Hello, ladies and gentlemen. Thank you for standing by for the GDS Holdings Limited's 1st Quarter 2017 Earnings Conference Call. At this time all participants are in a listen only mode. After management's prepared remarks, there will be a question and answer session. Today's conference 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.
Thank you. Hello, everyone, and welcome to the first quarter 2017 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. Gdservices.com.
Leading today's call is Mr. William Huang, GDS Founder, Chairman and Chief Executive Officer, who will provide an overview of the business. Mr. Dan Newman, GDS's Chief Financial Officer, 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 perspectives 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 and 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'll now turn the call over to GDS founder Chairman and Chief Executive Officer, William Huang. Please go ahead, William.
Hello, everyone. Thank you for joining today's call. In the first quarter of 2017, we continued to make meaningful progress across all aspects of our business and further strengthened our market leadership position. As you can see by over 60% and adjusted EBITDA by over 130% year on year. We invested over 15,000,000 of CapEx to deliver the capacity required by our customers.
We raised nearly 80000000 of debt to ensure that each new We maintained our strong sales growth momentum, sign up customers for over 7000 square meters net of new commitments. Was over 35,000,000 in terms of annual recurring revenue. This includes full recommitment of the area released by a true customer. I want to highlight that it is a rare case for any company to be able to relocate it such a large amount of area in such a short period. This further proves GDS high ability to execute and deliver as we add the stronger market demand as well as as a result, our total area commit growth to over 68,000 square meters 85% higher than 1 year ago.
We ended the quarter with commitment rates of 90% for area in service and the 38% for area under construction. We continued delivering the backlog, increasing our area utilized to nearly 38,000 square meters, 58% higher than 1 year ago. On the research side, we enhanced our supply pipeline with the Sinton acquisition, we announced last quarter of a 10,000 square meter project under construction. Construction is ahead of schedule and the customer will be moving in quarter Q3 faster than anticipated. In addition, I'm pleased to announce today that we have secured a new data center project in Beijing.
It will add over 4000 square meters of capacity when completed in the first half of twenty eighteen. This is a big win for us. Supply in Beijing is quite restricted. Our approval reflected governments recognize of our unique industrial leadership and deep experience. Clearly, both of these new projects demonstrate our sourcing capability.
Turning to the Our impressive sales achievement gave us high visibility to future growth. Quarter after quarter, we continue to execute against our plan, delivering our backlog to customers and driving the revenue and operating income growth. I will leave it to them to elaborate on these numbers. Let's move Before I talk about sales wins and the resource development, I want to update you on what we see happening in the market As we have said before, we believe China represents the biggest biggest data center opportunity in the world. And we believe GDS is best positioned to capitalize on this growth.
In our view, the data center market in China is growing at over 25% annually. With cloud and internet platform service providers, driving around 70% of new demand and the cloud being key. So to understand the data center opportunity, we must first understand how the cloud is developing in China. Mr. Jutek, Executive Vice Chairman of Alibaba stated that they see Cloud as a 13,000,000,000 market opportunity in China, assuming 20 percent of IT spending migrated to cloud In 2016, the China market was worth around RMB1.5 billion.
It is still early days but cloud adoption has clearly taken off. Alibaba and Tencent reported that their cloud customers and the revenues increased by 2 to 3 times over the past year. Alibaba forecast said that the market will grow by full time over the next 2 years. This growth is largely coming from the 3 Internet giants in China Alibaba, Tencent and Baidu. They see transformation opportunity in cloud and the related related technologies.
Each of them has put the cloud at the center of their strategic development. These three companies have a huge influence over the digital economy in China. They are able to leverage their dominant presence in different verticals to drive the development of their cloud platform in unique ways. Additionally, there are other giant companies such as Huawei, which are allocating more and more resource to public cloud development. And the global hyperscale payers such like Microsoft, AWS and IBM, which are significantly increasing that Cloud service providers aggregate demand for data sense capacity, but they have different kinds of requirements which they fulfill in different ways.
For their performance sensitive data and applications, which need to be housed in edge datacenters close to the end user in the Tier 1 market. They looked to also see most of their requirements. Why do they also? The first reason is because their business is highly dynamic and also allows them to accelerate their time to market. Secondly, they want to focus their attention on the customer facing products and services that they are critical, they are critical for their success.
