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. Lara Chen, Head of Investor Relations for the Company. Please go ahead, Lara. Thank you.
Thank you. Hello, everyone. Welcome to the 2Q 20 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 built and downloaded from our IR website at investorsgdservices.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, GSGFO, will then review the financial and operating results. Ms.
Jamie Ku, our COO is also available to answer Before we continue, please note that today's discussion will contain forward looking statements made under the Safe Harbor provision of the U. S. Private Securities Litigation Reform Act of 1995. Forward looking statements involve interior 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 a 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 conference, our 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 GDF's 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'm pleased to report that we had another very strong quarter.
We achieved record organic sales with over 26,000 square meters or 60 Megawatts 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 square meters, nearly doubled the moving for the prior quarter. We grew adjusted EBITDA by 48% year on year and our EBITDA margin closed 47% for the first time.
The operating environment in China is now almost back to normal. And despite escalating tensions between China and the U. S, we see no adverse impact on our business. Turning to our sales achievement on Slide 4. In the first half of twenty twenty, our organic sales totaled over 48,000 square meters.
Our original Original target for the full year was 80,000 square meter organic, but we are clearly on track for a higher number As since then, I'm confident that we can deliver over 90,000 square meter meter organic in FY 2020, which is a big step up from last year. Demand has clearly gone to a high level. This is not a temporary It's a continuation of a stronger digitization trend. China is already far advanced in some area of the digital economy, but there are many other areas which are just getting started. New technology such as 5g, AI, blockchain, IoT, and digital currency.
Can be demand multiple years. Chinese government's policy is giving us strong leading Chinese companies and are increasing their focus on the domestic market. For all of these reasons, We believe that demand In 2Q 2020, we obtained 4 organic hyperscale orders, each of which highlights the competitive advantage of our platform. Turning to Slide 6, Earlier this year, we acquired a large site in Shanghai which we felt was particularly well suited to high scale 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 7. In 4Q 2019, 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 and next floor area of around 65,000 square meters. In 2Q 20, we entered into a sales MoU with a leading CSP customer for around 30,000 square meters or nearly half the entire campus.
6000 square meter is already committed and the balance of 24,000 square meter. Will be committed over the next 2 years. By enabling hyperscale customers to lend and expand in this way, we get high visibility into future years sales. Let's turn it to Slide 8. We established our 1st data center project project in lung farm near Beijing in 2Q 2019.
Within a short period of time, we have gone from 1 data sense in lung function to 8 data centers in service or under construction, for which we have obtained over 48,000 square meters of commitments from several of our We have secured a lot of the land and the power for expansion in lung farm and have more coming in our pipeline. This will enable our customers to expand within our long form class turning to slide 9. Our top 2 customers continued to grow with us, both in Tier 1 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 realize from the next wave of hyperscale customers The demand from some of them could be almost as big as they talk to. 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. And therefore, very pleased to report that in 2Q 20 We obtained our first order from Binance.
And in the current quarter, we obtained our first order from them. PDD. Binance is 1 of the hyperscale order shown on Slide 5. On the enterprise side, we have recently signed up a number of notable new customers. Including Tesla, Starbucks, YAM China, BlackRock and Baozhan, a world leader in commercial Jones.
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 set We believe that hybrid cloud on our platform could drive significantly in the enterprise growth. Turning to slide 10. 1 of the key 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 5 quarters, we have stepped up our construction program from 78,000 square meter to 100 and 33,000 square meter. At the same time, we pre commit 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 off-site pre fabrication and modular construction. We are also working closely with us with strategic customers on joint procurement and the 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 market 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 gives us a significant competitive advantage.
Following the government's new infrastructure policy, we have not seen any change in the allocations of resource in urban Beijing. Shanghai is continuing with its quota system, which is a category to demand. Shenzhen may open up to a small extent. In the edge of time areas, more LAN and power will be allocated for data centers. But the entry barriers 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 1 markets. This is the story behind the Beijing 13 project, which we recently announced. The opportunity was brought to us by a private equity fund. We will work with them and with the original project and land owners. During the development phase, and then buy them all of the all odds.
