Hello, ladies and gentlemen. Thank you for standing by for GDS Holdings Limited's 1st Quarter of 2019 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'll now turn the call over to your host Ms. Laura Chan, Head of Investor Relations for the company. Please go ahead, Laura.
Thank you. Hello, everyone, and welcome to the 1Q 'nineteen 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 IR website at investors. Gdsservices.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's CFO, will then review the financial and operating results. Before we continue, Please note that today's discussion will contain forward looking statements made under the Safe Harbor provisions of the U.
S. Private Securities Litigation Reform Act of 1995. Forward looking statements involve inherent risks and uncertainties. As such, The company's results may be materially different from the views expressed today. Further information regarding these and other risks and uncertainties is included in the company's prospectus as filed with the U.
S. SEC. The company does not assume any obligation to update any forward looking statements except as required under applicable law. Please also note that GES earnings press release and this conference call include discussions of unaudited GAAP financial information as well as unaudited non GAAP financial measures. GDS press release contains a reconciliation of the unaudited non GAAP measures to the unaudited most directly comparable GAAP measures.
I will now turn over the call to GDS founder Chairman and CEO, William Huang. Please go ahead, William.
Thank you, Lola. Hello, everyone. This is William Huang. Thank you for joining us on today's call. We started 2019 right away 2018 left off.
Which with robust growth that's translated into strong 1st quarter results. Across our business. Demand remains as strong as ever. In the first quarter, we signed up customers for over 16,000 square meter of net additional area committed, which exceeded our own target. We are now halfway through the second quarter and it looks very good.
Maintaining resource supply in Tier One markets is a critical success fact. Since the beginning of this year, We made significant progress in securing additional land and power for hyperscale development and initiated 5 new projects. We continue to deliver operational resulting in over 60% service revenue growth and over 110% adjusted EBITDA growth year on year. Our margins are expanding even faster than we expected We crossed the 50% thresholds for NOI margin and our adjusted EBITDA margin hit 43%. An improvement of over 10% that percentage points in 1 year.
We removed the capital overhead by successfully raising around $595,000,000 of proceeds from the follow on offering and strategic investment by Ping An. We now have sufficient equity capital to cover our expansion plans for the foreseeable future During the first quarter, our new business totally around 30 Megawatt. Including 4 deals with high scale customers for over 5 megawatt each. 3 of the deals were with existing customers and 1 was with a new customer, a global cloud leader which is doing very well in China. Including the top tier 2 global players and all the major domestics ones, presenting our data centers giving us a unique strategic position.
We continue to add cloud pops AWS Direct Connect and Microsoft Express load are now living inside several of our data centers. Further strengthening our position and home of the club, we have a good track record of winning business from foreign cloud payers. If the China market opens up, there could be more opportunities for us. Enterprise customers accounted for 10% of our new business last quarter, We won several notable new logos, including 1 of the largest auto companies in the world. And 1 of the largest international hotel groups.
We also won sizable follow on orders from one of the biggest banks in China and from the leading card transaction platform. To finish off on demand, I'm also asking about how the macro situations is affecting us. The final thing I would say is that this has been going on for nearly a year We are enabling the expansion of the digital economy in China. It's a secular growth story. We have highlighted over the past few quarters how our strategic customer base is becoming more balanced and balanced and diversified.
We are tapping we are tapping into more sources of growth. We have set Approximate age expectations and we are well on track to achieve our sales target for this year. Our focus continued to continues to be on Tier One markets where customer located their latency sensitive dates New technology trends are multiplying datumvolume. And at the same time, government policies are making it more and more difficult for data centers to obtain the sufficient power supply where it is needed. To deal with this challenging, we are evolving our resource strategy.
We continue to add a data sense in the key cities whenever we can. Since the beginning of the year, we initiated another 4 organic projects, plus one acquisition which we are announcing today. At the same time, we have been working on securing large greenfield sites on the border of the cities where we can develop much larger scale. This is a long and complicated process, and it must work for our customers for power, for network and for the local governments. I'm happy to report that these efforts are hearing significant results.
