Hello, ladies
and gentlemen. Thank you for standing by for GDS Holdings Limited 3rd Quarter 17 Earnings Conference Call. 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.
Hello, everyone, and welcome to the 3Q 'seventeen earnings conference call of GDS Holdings Limited. The company's results were issued via newswire services earlier today and are posted online. Summary presentation, which we will refer to during this conference call, can be viewed 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, 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. Securities And Exchange Commission. The company does not assume any obligation to update any forward looking statements, except as required under applicable law.
Please also note that GDS 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 the call over to GDS founder, Chairman and Chief Executive Officer, William Huang. Please go ahead, William.
Thank you, Laura. Hello, everyone. Thank you for joining today's call. A few days ago, we just celebrated 1 year anniversary of our IPO on NASDAQ. I'm pleased to say that over the past year, We have delivered everything that we said, we were.
And more, I'm also pleased for all our shareholders to see that our share price is now trading well above the IPO price. In In Q3 2017, we continued to make significant progress across all aspects of our business and further strengthened our market leadership position. Let's see the Slide 4. I will give you some financial highlights. We grew service revenue by over 58% year on year, driven by a 47% increase in total area utilized over the period.
The delivery of the backlog accelerated in Q3 with the additional of over 8000 square meters of revenue generating space. By far, our highest addition in a single quarter. We realized further operation leverage with adjusted EBITDA growing by over 70% year on year. And our adjusted EBITDA margin reached reaching 31.5% compared with the 26.2% in the same period last year. Continue to sales growth momentum.
And at the same time, we continue to add significantly to our customer culture. Sign up over 6000 square meters net of new commitments in Q3. As shown on slide 5, our total area committed to grow to over 82,000 82,000 square meters, 41% higher than 1 year ago. Over the 1st 3 quarters of this year, We have added over 21,000 square meters net of new customer commitments was over US100 $1,000,000 in terms of annual recurring revenue when fully delivered. This sales achievement is ahead of our expectations at the beginning of this year.
In effect a booming market and the strength of our strategy position, which has given us consistently high win rates. We have significantly we have the significant sales pipeline, which we have converting in Q4. And with the addition of this new business, we expect to end the year well ahead of last year achievement of $120,000,000 of new booking. While we are growing at record rates, we have been able to maintain a stable average selling price and we expect to achieve returns on new investment in line with historical levels We are also successfully renewing contracts each quarter with industry high retention rates. Chang was again only 0.1% in Q3.
This reflects our high operating stance standards and a high degree of customer satisfaction, pricing on renewals is generally at similar level to previous contracts. Let's move to Slide 6. We continue to develop our customer franchise along two tracks On one side, hyperscale, cloud and data intensive large Internet customer And on the other side, high demanding large private sector enterprise and FSI customer We continue to work more and more close with our hyperscale cloud and large internet customers. From our observation, their demand for data sense capacity is growing at even faster rates than expected In the third quarter of 2017, our top 2 customers placed a new order with us further increasing their total comfort area in our data centers. Another exciting cloud in existing cloud customer.
1 of the largest cloud service providers globally also expanded their deployment in one of our data centers in the third quarter. In the fourth quarter of 2017, we expect to start hosting Baidu's cloud platform in addition to their traditional search business. In September, we announced that we had received a telecom license which enable us to provide a cloud connect service within and between our data centers. By having multiple cloud service providers inside our data centers, including all the largest ICE platform. We are able to capitalize on this opportunity to attract more enterprise and FSI customers During the third quarter of 2017, we increased our customer counts by 9% to 496 customers at quarterend.
Notable name customers, including a leading international luxury company. A multinational finishing company, the national foreign exchange trading system, etcetera. This significant increase in our customer base was largely driven by the availability of Cloud Connect service inside our data centers. Currently, we have over 30 cloud connector customers. During the computing conference hosted by Alibaba in Hanzhou a few weeks ago, Alibaba launched a hybrid cloud product together with GDS, which seamlessly integrated their public cloud resource with GDS co location, managed service and cloud connected to provide a customer a total solution for their IT deployment.
We have also entered into a partnership agreement with Microsoft to provide a direct connectivity to their cloud ports inside our data centers. In the next few months, we will enter into a similar agreement for direct connectivity with another major global cloud service provider. A new customer for GDS, which is currently installing their cloud Pops in our data centers in two markets. With all the cloud pops, either already there or coming. Our cloud connect service is up and running and is becoming a major focus for our future strategy growth.
