Hello, ladies and gentlemen. Thank you for standing by for GDS Holdings Limited second quarter 2020 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. Thank you.
Thank you. Hello, everyone. Welcome to the 2Q 2020 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'll 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 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 includes 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 Founder, Chairman, and CEO, William Huang. Please go ahead, William.
Thank you. Hello, everyone. This is William. Thank you for joining us on today's call. I am pleased to report that we had another very strong quarter. We achieved record organic sales with over 26,000 m² or 60 MW of new customer commitments. We stepped up our development activities. We now have 17 data centers under construction, our largest ever. Area utilized increased by over 14,000 m², nearly double the moving for the prior quarter. We grew adjusted EBITDA by 48% year-on-year, and our EBITDA margin crossed 47% for the first time. The operating environment in China is now almost back to normal, and despite the escalating tensions between China and the U.S., we see no adverse impact on our business. Turning to our sales achievement on slide four. In the first half of 2020, our organic sales totaled over 48,000 m².
Our original target for the full year was 80,000 m² organic, we are clearly on track for a higher number. As stated, I'm confident that we can deliver over 90,000 m² organic in FY 2020, which is a big step up from last year. Demand has clearly gone to a higher level. This is not a temporary break. It's a continuation of a strong digitalization trend. China is already far advanced in some area of the digital economy. There are many other areas which are just getting started. New technology such as 5G, AI, blockchain, IoT, and digital currency can be demand multiplier. Chinese government policy is giving a strong push, leading Chinese companies, and are increasing their focus on the domestic market. For all of these reasons, we believe that demand will be sustained long into the future. Let's turn into slide five.
In 2Q20, we obtained four organic hyperscale orders, each of which highlights the competitive advantage of our platform. Turning to slide six. Earlier this year, we acquired a large site in Shanghai, which we felt was particularly well-suited to hyperscale development. We have now obtained an anchor order from the leading CSP customer who was attracted by the location and the ability to expand on the same site. Turning to slide seven. In 4Q19, we signed a framework agreement with the government to set up a new data center campus in Changshu, serving the Shanghai market. The campus has a developable net floor area of around 65,000 m². In 2Q20, we entered into a sales MOU with a leading CSP customer for around 30,000 m² or nearly half the entire campus.
6,000 square meter is already committed, and the balance of 24,000 square meter will be committed over the next two years. By enabling hyperscale customers to land and expand in this way, we get high visibility into future year's sales. Let's turning to slide eight. We established our first data center project in Langfang, near Beijing, in 2Q19. Within a short period of time, we have gone from one data center in Langfang to eight data centers in service or under construction, for which we have obtained over 48,000 m² of commitments from several of our top 10 customers. We have secured a lot of land and power for expansion in Langfang and have more coming in our pipeline. This will enable our customers to expand within our Langfang cluster. Turning to slide nine.
Our top two customers continue to grow with us, both in Tier one markets and the remote locations. We fulfill about 30% of their incremental requirement. It's a great foundation for our business. At the same time, we see a lot of growth potential, more than we realized from the next wave of hyperscale customers. The demand from some of them could be almost as big as the top two. It's a strategic priority for us to expand this part of our franchise, further develop our ecosystem, and diversify our customers' relationships. We already have significant relationship with almost all of the hyperscale cloud and internet companies in China. However, until recently, we were missing a few desirable names. I'm therefore very pleased to report that in 2Q20, we obtained our first order from ByteDance, and in the current quarter, we obtained our first order from the PDD.
ByteDance is one of the hyperscale other order shown on slide five. On the enterprise side, we have recently signed up a number of notable new customers, including Tesla, Starbucks, Yum China, BlackRock, and DJI, a world leader in commercial drones. We won these customers because of the unique ability to set up a hybrid cloud architecture and access multi-cloud resources across our platform. We are also starting to see innovative industry cloud development. For example, we are working together with a technology company and one of our major cloud customers to set up a dedicated cloud for the auto insurance sector. We believe that hybrid cloud on our platform could drive significant enterprise growth. Turning to slide 10. One of the keys to achieve higher sales is to have the right kind of data center capacity in the right place and the right time.