And they recognize that sourcing, designing, building and operating sophisticated data center is very complex. 3rd, their business appreciate the flexibility of being able to access a secured supply of data center resource with short lead time when they need it from a trusted provider. Demand is running ahead of supply in the key market, hence a lot of new capacity has to be built. As the scale has increased in terms of space and power, It has become more and more difficult to secure suitable industry building for long term lease and to obtain sufficient power capacity. Obviously, the market opportunities opportunity has attracted more carrier nurture participants, but we don't see that we don't see them having a material impact on competition.
They developed assets on a case by case basis and no competitor has a presence comparable to us across all the Tier 1 market. No competitor has a combination of expertise, track record and the comprehensive sets of sustainable advantages that we do. We recognized several years again. We recognized several years ago the strategic importance of capturing demand from cloud service providers. First, because it represents a large part of the market opportunity.
And by serving these high volume customers, We gain scale advantages. 2nd, because we believe that access to key cloud infrastructure platforms located in our data centers is a unique value proposition that will drive the growth of our FSI and the larger enterprise franchise and attract more cloud players such as fast providers. There are only a few hyperscale cloud infrastructure players. So there are only a few opportunities to make this a winning strategy. We are we've had great success in catching this demand as shown on slide 6.
From almost nothing 3 years ago, cloud service providers now account for over 50% of our total area committed. In the last quarter, we obtained significant new commitments from 3 of the leading cloud service providers in China, including a follow on order from 1 of the major global players Our top 2 customers are now each present in 6 to 8 of our self developed data centers and in 4 to 5 different markets. We estimate that we halt the majority of their incremental cloud demand. They consider us as a partners the development of their cloud business. As we grew growing market leadership, We are actively taking steps to deepen relationship with key customers and formalize our partnerships in different ways.
So why do we win with cost service providers? There are many reasons. First, we have the right kind of data centers. Meaning for large scale, high power density and high efficiency facilities and they are located in all the right place. So they map to where our cloud customers deploy their platforms.
2nd, we are able to offer them certainty of future supply as a result of our secured expansion pipeline and the flexibility to take deliver when they need it. And 3rd, as cloud service providers increasingly penetrated the FSI and the large enterprise verticals. They see value in co locating with many of the best name in China, who are our existing customers. These attributes are not easily copied and they equip distinguish GDS from all other carrier neutral players. Besides the cloud service providers, in the last quarter, We added over 20 new FSI and large enterprise customers.
Further diversifying our customer base. I would like to highlight a few Customer, first, we signed a larger multisided order from the leading online securities and found the trading company. 2nd, we obtained an order for the settlement and the clearing platform being established by the central bank to support digital payment service providers. We already host the 3 leading e payment platform in China. We believe this new generation of FSI customers of a long runway for future expansion.
And the 3rd, we just recently we won a bid with 1 of China's largest online travel providers. Last, as we continue to build our ecosystem for both cloud and enterprise customers, we are in the process of opting the license and regulatory approved to provide the cross connected service in China. We will update the market when more details become available In summary, our sales outlook is strongest it has ever been The market is growing faster than imagining. And the customers are looking to us to meet their requirements. This is a golden opportunity for us, and we are moving forward the full speed ahead.
We have the strategic relationship and we are rapidly adding new customers resource supply is the critical input for us to sustain the momentum As shown on slide 7, our area in service remains at around 61,000 square meters, which is almost sold out. With the Syntern 5 acquisition, Our area under construction increased to just over 35,000 square meters at quarterend All of this total, around 13,000 square meters is pre committed and around 21,000 square meters is available to feed our current sales effort. The new data center project in Beijing, we call it Beijing III will be included in area under construction in Q2. It is located next to our Beijing 1. Which is already 96% committed.
We are very confident about the market ability of Beijing 3. Including Beijing 3, we will have around 25,000 square meters of area under construction. Which is not yet committed. 25,000 square meters is equivalent to about 4 quarters of new booking at our recent quarterly run rate. We intend supplementing these results in order to support sales in 2018.
We have resource held for 3rd future development that we plan to activate and we that we aim to secure in the next few quarters. Our data center portfolio shown on Slide 8, 10 of those data centers are in services. And 5 are under construction. Before
handing over the Dan for the financial
Review. I would like to highlight the recently announcement, a point of Mr. Chen Sun, as an independent director on our board. Chair was formerly the Chairman of Laura Pincus for Asia Pacific. He's one of the most renowned and successful investments in China.
