GDS : 2Q23 Earnings Transcript

REFINITIV STREETEVENTS

EDITED TRANSCRIPT

Q2 2023 GDS Holdings Ltd Earnings Call

EVENT DATE/TIME: AUGUST 22, 2023 / 12:00PM GMT

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AUGUST 22, 2023 / 12:00PM GMT, Q2 2023 GDS Holdings Ltd Earnings Call

CORPORATE PARTICIPANTS

Laura Chen GDS Holdings Limited - Head of Investor Relations

William Huang GDS Holdings Limited - Chairman and CEO

Daniel Newman GDS Holdings - CFO

CONFERENCE CALL PARTICIPANTS

Yang Liu Morgan Stanley - Analyst

Jonathan Atkin RBC Capital Markets - Analyst

Frank Louthan Raymond James - Analyst

Sara Wang UBS - Analyst

Timothy Zhao Goldman Sachs - Analyst

Mingxuan Li CICC - Analyst

Cooper Belanger TD Cowen - Analyst

PRESENTATION

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-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 GDS Holdings Limited - Head of Investor Relations

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 founder, Chairman and CEO, who will provide an overview of our business strategy and performance. Mr. Dan Newman, GDS 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 US 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 US 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 includes discussions of unaudited GAAP financial information 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.

I will now turn the call over to GDS founder, Chairman and CEO, Mr. William Huang. Please go ahead, William.

William Huang GDS Holdings Limited - Chairman and CEO

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.

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AUGUST 22, 2023 / 12:00PM GMT, Q2 2023 GDS Holdings Ltd Earnings Call

We are leveraging our competitive advantages in cost and speed and execution. We are financing expansion without relying on GDS balance sheet, and we will benchmark value creation through external funding rounds.

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 this target.

Turning to slide 5, in the first half of 2023, our gross additional area committed was around 28,000 square meters, 55% from China and 45% internationally. 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 up our growth. For the second half of 2023, we expect gross new bookings at similar levels to the first half.

Looking further ahead, there is no doubt such 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 2Q23, 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 move-in schedule.

Outside Beijing, in Langfang, we won a 3,600 square meters, or 8.3 megawatts order from a large internet customer. This is for expansion at a site where the customer has already deployed.

In Southeast Asia, we were able to increase power capacity for our Johor data centers, which results in upsizing of an existing order.

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 gross add 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 meters in China and 20,000 square meters 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. Fourteen months ago, this was an empty piece of land. Today you can see three large data centers, one of which is for AI computing, with 70 megawatts of IT power capacity in total.

Our ability to deliver so quickly in the new overseas market says a lot about our execution capabilities. For this project, we use our proprietary prefabricated liquid cooling and power modules. It gives 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.

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AUGUST 22, 2023 / 12:00PM GMT, Q2 2023 GDS Holdings Ltd Earnings Call

Daniel Newman GDS Holdings - CFO

Thank you, William. Starting on slide 18, in conjunction with our strategic business objectives, we have 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 freecash flowpositive within three years or sooner, with the benefits of asset monetization, and we will bring down net debt to adjusted EBITDA to below five 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 2Q23, we grew revenue by 2.6% quarter-on-quarter, and adjusted EBITDA by 9.3% quarter-on-quarter. During 2Q23, 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 1H23, we achieved net additional area utilized of 12,000 square meters. While gross add was sustained at historic levels, net add was impacted by a single customer redeploying between our data centers, as previously disclosed. This redeployment will continue into the second half of 2023. However, with contribution from international, we expect net additional area utilized to step up significantly.

Multi-service revenue per square meter was RMB2,170 in 2Q23. 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 4Q23 to 4Q22, we still expect an MSR decrease of around 4% over the course of this year.

Turning to slide 21, for 2Q23, our adjusted EBITDA margin was exactly 50%. Excluding the one-time service revenue arising from early termination and cash reimbursement, the adjusted EBITDA margin was 47.6%, a small increase on the previous quarter.

In 3Q23, 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 1H23, 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 1H23, our international CapEx was RMB1.2 billion. In 2H23, 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 2Q23, 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 2Q23, 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 mid-year. 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 2Q23, 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 a first-round private equity capital raise.

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AUGUST 22, 2023 / 12:00PM GMT, Q2 2023 GDS Holdings Ltd Earnings Call

Turning to slide 24, we confirm that our guidance for FY23 revenue, adjusted EBITDA and CapEx remain unchanged.

We would now like to open the call to questions. Operator, please.

QUESTIONS AND ANSWERS

Operator

Thank you, sir. (Operator instructions).

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.

We are now going to proceed with our first question, and the question comes from the line of Yang Liu from Morgan Stanley. Please ask your question.

Yang Liu Morgan Stanley - Analyst

Thanks for the opportunity to ask a question. I have a question related with international business. Previously, I think you talked a lot in terms of the strategy going in the surrounding area of Singapore and now you have a power quota or the permit to build 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 GDS Holdings Limited - Chairman and CEO

Okay, thank you Yang Liu. I think the strategy for Southeast Asia from day 1, we already form very, very clear view to build a data center in three major place. One is Singapore, one is Johor, one is Batam Highland. This in our view is preferred structure for serve the current requirement, even for the future requirement, because as everybody knows, Singapore is a network hub and a lot of our customer who want to deploy the data center in this region try to get their network or network hub in Singapore.

we also plan to link these three data center area together 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 owns a data center in three areas, so this is perfect for our future, let's say, marketing, right?

So, this is our major focus. It's our core asset to develop in the next five years. But on the other hand, we're also very proactively looking for some opportunity in Jakarta, KL and also other country opportunity. But again, I said, SIJORI area will be our focus in the next five years. We believe that demand is getting more stronger and stronger, so the future visibility is very, very high.

The second question, the spin off, I think definitely last quarter we already introduced it. We will s look at our business, one is China portion, one is international. The two markets actually is in a different situation.

In China, everybody knows that in the last two years it's a slowdown, but we should echo this situation. So, we form our new strategy to try to push China business moving towards the cashflow positive and strengthen our financial capability. We already introduced to the market and 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 can leverage our 20 years' experience and capability to well catch up this opportunity. So, in the international business, we will aim to grow more fast than in China business. So we need more capital but we don't want use more our holding capital to develop the business.

So, in the next few months, we already start to 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.

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