Over the past five quarters, we have stepped up our construction program from 78,000 square meters to 133,000 square meters. At the same time, our pre-commitment rates have remained over 60%. This demonstrates how our business is demand driven. In order to manage this level of construction, shorten lead times, and the lower cost, we have made significant progress in offsite prefabrication and modular construction. We are also working closely with strategic customers on joint procurement and supply chain management. We believe that our unit CapEx is the lowest in the market. Turning to slide 11. In order to maintain continuous supply, we have built up our pipeline in all Tier one markets. Currently, we have nearly 350,000 square meters of highly marketable capacity held for future development, and we are still adding to it.
We believe that this is far more than any other company, and it gives us a significant competitive advantage. Following the government's new infrastructure policy, we have not seen any change in the allocations of resources in urban Beijing. Shanghai is continuing with its quarter system, which is calibrated to demand. Shenzhen may open up to a small extent. In the edge of town areas, more land and power will be allocated for data centers, but the entry barrier is still high because the government is very selective and maintains strong controls. We have to be creative in order to generate a new supply, particularly in the urban areas of Tier one markets. This is the story behind the Beijing 13 project, which we recently announced. The opportunity was brought to us by a private equity firm.
We will work with them and with the original project and the landowners during the development phase, and then buy them all out. The deal looks a bit complicated, but we have total control. This is a highly marketable capacity for which we will obtain 100% pre-commitment in the near future. We are working on several other opportunities in urban Shanghai and Shenzhen that will also give us highly marketable capacity. Turning to slide 12. We continue to ramp up the development program for our JV with GIC. We expect to transfer the first project during the current quarter. We have also won our first order for a remote site from a second customer. These remote sites are a totally different proposition from our core business. Our customers set up these remote sites themselves and then look to us for the data center development and operation.
It could be a high volume opportunity, and we want to pursue it for strategic reasons. In terms of returns, it's not the best use our capital. We think the asset-light approach is the way to do it, and we are working on further innovations to optimize our cost of capital. Lastly, on slide 15, I would like to say a few words about what makes GDS fundamentally different from the other players in China. As of today, GDS has nearly 60 to be connected-
Excuse me, presenters. The line for our speaker is disconnected. Please take over, Daniel. Excuse me, presenters. The line for Mr. William has disconnected. The other presenter can please take over. Meanwhile, I will connect them. Thank you.
Okay. Okay, sorry. The line is just I come back again.
Go ahead.
Yeah. Okay. Sorry.
Presenters, yeah, we have the speakers back.
It's okay? Okay.
Okay.
Okay. Sorry. Let's turn into slide 15. Lastly, on slide 15, I would like to say a few words about what makes GDS fundamentally different from other players in China. As of today, GDS has nearly 60 interconnected data centers clustered in strategic locations in all of China major economic, financial, and network hubs. Within these data centers, we host all the major public clouds, which are accessible over all the major telecom networks. The scale of our facilities, expansion capacity, and the market it presents, together with software-defined connectivity and a multi-cloud ecosystem, add up to a platform which is unique and far ahead of the pack. This has obviously heightened interest in the data center opportunities in China. From a competitive perspective, nothing has changed for us. Our customers are looking for a total solution provider to address all their needs in an integrated way.
This is exactly what we offer. We have established our market position over many years and are clearly differentiated by our value proposition. We are confident that we will continue to build on our competitive advantage and further extend our leadership. With that, I will hand over to Dan for the financial and operating review.