Our focus today on our position in Beijing and Guangzhou. I will update you on Shanghai, Shenzhen and other potential markets on subsequent calls. Starting with Beijing. During 2018, we initially initiated 4 new projects in the city and in 1Q 'nineteen, we initiated 1 more Beijing 8. We believe that our Citi data centers will become increasingly valuable over time, and we are looking at all options to expand our portfolio.
Most of our Beijing data centers are in Dansheng District Southeast of Beijing which is a premier data center hub. Long Valley is an area adjacent adjacent to Daqing in Hervey Province. It is already a well established data center location. Serving the Beijing market with good network connectivity and power infrastructure. Given the constraints, we see demand moving to Langhang and are positioning ourselves accordingly.
Our major customers endorse this strategy And the first step, we leased 2 buildings in Langhang, the first Langhang 1. The first long form one is already under construction and fully pre committed a few weeks ago We entered into a framework agreement with the Long Farm Local Government for the acquisition of a large greenfield site and the allocations of significant power capacity. We're now in the formal process for the transfer of land use rights. With the additional of long form supply, we are strongly positioned in the Beijing market. Now we talk about Guangzhou.
Guangzhou was initially a slower market than Shenzhen in terms of the data center development. However, as power supply has become extremely limited in sensing we see demand shifting to Guangzhou. We have a data center cluster in WAN Pool District where our Guangzhou III are located. Today, we are announcing the acquisition of another project in the same area, 106. During 1Q 2019, we initiated a new project in the Nanasa District of Guangzhou.
Nanasa is a major logistics and IT hub, which complements our Greater Bay Area Presents. The project consists consists of 2 buildings. The 1st of which, 10 4 is under construction. We previously disclosed that we have acquired a greenfield site in Guangzhou, which will be hand over to us at year end. Talking all together, we are well positioned to capture demand in Guangzhou.
Outside of Tier 1 markets, our customer Customers also require large capacity for what we call cold data, which can be located in lower costs remote areas. We are starting to see demand from and fuel our customers to also this as well. Last year, we built 3 data centers in Hoping, which belong in this category. Going forward, we would like to do more projects like this because it's important for customer relationships. And with the right structure, it can enhance our return on capital.
We have therefore been working for quite a while on developing a joint venture structure at a project level, which enables us to bring in outside the capital from a partner. We are making good progress. We have a world class financial partner lined up. We will keep you updates updated on progress. With that, I will hand over to Dan for the financial and operating review.
Thank you, William. Starting on Slide 12, where we strip out the contribution from equipment sales and the effect of FX changes. In 1Q 2019, our service revenue grew by 7.5%, Underlying adjusted NOI grew by 10.8% and underlying adjusted EBITDA grew by 14.2% in consecutive quarters. Our underlying adjusted NOI margin reached 51.3% and our underlying adjusted EBITDA margin hit 42.5%. Which is 9.5 percentage points higher than a year ago.
Turning to Slide 13. The main driver of revenue growth was the increase in area utilized with over 9700 square meters added in the first quarter. 1Q is seasonally slow because of the cycle around Chinese New Year, and we expect the moving cadence to pick up throughout this year. Monthy Avenue or MSR per square meter decreased by 0.8percentquarteronquarter which is consistent with our expectations Slide 15 shows the strong quarterly trend in margin improvement at the NOI and EBITDA levels. As illustrated on Slide 15, the split between stabilized and ramping up data centers stayed at around the same as for the prior quarter, but the utilization rate for ramping up data centers in 1Q 2019 was higher.
On Slide 16, you can see that most of the improvement in NOI margin came from operating leverage on rent, labor and other costs. Our stabilized data centers achieved over 55% NOI margin in the quarter. Across the whole portfolio, we're expecting 1 to 2 percentage points further improvement in an airline margin over the next few quarters. We've been steadily realizing operational leverage on SG And A which is reflected in the EBITDA margin. Here again, we're expecting at least 1 percentage point further improvement throughout the year.
Through the year. Turning to our CapEx on Slide 17. We paid RMB834 million in 1Q 2019, and it should set up in the next few quarters. In our CapEx guidance, for 2019, we mentioned that the budget for land acquisitions was around RMB 500,000,000. The Guangzhou and Langhang sites account for less than half.