The deal looks a bit complicated but we have total control. This is highly market marketable capacity for which we will obtain 100 and pre commitment in the near future. We are working on several other opportunities in urban Shanghai and the Simpson 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 parent's 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 all sorts of the data center development and operation. It could be a high volume opportunities. And we are we want to pursue it for strategic reason.
But in terms of returns, it's not the best use of our capital. We think the asset light approach is is a way to do it and we are working on further innovative innovations to optimize our cost of capital Lastly, on Slide 15, I would like to say a few words about that, what's about what makes GDS fundamentally different from the other player in China. As of today, GDS has nearly 60 connected
Excuse me. First, just 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 a comeback again. Okay.
Yeah. Okay. Sorry. It's okay? Okay.
Sorry. So let's turn to slide 50 15. Lastly, on Slide 15, I would like to say a few words about our about what makes GDS fundamental the difference from other players in China. As of today, GDS has nearly 60 interconnected data centers, classed in strategic locations in all of China major economic financial and the network harbors. Within these data centers, we host all the major public clouds, which are which are accessible overall the major telecom networks.
The scale of our facilities expansion capacity and the market presents together with software defined connectivity and multi cloud ecosystem add up to a platform, which is unique and far ahead of the pack. This is obviously agent interested in the datacenter opportunities in China. But 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're confident that we will continue to build on our competitive advantage. And further expand our leadership. With that, I will hand over to Dan for the financial and operating review.
Starting on Slide 18, where we strip out the contribution from equipment sales, and the effect of FX changes. In 2Q 20, 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 committed backlog. Net additional area utilized during 2Q 20 was 29,324 Square Meters. Including organic move in of 14,336 square meters. On the last earnings call, I said that we expected organic move in during 2Q of 10 to 11,000 square meters. 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. Us. But if we exclude the revenue and area utilized for BJ101112, which closed 25 days before We expect the MSR per square meter to remain at a similar level in the second half of the year. Size 2021 show the quarterly margin trends. Due to seasonally high power consumption, utility costs was 1.8 percentage points higher than in 1Q 20.
Nonetheless, we were able to sustain our adjusted NOI margin. Our adjusted EBITDA margin has improved much faster than we expected during and reduced corporate expenses. In the second half of the year, the government commission 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.
1eighteen twenty CapEx paid was around RMB 3,900,000,000. 1,300,000,000 related to the purchase of the Pujang land and buildings. EUR337 million related to acquisitions, mostly the initial equity consideration for BZA 101112. And a further CHF 215,000,000 arose from the joint venture data centers. Up until June 30, 2020, we spent RMB 485 1,000,000 cumulatively on the joint venture data centers.
Most of which will be recovered as and when we transfer the equity interests in the project companies to GIC. In 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 RMB600 million on landbank. And 1,300,000,000 acquisitions, most of which is deferred consideration for Beijing 101112, and consideration due on the closing of BJ 9.
Turning to Slide 24. Our construction program has been growing fast and around half of our projects are now being filled. Which means longer construction timelines. Although working out construction sites is back to normal, In a couple of locations, we're 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 2 H20, particularly in the last few months of the year. Turning to Slide 25. When we announced the BJ's 101112 acquisition last December, 2 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%.
Vijay 10,011 12 contributed around RMB 29,000,000 in revenue. And around CHF 15,000,000 in NOI during the 25 days post the acquisition closing in 2Q 20. Looking forward, we have a number of potential M and 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 And A opportunities these days and 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 $505,000,000 from Hill House 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 $300,000,000 revolving credit facility at Holdco level to give us more flexibility in how we fund our investments.
All told, we or the equivalent of $940,000,000 of new debt financing and refinancing facilities during Q220. For the onshore portion, the weighted average tenure was 8 years, and the weighted average ordering cost was 6.1%, based on the current LPR reference rate. This continues the trend at extending the tenure and lowering the all in costs with our backlog now stands at 140,000 square meters equivalent to 72% of our revenue generating area. Our backlog per area under construction has gone up from 51,000 square meters to 82,000 square meters, over the past 5 quarters, which reflects increased area under construction, sustained high pre commitment rates and longer construction period for greenfield. Our backlog for area and service now stands at 57,000 square meters is trending up.