Thank you, William. Starting on slide 18, where we strip out the contribution from equipment sales and the effect of FX changes. In 2Q 2020, our service revenue grew by 8.3%. Underlying adjusted NOI grew by 8.5%, and underlying adjusted EBITDA grew by 9.1% quarter-over-quarter. Our underlying adjusted EBITDA margin was 47.8%. Turning to slide 19. Service revenue growth is driven mainly by delivery of the submitted backlog. Net additional area utilized during 2Q 2020 was 29,324 m², including organic move-in of 14,336 m². On the last earnings call, I said that we expected organic move-in during 2Q of 10,000-11,000 m². The recovery in 2Q exceeded our expectations. We are now at a level of move-in which we expect to sustain over the next two quarters. Our MSR per m² was down by 3% quarter-over-quarter.
If we exclude the revenue and area utilized for BJ 10, 11, 12, which closed 25 days before the quarter end, the MSR per square meter was down by 1%. We expect the MSR per square meter to remain at a similar level in the second half of the year. Slides 20 and 21 show the quarterly margin trends. Due to seasonally high power consumption, utility cost was 1.8 percentage points higher than in 1Q20. Nonetheless, we were able to sustain our adjusted NOI margin. Our adjusted EBITDA margin has improved much faster than we expected during the first half of the year. Some of this was due to government concessions and reduced corporate expenses. In the second half of the year, the government concessions will be less, and with the recovery, we expect a step up in our corporate activities.
Taking all of this into account, we expect our adjusted EBITDA margin to remain around 47% in the second half of the year. Turning to slide 23. 1H20 CapEx paid was around RMB 3.9 billion, RMB 1.3 billion related to the purchase of the Pujiang land and buildings, RMB 337 million related to acquisitions, mostly the initial equity consideration for BJ 10, 11, 12. A further RMB 215 million arose from the joint venture data centers. Up until 30th June 2020, we spent RMB 485 million cumulatively on the joint venture data centers, most of which will be recovered as and when we transfer the equity interest in the project companies to GIC. In 2H 2020, we expect organic CapEx to be more than double what we spent in the first half of the year, reflecting the higher level of sales and construction.
We also anticipate spending around another RMB 600 million on land banks and RMB 1.3 billion on acquisitions, most of which is deferred consideration for Beijing 10, 11, 12, and consideration due on the closing of BJ9. Turning to slide 24. Our construction program has been growing fast and around half of our projects are now greenfield, which means longer construction timelines. Although work on our construction site is back to normal, in a couple of locations, we are experiencing some short delays in activation of power supply.
The delivery schedule at those locations has been pushed back by a couple of months. We have a lot of capacity scheduled to enter service in 2H20, particularly in the last few months of the year. Turning to slide 25. When we announced the BJ 10, 11, 12 acquisition last December, two data centers were in service and one was under construction.
The overall utilization rate was 50%. As of today, all three data centers are in service and the overall utilization rate has increased to 75%. BJ 10, 11, 12 contributed around RMB 29 million in revenue and around RMB 15 million in NOI during the 25 days post the acquisition closing in 2Q 2020. Looking forward, we have a number of potential M&A deals on our radar screen.
There's one at quite an advanced stage, which involves taking over a project under construction at a very reasonable premium. There's more competition for M&A opportunities these days. Multiples have gone up. Nonetheless, I'm confident that we can continue doing highly accretive deals. Looking at our financing position on slide 26. We raised $505 million from Hillhouse and STT GDC through an equity private placement in June. We felt that this capital raising was necessary given where sales and construction are heading.
We also put in place a $300 million revolving credit facility at holdco level to give us more flexibility in how we fund our investments. All told, we completed RMB 6.7 million or the equivalent of $940 million of new debt financing and refinancing facilities during 2Q20. For the onshore portion, the weighted average tenor was eight years, and the weighted average all-in cost was 6.1% based on the current LPR reference rate. This continues the trend of extending the tenor and lowering the all-in cost of our onshore debt. Next on slide 27. Our contract backlog now stands at 140,000 m², equivalent to 72% of our revenue generating area. Our backlog for area under construction has gone up from 51,000 m²- 82,000 m² over the past five quarters, which reflects increased area under construction, sustained high pre-commitment rates, and longer construction periods for greenfield.
