GDS Holdings Limited (NASDAQ:GDS) Q2 2023 Earnings Call Transcript

GDS Holdings Limited (NASDAQ:GDS) Q2 2023 Earnings Call Transcript August 22, 2023

Operator: Hello, ladies and gentlemen, thank you for standing by for the GDS Holdings Limited’s Second Quarter 2023 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 would now like to turn the call over to your host, Ms. Laura Chen, Head of Investor Relations for the company. Please go ahead. Laura.

Laura Chen: Hello, everyone. Welcome to the second 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 during this conference call, can be viewed and downloaded from our IR website at investors.gds-services.com. Leading today’s call is Mr. William Huang, GDS’s Founder, Chairman and CEO, who will provide an overview of our business strategy and performance. Mr. Dan Newman, GDS’s CFO, will then review the financial and operating results. Ms. Jamie Khoo, our COO, is also available to answer questions. Before we continue, please note that today’s discussion will contain forward-looking statements made under the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995.

Forward-looking statements involve inherent risks and uncertainties. As such, the company’s results may be materially different from the views expressed today. Further information regarding these and other risks and uncertainties is included in the company’s prospectus as filed with the U.S. SEC. The company does not assume any obligation to update any forward-looking statements, except as required under applicable law. Please also note that GDS’ 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 measures. I’ll now turn the call over to GDS Founder, Chairman and CEO, Mr. William Huang.

Please go ahead, William.

William Huang: Thank you. Hello, everyone. This is William. Thank you for joining us on today’s call. During the second quarter, we continued to focus on our – strategic business objectives. In China, we are selectively targeting new business to give us a shorter book-to-bill cycle. We are prioritizing delivery of the backlog to grow revenue with less CapEx. We are increasing utilization rates to drive up return on invested capital. We are only initiating new projects based on firmly committed orders, and we are monetizing assets to achieve positive free cash flow as soon as possible. For international, we are developing a second growth engine. We are winning new business from reference China and global customers. We are leveraging our competitive advantages in cost and speed of execution.

We are financing expansion without relying on GDS balance sheet, and we will benchmark valuation creation through external funding loans. By pursuing these objectives, we will strengthen our financial position and unlock value for GDS shareholders. As we review our performance quarter-by-quarter, we will measure our progress against these targets. Turning to the Slide 5. In the first half of 2023, our growth additional area committed was around 28,000 square meters, 55% from China and 45% international. In China, new business volumes are down as customers need more time to ramp up. This gives us breathing space to focus on our other priorities, while our market leadership position remains as strong as ever. In Southeast Asia, demand is very strong.

We have won great new business, which lifts us our growth. For the second half of 2023, we expect gross new booking at similar level to the first half. Looking further ahead, there is no doubt that demand will rebound in China. Data center supply in Tier 1 markets has been restricted for several years. As demand strengthens, we will be well-positioned with our secured pipeline. Turning to Slide 7. In 2Q ’23, we won three notable orders. In Beijing, we won a 3,200 square meters or 6.1 megawatt order from a major Chinese financial institution. This used up some of our inventory and comes with a confirmed moving schedule. Outside of Beijing, in Langfang, we won a 3,600 square meters or 8.3 megawatt order from a large Internet customer. This is a full expansion at a site where the customer has already deployed.

In Southeast Asia, we were able to increase power capacity for our Johor Data Centers, which results in upsizing of an existing order. Turning to Slide 8. Our gross move-in for the second quarter was around 15,000 square meters. This is consistent with the quarterly run rate for the past two years. In the second half of 2023, we will start to see significant move-in from international. As a result, our quarterly growth added will be higher than in prior quarters. Turning to Slide 13. We are bringing new capacity into service when customers are ready to move-in. In the first half of 2023, we brought 15,000 square meters into service, almost all in China. In the second half of 2023, we will bring another 50,000 square meters into service, 30,000 square meter in China and a 20,000 square meter international.

All of this capacity has confirmed move-in schedules. Turning to Slide 16. We recently held an opening ceremony to deliver our first data center at the Nusajaya Tech Park, Johor. 14 months ago, this was an empty piece of land. Today, you can see three large data centers, one of which is for AI computing, which – with 70 megawatt of IT power capacity in total. Our ability to deliver so quickly in the new oversea markets says a lot about our execution capabilities. For this project, we use our proprietary prefabricated liquid cooling and power modules. It give us time-to-market and development cost advantage, which are critical success factors in today’s market. When we set up in Johor, our vision was to establish the SIJORI data center hub to serve the region by integrating Johor, Batam, and Singapore.

We are, therefore, delighted to be selected by the Singapore government along with three other data center operators for a total of about 80 megawatt new data center capacity in Singapore through the pilot data center call for application DC-CFA exercise. We are finalizing our development plans and will provide updates in due course. In Batam, we continue to make progress with establishing the essential infrastructure for our proposed development. Our International expansion is gaining momentum. I will now pass on to Dan for financial and operating review.

Dan Newman: Thank you, William. Starting on Slide 18. In conjunction with our strategic business objectives, we’ve adopted the following key financial targets. For the China segment, we aim to grow adjusted EBITDA at a mid-teens percentage CAGR. We are reducing organic CapEx to an annual level of RMB2 billion to RMB3 billion from next year onwards. We will be free cash flow positive within three years or sooner with the benefits of asset monetization. And we will bring down net debt to adjusted EBITDA to below 5 times. For the International segment, we will be EBITDA positive next year. Based on our current business plan, International will generate over 15% of consolidated adjusted EBITDA after three years. We are taking a low-risk approach only investing with the backing of firm customer orders and achieving similar returns to China.

