Good day, and welcome to the CyrusOne and GDS new strategic partner conference call. All participants After today's presentation, Please note this event is being recorded. At this time, I would like to turn the conference over to Michael Schafer, Vice President of Capital Markets And Investor Relations.
CyrusONE and GDS call. Today, I'm joined by Gary Wojtaszek, President and CEO of CyrusOne William Huang, Founder, Chairman and CEO of GDS and Jonathan Shillkraut, Chief Strategy Officer of CyrusOne. Before we begin, I would like to remind you that comments made on today's call and some of the responses to your questions deal with forward looking statements. Forward looking statements can be identified by the use of such words as estimate, anticipate, expect, and similar words, and phrases. Forward looking statements by their nature involve estimates, projections, goals, forecasts, and assumptions, and are subject to risks and uncertainties that could cause actual results or outcomes to differ materially from those expressed in the forward looking statements.
These forward looking statements speak only as of the date conference call should not be relied upon as predictions or future events. Factors that may cause our actual results to differ from expectations are detailed in CyrusOne's and GDS' filings with the SEC, which you may access on the SEC's website the respective company's websites. Each company expressly disclaims any obligation or undertaking to revise these statements following the date of this conference call, except as required by law. In addition, some of the remarks this morning contain non GAAP financial measures, You can find reconciliations of those measures to the most comparable GAAP measures in the presentation that is posted on the Investors section of the CyrusOne and GDS website. I would now like to turn the
call over to CyrusOne's President and CEO, Gary Wojtaszek. Thanks, Shafer. And howdy everyone, and thank you for joining the call on such short notice. I'm excited to announce a new strategic partner ship between CyrusOne and GDS, which brings together 2 of the fastest growing data center companies in the world. I met with William and Dan almost a year ago nice right away that our company share similar philosophies in terms of how we engage customers and the benefits that we offer to them.
Which in my view is critical to building a strong relationship and in turn creating a successful long term partnership between the two companies. We are both leaders in the hyperscale leasing space and combined count practically every major cloud company in the U. S. And China as customers. The Chinese companies are investing 1,000,000,000 of dollars in the U.
S. And likewise, practically all of our customers are looking to expand into China as they recognize the tremendous growth opportunities that China has to offer them. With our collective local expertise and unique capabilities in serving the fast growing segment of the market, we believe our partnership creates a compelling value proposition for More broadly, as I have said before, data has no boundaries and the explosion in data creation is expected to continue for years to come. Companies are increasingly recognizing the need to have a global data center presence and I'm excited to partner with William and the team at GDS. By helping our respective customers accelerate their growth.
I believe that by working together we will be able to serve our customers on the global scale they require of us. I will now turn the
and thank you to everyone joining this call. We are delighted to be here tonight and to welcome CyrusOne as our strategic long term investor. As Gary mentioned, our 2 companies share the same industry and a culture perspective, which creates the most solid foundation of our partnership. Among various data center companies in U. S.
And in China, we are most similar in terms of our business model as well as our customer base. We are also excited about the CyrusOne Equity investment in GDS of US100 $1,000,000. This investment directly connect to us to each other and will be a meaningful source of capital for our resource expansion in China. All CDS and the CyrusOne are leader in their respective market. We have introduced our expectations by consistently providing world class datacenter solutions for our customers seeking to outsourcing their mission critical IT business application data and content.
This partnership gives us the opportunity to leverage our expertise and establish a unique globalization approach. CyrusOne has nearly 1000 customers and extensive relationships in the US market. This partnership will help us get access to their larger customer base and enhance our sales to their U. S. Base customers who have operations in or would like to expand to China.
With our 16 years of experience and a track record of serving the most sophisticated customers, we are excited to continue delivering the work data center service to our existing and the potential new customers. We already have a very successful ongoing partnership with our major shareholder Ftt GDC, which is strongly positioned in strategically important to Singapore and the London data center market. And it's the clear market leader in India. The addition of our partnership with CyrusOne craves, a platform for providing solutions for customers in China. And across the most important Tier 1 market in Asia, the U.
