Dec 5, 2016
Executives
Laura Chen - Head of IR William Huang - Founder, Chairman and CEO Dan Newman - CFO
Analysts
Operator
Hello ladies and gentlemen. Thank you for standing by for GDS Holdings Limited’s Third Quarter 2016 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.
Laura Chen
Hello everyone and welcome to the third quarter 2016 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 Chief Executive Officer, who will provide an overview of the business. Mr.
Dan Newman, GDS’s Chief Financial Officer, will then review the Company’s third quarter 2016 operational and financial results. 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.
Securities and Exchange Commission. 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 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 will now turn the call over to GDS’s Founder, Chairman and Chief Executive Officer, William Huang who will start his discussion on slide 3.
Please go ahead.
William Huang
Hi everyone. Thank you for joining our first quarterly earnings conference call as a NASDAQ-listed public company.
Our Initial Public Offering on November 2nd was an important milestone for our Company. It enhances our brand and it increases our transparency.
This will help us extend our market leadership position. Turning to Slide 4, we are very pleased to report a record quarter with robust financial and operating results, as you can see on slide four.
Let’s move on to Slide 5 that highlights our sales achievement. We have added nearly 70% to our total area committed year-over-year.
This accelerating growth is primarily driven by strong demand from cloud service providers, which has taken off as gigantic companies like Alibaba and Tencent have made it their strategic priority. From what we know about our customers and where they are at, there is a long runway ahead and incremental demand is huge.
We are just in the early stages of cloud development here in China. In addition, we won two significant new customers which add to our outstanding portfolio of market-leading customers.
One is a top-tier Internet giant in China and the other is a top-three technology company from the US. We also won substantial new business from our existing customers.
Turning to our data centers on Slide 6, our construction plan is moving forward smoothly, on schedule and within budget. Our current projects will add around 37 thousand square meters of capacity, which is already nearly 35% pre-committed.
We continue to look for opportunities to increase capacity to meet growing demand. In closing, I’m thrilled about the tremendous data center opportunities in China and the rapidly escalating demand we are seeing from our Internet, E-commerce and Cloud customers.
As a first-mover and market pioneer in China, we are well positioned to capture the opportunities, grow the business and deliver shareholder value. With that, I will now turn the call over to our CFO, Dan Newman, who will discuss our financial results and additional key operating metrics.
Dan Newman
Thank you, William, and hello everyone. Slide 8 summarizes our third quarter results.
Service revenue grew by 57% year-over-year and 14% sequentially in the third quarter of 2016. Our adjusted EBITDA margin hit 26.2%, a sign of our operating leverage.
On Slide 9, you will see the total area committed increased 70% year-over-year and 31% sequentially to 58 thousand square meters. Total area utilized increased 63% year-over-year and 7% sequentially to 34 thousand square meters.
As a result of the strong sales growth, contract backlog (the difference between area committed and utilized) nearly doubled. Contract backlog is an important metric as it provides visibility to our future revenue growth.
Out of our 24 thousand square meter backlog as of September 30, 2016, around 11 thousand square meters relate to area already in service and 13 thousand square meters relate to area under construction. Based on minimum contractual commitments, the backlog will be largely delivered within the next four to five quarters.
We always plan on the basis of contractual minimums, but in practice, we consistently see our customers moving in ahead of schedule. Average Selling Price (ASP) for the backlog, as measured per square meter, is in-line with what we are achieving for our current revenue-generating space.
At this point, I’d like to update you on a customer development. We recently became aware that one of our customers intends to terminate its contracts with us as a result of a merger between the customer and one of its competitors in China.
This customer represented 3.7% of our total area committed and 3.6% of our area utilized, as of September 30, 2016, and was based in our Shanghai number one and two data centers. We are working through the details, but we expect the customer to terminate either at the very end of 2016 or early in January 2017.
We are entitled to a termination fee equal to around 9 months revenue from the contract. We have strong demand for our Shanghai data centers and, as a result, we are confident we can re-sell the space terminated by this customer bymid-2017.
In sum, the contract termination is not material to our business and it will not negatively impact our 2016 and 2017 financial performance. We will provide an update on our re-sale progress at the time we report our fourth quarter 2016 earnings.
Turning to Slide10, the increase in our service revenue over the previous quarter was mainly due to (1) an increase in area utilized as customers moved in and (2) an increase in revenue generated by our Guangzhou number one and Shenzhen number two data centers, which commenced operations during the second quarter of 2016. Our monthly service revenue decreased to 2,675 RMB (or 401 dollars) per square meter for the third quarter of 2016, compared with 2,780 RMB per square meter for the second quarter of 2016.
This slight change is a function of lower billing for new utilized space during the transitional period at the start of new contracts. Slide 11 adjusted EBITDA was 78 million RMB (or11.7milliondollars) in the third quarter of 2016, an 82.7% increase over the third quarter of 2015 and a 65.2% increase over the second quarter of 2016.
Adjusted EBITDA margin was 26.2% in the third quarter of 2016, compared with 22.5% in the third quarter of 2015 and 20% in the second quarter of2016. Excluding IT equipment sales and related costs, adjusted EBITDA margin for the third quarter of 2016 was27.4%.
Utilization rate of area in service was 70.4% at the end of the third quarter of 2016, compared with 56% at the end of the third quarter of 2015 and 66.2% at the end of the second quarter of2016. Our capital expenditures on Slide 12 increased in the third quarter of 2016 to 386.9 million RMB (or 58 million dollars) mainly due to the accelerated development of our Shanghai number three data center, the cost of completing the newly acquired Guangzhou number one data center and the initiation of our Shenzhen four project.
For our data centers under construction, as of the end of the third quarter of 2016 we need to incur an additional 1.7 billion RMB (or 255 million dollars) to complete the construction and full fit out. We have achieved an overall pre-commitment rate of 34.5% for data centers under construction, which reflects the strength of demand.
We have significant demand in hand and contracts in process for the available resource that is scheduled to come into service between now andmid-2017. Now, turning to our balance sheet and liquidity on Slide 13, as of September 30, 2016, gross debt was 3.9 billion RMB (or 589.6 million dollars), of which 83% was long term.
We had cash of 798.7 million RMB (or 119.8 million dollars) and the net proceeds from the IPO were a further 180 million dollars net of underwriting discount and IPO related expenses. Pro forma for the net IPO proceeds, our net debt to last quarter annualized adjusted EBITDA ratio at the end of the third quarter of 2016 was 6.2x.
We recognize that our leverage level is higher than you would typically see for mature market data center businesses. However, a lot of our debt is project-based and tied to the cash flows of those projects.
As a result, we can manage higher nominal debt levels. We are confident of our ability to manage debt at these levels and higher going forward.
Finally, we will not be providing forward-looking guidance as part of today’s earnings conference call. We intend to provide forward-looking guidance for 2017 at the time we report our fourth quarter 2016 earnings.
This concludes our prepared remarks. We now welcome your questions.
Operator, please go ahead.
Operator
Laura Chen
Thank you once again for joining us today. If you have further questions, please feel free to contact GDS’s investor relations through the contact information on our website or The Piacente Group Investor Relations.
Operator
This concludes this conference call. You may now disconnect your line.
Thank you.