The new data center acquisition in Guangzhou, Guangzhou 6, is at a total enterprise value including cost to complete with RMB550 1,000,000. We believe that this data center can achieve stabilized in annual NOI of over RMB80 million. We target closing the acquisition in 3Q 2019, subject to conditions around the property lease and power activation. We're working on other potential M and A deals and we hope to announce one more quite soon. Looking at our construction program, we have 1 data center Beijing 4 coming into service in the current quarter, and most of the capacity will be committed by then.
Across our top three markets, We are well positioned in terms of available capacity under construction relative to our sales targets and demand. As at the end of 1Q 2019, we have around 227,000 square meters of total capacity in service and under construction. Excluding 3rd party data centers, with a total IT power capacity of 463 megawatts. Our total development cost to date and to complete for this capacity is around RMB15 billion. The unit cost for this capacity works out at just under RMB66,000 or $10,000 per square meter.
And RMB32,000 or US4800 dollars per kilowatt. Going back to 1Q 2017, Our unit cost per kilowatt was rmb 35,000. As you can see, it is declined by 8% on a cumulative basis over the subsequent eight quarters. For the new projects which we are undertaking, the unit cost per kilowatt is typically around $30,000. With regard to financing on Slide 18, Following the equity issuance in 1Q 2019, our net debt to last quarter adjusted EBITDA multiple has come down dramatically to 4.9x.
Our approach to capital structure remains targeting 6040 debt to equity at the project level. In our models, this shows leverage going up again for a few quarters to over 6 times as we make investment ahead of generating EBITDA. We are comfortable with this as we always have been. During 1Q 2019, we obtained RMB2.3 billion or US340 million dollars of new debt facilities, including refinancing. The current credit environment in China is very favorable for borrowers like us.
We're establishing new relationships with Chinese banks, which enables us to diverse by our funding sources. And we're getting 8 to 10 year tenures and the lowest interest rates ever. For a couple of the facilities that we're working on now, the all in cost is expected to be less than 6% compared with an effective interest While at the same time, cognizant of our large cash balance, we're looking at optimizing our debt, which includes paying down some loans. It is going to take a couple of quarters to balance this out. Finally, on Slide 19, At the end of 1Q 2019, our backlog had increased over 81,000 square meters.
We currently have around 118,000 square meters, which is revenue rating. The backlog therefore implies that we can grow our revenue generating space by almost 70% without signing any new customer contracts. Lastly, we reconfirm the guidance, which we provided a couple of months ago. I would note that the quarterly cadence should increase over the year. To repeat what William said, we are well on track to deliver our full year targets.
With that, I will end the formal part of our presentation. And we'd now like to open the call to questions.
And session. These callers have additional questions. We'd like you to ask you to reenter the queue. First question comes from the line of Jonathan Atkin of RBC Capital Markets. Please go ahead.
Thanks very much. I wondered if you can talk a little bit about the timelines that you're seeing for customers in terms of move in, is that roughly the same or accelerating or taking longer? Is there a general trend that you could comment on? And then if you could also talk a little bit about your revenue, what's your current revenue exposure to non Chinese customers. And if you could expand a little bit about the interest level on the part of non Chinese players to enter the market and potentially become customers of GDS.
Thank you.
Okay. Thanks, Sean. It's Dan here. Last year, the total we call it net additional area utilized or move in was around 46,000 square meters. And I think you will have calculated yourself that our revenue guidance for 2019 implies a move in over the year, which is significantly higher than that.
In the first quarter, it was around 10,000 square meters from everything we know about our customers' moving intentions and what is written in the contracts in terms of contractual delivery schedule, we are, well on track to achieve the level of move in that we were expecting. It really can't comment more specifically to say that to talk about acceleration or slowdown. They do nothing can be read into it. It is as we expected. On the your question about, foreign customers, of course, we have 2 of the top global cloud service providers.
I prefer to talk about the exposure in terms of total area committed than revenue because revenue is a lagging indicators, as you know, by around 15 months. So from the top 2 global cloud service providers, that's in round numbers, around 5% of our business. And you may have seen, recently in terms of market shares, they both have around 6% market share of the cloud market in China. And, Amazon, for example, on their recent earnings call, highlighted that they were doing very well in China. So I think that we have any concern about that.