Over the past 20 years. Real estate based business has been one of his focus areas He helped build highly successful business in the logistics, hotels, and retailing sectors. It also founded the China real estate developer and investor association. GDS is the 1st and the only U. S.
Public company directorship that he has accepted since moving on from Warber Pinkers. Chen brings a rich investment background and experience, and we are delighted to have him join our board. With that, I will now hand
Thank you, William. In this section, I will focus on Four main areas 1st, revenue and operating leverage secondly, CapEx, thirdly funding and then fourthly, I will make some comments about delivery of the backlog and quarterly expectations for 2017 starting with the first quarter 2017 P and L analysis on Slide 10. On a GAAP basis, Service revenue grew by 14.7 percent quarter on quarter to RMB 343.7 million. However, this includes a termination fee of RMB44.1 million arising from the previously reported churn of 1225 Square Meters at our Shanghai Campus. The termination took effect a few days after We generated service revenue of RMB16 million from the churn area.
The termination fee is therefore equivalent to nearly 9 months revenue. On a pro form a basis, excluding the termination fee entirely from 1Q 2017, Service revenue was RMB299.6 million, which is the same as for the prior quarter. In other words, even without the buffer of the termination fee, we were able to keep service revenue at the same level as before the churn event. Turning to Slide 11, I will show you how we can better track the underlying trends in our financial results. On a non GAAP basis, adjusted NOI grew by 27.2 percent quarter on quarter to 179,400,000.
After excluding the termination fee and equipment profit, which is noncore, underlying adjusted NOI was 4.2% lower compared with the prior quarter. The main reason for this is that we booked a full quarter of operating costs for the 3 data centers, totaling over 12,000 square meters of space. Which came into service during 4Q 'sixteen. The contribution from these data centers will take several quarters to build up to breakeven. On a non GAAP basis, adjusted EBITDA grew by 34.7 percent quarter on quarter to 123,900,000 RMB.
After excluding termination fee, equipment profit and the impact of foreign exchange changes, underlying adjusted EBITDA grew by 2.3 percent quarter on quarter. Underlying adjusted EBITDA margin was slightly higher at 27.1% in 1Q 2017 compared with 26.5% in 4Q 2016. Now let's go further into the key growth drivers on Slide 12. In 1Q 2017, there was increase in area utilized of 816 Square Meters Netachurn or 2 041 Square Meters Gross. Typically, the first quarter of the year in China is comparatively slow due to the new year holiday.
The churn rate was 5 point on an area utilized basis. Excluding the single customer churn event, the churn rate was 0.1% on a revenue basis. Retention rates are very high. This was really just a one off event. The average monthly service revenue or NSR per square meter was RMB2708 in 1Q 17 compared with RMB 2797 in 4Q 'sixteen.
The lower MSR per square meter is mainly due to the churn area, having an above average MSR per square meter as it was very high power density. On the right hand side of Slide 13, we show a breakdown of our cost structure for 1Q 2017. All of these numbers on a or on a pro form a basis, excluding the termination fee, equipment sale and cost, and foreign exchange changes. Starting at the data center level, Utility cost, which is mainly a variable cost, was 23.8 percent of pro form a service revenue in 1Q 'seventeen compared with 23.2% in 4Q 'sixteen. As mentioned, we had 3 new data centers entering service in the prior quarter, which will take a while to reach optimal power usage efficiency.
Other data center level costs, which were mainly fixed, were 31.5% of pro form a service revenue in 1Q 2017, compared with 30.1% in 4Q 2016. The increase was mainly due to booking a full quarter of costs related to the 3 new data centers. 46.7% in 4Q 2016. Directionally, we do expect our NOI margin to trend up over time. To give you a better idea of the potential for margin improvement we can point to our stabilized data centers which for this purpose, we define as data centers with a utilization rate of over 80%.
At the end of 1Q 2017, we had 18,155 square meters of area utilized in self developed data centers, which was stabilized. The underlying adjusted NOI margin for these data centers was 56% in aggregate. At the same time, we had 12,859 square meters of area utilized in self developed data centers, which were still ramping up and therefore had not yet reached optimal levels of profitability. Moving on to the corporate level, Our SG and A excluding D and A and stock based compensation was RMB 7,700,000 lower in 1Q 2017, and came out at 17.9% of pro form a service revenue compared with 20.5% in 4Q 'sixteen. There were some year end costs and professional fees, which impacted the prior quarter.
