Hello, ladies and gentlemen. Thank you for standing by for GDS Holdings Limited's first 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 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. Hello, everyone, and welcome to the 1Q 2019 earnings conference call of GDS Holdings Limited. The company's results were issued via newswire services earlier today and are posted online. A summary presentation, which we will refer to during this conference call, can be viewed and downloaded from our IR website at investors.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 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 GDS 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, Laura. Hello, everyone. This is William Huang. Thank you for joining us on today's call. We started 2019 right where 2018 left off, with robust growth that's translated into strong first quarter results across our business. Demand remains as strong as ever. In the first quarter, we signed up customers for over 16,000 sq m 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 1 markets is a critical success factor. Since the beginning of this year, we made significant progress in securing additional land and power for hyperscale development and initiated five new projects. We continued to deliver operational, resulting in over 60% service revenue growth and over 110% adjusted EBITDA growth year-over-year. Our margins are expanding even faster than we expected.
We crossed the 50% threshold for NOI margin, and our adjusted EBITDA margin hit 43%. An improvement of over 10 percentage points in one year. We removed the capital overhead by successfully raising around $595 million of proceeds from the follow-on offering and the 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 totaled around 30 MW, including four deals with hyperscale customers for over 5 MW each. Three of the deals were with existing customers, and one was with a new customer, a global cloud leader, which is doing very well in China. We now have every single hyperscale cloud service provider, including the top two global players, and all the major domestic ones present in our data centers, giving us a unique strategic position.
We continue to add cloud POPs. AWS Direct Connect and Microsoft ExpressRoute are now living inside several of our data centers, further strengthening our position as home of the cloud. We have a good track record of winning business from foreign cloud players. 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 one of the largest auto companies in the world, and one 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 often asked about how the macro situation is affecting us.
The first thing I would say is that this has been going on for nearly a year, during which time we have continued to rack up impressive sales growth. 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 diversified. We are tapping into more sources of growth. We have set appropriate expectations, and we are well on track to achieve our sales target for this year. Our focus continues to be on Tier 1 markets, where customers locate their latency sensitive data. New technology trends are multiplying data volume. 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 challenge, we are evolving our resource strategy. We continue to add data centers in the key cities wherever we can. Since the beginning of the year, we initiated another four 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, as it must work for our customers, for power, for network, and for the local governments. I'm happy to report that these efforts are yielding significant results. I will focus today on our position in Beijing and Guangzhou. I will update you on Shanghai, Shenzhen, and other potential markets on subsequent calls. Let's start with Beijing. During 2018, we initiated four new projects in the city, and in 1Q19.
We initiated one more, Beijing Eight. We believe that our city 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 Daxing District, Southeast Beijing, which is a premier data center hub. Langfang is an area adjacent to Daxing in Hebei 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 Langfang and are positioning ourselves accordingly. Our major customers endorse this strategy. As a first step, we leased two buildings in Langfang. The first Langfang 1 is already under construction and fully pre-committed. A few weeks ago, we entered into a framework agreement with the Langfang local government for the acquisition of a large greenfield site and the allocations of significant power capacity.
We are now in the formal process for the transfer of land use right. With the additional of Langfang 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 Shenzhen, we see demand shifting to Guangzhou. We have a data center cluster in Huangpu District where our Guangzhou 1, 2, and 3 are located. Today, we are announcing the acquisition of another project in the same area, Guangzhou 6. During 1Q19, we initiated a new project in the Nansha District of Guangzhou. Nansha is a major logistics and IT hub, which complements our Greater Bay Area presence. The project consists of two buildings, the first of which, Guangzhou 4, is under construction.
We previously disclosed that we have acquired a greenfield site in Guangzhou, which will be handed over to us at year-end. Talking all together, we are well-positioned to capture demand in Guangzhou. Outside of Tier 1 markets, our customers also require large capacity for what we call cold data, which can be located in lower cost, remote areas. We are starting to see demand from a few our customers to outsource this as well. Last year, we built three data centers in Hebei, which belong in this category. Going forward, we would like to do more projects like this because it's important for customer relationships. 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 the project level, which enable us to bring in outside capital from a partner.
We are making good progress. We have a world-class financial partner lined up. We will keep you 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 1Q19, 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 9,700 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. Monthly revenue, or MSR per square meter, decreased by 0.8% quarter-on-quarter, which is consistent with our expectations for the full year.
Some of the decrease was due to lower power usage during the cold months. 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 stays around the same as for the prior quarter, but the utilization rate for ramping up data centers in 1Q19 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 one to two percentage points further improvement in NOI margin over the next few quarters. We've been steadily realizing operational leverage on SG&A, which is reflected in the EBITDA margin.