We will raise equity capital directly at the International level and project finance on a non-recourse basis. Turning to Slide 19. In 2Q ’23, we grew revenue by 2.6% quarter-on-quarter and adjusted EBITDA by 9.3% quarter-on-quarter. During 2Q ’23, we recognized one-time service revenue of RMB70.7 million arising from early termination of 3,000 square meters from the backlog and cash reimbursement of RMB22.1 million from our depository bank. Excluding these two items, revenue was flat and adjusted EBITDA was up 1.1% quarter-on-quarter. Turning to Slide 20. During 1H ’23, we achieved net additional area utilized of 12,000 square meters. While gross add was sustained at historic levels, net add was impacted by a single customer redeploying between our data centers, as previously disclosed.

This redeployment will continue into the second half of 2023. However, with contribution from International, we expect net additional area utilized to step up significantly. Monthly service revenue per square meter was RMB2,170 in 2Q ’23. Excluding the one-time service revenue arising from early termination, MSR was RMB2,108 per square meter, a decrease of 1.9% versus the previous quarter. Comparing 4Q ’23 to 4Q ’22, we still expect an MSR decrease of around 4% over the course of this year. Turning to Slide 21. For 2Q ’23, our adjusted EBITDA margin was exactly 50%. Excluding the one-time service revenue arising from early termination and cash reimbursements, the adjusted EBITDA margin was 47.6%, a small increase in the previous quarter. In 3Q ’23, we are seeing higher power tariffs and higher power usage in the peak summer months.

As a result, our margins will be seasonally impacted in the current quarter before recovering in the fourth quarter. Turning to Slide 22. In 1H ’23, our organic CapEx in China was RMB2.2 billion. We expect the full year to be in line with our guidance of RMB3.5 billion. In 1H ’23, our International CapEx was RMB1.2 billion. In 2H ’23, our International CapEx will increase to around RMB2.8 billion as we deliver 70 megawatts in Johor by January of next year. All of this capacity is billable within a few months of delivery. Looking at our financing position on Slide 23. At the end of 2Q ’23, our net debt to last quarter annualized adjusted EBITDA was 7.7 times. Excluding the debt and negative EBITDA of International, the multiple was 6.7 times.

During 2Q ’23, we repaid $300 million, when a CB was put. As a result, our cash position decreased to RMB8.2 billion or $1.1 billion at midyear. We are still working on the debt refinancing, which is required for the data center fund. When this is finalized, it will raise our cash balance by RMB1.5 billion. Up to the end of 2Q ’23, we provided around $400 million of funding to our international group by way of paid-up share capital and shareholder loans. In addition, international had incurred around $400 million of external debt. We now intend moving ahead with the first round private equity capital raise. Turning to Slide 24. We confirm that our guidance for FY ’23 revenue, adjusted EBITDA, and CapEx remain unchanged. We’d now like to open the call to questions.

Operator, please?

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Q&A Session

Operator: [Operator Instructions] We are now going to proceed with our first question. And the questions come from the line of Yang Liu from Morgan Stanley. Please ask your question.

Yang Liu: Thanks for the opportunity to ask a question. I have a question related with the international business. Previously, I think you talked a lot in terms of the strategy going – the surrounding area of Singapore. And now you have a power quota or the permit to build a data center inside of Singapore. So what could be the updated strategy for the whole Southeast Asia development plan? Especially what will be the business model for the Singapore data center? And of course, whether you have a plan to spin off the whole international business.

William Huang: Okay. Thank you, Yang Liu. I think the strategy for Southeast Asia from day 1, we already firm very, very clear view to build a data center in three major places. One is Singapore. One is Johor. One is Batam Island. This is, in our view, is a perfect structure for serve the current requirement even for the future requirement. Because Singapore – as everybody knows, Singapore is a network half and a lot of our customers who want to deploy the data center in this region try to get their network in Singapore network – pop whatever called. But these three, we have also plan to link this three data center area together – as to serve to our customer as a platform. So I think the business will give us a lot of advantage in the future compared with other competitors.

We are the first one who own these three – own the data center in three areas. So this is perfect for our future, let’s say, marketing, right? So this is our – major focus, is our core asset to get back in the next five years. But on other hand, we’re also looking for very proactive to looking for some opportunity in Jakarta, Kao, and also other countries opportunity. But again, I say, this is, we call the SIJORI area will be our focus in the next five years. And we believe the demand is getting more stronger and stronger. So the future visibility is very, very high. The second question is the spin-off. I think definitely, Dan already – last quarter, we already introduced it. We will focus on – we will spread the business to look at our business.

One is China portion, one is international. The two market actually is in different situations. In China, everybody – demand in the last two years is a slowdown, but we should echo this situation. So, we firm our new strategy to try to push China business moving towards the cash flow positive and strengthen our financial capability. This is our – we already introduced to the market in – that’s our business plan in next three years. But on the other hand, since the AI coming in a very big way, so I think we have to – we can leverage our 20 years’ experience and capability to catch up – well catch up this opportunity. So in international business, we will aim to grow more fast than in China business. So we needed more capital, but we don’t want to use more our Holding capital to get back the business.

So in the next few months, we already started working on that to raise external funds to support our international business. We got a lot of the interest from the different private equity, so far, yes.

Yang Liu: Yes. Thank you.

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