Turning to our investment activities. As shown on Slide 14, we paid CapEx of RMB 380,000,000 in 1Q 2017, which was a step up from the run rate over 2016. Replacement CapEx accounted for 3.3 percent of this total. We incurred CapEx mainly on our Chengdu 1 phase 3 data center, which is 100% pre committed and due for delivery starting in mid-seventeen, and on our Beijing 2 days center, which after the government imposed construction delay, we are completing as fast as possible. As William mentioned, we obtained a significant follow on order for BJ2 from a global cloud player.
Which will rollout simultaneously in our Beijing and Shanghai data centers. Shenzhen-four phase 1 is close to completion. We expect to obtain significant new commitments for this data center in the next couple of months. In fact, the deals are far along in the contracting process. Shenzhen Pied, I said by the project which we announced in March, is proceeding ahead of schedule.
The customer, which is pre committed to 50% wants to start moving in during 3Q 2017. Based on the pricing for the pre commitment, we expect the NOI yield for this project on a stabilized basis to be in the mid teens. Shanghai 4 at H4 is the 4th data center on our main Shanghai campus. We aim to bring the data center into service by the end of 2017. The previous phase, SH3 is now 89.3% committed.
All of our major cloud customers are present on this campus as well as over 100 FSI and large enterprise customers. SH4 is already substantially pre allocated on a soft basis. We have also shown here the new Beijing project BJ3 where construction starts in the current quarter. It's well placed to serve the customers who are present in the adjacent BJ1 data center. With the addition of BJ3, Our total area under construction is 39,315 Square Meters across seven sites.
Out of which 76.4% will enter service this year. With regard to financing, as shown on Slide 15, during 1Q 2017, we repaid a RMB 199.6 million mezzanine loan, which had a high interest rate and obtained 532,800,000 of new debt facilities. Our blended financing cost was 7.1% in 1Q 2017 compared with 8% in 4Q 2016. Excluding the convertible bond, the cost was 6.2% in 1Q 2017 versus 7.3% for the prior quarter. Almost all of our loans are floating rate linked to the PBOC rate.
At the end of the quarter, our gross debt was RMB 4,470,000,000, and our net debt was RMB 2,940,000,000. Net debt increased by RMB464 million since year end 2016. The ratio of net debt to last quarter annualized pro form a adjusted EBITDA was 9.2 times. Fully diluted for commercial with CB, the multiple was 6 times. So clearly, conversion of the CV would make a significant difference.
Because we are in a heavy investment phase, consolidated net debt to EBITDA ratios may not give a good indication of our finance structure. On a pro form a basis, if we deduct the financing obligations, relates to data centers under construction. The net debt to EBITDA multiple falls from 9.2 down to 7.5 times. If we further deduct the financing obligations of data centers, which are still ramping up, The net debt to EBITDA for the stabilized data centers, which I referred to earlier, would be 2.7 times. The level of debt which we put on each project is designed to reach this kind of multiple once stabilized.
As things stand, all of our data centers in service and under construction are fully funded, including the 2 latest projects, FZ5, and BJ3, where we are in the final stages of securing the debt financing. The fact that we have very strong customers and many long term contracts definitely helps us to access Assuming a continuation of our current funding approach, we believe that we have sufficient capital to take on around 5 further projects subject to size and timing. Turning to Slide 16. I would like to make some comments to set appropriate expectations for the quarterly progression of our results this year. Our backlog grew to over 30,000 square meters at the end of 1Q 2017.
This provides high visibility to future revenue Growth rates depend on how quickly customers move in and hence how quickly we can start billing them for the committed resource. Around 56% of the backlog relates to area at data centers, which are currently in service. For this part of the backlog, the move in process is smooth and ongoing. Relates to area data centers, which are still under construction. For this part, the moving process can only begin in the 3rd 4th quarters of this year.
I mentioned on our last earnings call, that we have a renewal this year for 4365 Square Meters, which relates to a single customer at a single data center. At the time of renewal, the customer will change out its IT platform and we will undertake some refit. As part of the deal for a multi year renewal, we've agreed not to build a customer during the change out period, which is expected to last 3 to 4 months. The change out will happen in phases over the next few quarters. But it will start to impact our revenue in the current quarter.