Here again, we're expecting at least one percentage point further improvement through the year. Turning to our CapEx on slide 17. We paid 834 million RMB in 1Q19, and it should step up in the next few quarters. In our CapEx guidance for 2019, we mentioned that the budget for land acquisitions was around 500 million RMB. The Guangzhou and Langfang sites account for less than half. The new data center acquisition in Guangzhou Six, is at a total enterprise value, including cost to complete, of 550 million RMB. We believe that this data center can achieve a stabilized annual NOI of over 80 million RMB. We target closing the acquisition in 3Q19, subject to conditions around the property lease and power activation. We're working on other potential M&A deals, and we hope to announce one more quite soon.
Looking at our construction program, we have one data center, Beijing Four, 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 1Q19, we have around 227,000 square meters of total capacity in service and under construction, excluding third-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 15 billion RMB. The unit cost for this capacity works out at just under 66,000 RMB or $10,000 per square meter, and 32,000 RMB or $4,800 per kilowatt. Going back to 1Q17, our unit cost per kilowatt was 35,000 RMB.
As you can see, it has 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 RMB 30,000. With regard to financing on slide 18, following the equity issuance in 1Q19, our net debt to last quarter adjusted EBITDA multiple has come down dramatically to 4.9x. Our approach to capital structure remains targeting 60/40 debt to equity at the project level. In our models, this shows leverage going up again for a few quarters to over 6x as we make investment ahead of generating EBITDA. We are comfortable with this as we always have been. During 1Q19, we obtained RMB 2.3 billion or $340 million 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 diversify our funding sources. We're getting eight to 10-year tenors 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 cost in 1Q19 of 6.6%. We're trying to take maximum advantage of this, 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 1Q19, our backlog had increased to over 81,000 sq m. We currently have around 118,000 sq m, which is revenue generating.
The backlog therefore implies that we can grow our revenue generation 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. We'd now like to open the call to questions. Operator?
Thank you. Ladies and gentlemen, we'll now begin the question and answer session. If you wish to ask a question, please press star one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press the pound or hash key. In the interest of time, we'll limit each caller to one question each. If callers have additional questions, we ask you to reenter the queue. Once again, to ask a question, it is star one on your telephone keypad. Our 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 can comment on? If you could also talk a little bit about 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, John. It's Dan here. Last year, the total, we call it net additional area utilized or move-in, was around 46,000 sq m. 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 sq m. From everything we know about our customers move-in 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. I really can't comment more specifically to talk about acceleration or slowdown. Nothing can be read into it. It is as we expected. On your question about foreign customers, of course, we have two of the top global cloud service providers. Yeah.
I prefer to talk about the exposure in terms of total area committed and revenue, because revenue is a lagging indicator, as you know, by around 15 months. From the top two global cloud service providers, that's, in round numbers, around 5% of our business. You may have seen that recently in terms of market shares, they both have around 6% market share of the cloud market in China. Amazon, for example, on their recent earnings call, highlighted that they were doing very well in China. I don't think 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 and financial institutions, who typically have very long track records in China and whose business is very stable.
Once again, we have no concerns about that.
Yep.
Thank you. Our next question comes from the line of Robert Guterman of Guggenheim. Thank you. Please go ahead.
Hi. Thanks for taking the question. 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%? Secondly, was the new strategic customer, was it one of those two clouds, or was it another entity?
Hi, Rob. It's Dan once again.
Hi.
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, there may not be significant power usage. That can affect the MSR. A 0.8% decline quarter-over-quarter versus what I commented last time, 5% over the full year, is pretty much in line. Yes, the new strategic customer was one of the two top global cloud players. What I think was significant about it is that, as is publicly known, we are hosting a couple of their POPs in two different markets. 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 Louthan of Raymond James. Please go ahead.
Great. Thank you. Wanted to talk a little bit about the guidance and if there was anything sort of one-time helping EBITDA in the quarter. If I do the math, it sort of implies that you're going to be above the range if you stay 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, it's a good observation. All I can say is we thought about it. Just, I think we gave guidance two 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 you once again. For those who wish to ask a question, please press star one on your telephone and wait for your name to be announced. The next question comes from the line of Cowen and Company, Colby Synesael from Cowen and Company. Please go ahead.
Hi. This is Michael Long 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? Second, based on what you're seeing in the market, how should we think about MSR trends in 2020 and beyond? Thank you.
I answered the 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 new booking will be on track. The second question is.
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 of power usage, of over $100. 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 worse.