Our only concern is to make sure that we are perfectly positioned for their expansion plans. Other than that, our business with foreign customers is mostly Multinational Corporations who typically have financial institutions who typically have very long track records in China and his business is very stable. Once again, we have no concerns about that.
Thank you.
Our next question comes from the line of Robert Gutman of Guggenheim. Thank you. Please go ahead.
Hi, thanks for taking the question. So Given the new business booked in the quarter and the timing of deliveries, is there any change in the expectation of the MSR for the year, which I think the guidance was for down 5%. And secondly, was the new strategic customer? Was it one of those to clouds or was it another entity? Hi, Rob.
It's Dan once again. I think the MSR trend is exactly as we expected. We know what capacity is due for delivery this year. We know what the selling price is in those contracts. Sometimes as customers move in, their racks may be empty, they may not be significant or they may not be significant power usage.
That can the MSR, but a 0.8% decline quarter on quarter versus what I commented last time, 5% over the full year is pretty much in line. And Yes, the new strategic customer was one of the 2 top global cloud players. I think was significant about it is that as is publicly known, we are hosting a couple of their pops in 2 different markets, but we also won for the first time a large order for their cloud platform.
Thank you. Our next question comes from the line of Frank Loven of Raymond James. Please go ahead. Great.
Thank you. I wanted to talk a little bit about the guidance and if there was was there anything, sort of one time help in EBITDA in the quarter, which might kind of do the math sort of implies that you're going to be above the range if you stay in this sort of in this range of margins for the year. Maybe tell us why you didn't raise the guidance there and how we should be thinking about that?
Frank, is a good observation. All I can say is we thought about it. Just I think you gave guidance 2 months ago. So, It seems a little bit premature, I'd rather wait to see where we are in the middle of the year.
Thank
Our next question comes from the line of Cowen and Company of Colby Sonation. From Cowen And Company. Please go ahead.
Hi, this is Michael on for Colby. Two questions, if I may. First, how would you compare the visibility you have into your leasing pipeline now versus the same time a year ago? And then second, based on what you're seeing in the market, how should we think about MSR trends in 2020 beyond?
Thank you. First question on the pipeline, we still think it's consistently like what we see in the beginning of the year. Nothing changed. And we are still very confident our news booking will be on track. The second question, it's Ahmed.
Yes. Michael, if we're talking about what we call our city data centers, so we're going to make a comment like for like. The pricing is stable to firm. I would say, which reflects the market situation. We are consistently getting a selling price per kilowatt per month, net or exclusive power usage of over USD 100 And that's been the case, for the last couple of years and, remains the case with the deals that we've done very recently.
I can't see anything in terms of dynamic that's going to change in the city data centers, certainly not for the worst. Then of course, we have a significant amount of new capacity, which will start to come on stream from late next year. In the sites that we're that we've started to disclose, which are on the borders of the city. From the very detailed work we've done and the customer interactions, we think that we'll be able to developed at a lower unit cost in those sites. There may also be some change in the product mix.
It might not all be 2n, which of course has significant implications for the cost. So if that's the case, if either of those is the case, then it will get reflected in the selling price. But the return, as I would say, will remain the same. But I think for modeling purposes, it's too early, too early to really build that in in a kind of detailed way. I think the MSR decline which we've seen, if it's in the city area, is really coming to an end.
It just has to work its way through over the next 4, maybe six quarters.
And we used to mention that even in Beijing such a specific market, I mean, the demand surprise is very extremely unbalanced. So what we can see is that in Beijing, mean, the price even goes high. Thank
Next question comes from the line of Colin McCollum of Credit Suisse. Please go ahead.
Yes, thanks for the opportunity. Just a quick one on this margin issue. It's obviously very strong in the first quarter. I think, Dan, you mentioned, sort of 1 percentage point more throughout the year. Were you referring to on top of the 1Q 'nineteen margin or were you was that comment more kind of a year on year kind of comment in terms of, the starting point for the margin?
That was the first question. And then a related points, just with the margins going up, I see you're still obviously making net losses given the depreciation and interest charges, but with interest charges also coming down, you mentioned what would be your thinking for when we might be moving to a net profit situation? Is it possible within this year or is it more next year or year after situation? Thank you.