We took account of the moving schedules and the 10.3 billing interruption when we provided our FY 2017 revenue and adjusted EBITDA guidance. And we reaffirm those numbers. In terms of quarterly progression, taking 1Q 2017 pro form a as the base, We expect revenue in 2Q 2017 to grow in the high single digits in percentage terms quarter on quarter and then at higher growth rates in the second half of the year. We expect adjusted EBITDA to follow a similar pattern. To that, I will end the formal part of my presentation.
For the benefit of all callers participating in today's call. Questions. Our first question is coming from the line of Gokulih harikaran from JP Morgan. Please ask your question.
Yes, hi. Thanks, William, and Dan. First, let me ask a quick question on the kind of change in tone on interconnect or cross connect. Could you talk a little bit about what have changed from a regulatory framework perspective that is, it feels like you are more confident on getting rights to do cross connect, especially inter data center cross connects. And could you also talk a little bit about, on a pro form a basis how much of an impact it could have, if you could charge our forecast connect, just like some of the global data center guys are able to charge?
Yes, hi, Kirk. The old telecom guy, William's hand is over to me. There wasn't there was a change in the what was referred to as the catalog of the telecom services in 2015, including the end of 2015. Including under basic services, a category of, I'd say, in English, call it, telecom infrastructure service. Which entitles the licensee to actually install and operate fiber for very specific and limited purposes.
And we believe that cross connect within a data center would fall within the remit of that license. So far, only very few licenses for that particular category of service have been issued. We initiated the application process and we've received preliminary approval. I think it could take some quarters, so we don't want to be specific. In fact, for a new category of license, it not be quite a protracted process before the license is finally issued.
In terms of the impact and cross connect is already possible inside our data centers or between our data centers, but just not through our own fiber. So the fact that we have the ecosystem of Cloud And Enterprise And FSI customers is already part of the value proposition obviously would facilitate our own product offering in the network area if we could manage it entirely ourselves. I don't want to talk about it in revenue terms. I believe that this will become a major driver the growth of our FSI And Enterprise business, going forward.
Yes, Google, I want to add on some points. First of all, I'd say we are pretty focused on to grow our Colo business. In my view, it's like a base because based on our scale of the hosting colo, our customer, as we introduced before, our hot customer or in the future, they already have a lot of demand connect to each other. As you see in the U. S, cross connected to cloud and connected to multicloud and the cloud connect cloud and the customer connect to customer it's getting more momentum, right?
So this is what happened in China already. And GDS is in the best position because our customer if you look at our platform profiles, one is cloud platform. We have the major crop app in our data center. And on the other hand, we have the financial institution and large enterprise customer and internet platform. So this is will drive a lot of demand of connect to each other.
But so far, we want to divest very carefully to fulfill the license issue, right? And also, we want to divest our product properly to provide the service for future. But this will cost the GDS number 1 is to help GDS strengthen our stickiness of our customer. This is a major, I mean, a benefit for future. 2nd, potentially can be a new revenue stream.
But we want, we don't want, it's still at the very early stage. Although we already start to prepare, but we, as Dan mentioned, we don't want to talk too much right now. But once it's everything ready, we will introduce more detail.
Okay, great. 2nd question I had is, if we look at your potential ramp up schedule in terms of, pre commitments, as well as new data centers coming online, both change in 5 well as the newly secured Beijing III, if you think about, let's say, sometime in 2018, do you still feel that your top 2 customers to have close to 50% area committed right now will be, kind of like becoming bigger and bigger as a percentage of your area committed when we get all these data centers, are pretty much committed, or do you think that this mix can still remain in that 50, 51% range? And just asking the question from the perspective that the top 2 internet companies who are pushing in the cloud space in China seems to be basically dominating the market. I think number 1 is really dominating, but number 2 is also coming in and 3, 4, 5 are still really So just wanted to understand how you see this shape up over the next couple of years.
Portion of represented by the top 2 customers. Yeah, it's only speculation, of course. I think at this stage, the major impetus is coming from the cloud and they have service providers, they have to roll out the platform before they can attract the demand. So I think we are in a phase where we will see the percentage represented by these cloud service providers increasing. But then over time, I think we'll see the cloud segment will diversify because there will be many more SaaS providers, maybe smaller individually in order size, but larger in number.