Our backlog for area in service now stands at 57,000 m². It's trending up. We typically deliver 20%-25% of the backlog for area in service in each quarter. However, in 2Q20, it was 30%. Finishing on slide 28. Today, we are confirming the full year guidance for revenue and adjusted EBITDA. However, as I've already indicated, we are raising our CapEx guidance from RMB 7.5 billion - RMB 10 billion. With that, I'll end the formal part of my presentation, and we'd now like to open the call to questions. AJ, please.
Certainly. Ladies and gentlemen, we will now begin the question and answer session. If you wish to ask a question, please press star one on your telephone keypad and wait for your name to be announced. If you wish to cancel your request, please press pound or hash key. For the benefit of all participants on today's call, please limit yourself to two questions. Thank you. We have the first question from the line of Jonathan Atkin. Please go ahead.
Thanks very much. I wanted to ask first about the slide that shows a lot of your hyperscale orders, slide five. It would appear that a lot of the demand is in North China. I wondered if you would have any kind of comment about where you expect most of the demand in the market to come from. Is it a lot of it also happening elsewhere, but it just happens to be that the wins that you got were kind of weighted towards the North? Then maybe related to that, is the overall pace of demand notably different now, market demand, not just your share, compared to, say, six or 12 months ago? Thanks.
Hi, John. It's Dan here. I'll take the first question. I think third party market research gives some various different indications. By our estimate, I think Beijing and Shanghai together account for around 60% of the market opportunity in tier one markets. If you look at the websites of the leading cloud players in China, you'll see that they have most of their availability zones and most of their cloud ports in both of those two places. I don't think it's that surprising given that we try to be strategically positioned across where the market opportunity is, that Beijing should be such a significant part of our new business.
It also so happens that the Beijing market is probably the most constrained in China, and our early move, our first move to Langfang and the scale that we've set up there has been very instrumental in enabling us to win so much business. We've significantly increased our market share in Beijing. To be clear, when I talk about Beijing and Shanghai, is that would include the surrounding areas. Once again, if you look at the cloud websites, you'll see that there are regions defined around Beijing and Shanghai, which include availability zones which could be on the outskirts of those cities. Places like Langfang, Kunshan, Changshu, in relation to Beijing and Shanghai, are within that same low latency to qualify as being within the same region. A place like Zhangbei or Huailai, further away from Beijing, they are in a different region.
John, can you please repeat the second part of your question?
Yeah. I was just interested that the pace of demand or the volume of demand in the market, is that similar to what it was six or 12 months ago, or has that ticked up? Market demand for data center space.
William, would you like to answer that? Unfortunately, today William is in Shanghai, I am in Hong Kong today. A little more difficult to coordinate.
Okay. In general, I cannot describe the exact number of the market size right now, because it's always changed. The change is big. The change is good thing because what we can see the trend compared to 12 months ago, is obviously in the next three or five years, the demand is definitely accelerate. That's why I think it's very natural we still catch up with the trend, right? For the last year, we set up the new normal. It's 700 m² per year by organic. This year, looks like we can get it, definitely not look like. Definitely we can deliver over 90,000 m² new sales. That's by organic.
Great
Yeah. It's obviously, right?
My last question, just any update on Hong Kong, the construction market demands, and kind of what you're expecting there from that project?
Yeah, I think we bought two piece of land in the last 12 months, and we already start to construct. Everything is on schedule right now, and the first data center we plan to launch by middle of the 2022. Another one may be eight months later, right? This is our current schedule. Looks like the demand is very active in Hong Kong market, especially from the mainland China, from our customer install base. I think we are not expect any other new customer in Hong Kong. We definitely will get the anchor customer from our existing customer right now. We're hope, and we confident to get the most of the commitments before our first data center officially launch.
Thank you very much.
Thank you. We have our next question from line from Yang Liu from Morgan Stanley. Please go ahead.
Thanks. I have two questions.