We typically deliver 20% to 25% of the backlog for airlines services in each quarter. However, in 2Q 20, 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 1,000,000,000 to 1000000000.
With that, I will end the formal part of my presentation. And we'd now like to open the call to questions.
Certainly, ladies and gentlemen, we will now begin the you. Respond 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 John Atkin. Please go ahead.
Thanks very much. I wanted to ask, of course, about slides, this slide that shows a lot of your scale orders, slide 5, and it would appear that a lot of the demand is in north of China. And I wondered, if you would have any kind of comments 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. And then maybe related to that, is the overall pace of demand notably different now, Mark demand, not just your share compared to say 6 or 12 months ago?
Thanks.
Hi, Joanna. It's Dan here. I'll take the first question. Yes, I think 3rd party market research is is some various different indications, but by our estimates, I think Beijing and Shanghai together account for around 60% as the market opportunity in Tier 1 markets. And if you look at the websites of the leading CAL players in China, you'll see that they have most of their availability zones and most of their cloud bots in both of those two places.
So I don't think it's that's surprising given that we try to be strategically positioned across where the market opportunity is. That staging should be, such a significant part of our new business. It also so happens the Beijing market is probably the most constrained in China. And our early move, our first move to Langhang, 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 phasing in Shanghai, so that would include the surrounding areas. Once again, if you look at the cloud websites, you'll see that there are regions to find around Beijing and Shanghai, which include availability zones, which could be on the outskirts of those cities. So cases like Lanfeng, 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 Zhang Bay or Huaili, further away from Beijing that they are in a different a different region. John, can you please repeat the second part of your question?
Yes, I mean, I was just interested that the pace of demand the volume of demand in the market? Is that, similar to what it was 6 or 12 months ago or, has that picked up? Market demand for data center space?
William, would you like to answer that? Unfortunately, to say William is in Shanghai. I'm in Hong Kong, please. Little more difficult to coordinate.
In general, I can't describe the exact number of the market size right now because it's always changed. But the change is good. The change is a good thing because what we can see, see the churn compared with us 12 months ago is It's obviously in the next 3 or 5 years, the demand is definitely accelerated. So that's why I think it's very nature. We still catch up with the we set up a new, a normal, it's a 100 square meter per year by opening So this year, it looks like we can get it definitely not look like definitely we can deliver over 90,000 square meter new cells, that's by organic.
So it's Great. Yeah, it's obviously, right. And then my last question, just any update
on on on construction market demands and kind of what you're expecting there from that project?
Yes, I think we had the we bought 2 piece of land in the last 12 months and we already start to construct And we hope everything is on schedule right now. And the first data center would we plan to launch by middle of 2022. And the another one may be 8 months or 8 months later, right? This is our current schedule. Looks like the domains very active in Hong Kong market, especially from the main China from our customer our customer installed base.
So I think the we are not expect any other new customer in Hong Kong we definitely will get we will get the anchor customer from our existing customer right now. And we are we hope and we confident to get the most of the commitments before our first data center official launch.
Thank you. We have our next question from the line of
I have 2 questions here. The first one is We saw a pretty big upward revision in terms of the full year CapEx, which is a bit of a 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, is management update us in terms of the investment return profile, in places like, a, a, a long time, Changshu, etcetera. Especially given the demand supplies there are growing very fast.
And could management update us in terms of the overall asset level IRR in the places? Thank you.
Yes, Yang. It's Dan here. 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, seeing in case of Pujian, Changshu, and so on, where development is scheduled to take place over 2 or 3 years, but we incurred the the cost of acquiring those those sites, upfront.
The same also applies to some extent to the position. So for example, Beijing 13, we bought out a shareholder from a project and injected capital to take a controlling interest in the land, but that will be, 2021 or even 2022 project in terms of when it comes into service. So I don't think you can look it up CapEx exactly in relation to the current run rate of sales. And what you can look at is the pre commitment rates for the projects that we're initiating, which is consistently in that 60% to 70% range. And you can also look at the pipeline that we build up, which is now 350,000 square meters, you know, equal to more than 3 years of new business, the at the current run rate.