And then of course, there will be the growth of the enterprise an FSI side, because we already have mostly access nodes for the cloud platforms in China inside our data centers. So I mean, that's how I see it. I don't see it as being a 2 horse race. We have valuable relationships with more than 2 hyperscale cloud service providers. But the strength of our relationship with those 2 is, very significant.
And we really mentioned that we are taking steps to formalize the partnership to recognize all the ways in which we can be of mutual benefit to each
other. Year.
My last question on margin leverage, Dan, I think Your pro form a margin is hovering still around, 26% to high 20% range. Is this kind of second half of this year when we really see that start to move up towards the 30% range that you've talked about before? Or is that still like dependent on how quickly some of these new data centers come online?
Yes. I mean, from my point of view, I mean, what's important for me to see is that each data center is hitting a high level of profitability in giving us a high return. And that's happening consistently. And stabilized data centers, actually, the margins are still going up. I mean, they're not all fully utilized yet.
You're correct what you said that the leverage will be more significant in the 3rd fourth quarter of this year. And continue into next year, yes.
Our next question is coming from the line of Jonathan Achin from RBC Capital Market. Please ask your question.
Thank you. So I was interested in your the top 5 customer slide. I just wanted to clarify Is are any of those top bot global players, or not? Slide 22?
Yes. One of them is a global player. Yeah.
Right. Okay. Just wanted to clarify.
I'm going to get anyways.
Right. So I wanted to talk or get you to comment a little bit about the broader environment given the growth in the overall category? And what do you think is that GDS' current share, as you look some of these spending trends among cloud service providers, Internets, and even FSIs. And then, and then, maybe just my last question, I'll get that right straight away. You gave very useful commentary about how the revenue develops through the end of the year to hit your full year guidance.
I was interested in the fact that you've got new capacity coming online. And so there's going to be some operating expense implications. Can you talk a little bit about the margin or OpEx developments as we sort of move through the year. And as we think about unit revenues, should we keep them the MSR number that you talked about at around 2700. Is that going to be roughly the same?
Thank you.
Yes, John, your first question was does make sure I answered clearly, was you asking about what is our market share of the cloud business, right?
As you look at your pipeline and you guys, so these customers are growing with companies other than GDS. So I was interested in kind of your view as to competitive supply? And is competitive supply growing as rapidly? Is it happening among the telcos? Is it happening among other Chinese companies or our global data center companies also adding capacity in the market?
Okay. I'm not sure about let me let me see if I understood correctly. I mean, John, if you look at the cloud service providers point of view, In each market, they typically have 2 to 3 zones, which are separate from each other. And hence it's quite common to see different service providers for each zone. So if we're doing well, we should get around onethree to half the business.
So which we have done at least that. Who else is getting the business? Typically, it will be the incumbent telecom operator in each region. And sometimes the incumbent or even one of the competitive telecom operators, they don't have data center resource suitable to satisfy this requirement. So we've actually benefited both from getting, let's say, One distinct piece class, in some cases, we have effectively working with a telecom carrier to fulfill their piece.
Does that answer your question about the cloud market share or did I miss something that?
Yes. Maybe one other question, is there any discernible supply coming on by non Chinese players to meet data center demand within China?
Well, without betraying any customer conferences, I can tell you that the least the top 2 global players are stepping up their presence in China.
I was referring more to data center construction. So are there other flyers in the market that you're seeing, differently than perhaps 6 months ago?
There's always you mean, we don't have to go on data center supply, right? Yes. John, the market is still quite tight. And, all of this demand needs to be satisfied with new builds. There's not that much new build going on, right?
So, if you're asking for the point of view, is there a a lot of supply that's going to materialize. The answer is no. For our point of view, we don't worry too much anyway because we're not just competing at the asset level in a particular market. So I think we are fairly immune to that because our relationship with the cloud service providers is a reflection of a lot of other attributes, which will then enumerate it.
So I see on slide 16 that you talked about ASPs being roughly, roughly similar in the backlog is what you currently have. So I guess my final question then just to be a little bit more specific is about OpEx or margins and how that's kind of developed.