Yeah.
The first one is, we saw a pretty big upward revision in term of the full year CapEx, which is even bigger than the sales upward revision. Could management elaborate more about where the biggest delta coming from, especially given the CapEx increase pretty big? The second question is, could management update us in term of the investment return profile in places like Langfang and Changshu, et cetera. Especially given the supplies there are growing very fast, and could management update us in term of the overall asset level IRR in those places? Thank you.
Yes, Yang. It's Dan here. On the increasing CapEx, I itemized it in terms of land and building acquisitions and organic growth. The land and buildings, to some extent, that is pulling forward CapEx because we're paying for large sites. We've seen cases of Pujiang, Changshu, and so on, where development is scheduled to take place over two or three years. We incurred the cost of acquiring those sites up front. The same also applies, to some extent, to the acquisitions. For example, Beijing 13, we bought out a shareholder from a project and injected capital to take a controlling interest in the land. That will be a 2021 or even 2022 project in terms of when it comes into service. I don't think you can look at our CapEx exactly in relation to the current run rate of sales.
What you can look at is the pre-commitment rates for the projects that we're initiating, which is consistently in that 60%-70% range. You can also look at the pipeline that we build up, which is now 350,000m² equal to more than three years new business at the current run rate. I think we're very happy to allocate capital for that purpose. Your question about customer return profile. This is key because this is what we target. It's not the selling price, it's the return on investment. What we've seen so far, we've done a lot of business in Langfang. We've got a large order in Changshu. Return on those edgy town sites is well up to the level of return in the downtown or urban areas. The development cost for unit CapEx is lower.
Hard to be precise, let's say maybe around 10% lower. Not due to the cost of real estate, but more due to the efficiency of building greenfield, building large scale on a single site, and spreading infrastructure cost across more capacity. That means that the selling price is also correspondingly lower. From all deals we've done so far, I can assure you that the project returns are well up to our historic levels.
Thank you.
Thank you. We have our next question from the line of Colby Synesael . Please go ahead.
Okay. Thank you. Dan, I think in your comments you said that net installs should be similar in the third and fourth quarter to what we just saw in the second quarter, and I think that was around 14,000 organic. Just curious why it wouldn't actually even be higher, particularly in the fourth quarter, given the amount of capacity you have coming online. I guess could you just remind us how much capacity you have coming online, maybe in the third and the fourth quarter, just to help us there. Also, I think in William's comments, he mentioned that you guys got 30% of the incremental demand from your top two customers in the quarter. I was just wondering if you could unpack it a little bit. I don't know if I exactly understand what that meant, and maybe just giving a sense of market share.
I think one of the questions I always get from investors who might not be as familiar with the Chinese market is what is the market share of somebody like GDS and maybe of just third party data centers, et cetera. Anything on that could be helpful too. Thank you.
Sure. On the net installs, we were expecting this year to be a series of step-ups. One factor behind that was having new data center capacity come into service in each quarter. That was according to the original development timelines. What has happened is that the first quarter was around 2,000 or 3,000 square meters lower move-in than we had in our budget. In the second quarter, I said we're expecting 10,000- 11,000. It came out at 14,000. Now I'm indicating that, excuse me, around 14,000 or 15,000 should be the case in the third and fourth quarter. One methodology that you can use to predict this, although it's not totally reliable, is to look at the backlog for area in service at the beginning of the quarter. At the beginning of the third quarter, it was 57,000 square meters.
Typically, we deliver 20%-25% of that number in a particular quarter. 25% of that number would be around 14,000. That's the logic there. If you go back to the second quarter and look to that metric, you'll see that we delivered 30% of the backlog for area in service. That was existing at the beginning of the second quarter. In terms of the timing of new data centers coming into service, there's 49,000 m² of new capacity scheduled to come into service during the second half of the year. I didn't break it down by quarter, but I can tell you the significant majority of that is going to be in the fourth quarter. Normally, we don't see much move in the same quarter as when a data center comes into service.