S. And Europe, which is a unique value proposition, highly relevant to today's customer requirements. We believe this stronger position will drive long term value to our shareholders, and we look forward Thank you. Now, I will turn the call over to the Jonathan who will take you through the slide.
Thank you, William, and thank you, Gary. And thanks to those of you who are joining us telephonically this morning. I'm going to move to slide 4. As William and Gary mentioned, we are excited to announce this strategic partnership today. A partnership between two companies that are well positioned in their home markets and now have the opportunity to leverage each other's relationships expertise and footprints and helping serve our collective customer base.
On slide 4, we've listed out some of the highlights for each of our companies. I would like to call out just three items: first, together CyrusOne and GDS have more than 30 years of operating experience second, within our home markets, the U. S. And China, the 2 largest economies on the planet, we have essentially every major market covered And third, collectively, we have nearly 1500 customers, including a significant number of Fortune 1 1000 or their equivalent type enterprises and nearly every major cloud and hyperscale provider in the world. This group of hyperscale and cloud providers, we believe, is driving 70% plus of secular demand.
Flipping to slide 5, Slide 5 lays out the major tenants of our strategic partnership, which is really 2 integrated pieces, a commercial agreement and a strategic investment. The commercial agreement is comprised of a collaborative sales and marketing arrangement and a sharing of best practices. The sales and marketing agreement we believe is a 1st in our industry, encompassing an exclusive referral arrangement, which targets our home market clients for the sharing of practices will bring together the best of our individual company's experiences in design and construction back end in customer facing systems and operation policies
and procedures.
CyrusONE is also investing $100,000,000 into GDS at a price which is a 4% discount to yesterday's close. Post transaction CyrusOne will own roughly 8% of GDS and Gary will be joining the GDS Board of Directors. Moving on to slide 6. The strategic rationale behind our partnership is fairly straightforward First and foremost, it's about the ability to serve our customers' needs, customers which are increasingly global and looking for help on a global basis. Second, in this effort to help customers to navigate for outsiders and within the U.
S. For Chinese companies where the differences in the marketplace may be unfamiliar to potential customers. 3rd is a benefit from the combined knowledge built across the two platforms over 30 years of combined experience that I mentioned earlier. On slide 7, you can see what we're trying to achieve. Helping our customers access the 2 largest markets by GDP in the world and on a and hyperscale providers, but a vast number of enterprise customers looking for this extended footprint.
And our commercial agreement will simplify resource acquisition onboarding and account management for our collective customers. On slide 8, we highlight the geographic reach that we are assembling. I love this slide. In China, EDS is a tremendous opportunity on its own. Against the backdrop of rapidly growing data center demands, it is an economy where only 2% to 3% of IT spend is currently dedicated to cloud infrastructure and the cloud economy itself, while in an earlier stage of build out than in the U.
S, is expected to grow at rates that will allow it to double every 2 or 3 years. Biggest internet cloud players in China, Alibaba and Tencent to be a preferred vendor for their data center resources. These players are among help with their resource needs in the U S. At the same time, many of the hyperscale providers we serve in the U S as well as our community of Fortune 1000 Enterprises have ambitions to work in China and GDS can help them with their data center resource needs in this market. On slide 9, we walk through some of the knowledge base that we hope to share between the two companies While we at CyrusOne often talk about our experience with design and construction, I would highlight that GDS also has a great deal of experience here building in somewhat different geographies and markets than we are used to.
And at the same time, we've been very impressed with the philosophies underpinned many of the self developed systems which GDS uses to operate its data centers. Most of all, however, We believe this information exchange will be facilitated by the common cultural attributes that both Gary and William mentioned at the beginning of the call. Finally, on commercial agreement, but is also a big positive for both companies. For GDS, the company is receiving $100,000,000 investment priced at a 4% discount to yesterday's close and positive for us at CyrusOne, but a 5% plus premium to the 30 day VWAP, a positive for GDS. These proceeds will be used to fund development projects across GDS's key markets, providing capacity to sustain its already strong sales momentum.