Yes. Well, I think the expectation on the revenue per square meter, you should assume it stays around the level that it's been in the last 6 or so quarters. It will fluctuate because it's affected by the timing of during the quarter when somebody moves in, it's affected by power usage levels. It's affected by the contract terms where sometimes the pricing builds up to the full billing amounts, over a period of time. But essentially, as I've said a few times, the average selling price in that contract backlog is almost exactly the same.
As the MSR that we're actually yielding for the capacity, which is billable now today. And your question about, OpEx, I mean, clearly, there is a lot of capacity that's going to come into service during this year. I mentioned the number. It's threefour of the area production will come into service this year. And that's always a drag on the consolidated, NOI and EBITDA margins.
So the underlying profitability is there, as I try to demonstrate by referring to the stabilized data centers, But the trend is always going to be held back because we're in a phase where there is actually more capacity under development that we even anticipated.
Our next question is coming from the line of Michael Hart from Guggenheim. Securities. Please ask your question.
Hi, thanks for taking the questions. I guess first to kind of follow on some of the themes that Jonathan was asking about. It seems like as you look at across your markets broadly, there's a lot of demand and limited supplies that should translate to pretty strong pricing. Was wondering if you could kind of give us some more granular color on which markets do you see that have particularly strong pricing trends or are there any markets you would call out where maybe you haven't seen as much strength in pricing as you might have seen elsewhere?
Mike, I'll go first when we'll add. Thanks for your question. The China market is fairly concentrated as indeed I believe the U. S. And European markets are as well.
It's really about Beijing Shanghai, Shenzhen, to a lesser extent, Wangzhou and Chengdu. And that's where the cloud platforms are are being located right now at this period of development. And I would not distinguish the supply demand or pricing in any one of those markets. All of the demand has to be satisfied with new builds there isn't any significant difference in terms of the amount of supply relative to demand in any one of those markets. Pricing is pretty similar in each of those markets.
I mean, there have been times in the past where there may be a little bit of divergence, but not material. It's pretty similar in at least in Beijing Shanghai, Shenzhen. It's very similar.
Yes, I would like to say the market which we choose, which we target is all the Tier 1 market in China. And the demand is major driven, the data center demand major driven by this area. So this demand is very strong in each core market. So that's why we are target for target to this key market. That's our strategy.
So this is that we can, the price, the pretty similar, in, compared with this, 4 different core market. But in China, if you compare with the Tier 2 city and a lot of the Tier 2 Tier 3 city, a lot of degenerative by the government, the data centers are viewed by the governments. The price is a huge difference. So our whole market, we are sitting on the golden market in our body, right? So the demand is strong and the supply is not it's more and more difficult.
Great. Thank you. That was, it's really helpful. I guess, the next thing kind of following on the issue of supply coming on I know you mentioned that the demand really requires new builds. So you're seeing customers they're willing to take commitments for construction that hasn't begun yet.
Do you have a level of pre commitment that you look at to have either either firm contracts or soft pre commitments before you begin construction or you feel pretty confident you can begin construction and demand will show up for that new supply?
Michael, we had the benefit of having established customer relationships with many of the customers who matter in China. And we are kind of closely aligned in terms of our resource plan. And there resource requirements. If anything, actually, the planning process with certain customers is getting more is getting closer and more frequent. So when we undertake a new project, I'd say we already have the very strong sense of the demand, how it that translates eventually into a contract And that can take some time.
Of course, from external point of view, our disclosures are based on what's contracted. But internally, we for now use the word soft allocation. These projects are soft allocated long before you hear about them being contracted. So when you look at our capacity that we have under construction, a lot of
that is software allocated. Yes. Michael, I would like to say, if you look at it last year and the year before last year. Every year, our new incremental order is from Last year is almost 70% is from our existing installed base. So that will translate we already know a lot of our customers, their intention and their demand and their plan.
So this is, as Dan mentioned, actually internal insight, we already know, get some commit from our customers. Then we go to the counter. So this year, we repeat again. So a lot of our new incremental order 80% or almost this year, work from our existing customer.
Great. Thank you very much.
As there are no further questions at this time, I'll now turn the call back to the company for closing remarks.
Thank you once again for joining us today. If you have further questions to please feel free to contact GBS Investor Relations through the contact information on our website or the Piacente Group Investor Relations. This concludes our conference call. Thank you.
Ladies and gentlemen, that does conclude our conference for today. Thank you for participating.