Hello, ladies and gentlemen. Thank you for standing by for the GDS Holdings Limited's first 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, Laura.
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.gds-services.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. Daniel Newman, GDS 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 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 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 on slide three, we grew total revenue by over 60% and adjusted EBITDA by over 130% year-on-year. We invested over RMB 50 million of CapEx to deliver the capacity required by our customers. We raised nearly RMB 80 million of debt to ensure that each new project is fully funded. We maintained our strong sales growth momentum, signed up customers for over 7,000 sq m net of new commitment, worth over RMB 35 million in terms of annual recurring revenue. This includes full recommitment of the area released by a churn customer.
I want to highlight that it is a rare case for any company to be able to relocate such a large amount of area in such a short period. This further proves GDS's high ability to execute and deliver as the strong market demand. As a result, our total area commit grew to over 68,000 sq m, 85% higher than one year ago. We ended the quarter with commitment rates of 90% for area in service and 38% for area under construction. We continued delivering the backlog, increasing our area utilized to nearly 38,000 sq m, 58% higher than one year ago. On the resource side, we enhanced our supply pipeline with the Shenzhen acquisition we announced last quarter of a 10,000 sq m project under construction. Construction is ahead of schedule, and the customer will be moving in 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 4,000 sq m of capacity when completed in the first half of 2018. This is a big win for us. Supply in Beijing is quite restricted. Our approval reflected Government's recognition of our unique industry leadership and deep experience. Clearly, both of these new projects demonstrate our sourcing capability. Turning to the slide four. 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 Dan to elaborate on these numbers. Let's moving on to slide five. Before I talk about sales wins and 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 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. To understand the data center opportunity, we must first understand how the cloud is developing in China. Mr. Yu Qiang, Executive Vice Chairman of Alibaba, stated that they see cloud as a RMB 13 billion market opportunity in China, assuming 20% of IT spending migrate to cloud. In 2016, the China market was worth around RMB 1.5 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 two to three times over the past year. Alibaba forecast said that the market will grow by four times over the next two years. This growth is largely coming from the three internet giants in China, Alibaba, Tencent, and Baidu. They see transformational opportunity in cloud and the related technologies. Each of them has put the cloud at the center of their strategic development. These three companies have huge influence over the digital economy in China. They are able to leverage their dominant presence in different vertical 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.
The global hyperscale players such as Microsoft, AWS, and IBM, which are significantly increasing their presence in the China cloud market. Cloud service providers aggregate demand for data center 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 hosted in edge data centers close to the end user in the Tier 1 market. They look to outsource most of their requirements. Why do they outsource? The first reason is because their business is highly dynamic, and outsourcing allows them to accelerate their time to market. Secondly, they want to focus their attention on the customer-facing products and services that are critical for their success. They recognize that sourcing, designing, building, and operating sophisticated data centers is very complex.
Third, their business appreciates the flexibility of being able to access a secured supply of data center resources with short lead time when they need it from a trusted provider. Demand is running ahead of supply in the key markets. 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 industrial buildings for long-term lease and to obtain sufficient power capacity. Obviously, the market opportunity has attracted more carrier-neutral participants, but we don't see them having a material impact on competition. They develop 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 the combination of expertise, track record, and the comprehensive sets of sustainable advantages that we do.
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. Second, 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 large enterprise franchise, and attract more cloud players such as SaaS providers. There are only a few hyperscale cloud infrastructure players, so there are only a few opportunities to make this a winning strategy. How are we doing? We've had great success in capturing this demand. As shown on slide six. From almost nothing three 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 three of the leading cloud service providers in China, including a follow-on order from one of the major global players. Our top two customers are now each present in six to eight of our self-developed data centers and in four to five different markets. We estimate that we host the majority of their incremental cloud demand. They consider us as partners in the development of their cloud business. As we grow in market leadership, we are actively taking steps to deepen relationships with key customers and formalize our partnerships in different ways. Why do we win with cloud 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 places.
They match to where our cloud customers deploy their platforms. Second, we are able to offer them certainty of future supply as a result of our secured expansion pipeline and the flexibility to take delivery when they need it. Third, as cloud service providers increasingly penetrated the FSI and the large enterprise verticals, they see value in co-locating with many of the best names in China who are our existing customers. These attributes are not easily copied, and they 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 customers. First, we signed a large multi-site order from the leading online securities and fund trading company.
