Mar 2, 2017
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 Fourth Quarter and Full Year 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 fourth quarter and full year 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 financial and operating results and provide our outlook for 2017. 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’s 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.
Please go ahead.
William Huang
Hello everyone. This is William.
Thank you for joiningtoday’scall. 2016 was a year of great achievement for GDS.
As you can see on Slide 3, we grew Service Revenue by over 50% and Adjusted EBITDA by over 60%. We invested significantly to expand our capacity and our sales growth was phenomenal.
We signed up customers for 25,000 square meters of new contracts, worth over $120 million in annual recurring revenue. Based on leading market research, our incremental market share grew to over 30%.
We delivered nearly 15,000 square meters of Area, Utilized to customers. We added over 23,000 square meters of new capacity into service and ended the year with a very high level of commitment rate.
Turning to Slide 4, our huge contract backlog has become even bigger. This gives us high visibility to future growth.
At the end of 2016, we had over 23,000 square meters committed, but not yet utilized, worth over $110 million in annual recurring revenue. We are continuing to execute against our plan, delivering our backlog to customers and driving impressive revenue and operating growth quarter after quarter.
On Slide 5, before I discuss our results and strategy, I would like to share our views on the market. As we have stated previously, we believe China represents the biggest data center opportunity in the world.
And we believe that GDS is the best positioned in the market. It’s well documented that the digital economy in China is booming and Cloud adoption is leading the way.
Compared to the USA, cloud adoption is still in its infancy, but growing fast. China’s internet giants are squarely focusing more and more on Cloud.
At the same time, the Global Cloud giants are focusing more and more on the China market. All over the world, Cloud Service Providers are driving huge demand for data center capacity.
Here in China, we see this trend magnified. Leading Cloud Service Providers in China are driving the majority of new demand.
These guys are looking to outsource all of their requirements in Tier 1 markets. But, it’s not easy for them to do this.
First, Cloud Service Provider s here require huge space and power. In China, in the big cities, that’s a big challenge.
Second, they are deploying their Cloud platforms in all the Tier 1 markets at the same time, so you need to be ready everywhere. Third, they want certainty of getting capacity when and where they need it.
Fourth, they want to work with people who understand their requirement and perform to a very high standard. They want flexibility and a total solution provider.
Here is our golden opportunity. As we have described before, GDS is uniquely positioned in this environment, better than anyone else.
We have had great success in capturing demand from Cloud. From almost nothing 3 years ago, Cloud Service Providers now account for 45% of our business, as shown on Slide 6.
We believe that we are the leading supplier to the Top 3 Cloud players in China. They are all using multiple GDS datacenters.
Why do we win with Cloud Service Providers? We win with these customers by having the right assets in all the right places, which nobody else has.
And, these assets are backed up by a secure expansion pipeline and our 15-year solid track record of operational excellence. We believe we have a win-win partnership with the Cloud customers.
They are important to us and we are also important to them. As we get stronger and stronger, this partnership also continues to grow stronger.
Our strong position with Cloud service providers makes us the natural choice for enterprise customers. Our data centers offer enterprises co-location space and a unique access point to multiple Clouds.
Cloud service providers attract enterprises. As we explained on our road show, this focus is central to our growth strategy and it’s working.
In 2016 we added more than 120 new enterprise logos. In particular, we have had great success with a new kind of financial customer offering e-payment, online securities, clearing and settlement services.
We believe this type of customer offers a long runway for expanded services. Resource supply is critical to keep up our sales momentum.
We believe that our ability to source, design, and construct new projects are key competitive advantages. As shown on Slide7 at the end of 2016, we had about 25,000 square meters of Area Under Construction, of which 27% was pre-committed.
In the current quarter, we are in the process of taking over a new project in Shenzhen with 10,000 square meters of high-powered space under construction, which is already 50% pre-committed to a major Cloud customer. We are actively seeking to add new projects to our development pipeline.
We have promising prospects in all our markets which we aim to convert in the next few quarters. Turning to Slide 8, we are in a much stronger position now than when we began 2016.
We’ve added capacity, attracted new customers, deepened our existing engagements and executed according to plan. We’ve seen across-the-board improvement and now are bigger and stronger than we ever been.
There is huge growth to come from the Cloud customer segment and we want to be the hub for cloud and enterprise development. With our established relationships, we believe that we are in a good position to win this demand.
In 2017, we aim to deepen our relationships with the major Cloud customers. We are aligning our resource plan to meet their requirements.
We are helping them to access our enterprise customer base. At the same time, we are leveraging the Cloud platforms in our data centers to attract and add value to enterprise customers.
As we enter 2017, we will leverage the solid foundation we have laid and continue to deliver resources to fulfill our sales growth. Our key objective for the current year is to be at the level of sales which we achieved in 2016 and we are confident of doing it.
I will now hand over the call to Dan for the financial review.
Dan Newman
Thank you, William. In this section, I will focus on 4 main areas: (1) Revenue and Operating Leverage, (2)CapEx, (3) Funding, and then (4) the 2017 Business Outlook.