That's arising too late to really drive increase in installs this year. It's a very good base for when we start to look at next year. Your question about market share. We have our own internal market research. I believe it's a lot more reliable than what we see from third parties. There's issues with market research about whether it actually maps the data center business or whether it includes a lot of other telecom value-added services. We think there's a lot of double counting, because some carrier neutrals are reselling carrier data centers, and some carriers are reselling carrier neutral data centers. Also, I think the data which comes from the telecom carriers, typically they would include a lot of network revenue, the connectivity revenue for data centers in their numbers. We will endeavor in the near future to publish some market research.
I think it will show that our market share on the carrier neutral side, our market share, carrier neutral side is in the 20s. Maybe in the Tier 1 markets it's a little higher than that. As we indicated, with the very largest hyperscale customers, it's more like 30%.
Thank you.
Thank you. We have our next question from the line of Gokul Hariharan. Please go ahead.
Thanks for taking my question. First question, could you talk a little bit about the engagements that you're having with some of the new customers that you've added, especially ByteDance and Pinduoduo. Obviously ByteDance, the size of their business, data center needs, compute needs, et cetera, are quite sizable, comparable to your two biggest customers. How do you see that relationship progress over the next couple of years? Second, maybe related question as well, I think, William, you mentioned that we've stepped up from that 70K sales or area committed organic basis over the last couple of years to definitely 90K this year. Over and above that, you're also making some acquisitions. If you think about some of these new customers that you've added, plus growth from your existing customers as well, is that 90K number per year the new normal?
We should actually think that it could be higher than that number as well from an organic sales. If you can talk about maybe what could the full year number, including acquisitions be, as we look into the next couple of years, given some of these new customers and growth in your existing customer base.
Gokul, again William, I take your first question, how we engage the new customer. I think we are working very hard, it's our key strategy. I mean, I think since our IPO, how to diversify our customer. In the last couple of years, the leading demand is from a couple of big cloud. That's what we already catch up. What we realized is currently in the last couple of years, the new internet giant grows so fast, and we start to engage them at least two years ago. Unfortunately, we didn't get any opportunity in the past two years. We still keep engaged our customer. Now I think our customer start to set up their new criteria. When it was a baby company, they maybe had a different criteria to select a vendor.
Now I think their criteria is more close to their standard of the giant standard. I think that we have the ability, we have the chance to gather this deal. So far, I think our customers still focus on to deploy their data center needs requirement in the Tier 1 market plus remote. Everybody know GDS, our core asset, our focus is the Tier 1 market. I think this is the first time our customer deploy their server in the Tier 1 market, which we think it's our strength and our capability. That's why we can gather the deal. Looking forward, I think those customers will, in the future, we believe will grow very fast and they will be our, let's say, next generation of the hyperscale contributor.
As I just mentioned, their number, if you look at what the total server they procured in this year and the next couple of years, the level of the server procurement is such close to the traditional cloud player. We are happy to see that. That means in the future, the anchor customer will be more diversified. This is our key strategy, and we will continue on that. This is the first question. What's the second?
Question's on the RMB 90,000 you said.
Oh, okay. 90,000. Yeah. We are happy we continue to catch up the acceleration of the market demand. We don't want to put a big number right now. I think this year, obviously, we can achieve. I think next year, in terms of 90, I think we are confident, but maybe we can do more, but we are not just pursue the number, we are pursue the growth quality. We will see. I say next year, 90,000 m², I believe we can continue, right. We don't want to put the big number right now for the next couple of years.
Okay. Got it. Just one follow-up on this. Are you seeing some of these customers You mentioned that they are building Tier 1 data centers for the first time. Do you feel that strategy for some of these customers is still to keep their existing data center providers in remote sites and kind of embrace some of the newer data center providers like you or establish in Tier 1 data center providers like you in Tier 1 cities? Do you feel like they are also changing the strategy in terms of pulling demand from public cloud and kind of starting to move towards their own compute and other services hosted on their own data centers?
