened in the last couple of years?
Speaker #5: Understood. And how are you how are the conversations going with customers regarding some of these AI orders? Given the supply situation, I think definitely seems a little bit more optimistic in Q3 compared to what it was in Q2.
Speaker #5: Are you seeing a lot more interest from customers? And the sticking point is still your certainty of availability of chips? Or are there any other factors, like the inference-related demand, that is going to come a little bit later within this AI cycle compared to a lot of the remote site training demand that has already happened in the last couple of years?
Ross Warner: We saw in the first quarter, if there is no chip supply issue, we would see much stronger bookings. You know that gives us a lot of confidence about the future. So it really is an issue around chip supply. That is not an issue that gets resolved very quickly. There has been policy changes. I think right now, customers are waiting for the new technology in terms of the next generation of NVIDIA chip. So it may not just be all about H20, H20, H20. It could be about the next big thing. I think we will have a clearer view on that in the next couple of months. Then we can talk more precisely about the timing of when we will start to see those large orders. In the meantime, all we can do is get prepared. I think we are very well prepared.
Speaker #4: No, we saw in the first quarter there’s no chip supply issue. We would see much stronger bookings, and that gives us a lot of confidence about the future.
Speaker #4: So it really is an issue around chip supply. And that's not an issue that gets resolved very quickly. There's been policy changes and I think right now there's I think customers are waiting for the new technology in terms of the next generation of Nvidia chip.
Speaker #4: So it may not just be all about H20, H20, H20. It could be about the next big thing. And I think we'll have a clearer view on that in the next couple of months.
Speaker #4: Then we can talk more precisely about the timing of when we'll start to see those large orders. In the meantime, all we can do is get prepared.
Speaker #4: And I think we're very well prepared. Yeah, we've had the powered land. We've incurred some CapEx to prepare that too, which shortens the lead time.
Ross Warner: We have had the powered land. We have incurred some CapEx to prepare that, which shortens the lead time. We know from our previous experience in China and also from observing experience of DayOne Data Centers Limited that when customers are deploying AI, they are usually in a hurry. So I think we are very well prepared in terms of developable land. We are well prepared in terms of our access to capital, both the capital we have raised and our ability and confidence in being able to recycle more. I do not think there are any other data center companies in China which are as well prepared in both those respects.
Speaker #4: And we know from our previous experience in China and also from observing the experience of day one that when customers are deploying AI, they're usually in a hurry.
Speaker #4: So, I think we're very well prepared in terms of developable land. And we're well prepared in terms of our access to capital—both the capital we've raised and our ability and confidence in being able to recycle more.
Speaker #4: I don't think there's any other data center companies in China that are as well prepared in both those respects.
Speaker #6: Yeah.
Operator: Thank you, Gokul. Dear participants, thank you very much for your time. Due to the time limit of today's call, we will not be addressing any further questions. At this moment, we would like to turn the call back over to the company for any closing remarks.
Speaker #2: Thank you, Gokul. Yes, participants, thank you very much for your time. Due to the time limit of today's call, we will not be addressing any further questions.
Speaker #2: And at this moment, I would like to turn the call back over to the company for any closing remarks.
Speaker 8: Thank you very much once again for joining us today, and see you next time. Bye.
Speaker #3: Thank you very much, once again, for joining us today. We look forward to seeing you next time. Bye.
Speaker #4: Okay.
Speaker 10: Thank you.
Operator: This concludes today's conference call. Thank you for participating. You may now all disconnect. Have a nice day.