So 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 selling price, it's the return on investment. And, what we've seen so far, we've done a lot of business in landfiring. We've large order in chapter 2.
Return on those Edgytown sites is well up to the level of return in the downtown or urban areas. The development costs for Unit CapEx is lower, hard to be precise, but 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 costs across more capacity. So that means selling price, is also correspondingly lower. But 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. We have our next question Kobi Chen. Please go ahead.
Okay. Thank you. Dan, I think in your comments, you said that net install should be similar in the 3rd and 4th quarter to what we just saw in the 2nd quarter. I think that was around 14,000 organic. Curious why it wouldn't actually even be higher, particularly in 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 3rd fourth quarter, just to help us there? And then Also, I think in William's comments, he mentioned that you guys got 30% of the incremental demand from your top 2 customers in the quarter. 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.
Does that 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, etcetera. But anything on that could be helpful too. Thank you.
Sure. So on the Neti installs, Yes. We were expecting this year to be a series of step ups. And one factor behind that was having new data center capacity come into service in each quarter, that was, yes, according to the original development timelines. What has happened is that the first quarter was around 2 or 3000 square meters lower move in than we had in our budget.
In 2nd quarter, I said we're expecting 10 to 11,000 that came out at 14 And now I'm indicating that around 14 or 15 should be the case in the 3rd fourth quarter. On methodology, that you can use to predict this, although it's not totally reliable, is to look at the backlog for air in service at the beginning of the quarter. So at the beginning of third quarter, was 57,000 square meters. And typically, we deliver 20% to 25% of that number in a particular quarter. So 25% of that number would be around 14,000.
So that that's kind of like the logic there. If you go back to the second quarter and look to that measure, metric, you'll see that we delivered 30% to the backlog there in service. That was that was existing at the beginning of the second quarter. In terms of the, into service, has 49,000 square meters of new capacity scheduled to come into service during 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 4th quarter.
And normally, we don't see much move in in the same quarter as when a data center comes into service. So that's a rising too late to really drive, increase in installs this year, but it's a very good base, for when we start to look into look at next year. And 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 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 resetting carrier neutral data centers. And also, I think the data which comes from the telecom carriers typically, they would include a lot of network revenue, the connectivity revenue to 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 is in sorry, our market share a caran neutral side is in the 20s. Maybe in the Tier 1 markets, it's a little higher than that. And as we indicated, with the very largest hyperscale customers, it's more like 30%. Thank
you. We have our next question from the line of Gokul Hauser. 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 by Dan and Pindaduo, obviously by Dan the size of their business, data center needs, compute needs, etcetera, are quite sizable comparable to your 2 biggest customers. So how do you see that relationship progress over the next couple of years? 2nd, and maybe related question as well, I think, William, you mentioned that we have stepped up from that 70 K sales or area committed organic basis over the last couple of years to definitely $90,000 this year. Over and above that, you're also making some acquisitions.
So if you think about some of these new customers that you've added plus growth from your existing customers as well, Is that 90 K number per year the new normal? Or we should actually think that it could be higher than that number as well from an organic sales acquisition, obviously, is, or 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?
So, good afternoon, William. I think I take your first question, how we engage the new customer? I think we are working very hard on to it's our key strategy. I mean, things like IPU, how to diversify our customer But in the last couple of years, the leading demands from the 2, a couple of big cloud. So that's what we already catch up.
But what we realized is currently in the last couple of years, the new Internet giant grow so fast. And we start to engage them in at least 2 years ago. But unfortunately, we didn't get any opportunity in the past 2 years, but we still keep engaged our customer. And now I think our customers start to set up their new criteria, when it was baby company, they maybe have a different criteria to select a vendor. But now I think the criteria is more close to their standard.
Of the giant standard. So I think that we have the ability. We have the option a chance to, to gather this deal. And so far, I think that our customers still focus on to deploy their data center needs requirement in the Tier 1 market plus remote But everybody know GDS, our core asset, our core our focus is the Tier 1 market. So I think this is the time, this is the first time our customer deploy their server in the Tier 1 market, which we think is our world.