And the expected yields in these projects should meet or exceed our own mid teens targets. For CyrusOne, we have the opportunity to financially participate in 1 of the fastest growing providers in 1 of the fastest growing markets, a company which produced roughly $200,000,000 of annualized revenues in the second quarter of this year but had an announced backlog of an additional $163,000,000 in annualized revenues. And as you can see from the implied trading multiples on this page, which are based on consensus estimates, GDS's expected growth in EBITDA leads to an implied EV to 2019 estimated EBITDA multiple well below our own and our data center peers. With that, I'm going to turn the call back over to Gary and William and the operator for
The first question today will come from Jonathan Atkin of RBC Capital Markets. Please go ahead.
Thanks. Good morning. So I was interested if you could talk a little bit maybe Gary initially, you said you started talking about a year ago. Can you go into more details to kind of what brought you together? Also, how did you determine the amounts of the investment to $100,000,000 and when does that actually take effect?
Sure. Hey, Jonathan. Thanks for the question. So yeah, we started talking right around last fall shortly after their IPO, actually I was on a non deal roadshow on the West Coast and I heard about about GDS. And through a couple of introductions, we started, meaning when they were back in the States over, I guess, beginning probably around January was the first time we met in person.
And we met several times in the states over this period. And as we started meeting, William Dan and myself, it became clear to me that culturally, we were the same type of company. I mean, we both our customers the same way. We both thought about what we can bring to customers in terms of the value proposition that we offer to them very similarly. And I just thought that there was the makings of a really nice relationship.
And given our customers have been asking us for a long time to expand internationally. This just seemed like a great opportunity for us to help our customers out by partnering with GDS. The $100,000,000 just felt like it was a sizable enough investment to make us relevant to that relationship. But the most important thing here is really the strategic cooperative relationship that we have with them in terms of the sales and marketing arrangement, the the sharing that we're going to share with them in terms of the design and development of our construction and the back end operations. We think that that really long term is going to be what really kind of gives this gives this relationship and this investment really more substance on that.
And we're excited to begin working with them on that.
And then I'm sorry, in terms of the timing, I might have missed this the timing of when this closes?
In 2 days.
Okay. And then, are there, as you talked about going international, and then, William mentioned STT as well. And they've got Singapore, London, India, and you've talked about Europe in the past, but Is there any are there any implications for your kind of entry into other markets where either SCT has an affiliate or elsewhere
Yeah. No, I think, what you heard when Maureen was talking, they have a great partner in STT. Which has been developing a really nice global data center footprint across the world. So they have a really nice presence in Europe with an acquisition that they had a 50% ownership of now. They increased to 100 they're clearly the largest owner of data center capacity in India.
They have other operations in Singapore. So what you see by this combination is really what I've been talking about for the last couple of years in that to really be critically important to your suppliers, you need to have to be able to serve those supplier those customers throughout the world. And this is the beginnings of that. This doesn't stop our expansion into Europe. We're looking at expanding further into Europe.
But what you see out of this combination is that now we'll have 2 partners there to help us expand to make sure that the success in Europe is going to go on at a faster pace than we could individually do
The next question will be from Colby Fineaselle of Cowen And Company. Please go ahead.
Great. Thank you. A few questions. First off, Regarding the investment, how do you CyrusOne intend to fund this? And then also what's the end goal here?
I mean, you're going to take 8% to begin with. I appreciate that you're locked up in terms of expanding that for, I think I saw maybe 18 months. Would you anticipate that if this does go well that you'll continue to increase your share? And I think in China, there's a limit. I think you could maybe on only 49%.