I think it's not covering. I don't know what kind of application they deploy in a direct spot to our data center. We still see the trend, they still use the cloud in a significant way. They also have another purpose, right? I believe they have a different purpose to deploy some dedicated IT infrastructure by themselves. I think this is also the trend. In my view, they use the public cloud still grows, and they also start to build their own hybrid cloud strategy right now. We are benefit on both.
Okay. Understood.
In terms of the remote, everybody know remote site is one of our new product, right? Just what we did with GIC. It's not our core business, but for some strategic reason, we still keep doing. It's not our core business, but I would like to say we are ready to do more. What we can tell is our customer will give us more business. We have more opportunity on this part.
Understood. Thank you.
Thank you. We have the next question from the line, Tina Hou from Goldman Sachs. Please go ahead.
Hi. Thank you very much, management, for taking my questions. I have two. The first one is that could you help me understand, because we're raising our guidance in terms of our floor area sales in terms of organic from 80,000- 90,000 square meters. However, we're keeping our annual revenue guidance unchanged. Is this because the acquisition side of things is lower than what we were expecting previously, or are we just being more conservative on this side? The second question is, we wanted to understand in terms of like the big cloud customers data center vendor strategy, do you see any difference between, say, Alibaba Cloud or Tencent Cloud? Like normally, how many data center vendors do they usually pick? Thank you.
Tina, it's Dan here. On your first question, there's a cycle from sales, most of which is pre-commitment during the time the data center is under construction, and then the data center comes into service, and then over maybe 18 months or even 24 months-There's a move-in. Our sales is a great lead indicator for revenue growth in the future, but it wouldn't affect revenue in the current year. In fact, when we give guidance, or if we look forward 12 months at any time, pretty much all the revenue growth looking 12 months forward would come from contracts which were already signed prior to the beginning of the year. If you're talking about raising revenue guidance, and if I was giving revenue guidance for 2022, maybe I'd be raising that on account of the higher sales. That's how it works.
William, would you like to answer the question about different strategies of the big cloud customers?
Yeah, I think as we talk about it, we already built our platform in all the key markets, which we have the very significant advantage compared with others. I think this is very important for our customer. I think our customer, the criteria for them is continued high visibility of the resource in each region, in your platform, in all core location. This is very important. Of course, the operation skill is also very important for them, and the cost. This is the key criteria. Typically, I think historically, the top customer, they use a lot of different data center service provider historically. In the recent couple of years, they shrink the name and they narrow the vendor list after many years business relationship. I think typically, the major customer, they will have three or four service vendor.
This is the current situation, what we face. As we used to talk about it, we signed a strategic vendor agreement with our top three customers so far. I think that we believe GDS is the major vendor in terms of the top three key vendor, right? Is that your question?
Yes. Thank you very much.
Yeah.
Thank you. Once again, if you wish to ask a question, please press star one on your telephone keypad and wait for your name to be announced. If you wish to cancel a request, please press pound or hash key. For the benefit of all participants on today's call, please limit yourself to one question at a time. Thank you. We have the next question from the line of Frank Louthan from Raymond James. Please go ahead.
Great. Thank you very much. Can you comment on the trends in MRR per square meter? It's been declined a little bit more this quarter than we'd modeled. What are the thoughts on the trends on that for the rest of the year? My second question, can you give us an idea, just for those of us not in the region as often, about some of the current steps that the government's taken with regards to any future outbreaks with COVID-19 and how that policy has evolved? How do you think in the going forward reactions to the virus could impact your business, either the ability to construct or get labor employees at different locations and so forth? Just talk to us a little bit about what the current policies are and are they better or worse than they've been over the last six months or so? Thanks.