In the near future, we will have a grand slam of all the top tier cloud service provider in China accessible inside our data center. But by developing such a unique ecosystem, we are adding value to our cloud customers by facilitating their road to market as well as to our enterprise and FSI customers. Let's move to slide 8. In the third quarter of 2017, we brought our Beijing 2 data center into service. With this addition, we had over 77,000 square meters of data center area in service at the quarter end with around a 90% commitment rate As announced a few weeks ago, we acquired a second data center in Guangzhou that's called Guangzhou 2.
Which is next to our existing Guangzhou 1 data center. Guangzhou 2 is fully committed and utilized by a larger internet's customer. The acquisition was just complete in 4Q. We have also started started the construction of our new data center in Chengdu, Chengdu 2, phase 1, We expect to secure anchor customer commitments for this project very shortly. At the end of third quarter of 2017, our total area under construction was over 37,000 square meters and around 35% of this capacity or 13,000 square meters was pre committed with legally binding legally binding agreement However, for the remaining 65 5 percent or 24,000 square meters We have a substantial sales pipeline and a larger part of this capacity is already in the contracting process.
Like I said, our customers plan to upscale their data center capacity significantly over the next few years and are looking to us to fulfill their requirements on a continuous basis. The opportunity is ours to lose. If we do not keep our keep up with this demand. We already secured significant resource pipeline in all key markets to support our growth for the next few years. Meanwhile, we have initiated new projects at a faster rate than previously expected.
And also sped up our development timelines. We have stepped up our procurement efforts in secure more resource, including industrial buildings and land. For our organic capacity growth. At the same time, we are pursuing opportunities for project acquisition so as to supplement our organic growth. So far, our focus has been entirely on Tier 1 markets and this will remain our core strategy.
However, we are exporting opportunities to work selectively with our hyperscale cloud customers to expand their datacenter footprint outside the Tier 1s markets. This is very strategic for future growth Let's move to slide page 9. We were delighted to announce recently the formation of our strategic partnership with CyrusOne, one of the leading data center providers in the U. S. We feel that there is a very good fit between our business.
In terms of vision for the industry, strategic positioning, customer focus and culture. Furthermore, we feel that this alignment creates a unique value proposition for our customers and positions us better to fulfill their future future requirement. Currently, GS has have about 50 foreign customers which accounts for around 10% of our revenue. This is an important customer's segment and we believe that there is a high potential for us to expand with the CyrusOne's 1000 plus customer base in the U. S.
Our hyperscale cloud and the larger internet customers also talked to us about their plan for international expansion especially in the U. S. With our partnership with CyrusOne, we are now able to deepen our dialogue with these customers at a time when their overseas requirements are becoming quite sustainable substantial. Following the announcement of the deal, CYRENS-one and GDS have assigned several key executives and started to comprehensive conversation between the two teams in terms of sales construction, design and other aspects of business where we can benefit each other. Cyberone is doing a very good job in keeping their development costs at a low level compared to their U.
S. Peers, which is surely something that we can learn from them. At the same time, our operations tools are inspiring To underpin the commercial agreement between the two parties, we received a $100,000,000 equity investment from CyrusOne, which we will use to further expand our capacity. They will have about 8% of our issued shares capital as well as our board seat. The connected economic interested and the ball presents brings the 2 of us closer together and the providers added a motivating motivation tool make this a highly success collaboration.
With that, I will now hand to the end of the call over to Dan for the financial and operation review. Thank you. Thank you, William.
Dial P and L analysis for 3Q 'seventeen in order to better highlight the underlying trends, I'll start with a version shown on slide 12. On a GAAP basis, Service revenue grew by 27.6 percent quarter on quarter to RMB423000000 in 3Q 'seventeen. On a non GAAP basis, underlying adjusted NOI grew by 29.6% quarter on quarter, to RMB201.5 million. And underlying adjusted EBITDA grew by 34.4% quarter on quarter to RMB134.9 million. The underlying adjusted EBITDA margin was 1.6 percentage points higher at 31.9% in 3Q 'seventeen compared with 30.3% in 2Q 'seventeen.