Starting with the 4Q16 P&L analysis on Slide10. We view Service Revenue, Net Operating Income and Adjusted EBITDA as the key financial indicators of our performance.
After stripping out Equipment Profit, Stock-Based Compensation, and FX Gains, all three measures show year-on-year growth of over 50% and quarter-on-quarter growth of over 10%. Let’s go in to detail on revenue.
We have two revenue segments, comprising Co-location and Managed Services (which we refer to as “Service Revenue”) and Equipment Sales. Service Revenue is recurring in nature and this is what we consider our core business.
Equipment Sales arise on a demand-basis, when customers require us to do some procurement as part of the fulfillment of the service contract. This is non-core.
It may help to strip out Equipment Sales less Cost in order to see more clearly the underlying performance of the Service business. The amounts for Equipment Profit in each period are shown in the note below the table.
In 4Q16, our Service Revenue grew by 55% year-on-year and by 12.3% quarter-on quarter. Next, Underlying Adjusted Net Operating Income.
This measure highlights our performance at the data center level, before taking account of depreciation, equipment profit, stock- based compensation and corporate costs. In 4Q16, our Underlying Adjusted NOI grew by 58% year-on-year and by 10.2%quarter-on- quarter.
SG&A, after deducting Stock-Based Compensation, was RMB 68.6 million in 4Q16, an increase of 32% year-on-year and 9.7% quarter-on-quarter. This increase mainly relates to expanded sales activities and increased corporate costs as we prepared for life as a publicly listed company.
“Other Income” mainly comprises Foreign Currency Exchange Gains. The gain in 4Q 16 arises from depreciation of the Reminbi against the US dollar.
Underlying Adjusted EBITDA, excluding Equipment Profit and FX Gains, was Rmb79.3 million in 4Q16, implying growth of 90% year-on-year and 12.4% quarter-on-quarter. Underlying Adjusted EBITDA Margin, excluding Equipment Profit and FX Gains, was 26.5% in 4Q16, compared with 21.5% for 4Q15 and 26.4% for 3Q16.
Turning to the Full Year P&L Analysis on Slide 11 as I stated earlier, all 3 measures show robust growth. We achieved Service Revenue of RMB 1 billion in FY16, showing a growth of 53%, driven mainly by the near 15,000 square meter increase in Area Utilized, or revenue-generating space, during the year.
Adjusted NOI grew by 48%. If we exclude Equipment Profit, Underlying Adjusted NOI grew by 56%.
The Adjusted NOI Margin was 45%,the same as FY15. At the individual data center level, there was significant operating leverage as utilization ramped up during FY16.
However, at the consolidated level, this was offset by the growth drag from over 23,000 square meter new Area In Service. This is typical of the data center lifecycle.
Adjusted EBITDA grew by 64% and Underlying Adjusted EBITDA grew by 84%. Now let’s go further into the key drivers of this growth.
As you can see on Slide 12, Service Revenue and Area Utilized grow in synch. In 4Q16,there was an increase in Area Utilized of over 2,700 square meter.
The Churn event which we discussed on our last earnings call took effect in early January 2017, so it did not impact these numbers. The MSR per square meter in 4Q16 was slightly higher compared to the prior quarter, but this is within the normal range of fluctuation.
On the right hand side of Slide 13, we show a breakdown of our cost structure for 4Q16. Starting at the data center level utility cost, which is mainly a variable cost, was 23.2% of Service Revenue in 4Q16.
We do expect to see some upward trend in Utility Cost as we have more high power density customers moving in. In addition, we have new data centers which take a while to reach optimal power usage efficiency.
Other data center-level costs are mainly fixed. The Adjusted NOI margin for the Service business was 46.7% in 4Q16.
This was achieved on capacity with an average 65.6% Utilization Rate. This capacity was practically sold out.
So as the Backlog is delivered and the Utilization Rate rises we should see further operating leverage on fixed costs. Moving on the corporate level, our SG&A is dimensioned for current growth levels, so we expect to achieve significant operating leverage on our SG&A costs.
As shown on Slide 14, we incurred CapEx of RMB 1.1 billion (or $165 million) in FY16,representingan increase of 57% year-on-year. Our CapEx growth is in line with new business and revenue growth.
For the capacity “In Service” at year end, the cost to complete was RMB 293 million. For the capacity “Under Construction” at year end, the cost to date was RMB 269 million and the cost to complete was RMB 1.1 billion, most of which we expect to incur in the current year.
In addition, we will have CapEx related to the new project,SZ5, which we are taking over and to other new projects which we expect to initiate during 2017. Reviewing each of the projects, SZ4 Phase 1 will enter service in 2Q17.
It was 19.2% pre-committed at year-end. There are currently major customer orders in the contracting process.
CD1 Phase 3 will enter service in mid-17 and is 100% pre-committed. BJ2 will enter service in 2H17.
There was some delay to this project caused by the Government mandated shutdown of construction in Beijing during a high pollution period. Construction of BJ2 has re-started.