Is it fair to think that at some point you might end up getting there? And then just more as it relates to the actual, fundamental logic for this transaction, we've seen other companies like interaction in the past due cross border relationships. It's quite frankly a little bit less clear successful those have actually been, in terms of benefiting financials, what makes you think that this is going to be, I guess, different than other deals that we've seen? And as part of that is are the back customers already customers of CyrusOne or would you anticipate that they become customers because of this deal?
Yes, I'll take your 3rd question first Colby. And I'd also mention that William is also on the call as well. So if you you have any specific questions for him or anything about GDS, definitely weigh in as well. With regard to your your the last question and John and then Diane Wines are the other 2. I've always been dubious about any type of relationship agreements from purely on the sell side.
And most of those relationships I think as you rightly point out don't seemingly work And the reason I believe most don't work is twofold. 1 is culturally, both organizations are not really as committed to it as Edna initially say. I mean, a lot these things look good on paper, but in actuality, if there's not a lot of support from the executive team, those initiatives don't really work. And I don't think that the case here at all. William and I have been talking at length about how we're going to affect this transaction.
We've worked detailed plans in terms of putting together account teams in place going to start this immediately working on how we're going to map out our customer accounts, how we're going to start selling, their facilities to our customers in China and vice versa. The other thing that's unique about this relationship is basically it's a $100,000,000 investment, right? So it's $100,000,000 investment. So we're basically putting our money, so to speak, where our mouth is. And taking an 8% ownership interest in GDS.
As part of that, I'm also going to be on the board of GDS to make sure that we're both working jointly together to ensure the success of this. So I think those things are really what I think separates this transaction now from all of the others and we're really excited about the opportunities to accelerate the growth in each of our respective markets. I'll turn the funding question back over to Dianne.
Hi Colby. You know, we have ample capacity on our revolver to fund the investment, particularly since we increased the revolver to $1,100,000,000 earlier this year. And as Gary mentioned, we will be funding the $100,000,000 investment in the next few days.
So you're not intending to have to go back to the equity market. To get your leverage down, you'll be comfortable with this new leverage?
We're definitely very comfortable funding this on the line.
Yes. And Colby, in terms of our long term investment plans with GDS, I would just say that we're very comfortable with the absolute dollar level and percentage ownership in GDS that this investment and strategic relationship set up And for the time being, feel very good just about where we are.
The next question will be from Robert Gutman of Guggenheim Partners. Please go ahead.
Could you tell us a little bit more about GDS's market share in China and their market share within the cloud vertical? And, maybe a little bit on their returns on invested capital as a company as well?
Hey, William, can you take that one?
Yes, sure. I can. I mean, so basically we are before our IPO last year, in all the key Chinese market, GDS only 25 of the market share in terms of the, let's say, the high performance data center, Karen Nutrient the data center market share. So I think it is we believe so far we didn't see any market report recently but we will see soon. But based on our estimate, our own let's say, estimation, I mean, I think we are almost getting increased our market share from the 25% to 35%.
So far. And we also believe based on our market momentum, we also believe this record will keep grow up. In China. Frankly speaking, it's difficult to give you a very accurate number. But what I can tell you is based on their carry neutral parts, I think that we definitely above 50% of the cloud market share.
And the returns on assets that you target?
Yeah, I would like to let our, Mr. Daniel, our CFO to answer your question.
Yeah. Hi, Robert. We just talk about development yields in the same sense as you use in the US. You know, I think our returns are anywhere from the mid teens into the 20s across the whole portfolio, probably around 20% in terms of a kind of NOI yield.
And the next question will be from Frank Louthan of Raymond James. Please go ahead.
Yeah. Hi. This is Alex Sklar here for Frank. Do you have any overlapping customers today, specifically with the kind of top 10 customers And have you already spoken with any of the top GDS customers in terms of telling them about CyrusOne and what you can bring them here in
the in the US? Thank you.