Turning to Slide 13. In 3q17, there was an increase in area utilized of 8109 Square Meters, which was the major driver factor driving higher revenue growth. This increase resulted from accelerated move in by certain cloud customers at our Shanghai 3 Shenzhen II and Shenzhen Five facilities, plus the move in which occurred at the newly in service Beijing II data center. The average monthly service revenue or MSR per square meter was RMB3031 in 3Q 2017 compared with RMB2750 in 2Q 2017. The MSR increase was mainly due to our high addition to area utilized in 3Q 'seventeen occurring early in the quarter driving up the average.
We expect MSR to be sustained at more normalized levels in the coming quarters. On Slide 14, we show growth in NOI and EBITDA and margin development over the past five quarters. In 3Q 2017, we achieved an underlying adjusted NOI margin of 47.6 percent, which was 0.7 percentage points higher than for 2Q 2017. To better understand NOI margin development, we can look at the analysis on Slide 15. The pie chart on the left shows the breakdown of our total capacity in service and under construction by stage development.
At the end of 3Q 2017, We had just over 34,000 square meters or 29.7 percent of our total capacity, which was stabilized. This part of the portfolio was 96.9 percent committed and 92.7% utilized. Our self developed stabilized data centers had an NOI margin of around 60% in 3Q 'seventeen. At the same time, we had over 40 3000 square meters or 37.8 percent of our total capacity which was in service and still but only 43.2% utilized as customers are still moving in. Naturally, these data centers have not yet reached the optimum operating leverage.
But based on the existing customer commitments, we can say that they are certainly on the same path to the same end result. In summary, as data centers come into service, it results in a drag on our margins, But over time, as the proportion of stabilized data centers increases, the overall margin will improve. On slide 16, our SG and A, excluding D and A and stock based compensation, showed an improvement at 15.9% of service revenue compared with 16.9% in 2Q 2017. Taken together with the improvement at the operating level, the underlying adjusted EBITDA margin improved by 1.6 percentage points, to 31.9% in 3Q 2017. Turning to our investment activities.
As shown on Slide 17, we paid CapEx of RMB443.7 million in 3Q 'seventeen. Replacement CapEx accounted for 2% of total quarterly CapEx compared with 3.8% in 2Q 2017. Our total area under construction was 37,478 square meters across seven sites, out of which 47.9% will enter service in 4Q 2017. We will also have 5375 Square Meters from the GZ2, Guangzhou II acquisition, Additar area and service in 4Q 2017. Now I'd like to update you on the progress of each project, which was under construction as of 3Q 2017.
Chenzhen for phase 1 has come into service during 4Q 2017. We already have customers moved in and significant demand in hand for this facility. Shanghai 4 will come into service at the end of this year. The capacity is fully allocated Beijing III is one of the projects which we accelerated and has already come into service ahead of schedule in 4Q 2017. It is 100% committed to a major cloud service provider.
Shenzhen-five phase 1 entered service in late June, a full quarter ahead of schedule and is 100% committed and already 62.8% utilized. Shenzhen 5 phase 2 is under construction and will enter service in 2018. Phase 2 is reserved for expansion by the anchor customer in phase 1. Shanghai 5 is a new project, which we announced in July, We have significant demand from both FSI and cloud customers for this facility, and we are considering the allocation to satisfy our customer requirements. Shanghai 6 is the 1st of 2 data centers on our new campus in the Weigachau free trade zone.
It is about 45% pre committed by China's leading online travel company as we announced previously. The building is under construction pursuant to a build to suit lease with a property partner and we will not incur CapEx until the shell is handed over to us in the second quarter of next year. Chengdu to phase 1 is an expansion project at our Chengdu campus, Qindu1 is 99.6 percent committed with 2 major cloud customers in the data center. We initiated Chengdu too to fulfill their demand and expect to obtain pre commitments shortly. With regard to financing, as shown on Slide 18.
At the end of the quarter, Our gross debt was rmb 5,900,000,000, and our net debt was rmb 4,800,000,000. The ratio of net debt to last quarter annualized adjusted EBITDA was 8.9 times. Pro form a for the $100,000,000 proceeds of the equity issuance to CyrusOne the ratio would be 7.7 times. We have a convertible bond outstanding, which was issued in December 2015, is held by our strategic partner STT and by Ping An insurance. The conversion price is $13.40 per ADR, But the rise of our share price, the CB is currently in the money.