Second, we obtained an order for the settlement and clearing platform being established by the central bank to support digital payment service providers. We already host the three leading e-payment platform in China. We believe this new generation of FSI customers offer a long way for future expansion. Third, we just recently won a bid with one 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 obtaining 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 the strongest it has ever been. The market is growing faster than imagined, and the customers are looking to us to meet their requirements.
This is a golden opportunity for us, and we are moving forward 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 seven, our area in service remains at around 61,000 sq m, which is almost sold out. With the Shenzhen five acquisition, our area under construction increased to just over 35,000 sq m at the quarter end. Out of this total, around 13,000 sq m is pre-committed and around 21,000 sq m is available to feed our current sales effort. The new data center project in Beijing, we call the Beijing Three, will be included in area under construction in Q2. It is located next to our Beijing One, which is already 96% committed. We are very confident about the market ability of Beijing Three.
Including Beijing Three, we will have around 25,000 sq m of area under construction, which is not yet committed. 25,000 sq m is equivalent to about four quarters of new booking at our recent quarterly run rate. We intend supplementing these resources in order to support sales in 2018. We have resource held for future development that we plan to activate, and we have promising prospects in all our market that we aim to secure in the next few quarters. Our data center portfolio is shown on slide eight. 10 of those data centers are in services, and five are under construction. Beforehand handing over to Dan for the financial review, I would like to highlight the recent announcement appoint of Mr. Chang Sun as an Independent Director on our board. Chang was formerly the Chairman of Warburg Pincus for Asia Pacific.
He's one of the most renowned and successful investors 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. He also founded the China Real Estate Developers and Investors Association. GDS is the first and only U.S. public company directorship that he has accepted since moving on from Warburg Pincus. Chang Sun brings a rich investment background and experience, and we are delighted to have him join our board. With that, I will now hand the call over to Dan. Thank you.
Thank you, William. In this section, I will focus on four main areas. First, revenue and operating leverage. Secondly, CapEx. Thirdly, funding. Fourthly, I will make some comments about delivery of the backlog and quarterly expectations for 2017. Starting with the first quarter 2017 P&L analysis on slide 10. On a GAAP basis, service revenue grew by 14.7% quarter-on-quarter to RMB 343.7 million. However, this includes a termination fee of RMB 44.1 million arising from the previously reported churn of 1,225 sq m at our Shanghai campus. The termination took effect a few days after the start of the quarter, and the fee is now cash in the bank. In 4Q16, we generated service revenue of RMB 16 million from the churn area. The termination fee is therefore equivalent to nearly 9 months revenue.
On a pro forma basis, excluding the termination fee entirely from 1Q17, service revenue was RMB 299.6 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% quarter-on-quarter to RMB 179.4 million. After excluding the termination fee and equipment profit, which is non-core, 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 three data centers, totaling over 12,000 sq m of space, which came into service during 4Q16.
The contribution from these data centers will take several quarters to build up to break even. On a non-GAAP basis, adjusted EBITDA grew by 34.7% quarter-on-quarter to RMB 123.9 million. After excluding termination fee, equipment profit, and the impact of foreign exchange changes, underlying adjusted EBITDA grew by 2.3% quarter-on-quarter. Underlying adjusted EBITDA margin was slightly higher at 27.1% in 1Q17, compared with 26.5% in 4Q16. Now let's go further into the key growth drivers on slide 12. In 1Q17, there was an increase in area utilized of 816 sq m net of churn, or 2,041 sq m gross. Typically, the first quarter of the year in China is comparatively slow due to the New Year holiday. The churn rate was 5.5% on a revenue basis or 3.2% 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 MSR, per square meter was RMB 2,708 in 1Q17, compared with RMB 2,797 in 4Q16. 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 1Q17. All of these numbers are on a pro forma basis, excluding the termination fee, equipment sale and cost, and foreign exchange changes. Starting at a data center level, utility cost, which is mainly a variable cost, was 223.8% of pro forma service revenue in 1Q17, compared with 23.2% in 4Q16.