Strength and our capability. So that's why we can get a deal And looking forward, I think those kind of those customer will in the future, we believe will will grow very fast and there will be our, let's say, next generation of the hypescale contribute. And as I just mentioned, their number, if you look at what the server what's the server total server they procured in this year and the next couple of years. The level of the server procurement is more close to the is successful close to the traditional cloud player. So we are happy to see that.
That means GDS anchor customer in the future, the anchor customer will be more diversified. And this is our key strategy and we will continue on that. This is the first question. Okay. 90,000 cans.
Yes, I think the yes, we are happy. We are, we cannot catch up. We'll continue to catch up the acceleration of the market demand. So we really want to put some big numbers right now. I think the 90 this year, obviously, we can achieve.
But I think next year, In terms of 90, I think we are confident. But maybe we can do more, but we are not just pursued the number. We are pursuing the gross quality. So we will see, I see next year, ninety a 90, ninety thousand square meter, I believe we can continue, right? But 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 established in Tier 1 data center providers like you in Tier 1 Cities? Or do you feel like they are also changing the strategy in terms of pulling demand from the cloud and kind of starting to move towards their own datacenter their own compute and other services hosted on their own data centers?
I think it's not covering. I think I don't know what's kind of the application data point in a direct to our data center. But we still see the channel. They still use the cloud. Very in a significant way.
And then they also have another purpose, right? I think I believe they have different purpose. To deploy some dedicated IT infrastructure by themselves. I think this is also the trend there, in my view, they use public cloud, still growth. And they also start to use their build their own hybrid cloud strategy write down.
So we have benefits on both In terms of the remote, I think the remote, everybody knows, 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, if we, I mean, it's not our core business, but I would like to say We are ready to do more. And what we can tell is our customer will give us more business We have more opportunity on this part.
Thank you. We have the next question from the line of Tina Howe from Goldman Sachs. Please go ahead.
Hi, thank you very much management for taking my questions. I have 2. The first one is that, could you help me understand? Because we're raising our guidance in terms of our floor area sales from in terms of organic from 80,000 to 9000 Square Meters. However, we're keeping our annual revenue guidance unchanged.
So 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? And then the second question is in terms of, we wanted to understand in terms of, like, the big cloud customers, datacenter vendor strategy? Do you see any difference between say Ali Cloud or Tencent Cloud. So like normally, how many datacenter vendors do they usually pick?
Thank you.
There's a, there's a cycle from sales, most of which is, pre commitment during the time that data center is under construction and when the data center comes into service and then over maybe 18 months or even 24 months, there's a move in. So 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, well, if we look forward 12 months at any time, pretty much all the revenue growth looking 12 months forward, which would come from contracts, which were already signed prior to prior to the beginning of the year. So I mean, if I was, yes, we were talking about raising revenue guidance. I mean, if I was giving revenue guidance for 2022, maybe I can raise that account of, on account of the higher sales.
That's how it works. Wouldn't you like to answer the question about different strategies of the big cloud customers?
Yes, I think We have to as we talked about it, we already build our platform in all the key markets, which we have a very significant, I mean, advantage compared with other. So I think this is very important for our customer. So I think our customer that they have the criteria for them is continue high visibility of the resource in each region in your platform in all core location. This is very important. And to continue and of course, the operation skill is also very important for the and the cost is also this is the key criteria.
And typically, I think the historically the top customer, they use a lot of the difference data center service provider in historically. But in the recently, in the couple of years, they strengthened the name and they have the very they narrowed the to narrow the abandoned list after many years, business relationship. So I think the typically, the major like a customer, they will have 3 or 4 service vendor. So this is the current situation, what we face. And as you as we used to we used to talk about it, we signed some signed a strategic vendor agreement with our top 2 our top 3 customers so far.
So I think that we believe GDS is the major, I mean, a vendor in terms of the top 3 key vendors, right? Is that your question?
Thank you. And wait for your name to all participants on today's We have the next question from the line of Frank Walton 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 and then we'd model just what are the thoughts on the trends in that for the rest of the year? And then 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 outbreak with COVID-nineteen and how the how is that policy has evolved?