We have an issue as call, which can be exercised if the closing price of GDS ADRs is above $16.75 for 10 consecutive trading days. If this condition is met, we intend exercising the call in order to save interest and deleverage On a pro form a basis, conversion of the CB will reduce our net debt to EBITDA multiple by a further 1.9 times. Combining the CyrusOne proceeds and CB conversion, our net debt to EBITDA multiple would be 5.8 times on a pro form a basis. During 3Q 2017, we secured RMB 570,000,000 of new debt facilities including RMB 380,000,000 of refinancing of existing short term facilities. Our blended financing cost was 7.4% in 3q 'seventeen compared with 6.9% in 2q 'seventeen.
Excluding the convertible bond, the cost was 6.8% in 3Q 2017 versus 6.1% for the prior quarter. The increased financing cost was due to refinancing costs. Looking at the debt maturity chart, on the right hand side of this slide. At a RMB1.17 billion shown as maturing in 2018, We have now completed over RMB700 1,000,000 refinancing, extending the maturity of this debt, which will be reflected in our 4Q 2017 disclosures. Prior to the investment by CyrusOne, all the projects which we've disclosed as in service and under construction up to the end of 3Q 2017 are fully funded in terms of equity and debt.
What I mean by fully funded is that we have sufficient cash on our balance sheet to fully capitalize these projects and have secured sufficient project finance to take these projects to completion and to deliver the entire backlog and more. The proceeds from CyrusOne investment will enable us to capitalize new projects that we intend taking on and announcing over the next few quarters. In a single transaction or series of transactions during the 12 month period without the prior approval to shareholders. As we've used up most of this capacity with the issue to CyrusOne, we will consider seeking shareholder approval in the near future to raise the ceiling for a period of time. This will enable us to retain flexibility for future share issuance including capital raising.
We may consider various opportunities to raise capital through the equity and debt capital markets. I showed on slide 19, at the end of 3Q 2017, our backlog stood at 32,271 Square Meters, was around 155,000,000 dollars in terms of annual recurring revenue, which is equivalent delivery of this backlog provides high visibility for revenue growth. Finally, on Slide 20. At the beginning of this year, we provided guidance for FY 'seventeen revenue adjusted EBITDA on CapEx which we reaffirmed in our last earnings call. We now believe that based on the financials we reported in our current growth rate, we expect our full year performance to be above the midpoint of the range that we originally guided.
Accordingly we are raising the low end of the previous range to the midpoint of the previous range. The high end remains unchanged. Rmb1525 million to RMB1575 1,000,000 for revenue and RMB 480,000,000 to RMB495,000,000 for adjusted EBITDA. The top end of the range implies year on year growth of 57% in service revenue and 83% in adjusted EBITDA. In order to meet strong demand, as reflected in our sales achievement during the year to date.
We've initiated new projects at a faster rate than previously expected and accelerated development timelines. Accordingly, we now expect CapEx for the year ending December 31, 2017 to reach about RMB 2,300,000,000. As compared with the previously provided level of around RMB1.8 billion. With that, I will end the formal part of my presentation And we'd now like to open the call you.
We have the first question from the line of, Gokul Harajaran Please ask your question.
Yes. Hi. First of all, congrats on the great results, William and Dan and congrats on the CyrusOne deal also. I had a couple of questions. Dan, you did mention about the breakdown of the portfolio by development stage.
Could you give us some idea about where you expect the EBITDA margins for maybe the area in service and area in stabilized ones and area in service ramping up kind of data centers. Roughly, I don't think you want to give the exact numbers, but if you could give us some rough ranges on that, And the second question I had is, William did refer to some of the projects for a strategic reason looking at some of the non tier 1 locations. Could you talk about what size this would account for eventually in terms of the overall area under service? Is it going to be small or is it going to be something that quite big for some of your bigger cloud customers. Thanks.
Dan, maybe you answered this first question.
Yes, hi, hi, Michael. By the way, this pie chart can be constructed from the data, which is disclosed in the appendix's presentation. So if
we look at the
2 parts of the pie, which relate to data centers in service, stabilize refers to data centers where the utilization rate is above 80% happens currently to be 92.7% for that part of the portfolio in aggregate. So that part of the portfolio is pretty close to reaching the highest level attainable in terms of margin. So we don't refer to it as EBITDA margin. We refer to it as NOI margin. The NOI margin for that part of the portfolio is around 60%.