Hi, Frank. Dan here. The MRR per square meter for the second quarter, it was down by 3%. The way we calculate it is we take the average of the opening, closing area utilized. The Beijing 10, 11, 12 acquisition closed on June the 5th. We had 25 days revenue contribution, we included the whole of the area utilized in the quarter end number. If we strip that out, the MSR decline was just about 1%, which is more or less what I indicate is kind of a long-term trend line. In the third quarter, we will have a full quarter's contribution from Beijing 10, 11, 12.
I think as some analysts, investors calculated when we announced the deal, the MSR of those three data centers is lower than our average. There will be some dilutive effects in the third quarter and going forward. I think the MSR will be around the level that it was before adjustments in the second quarter. I talked earlier about the economics of the Edgetown sites. The MSR there is lower, the unit CapEx is lower. I said the returns were very acceptable. There will be continuing gradual decline in the MSR and from time to time, we will try to highlight what's happening with our internal investment, which is really what we target to sustain, and I think we are indeed doing that. William, you'll talk about the operating environment in China and what happens if there's a resurgence of virus?
Fortunately, I'm in Shanghai after 14 days quarantine. I feel that everything has go back to the normal. It looks like in terms of the daily life, retail, restaurant, cinema, entertainment, everything has go to the normal. Almost 95%, I think, yeah, it's go to the normal. I think from the supply chain point of view and the working permission point of view, everything is go back. I think it comes to normal and we didn't see any impact in the next few quarters.
Okay, great. Thank you.
Thank you. The next question comes from the line of James Huang from UBS. Please go ahead.
Good evening, management. I've got two questions. First question's on supply. We're hearing that, for example, steel mills in China, which have very cheap access to electricity, are being converted into data centers. Just want to get your thoughts on how do you assess the risk of potential capacity oversupply, and how would you cope with an oversupply situation should occur? The next question is just in terms of contracting renewed so far this year, what are you seeing in terms of pricing? Is it broadly similar or lower versus prior terms? Thank you.
Okay. I take the first question. I think a data center is, actually, if you look at a data center, in my view, it's a high barrier industry. Of course, recently we see a lot of the new player jump to the market. In terms of our customer profile, okay, our customer need a reliable vendor, right? I think a lot of the new player cannot catch up in a shortened time. I think they're way behind us. It's not direct impact us. On the other hand, GDS used 19 years build up our value proposition and our position. It's not easy to change our position. I think in my view, we are already there, and obviously, we are in a better position. Our customer is smart, very sophisticated. It will not change our position in our customer.
Of course, in terms of the competition, it's more concentrated on the tier two player, even tier three, right? It will not change any our position, in my view.
James. Dan here. On your question about pricing on contract renewals, let me answer it in a bigger picture way. We did our first business with our top two customers in 2014 and 2015. Those contracts have come up for renewal and we'll start to see in the next second half of this year and then next few years, more of the kind of cloud and large IoT business come up for renewal. If you look at the contract renewal schedule, which is on page 42 of our earnings presentation, roughly, say in second half of 2020, 2021, 2022, it's somewhere around 50%, 60%+ of that area relates to cloud and large IoT customers. We've already had quite a number of conversations. We think overall the outcome is going to be flat relative to the pricing, the existing contracts.
There may be some isolated cases where it comes down. There may be some where it goes up. Overall, I think it's flat. I commented before, this is not actually a reflection of the market, particularly not for these first two contracts, because those early orders were for kind of downtown data centers close to CBD, where the current market price is definitely higher than what it was. We can't reset these to market. We have to reset it to where we're doing business with those customers and the overall relationship. We don't have a standard price for our larger customers. It does change from deal to deal, from place to place, data center to data center, time to time.
Yeah, when we do these contract renewals, we have to take cognizance of what is the price that we are agreeing with those customers, for similar kind of data centers and similar areas if it's a completely new piece of business today. Yeah, I think flat overall and we leave something on the table in terms of not extracting the full market price.
Thank you very much.
Thank you. As there are no further questions, I would like to hand the call back over to the company for any closing remarks.
Thank you all 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. Bye for now.
Thank you. This concludes this Conference call. You may disconnect your line. Thank you.