How do you think 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 us a little bit about what the current policies are and are they better or worse than they've been over the last 6 months or so? Thanks.
Yes. Hi, Frank. It's Dan here. The MSR for when it's after square meter for the 2nd quarter, it was down by 3%. The way we calculate is we take the average of the hopefully including air to utilize.
So the, page 101112 acquisition closed on June 5th. So we had 25 days revenue contribution, but we the whole of the area utilized, in the quarter end number. So if we strip that out, then the MSR decline was just about 1%, which is more or less what I indicate is kind of a long, long term trend line. In the third quarter, we will have a full quarter's contribution from Beijing 10, 11, 12. And I think there's some and its investors calculated when we announced the deal, the MSR that data center is for those 3 data centers is lower than our average.
So there will be some dilutive effects in the 3rd quarter. And and going forward. But I think the MSR will be around that level of around 2, yes, around the level that it was has before adjustments in the second quarter. I talked earlier about the economics of the Ed Town sites, the MSR there, is lower. The unit CapEx is lower.
Terms were very, highly, very acceptable. So there will be continuing gradual decline than the MSR. And from time to time, we will try to highlight what's happening without external investment, which is really what we target to sustain. And I think we are indeed doing that. William, you'll talk about the operating environments in China and what happens when there's if there's a resurgence of ours?
Yes. Unfortunately, I'm in Shanghai up to 14 day's quarantine. I feel that everything is go back to the normal So it looks like in terms of the daily life, retail, restaurant, cinema, entertainment, everything will go to the normal. So almost 95%, I think, yes, it's good to the normal. So I think the, from the supply chain point of view and the working permission point of view, everything is go back.
So I think it's come to normal and we didn't see any impact in the next few months, few quarters.
Okay, great. Thank you.
The next question comes from the line of James Wang from UBS. Please go ahead.
Good evening, management. I've got two questions. First question is on supply. So we're hearing that, for example, steel mills in China which have very cheap access to electricity are being converted into data centers. So just want to get your thoughts on how do you assess the risk of potential capacity of the supply And how would you cope with an oversupply situation should occur?
And the next question is just in terms of contracting renewed stuff by this year. What are you seeing in terms of pricing? Is it broadly similar or lower versus prior terms? Okay. I'll take the first question.
I think data center is actually if you look at the data center, it's actually it's a very, very in my view, it's a high barrier industry. Of course, in recently, we see a lot of the supply a lot of the new player jump to the market. But in terms of our customer profile, okay, our customer need a reliable vendor, right? So I think a lot of the new player cannot catch up varies in a short time. So I think there's a way behind us.
It's not direct impact us. On the other hand, GDSU's 19 years build our value proposition and our position. It's not easy to to change our position. So I think the, in my view, we are already there and obviously, we are in a better position. And our customers are smart, very sophisticated So it will not change our position in our customer.
But of course, in terms of the competition, it's more concentrated on the tier 2 player, even tier 3, right? So it will not change any of our position in my view.
James, it's Daniel. Your question about pricing on contract renewals. Let me let me answer it in a bigger picture way. We did our first business with our top 2 customers in 2014, 2015. So 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 cloud and large inserts business come up for renewal. If you look at the contract renewal schedule, which is on Page 42 about our earnings presentation, roughly say, in second half of twenty twenty, twenty twenty one, twenty twenty two is somewhere around fifty 60% plus of that, area relates to cloud and large customers. So 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, and there may be some where it goes up.
But overall, I think it's flat. I've commented before, this is not actually a reflection of the market, 60 not for these first two contracts because You know, those early orders were kind of downtown data centers close to Cbd, where the current market price is definitely higher than what it was. So 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 still have a and price to our larger customers.
It does change from deal to deal from place to place, data center, data center, time to time. So yes, 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 it is a completely new piece of business, today. So, yeah, I think a flat, flat overall, and you leave something on the table in terms of not extracting the full market price.
Thank you very much.
Thank you. Is there 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 information on our website or the Piacente Group Investor Relations. Bye for now.
This concludes this conference call. You may disconnect your line.