For the part which is ramping up, it's the aggregate of data centers at all sorts of different stages. Some are some are EBITDA negative and some are breakeven and some are on their way, closer to reaching stabilization.
If we add the red
and the gold looking at this pie chart, we add the stabilizer and the ramping up together. The aggregate NOI margin for the area in service is 47%. So that gives you some idea of how much the ramping up part is dragging down or averaging down. For the area under construction, most of the costs, pre operating costs are capitalized We do include, in SG and A, some startup costs of a few 1,000,000 RMB. And of course, there are some other overheads related to new projects.
But The area under construction doesn't impact the NOI margin. It only impacts NOI margin as projects move from under construction too in service.
I answered your the second question. Number 1, I think the global market trend is invoked I mean, the total the oil market, mainly driven by the hyperscale car player and the Internet giant, This is what happened in China already. So in China, it's the same. I think what we can tell is To echo this evoked evolution, I see the product will difference. So we still we as I said, we still keep the, our, the focus on developing our core data center in our all the key market Tier 1 city.
This is a this is already I don't want to repeat to echo the market evolving. I see we are we see some hype skill demand is in a will happen in the near future in a Tier 2 city. And to catch up with this, another growth driver, GDS is well prepared to catch up with that. So I think that in a we can tell in the next couple of years, The gross were 2 types of the gross. 1 is the high performance data center, which is we already did in the last 10 years.
Another new growth driver will come from the hyperscale. We don't want to lose this opportunity, but so far, we are quite selective, to do in Tier 2 City. Our another strategy as I repeat in the last couple of quarters, I say we will not we are focused on our Tier 1 city and we will focus on to follow-up our key customer, which is a cloud payer. And therefore, it will let GDS in the next few years still maintain competitive advantage in strategic view. That's my answer.
But if we look at it currently, let me give you some clear, I mean, a percentage of our business, I just want to say, just a start. It's not say, I cannot give you a certain number currently.
Okay. Got it. We
have the next question from the line
of Jonathan Atkin. Please ask your question.
Thanks very much So I was interested in the guidance change and how much of that reflects inorganic factors. I may have missed it. I think you may have called out the revenue contribution from from Guangzhou too, but if you could maybe just clarify how much of the guidance is organic versus organic And then secondly, in the scripts, you spoke about obtaining additional resources. Land would be an example of that. And can you a little bit about the different cities where you have lands not yet under development and therefore it would appear in any of the charts that you provided.
You've talked about challenges in the Beijing market in prior calls, but if you could maybe give us a little bit of color around that, that would be helpful. Thank you.
Okay, John. Hi. It's Dan here. You asked whether the guidance change was related to the acquisition. I mean, the answer to that is no.
The Guangzhou 2 acquisitions just closed. So we're about 6 weeks from the year end. So only a very short period of time. As it so happens, you go back to the IPO prospectus, you'll see that we had an MOU for this acquisition some time ago. We thought it might happen earlier, but, we waited until certain conditions were right, including the redundant power capacity.
So we moved ahead when those conditions were were met. As it relates to, area held for future development, I think what we're trying to highlight is that we have projects where you see phase 1 or phase 2 even. But we have expansion capacity on those sites. So just to give some examples, in Shenzhen, Shenzhen 4, Phase 2, is as big as Shenzhen for phase 1. In Shanghai 6 is on a site where we have an agreement with a property partner for the build to suit lease of 2 data centers.
So the second one, which is just dirt on the ground, we've reserved the name Shanghai Second. And, in Shanghai 5, we have also in 2 phases. In Chengdu, Chengdu 2, phase 1 is part of potentially a much larger construction. And we have land in Kunshan, which we have a development agreement for a relatively large site in a very prime location in Beijing. So it's actually quite a lot if you add it all up.
And it's very much within our control as to when we activate this. And that is part of what gives us confidence about being able to sustain our sales momentum beyond what you see in terms of what's under construction But I think the point that William was making, which I just want to reemphasize, is that the market growth opportunity is bigger than we foresaw and which I think anyone foresaw. And we have already taken steps to supplement our resource plan in quite a significant way. And that will be come apart over the next few quarters.
You.
As there are no further questions, I'd like to now turn the call back over to the company for closing
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, ma'am. Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may all disconnect