Yes. We have overlap, as you know, we don't talk specifically about customer names, but We each have overlap by 1 or 2 customers in each of our current portfolio in the cloud space today. So, we've not clearly spoken to any of the customers about this arrangement until we were announced today, but our expectation is that we're going to accelerate the growth that each of us has in our markets. If you think about what we're doing in the states here is we've got really broad, strategic relationships with a lot of the cloud customers. What we'll be looking at doing is, is educating those customers on what facilities GDS has to offer them, where they're at in those locations and helping that whole contracting process go that much faster kind of relating our facilities to the GDS facilities so that we can educate the customers quickly and accelerate that growth.
And William has the same challenges over there. We currently have a couple Chinese customers as an overlap currently and we expect that those relationships will expand further with this relationship with GDS.
And the next question will be from Vincent Chow of Deutsche Bank. Please go ahead.
Hey, good morning, everyone. Just to follow-up on the customer question. So of the fifty customers you outlined for GDS. How many of those are unique to would be unique to SARS 1?
Oh,
448 roughly. Got it.
That answered that question. Okay. And then just another question, just I'm not as familiar with the Chinese market here, but just and I apologize, I'm just looking at some data I don't know if I'll fax that here, but the EBITDA margin profile looks quite a bit lower than in the U. S. I'm just curious, is that just a function of the size of the company, a GDS or is there something structural there that causes it to be quite a bit lower than in the U.
S?
Maybe Dan or William, do you guys
get that? Yes. Hi, Vincent. It's Dan here. We have a portfolio at different stage develop and stabilize ramping up and under construction.
Of course, there's quite significant growth drag because we're in such a high growth phase. But we've disclosed quite regularly the NOI margin, for our stabilized data centers, I think in the last quarter, That was about 61%. There are data centers which are ramping up which are on a pathway to that kind of end result as well. So I think that's probably pretty much in line with the U. S.
If not higher.
Okay. And I guess just this might be a tough question to answer at this point, just given the newness of the relationship, but clearly the commercial agreement it theoretically should result in potentially some more sales volume. You've got some best practices on the design side. Yields are comparable, maybe slightly higher GDS? And I'm just curious when you think we might see some impact on financials from the relationship?
Well, we'll talk more about guidance then in 2 weeks' time once we give our updates We're so close to the quarter. We don't want to talk about any forward looking financial information at this point.
And the final question today will come from Simon Flannery of Morgan Stanley. Please go ahead.
Great. Thank you very much. I wonder if William, maybe you could just address the use of proceeds here? Is this going to allow you to accelerate some of your, your data center build out? And then for Gary, you talked about your interest in Europe.
If you wanted to do other investments in Asia, might you do that jointly with GDS or with STT or would you would that likely be settled or is any of that covered under this agreement? Thanks.
Yes, I think basically the use did this equity will let GDS exelates our business plan in the future. And we already fully funded our business plan as we talked about during the IPO. So I think since we see the market momentum, it's a strong, so we should prepare some capital for the future high growth.
Thank you. Yeah. And Simon, it's Jonathan. Look, in terms of our plans for Western Europe. I think they remain undeterred.
This investment doesn't change our trajectory or objectives in that market at all. As we look to potential other opportunities in the Asia Pacific region, certainly be open to exploring them with GDS or STT for that matter. I think when you look at China, there certain difficulties with that market in particular that really require local expertise partnership with GDS. Every market, as you look across the globe and in Asia Pacific specifically, has a different level of local T's necessary. And so we'll have to evaluate those markets on a market by market basis.
And ladies and gentlemen, this will conclude our question and answer session. I would like to hand the conference back over to Gary Wojtaszek for his closing remarks.
Great. Thanks, thanks, everyone. I think as you can get a sense, we're really excited about the opportunity that we just started with William and the team. Really looking forward to working with them and driving some results in 2018 and more broadly beyond that. So, thank you very much.
We'll talk a lot more on our earnings call in 2 weeks, 2 weeks time. And I'll turn it over to William for his final comments.
Thank you. Talk to you guys in our earnings call as well.
Thank you, sir. Ladies and gentlemen, the conference has now concluded. Thank you for attending today's presentation.