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've started to disclose, which are on the borders of the cities. From the very detailed work we've done and the customer interactions, we think that we'll be able to develop 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. If that's the case, if either of those is the case, then it will get reflected in the selling price. The return, as I always say, will remain the same. I think for modeling purposes, it's too early to really build that in a kind of detailed way.
I think the MSR decline, which we've seen in the city area, is really coming to an end. It just has to work its way through over the next four, maybe six quarters.
We used to mention that even in Beijing, such a specific market, the demand and supply is extremely unbalanced. What we can see is in Beijing, the price even goes high.
Thank you. Once again, for those who wish to ask a question, please press star one on your telephone and wait for your name to be announced. To cancel the request, please press the pound or hash key. Next question comes from the line of Colin McCallum of Credit Suisse. Please go ahead.
Yeah, 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 one percentage point more throughout the year. Were you referring to on top of the 1Q19 margin, or was that comment more kind of a year-on-year kind of comment in terms of starting point for the margin? That was the first question. Then, a related point, just with the margins going up, I assume you're still obviously making net losses given the depreciation interest charges. 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 a next year or year after situation? Thank you.
Yeah. Colin, on margin. First of all, the first quarter margin is not a flash in the pan. It is 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 am not saying every quarter in a consistent way, but in terms of a trend by one to two percentage points, I said over the next few quarters. I do not want to be locked in to say that is exactly what it would be by the end of the year, but there is going to continue to be one to two percentage points improvement in the NOI margin over the next few quarters. In addition to that, there can be a further 1% improvement due to leverage on SG&A.
If you take those together, I was really saying there is two to three 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, Colin, and talk to you one-on-one about that? Not that I am evading, I just do not know right now. I think net income will probably not be positive until 2021, maybe first half of 2021.
Thank you. The next question comes from the line of Yang Liu of Morgan Stanley. Please go ahead. Yang Liu, your line is open. Please ask your question.
Thanks for the opportunity to ask questions. I have three questions. The first one is, can management comment on the valuation multiple in private market when you do the M&A project, particularly given the credit environment in China can improve? I am not sure if the pricing of the M&A deal also got increased. The second question, could you please elaborate more about what kind of advantage help GDS win order from the global leading cloud vendors in China? I am sure it is previously used another vendor in China. The third question is, how about the cloud demand mix in first quarter? I think management previous guide the demand from tier 2 cloud vendors in China are particularly strong this year. How about the situation now? Thank you.
The first question is. Yeah. Should I take the first question?
Yeah.
Yeah. Thanks, Yang Liu. I'll take the first question on valuation multiples. I'm sure you calculated that from what I said, The implied multiple for what we call Guangzhou six acquisition is probably seven times or 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 require, and then that valuation translates into a multiple. We're not really talking about what is the market multiple. It's, "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're a cash buyer. I think we're being one of the few, if not the only cash buyers 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 A-share, Shanghai, Shenzhen stock exchange listed companies who try to play a game around injecting data center assets, boost evaluations. You know very well, tech stocks in China trade at very high multiples. When the A-share market was down, that created an advantage for us. Earlier this year, come back up. We did see, at least in one situation, the one situation that we were working on, the seller's attention got distracted by the possibility of doing something like that. Maybe in the last week, if there's something positive that's come out of it, you can say maybe the softening of the A-share market will put us back in a strong position for M&A. I think that's really all I can comment.
Let me answer your second question, is how we win the cloud from the other vendors. I think number one, our position is very clear. Our focus is the Tier 1 market. We are the only platform player in all the Tier 1 market. That's our focus. In our sales side, 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 almost every cloud player, they want put their POPs in all the Tier 1 market, even from now, even for the future, right? That's very strategic for us. This is which our focus. The win fact is, number one, we are the platform player. Number two, the long-term operation track record and consistent supply in all Tier 1 market. We have the experience to serve the long-term customer, right?
I think the service in terms of full service, resource supply, the operation scale and our ecosystem, this is all the fact. We win the cloud customer. In the meanwhile, we win their POPs in the Tier 1 market. That's our focus. The third question is that we noticed there's a lot of the second Tier 2 city demand from the cloud player. This is a new market, as we mentioned a couple of years ago. We know this market will be another new market for us. We try to do more, but in a proper structure and a proper private equity partner. Because if we don't have those kind of the element, the return is very poor.
Now, as I just mentioned, we're 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. From now on, I can say maybe in the next couple quarter, we can do more. We can fulfill more requirement from our existing customer in the Tier 2 city.
Thank you. As there are no further questions, I'd like to now turn the call back over to the company for 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. Thank you.
Thank you. This concludes this conference call. You may now disconnect your line. Thank you.