The pre-commitment rate is now 31.4%,including a significant follow-on order from a major US Cloud customer which we closed in the current quarter. SH4 is the 4th data center on our main Shanghai campus.
The shell and core were built-to-suit by a property development company. We aim to bring the data center into service by the end of 2017.
All of our major Cloud customers are present on this campus as well as over 100 FSI and large enterprise customers. We already have significant demand in hand for this capacity.
We regard acquisitions as one strand of our sourcing strategy. As William mentioned, we are in the process of taking-over a data center which is currently under construction in Shenzhen.
It is a large new building, particularly well-suited to use as a datacenter, in a central location, with a substantial amount of secured power capacity. When developed, it will provide us with 10,000 square meter of high-powered net floor area, which is already 50% pre-committed on a long-term basis to a major Cloud service provider.
The remaining 50% is highly marketable. The acquisition is subject to satisfactory completion of due diligence and we aim to close it by the end of the current quarter.
It’s rare to find a data center of this size and power in such a good location and it will be a very value-enhancing addition to our portfolio. At year-end 2016, our gross debt was RMB 4.29 billion and our net debt, including the net proceeds of the IPO, was RMB 2.48 billion.
Before discussing our funding plans, I would like to provide some explanation of our debt capital structure. Our gross debt can be categorized into, RMB 1.1 billion (26%) of capital leases, which are almost entirely leasehold interests in properties where the underlying cash flows will be incurred over periods of up to 20 years.
RMB 1.0 billion (24%) of convertible bonds, held by our strategic shareholder, ST Telemedia Global Data Centers, and by Ping An Insurance. The bonds are due in December 2019 if not converted, and the bondholders have the option to extend the maturity by 1year.
The balance of RMB 2.1 billion (50%) is mainly project terms loans, working capital loans, and mezzanine loans. Out of this total, RMB 580 million relates to data centers which are immature with breakeven EBITDA in aggregate.
At year end 2016,our Net Debt/to LQA Adjusted EBITDA multiple was 6.7 times. However, if we exclude the debt related to the immature data centers, the multiple was 5.1 times.
If we also exclude the capital lease obligations related to the immature data centers the multiple was 3.7 times. In the coming year, our business plan requires us to raise around RMB 2.0 billion (US$288mn) in new debt facilities, the majority of which we expect to draw by year-end 2017.We have a long track record of successful financing.
With our high levels of pre-commitment and long term contracts with some of the largest companies in China and the World, we are confident of achieving our financing objectives. Turning to Slide 16, as mentioned by William, we had a great year for Sales.
Our Total Area Committed increased to over 61,000 square meter, yielding a Backlog of 23,000 square meter. Out of this total, around 16,200 square meter relates to Area Under Construction and 6800 square meter relates to Area In Service.
The Average Selling Price (or “ASP”) for the Contract Backlog was almost the same as the Monthly Service Revenue (MSR) for the Area Utilized. On our last earnings call, we told you about a churn event.
It took effect in early January 2017. The good news is that we are going to receive a RMB 46 million termination fee which we expect to book as Service Revenue in 1Q17.
The further good news is that we have reallocated all of the space to other customers and it is in the contracting process. We have therefore been able to insulate us from this event.
During 2017, we have contract renewals for 8,287 square meter of capacity, of which 4,365 square meter relates to a single customer at a single data center. This customer is in the process of renewing for 6 years.
At the time of renewal, the customer will change out their IT platform and we will undertake some refit. The implementation plan is currently being worked out.
However, we anticipate that during the change out period, there may be some interruption to our billing. Looking further ahead, we do not have any other large contracts up for renewal in the next couple of years.
On Slide 17 as William mentioned, our first objective for 2017 is to sign up new business which exceeds last year’s level. Based on our current Sales pipeline, backed up by our secured development plan, we are confident of achieving this target.
With regard to Revenue, our huge backlog gives us visibility to future revenue growth. However, Revenue recognition is a function of how quickly customers move in.
Based on our view of customer move-in schedules, we expect full year 2017 revenue to be in the range of RMB 1.475 billion – RMB 1.575 billion ($220 million at the mid-point). For the avoidance of doubt, this includes the termination fee and the potential interruption to billing which I just talked about.
Our guidance implies a growth rate for Service Revenue of over 50% at the mid-point of the range. For the full year 2017, we expect Adjusted EBITDA to be in the range of RMB 465 million – RMB 495 million ($70 million at the mid-point), implying year-on-year growth of over 75% at the mid-point of the range.
With regard to CapEx, taking into account the data centers under construction, the acquisition which we have announced today, and the projects which we are planning to add, we expect total CapEx for the full year 2017 to be around RMB 1.8 billion ($260million). With that I will end the formal part of my presentation.
We would now like to open the call to questions. With that I will end the formal part of my presentation.
Operator, please open the call for questions.
Operator
Operator
As there are no further questions, I’d like to now turn the call back over to the Company for closing remarks.
Laura Chen
Thank you once again for joining us today. If you have further questions, please feel free to contact GDS’ 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. 1