Hello, ladies and gentlemen. Thank you for standing by for GDS Holdings Limited Fourth Quarter and Full Year 20 16 Earnings Conference Call. At this time, all participants are in listen only mode. After management's prepared remarks, there will be a question and answer session. Today's conference call is being recorded I'll now turn the call over to your host, Ms.
Laura Chen, Head of Investor Relations for the company. Please go ahead Laura.
Hello, everyone, and welcome to the Fourth Quarter and Full Year 2016 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 built and downloaded from our IOS site at investors. Cdservices.com. Leading today's call is Mr.
William Huang, CDS' 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 and provide our outlook for 2017. 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 perspective as filed with the U. S.
Securities Exchange Commission. The company does not assume any obligation to update any forward looking statements except as required under applicable law. Please also note that GDS earnings press release and this conference call include discussions of unaudited GAAP financial information as well as unaudited non GAAP financial measures. GDS press release contains a reconciliation of the unaudited non GAAP measures to the unaudited most directly comparable to your AP measures. I will now turn the call over to GDS founder, Chairman and Chief Executive Officer, William Huang.
Please go ahead, William.
Thank you, Hola. Hello, everyone. This is William. Thank you for joining today's call. First, I would like to highlight some year 2016, our achievements.
2016 was a great year, it's a year of great achievement for GDS. As you can see on slide 3, We grew service revenue by over 15% and adjusted EBITDA by over 60%. We invested significantly to expand our capacity and our sales growth was phenomenal We signed our customers for 25,000 square meters of new contracts, worth over 120,000,000 in annual recurring revenue. Based on leading market research, Our incremental market share grown to over 30%. We delivered nearly 150,000 square meters of area utilized to customers.
We added over 23,000 square meters of new capacity into service and ended the year with a very high level of commitment to bring. Let's turn it to slide 4. Our huge contract backlog has become even beneficial. This gives us high visibility to future posts At the end of 2016, we had over 23,000 square meters committed but now it's utilized. It was over $110,000,000 in annual recurring revenue.
We are continuing to execute against our plan, delivering our backlog to customers and driving impressive revenue and operating growth quarterly after quarter. Call it after quarter. Let's move on to slide 5. Before I discuss our results and the strategy, I would like to share our view on this market. As we have stated previously, we believe China represents the biggest data center opportunity in the world And we believe that GDS is the best position in the market.
It's well documented that the digital economy in China is booming and the cloud adoption is leading the way. Compared to the USA, cloud adoption is still in its infancy, but growing fast. China's internet giants are squarely focusing focusing more and more on cloud. At the same time, the global car player are focusing more and more on the China market. All over the world, cloud service providers are driving huge demand for data center capacity.
Here in China, we see this trend magnified. Leading cloud service providers in China are driving the majority of the new demand. These guys are looking to also see all of their requirements in Tier One market, but it's not easy for them to do that. 1st, Cloud service provider here with quite a huge space and power. In China, in a big city, sets a big challenge.
2nd, they are deploying their cloud platform in all the Tier 1 cities at the same time. So you need to be ready everywhere. 1st, there was certainty of getting capacity when and where they needed. 4th, they want to work with the people who understand them their requirements and it performed to a very high standard. They want the flexibility and the total solution service provider.
They want and the high visibility of the resource plan. Here is our golden opportunity. As we have described before, GDS is uniquely positioned in India's environment, better than anyone else. We have had great success in cash sheet demand bound to clouds. From almost nothing 3 years ago, cloud service providers now accounts for 45% of our business.
As shown on slide 6, We believe they are all using multiple GDS data centers. So why do we win with the cloud service provider? We win with these customers by having the right assets in all the right market which nobody else has. And these assets are backed up by a secure expansion pipeline and our 15 year solid track record of operation excellence. We believe we have a win win partnership with the cloud customers.
They are important to us and we are also important to them. As we get stronger and stronger, this partnership also continued to grow stronger. Our stronger position with the cloud service provider makes us the nature choice for enterprise customers. Our data center enterprises co locating space and a unique access point to multiple cars. Cloud service provider attracted enterprise, as we expand on our roadshow, This focus is centered to our growth strategy, and it's working.
In 2016, we added more than 120 new enterprises logos. In particular, we have had a great success with the new kind of financial custom offering, like e payments, online security, clearing and the settlement services. We believe this type of custom offer a long, long way for expanded services. Resort supply is critical to keep up our sales momentum. We believe that As shown on slide 7, at the end of 2016, we had about 25,000 square meters of area under construction, of which 27% was pre committed In the current quarter, with 10,000 square meters of high powered space under construction, which is already 50% pre committed to a major cloud service provider.
We are actively seeking to add a new project to our development pipeline. We have promising prospects in all our markets which we are we aim to convert in the next few quarters. Let's turn to the slide 8. We are in a much stronger position now than when we begin 2000 beginning 20 16. We have added capacity, attractive new customers deepen our existing engagements and execute according to plan, we've seen cost across the board improvements and now are bigger and stronger than we ever been.
There is a huge growth to come from the cloud customer segment. And we want to be the hub for cloud and enterprise development. With our established relationships, we believe that we are in a good position to win this demand in 2017. We aim to deepen our relationships with the major cloud service providers. We are aligned our resource plan to meet the requirements we are helping them to access our enterprise customer base.