As mentioned, we had three 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 are mainly fixed, were 31.5% of pro forma service revenue in 1Q17, compared with 30.1% in 4Q16. The increase was mainly due to booking a full quarter of costs related to the three new data centers. Underlying adjusted NOI margin was 44.7% in 1Q17, compared with 46.7% in 4Q16. 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 1Q17, we had 18,155 square meters of area utilized in self-developed data centers, which were 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&A, excluding D&A and stock-based compensation, was RMB 7.7 million lower in 1Q17 and came out at 17.9% of pro forma service revenue, compared with 20.5% in 4Q16. 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 million in 1Q17, which was a step up from the run rate over 2016. Replacement CapEx accounted for 3.3% of this total.
We incurred CapEx mainly on our Chengdu One phase 3 data center, which is 100% pre-committed and due for delivery starting in mid 2017, and on our Beijing Two data 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 BJ Two from a global cloud player, which will roll out 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 Five, SZ Five, the project which we announced in March, is proceeding ahead of schedule. The customer, which is pre-committed for 50%, wants to start moving in during 3Q17.
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, SH 4, is the fourth data center on our main Shanghai campus. We aim to bring the data center into service by the end of 2017. The previous phase, SH 3, 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. SH 4 is already substantially pre-allocated on a soft basis. We have also shown here the new Beijing project, BJ 3, where construction starts in the current quarter. It's well-placed to serve the customers who are present in the adjacent BJ 1 data center.
With the addition of BJ 3, our total area under construction is 39,315 sq m across 7 sites, out of which 76.4% will enter service this year. With regard to financing, as shown on slide 15, during 1Q17, we repaid a RMB 199.6 million mezzanine loan, which had a high interest rate, and obtained RMB 532.8 million of new debt facilities. Our blended financing cost was 7.1% in 1Q17, compared with 8% in 4Q16. Excluding the convertible bond, the cost was 6.2% in 1Q17 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 4.47 billion, and our net debt was RMB 2.94 billion. Net debt increased by RMB 464 million since year-end 2016. The ratio of net debt to last quarter annualized pro forma adjusted EBITDA was 9.2x.
Fully diluted for conversion of the CB, the multiple was 6x. Clearly, conversion of the CB 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 financing structure. On a pro forma basis, if we deduct the financing obligations related to data centers under construction, the net debt to EBITDA multiple falls from 9.2 down to 7.5x. 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 2.7x. 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, SZ 5 and BJ 3, 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 the debt finance which we need. 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 sq m at the end of 1Q17. This provides high visibility to future revenue growth over a one to two year time horizon.
On a near-term basis, growth rates depend on how quickly customers move in, 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. The balance of 44% relates to area data centers which are still under construction. For this part, the move-in process can only begin in the third and fourth quarters of this year. I mentioned on our last earnings call that we have a renewal this year for 4,365 sq m, 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 bill the customer during the change-out period, which is expected to last three to four months. The change-out will happen in phases over the next few quarters, it will start to impact our revenue in the current quarter. We took account of the move-in schedules and the temporary billing interruption when we provided our FY 2017 revenue and adjusted EBITDA guidance. We reaffirm those numbers. In terms of quarterly progression, taking 1Q17 pro forma as the base, we expect revenue in 2Q17 to grow in the high single digits in % terms quarter-on-quarter, then at higher growth rates in the second half of the year. We expect adjusted EBITDA to follow a similar pattern. With that, I will end the formal part of my presentation.
We would now like to open the call to questions. Operator, please proceed.
Ladies and gentlemen, we will now begin the question and answer session. If you wish to ask a question, please press star one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press the pound or the hash key. For the benefit of all callers participating in today's call, if you wish to ask your question to management in Chinese, please also immediately restate your question in English. Once again, if you wish to ask a question, please press star one on your telephone and wait for your name to be announced. Our first question is coming from the line of Gokul Hariharan from J.P. Morgan. Please ask your question.
Yeah, 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-connect. Could you also talk a little bit about, on a pro forma basis, how much of an impact it could have if you could charge for cross-connect, just like some of the global data center guys are able to charge?
Yeah. Hi, Gokul. The old telecom guy, William will hand it over to me.
Yeah.
There was a change in what was referred to as the catalog of the telecom services in 2015, including.