Yes, Colin, on margin, 1st of all, the first quarter margin is not a flash in the pan. It's it's a data point on the trend line. What I was indicating is that at the NOI level, we can see, that it will continue to improve. I'm not saying every quarter a consistent way, but in terms of a trend by 1 to 2 percentage points, I said over the next few quarters, I don't want to be locked in to say that's exactly what it would be by the end of the year, but there's going to continue to be 1 to 2 percentage points improvement in the NOI margin over the next few quarters. And in addition to that, there can be a further 1% improvement due to leverage on SG percentage point improvement that we can see with a reasonably high degree of confidence over the next few quarters.
Your question
about net income, can I take that offline, Poland? And and talk to you one on one about that. Not that I'm evading. I just don't write down. I think net income would probably not be positive until 2021.
Maybe the first half of twenty Thank you.
Our next question comes from the line of Yang Liu of Morgan Stanley. Please go ahead. Please ask your question.
Thanks for the opportunity to ask questions. I have 3 questions. The first one is, can management comment on the evaluation multiple in private market when you do the M and A project, particularly given the credit environment in China got improved. I'm not sure if the pricing of the M and A deal got also got increased. The second question, could you please elaborate more about how or what kind of advantage help GDS win order from the global leading cloud vendors in China.
I'm sure it's previously used another vendor. In China? And the third question is, how about the cloud demand mix in the first quarter? I think management's previous guide, the demand from Tier 2 cloud vendors in China are particularly strong this year. How about the situation now?
Thank you.
Thanks, Andrew. I'll take the first question on valuation multiples. I'm sure you calculated that, what I said the implied multiple for the, what we call, Guangzhou 6 acquisition is probably 7 times or less than less than seven times. We evaluate projects from multiple respects, but fundamentally, our financial approach is always looking at the return on investment. There's a return target that we that we, require.
And then that valuation translates into a multiple. So it's not we're not really talking about what is the market multiple is, hey, this is the valuation that we can justify. It just so happens to come out at around seven times. In this case, in terms of the dynamic in the market, we have the cash buyer, I think we're being one of the few, if not the only cash buyers, for for a while. That gives us a special position.
I talked before about there being more opportunities In the past, the competition in terms of on the buy side has come from Asia, Shanghai Chenzhen Stock Exchange listed companies. We tried to play a game around injecting data center assets, boost evaluation, as you know, very well, tech stocks in China trade at very high multiples. When the Asia market was down, that creates an advantage for us. I think earlier this year, come back up. We did see at least in one situation, the one situation that we're working on, the seller's attention got distracted by the possibility of doing doing something like that.
But then maybe the last week, if there's something positive that's come out of it, you can say maybe the softening of the Asia market will put us back in a stronger position for M And A. I think that's really all I can comment.
Let me answer your second question is how we win the club from the other vendors. I think number 1, our position is very clear. We target our focus is the Tier 1 market. We are the only one only platform player in all the Tier 1 market. That's our focus.
So in our sales side, we try to it's our strategy to focus on to get more this type of the customer in all the Tier 1 market. Because it's very strategic, because most most, most, almost every cloud player they want. Put their, pops in all the Tier 1 market even from now for the future, right? So that's, that's very strategic for us. So this is our which are focused.
So our win fact is number 1, we are the platform player number 2, the long term operation track record and consistent supply in all Tier 1 market. And we have the experience to serve the long term customer, right? So I think the service in terms of full service, resource supply, and the operation scale and our ecosystem. This is all the fact we win the cloud customer. And in the meanwhile, we win their pops in the Tier 1 market.
That's our focus. Yes, the third question is that we noticed that there's a lot of Tier 2 city demand from the cloud. Payer. This is a new market, as we mentioned a couple of years ago. So we know this market will be another new market for us.
So we try to do more, but in the proper structure and the proper private equity partner. Because if we don't have those kind of the element, the return is very poor. So now, as we just said, I just mentioned, We just, we almost get there to set up the right structure with a world class private equity. To do this type of data center in the future. And from now on, I can say maybe in the next couple of quarter, we can do more.
We can fulfill more requirement from the from our existing customer in the Tier 2C.
Thank you.
Thank you once again for joining us today. If you have further questions, please feel free to contact GBS our website or the Piacente Group Investor Relations. Thank you.
This concludes this conference call. You may now disconnect your lines. Thank you.