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.
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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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