The end of 2015.
End 2015. Including under basic services, a category of, I would say in English call it telecom infrastructure service. Which entitles the licensee to actually install and operate fiber for very specific and limited purposes. 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 cannot be quite a protracted process before the license is finally issued. In terms of the impact, a cross-connect is already possible inside our data centers or between our data centers, but just not through our own fiber.
The fact that we have the ecosystem of cloud and enterprise and FSI customers is already part of the value proposition. Obviously, it 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 of the growth of our FSI and enterprise business going forward.
Gokul, 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 a base, because based on our scale of the hosting a colo, our customer, as we introduced before, our hub 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 then connected to multi-cloud, and the cloud connect cloud, and the customer connect customer. It's getting more momentum, right? This is what happened in China already. GDS is in the best position because our customer profile, if you look at our customer profile, one is a cloud platform. We have the major cloud platform in our data center.
On the other hand, we have the financial institution and the large enterprise customer and internet platform. This will drive a lot of demand of connect to each other. So far, we want develop very carefully to fulfill the license issue, right? Also we want to develop our product properly to provide the service for future. This will cost the GDS, number one, is help GDS strengthen our stickiness of our customer. This is a major benefit for future. Second, potentially can be a new revenue stream. It's still at a very early stage. Although we already start to prepare. As Dan mentioned, we don't want to talk too much right now, but once everything ready, we will introduce more detail.
Thank you. Okay, great.
Okay.
Second question I had is, if we look at your potential ramp-ups schedule, in terms of pre-commitments as well as new data centers coming online, both Shenzhen 5 as well as the newly secured Beijing 3. If you think about, let's say, sometime in 2018, do you still feel that your top two customers who have close to 50% area committed right now will be becoming bigger and bigger as a percentage of your area committed when we get all these data centers pretty much committed? Or do you think that this mix can still remain in that 50, 51% range? Just asking this question from the perspective that the top two 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, number 2 is also coming in, three, four, five are still really far behind. Just wanted to understand how you see this shape up over the next couple of years.
The portion represented by the top two customers. Yeah.
Gokul, it's only speculation, of course. At this stage the major impetus is coming from the cloud, and the service providers, they have to roll out the platform before they can attract the demand. We are in a phase where we will see the percentage represented by these cloud service providers increasing. Over time, we'll see the cloud segment will diversify because there'll be many more SaaS providers. Maybe smaller individually in order size, but larger in number. Of course, there will be the growth of the enterprise and FSI side, because we already have most of the access nodes for the cloud platforms in China inside our data centers. That's how I see it. I don't see it as being a two-horse race. We have valuable relationships with more than two hyperscale cloud service providers.
The strength of our relationship with those two is very significant and William 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.
Yeah.
Understood. My last question on margin leverage, Dan. Your pro forma margin is hovering still around 26% to high 20% of range. Is this kind of second half of this year when we really see that start to move up towards the 30% kind of range that you've talked about before? Is that still dependent on how quickly some of these new data centers come online?
From my point of view, what's important for me to see is that each data center is hitting a high level of profitability and giving us a high return. That's happening consistently. The stabilized data centers, actually, the margins are still going up. They're not all fully utilized yet. You're correct what you said, that the leverage will be more significant in the third and fourth quarter of this year and continue into next year.
Okay, great. That's all I had.
Our next question is coming from the line of Jonathan Atkin from RBC Capital Markets. Please ask your question.
Thank you. I was interested in the top five customer slide. I just wanted to clarify, are any of those top five global players or not?
Which one?
Slide 22.
Yeah. One of them is a global player, yeah.
Right. Okay. Just wanted to clarify.
Number four, if you would. You're going to guess anyway, so.
Right. I wanted to talk, or get you to comment a little bit about the broader environment, given the growth in the overall category. What do you think is GDS' current share, as you look at some of these spending trends among cloud service providers, internets, and even FSIs? 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 implication. Can you talk a little bit about the margin or OpEx development as we sort of move through the year? As we think about unit revenues, should we keep them, the MSR number that you talked about at around 2,700.
Is that going to be roughly the same? Thank you.
Yeah. John, your first question was. Just make sure I answer clearly. Was you asking about what is our market share of the cloud business, right? Is that what you're asking?
Yeah. As you look at your pipeline.
Yeah.
These customers are growing with companies other than GDS. 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 are global data center companies also adding capacity in the market?
Okay. I'm not sure about. Let me see if I answered correctly. John, if you look at it from a cloud service provider's point of view, in each market, they typically have two to three zones which are separate from each other. Hence, it's quite common to see different service providers for each zone. If we're doing well, we should get around one third to half the business. Which we have done at least that. Who else is getting the business? Typically, it will be the incumbent telecom operator in each region. Sometimes the incumbent or even one of the competitive telecom operators, they don't have data center resource suitable to satisfy this requirement. We've actually benefited both from getting, let's say, the one distinct piece plus, in some cases, we are effectively working with a telecom carrier, to fulfill their piece.
Did that answer your question about the cloud market share, or did I miss something there?
Yeah. 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 confidences, I can tell you that at least the top two global players are stepping up their presence in China.
I was referring more to data center construction. Are there other suppliers in the market that you're seeing differently than perhaps six months ago?
You mean, John's asking on data center supply, right? Yeah.
Yes
The market is still quite tight. All of this demand needs to be satisfied with new builds. There's not that much new build going on, right? If you are asking for the point of view is there a lot of supply that's going to materialize? The answer is no. From 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. I think we're fairly immune to that, because our relationship with the cloud service providers is a reflection of a lot of other attributes which William enumerated.
Okay. I see on slide 16 that you talked about ASPs being roughly similar, in the backlog as what you currently have.
Yeah.
I guess my final question then, just to be a little bit more specific, is about OpEx-
Yeah
or margins and how that kind of develops.
Yeah. 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 six or so quarters. It will fluctuate because it's affected by the timing 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 amount over a period of time. 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. Your question about OpEx. Clearly, there is a lot of capacity that's going to come into service during this year.
I mentioned the number, three-quarters of the area under construction will come into service this year, and that's always a drag on the consolidated NOI and EBITDA margins. The underlying profitability is there, as I try to demonstrate by referring to the stabilized data centers. The trend is always going to be held back because we're in a phase where there is actually more capacity under development than we even anticipated.
Thank you very much.
Okay.
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, 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 supply, that should translate to pretty strong pricing. I 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 if there are 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.
Okay
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, Guangzhou and Chengdu. That's where the cloud platforms are being located right now at this period of development. I would not distinguish the supply, demand, or pricing situation 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. The pricing is pretty similar in each of those markets. There have been times in the past where there maybe have been a little bit of divergence, but not material. It's pretty similar, at least in Beijing, Shanghai, Shenzhen. It's very similar.
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 driven by this area. This demand is very strong in each core market. That's why we are target to this key market. That's our strategy. This is that the price is pretty similar compared with this four different core market. In China, if you compare with the Tier 2 city and a lot of the Tier 3 city, a lot of driven by the governments, the data center built by the government, the price is huge different. Our core market, we are sitting on the golden market in our world. The demand is strong, and the supply is more and more difficult.
Great. Thank you. That was 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 firm contracts or soft pre-commitments before you begin construction, or do you feel pretty confident you can begin construction, and demand will show up for that new supply?
Michael, we have the benefit of having established customer relationships with many of the customers who matter in China. We are kind of closely aligned in terms of our resource plan and their resource requirements. If anything, actually, the planning process with certain customers is getting closer and more frequent. When we undertake a new project, I would say we already have a very strong sense of the demand. How that translates eventually into a contract, now that can take some time. Of course, from external point of view, our disclosures are based on what's contracted. Internally, for now, we use the word soft allocation. These projects are soft allocated long before you hear about them being contracted. When you look at our capacity that we have under construction, a lot of that is soft allocated.
Michael, I would like to say, if you look at last year and at the year before last year, every year, our new incremental order, last year is almost 70%, is from our existing install base. That will translate. We already know a lot of our customers, their intention and their demand, and their plan. This is, as Dan mentioned, actually internal insight. We already get some commit from our customers. We go to contract. This year, we repeat again. A lot of our new incremental order, 80% almost this year, were from our existing customers.
Great. Thank you very much.
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Thank you.
This concludes our call. Thank you.
Thank you.