At the same, we are leveraging the cloud platform in our data centers to attract and add value to enterprise customers. As we enter 2017, we will leverage the solid foundation we have laid to led and continue to deliver results to fulfill our sales growth. Our key objective for the current year is to beat the level of sales which we achieved in 2016. And we are confident of doing that. Now I will hand over the call to my colleague Dan for the financial review.
Thank you.
Thank you, Helen. Hi, everyone. It's Dan here. In this section, I'll focus on Four main areas: revenue and operating leverage, CapEx, funding, and then the 2017 business outlook. Starting with the 4Q16 P and L analysis on Slide 10.
We view service revenue net operating income and adjusted EBITDA as the key indicators of our financial performance. After stripping out equipment profit, stock based compensation and FX gains, All three measures show year on year growth of over 50% and quarter on quarter growth of over 10%. Let's go into detail on revenue. Comprising co location and managed services, which we refer to as service revenue and equipment sales. Service revenue is recurring in nature and this is what we consider our core business.
Equipment sales arise on a demand basis. When customers require us to do some procurement as part of the performance of the service contract. This is non core. It may help to strip out equipment sales less cost. In order to see more clearly the underlying performance of the service business.
The amounts of equipment profit in each period are shown in the note below the table on slide 10. In 4Q 'sixteen, our service revenue grew by 55% year on year and by 12.3% quarter on quarter. Next, underlying adjusted net operating income. This measure highlights our performance at the data center level. Before taking account of depreciation, equipment profit, stock based compensation and corporate costs.
In 4Q 'sixteen, our underlying adjusted NOI grew by 58% year on year and by 10.2% quarter on quarter. SG And A after drop deducting stock based compensation, was $68,600,000 in 4Q 'sixteen, an increase of 32% year on year, and 9.7% quarter on quarter. This increase mainly relates to expanded sales activities, and increased corporate costs as we prepared for life as a public delisted company. Other income, mainly comprised of foreign currency exchange gains. The gain in 4Q 'sixteen arose from depreciation of the renin B against the U.
S. Dollar. Underlying adjusted EBITDA which is excluding equipment profit and FX gains was RMB79.3 million in 4Q 'sixteen. Implying growth of 90% year on year and 12.4% quarter on quarter. Underlying adjusted EBITDA margin, once again, excluding equipment costs and FX gains, was 26.5% in 4Q 'sixteen compared with 21.5% for 4Q 'fifteen, and 26.4% for 3q 'sixteen.
Turning to the full year P and L analysis on Slide 11. As I stated earlier, all three measures show robust growth. We achieved service revenue of RMB1 billion in FY 'sixteen, showing growth of 53%. Driven mainly by the near 15,000 square meter increase in area utilized in revenue generation space during the year. Adjusted NOI grew by 48%.
If we exclude equipment profits, underlying adjusted NOI grew by 4.56%. The adjusted NOI margin was 45% the same as FY15. At the individual data center level, there was significant operating leverage, as utilization ramped up during FY16. However, at the confirmed data level, this was offset by the growth drag from over 23,000 Square Meters new area and service. This is typical of the data center lifecycle.
Adjusted EBITDA grew by 64% and underlying adjusted EBITDA grew by 84%. Now let's go further into the key growth drivers. As you can see on Slide 12, Service revenue and area utilized, growing sync. In 4Q 'sixteen, There was an increase in air utilized of over 2700 square meters. The churn event, which we discussed in our last earnings call, took effect in early January 2017, so it did not impact these numbers.
The monthly service revenue or NSR per square meter in 4Q 'sixteen was slightly higher than the prior quarter, but this is within the normal range of quarterly fluctuation. On the right hand side of Slide 13, we show a breakdown of our cost structure for 4Q 'sixteen. Starting at the data center level, utility cost, which is mainly a variable cost, was 23.2% in service revenue in 4Q 'sixteen. We do expect to see some upward trend in utility costs, which as we have more high power density customers moving in. In addition, we have which take a while to reach optimal power usage efficiency.
Other data center level costs are mainly fixed. The adjusted NOI margin excluding equipment profit, I. E, the adjusted NOI margin for the service business, was 46.7% in 4Q 2016. This was achieved on capacity with an average 65.6 percent utilization rate. This capacity was practically sold out.
So as the backlog is delivered and utilization rate rises, we should see further operating leverage on fixed costs. Moving on to the corporate level, our SG and A is dimension to current growth levels, so we expect to achieve significant operating leverage on our SG and We incurred CapEx of R1.1 billion dollars that's $165,000,000. In FY 'sixteen, representing an increase of 57 percent year on year. Our CapEx growth is in line with new business and revenue growth. For the capacity in service at year end, the cost to complete was 293,000,000 LNG.
For capacity under construction at the year end, the cost to date was RMB269 1,000,000 and the cost to complete was RMB1.1 1,000,000,000. Most of which we expect to incur in the current year. In addition, we will have CapEx related to a new project Chenzhen Five, which we are taking over and to other new projects, which we expect to initiate during 2017. Reviewing each of the projects. Shenzhen IV Phase I will enter service in 2Q 2017.
It was 19.2% pre committed at year end, and there are currently major customer orders in the contracting process. Chhengzhou-one Phase III will enter service in mid-seventeen and is 100% pre committed. Beijing 2 will enter service in second half of 'seventeen. There was some delay to this project, caused by the government mandated shutdown of construction in Beijing during a high dilution period. Construction with Beijing 2 has restarted.
The pre commitment rate is now at 31.4%. Including a significant follow on order for a major U. S. Cloud customer, which be closed in the current quarter. Shanghai 4 is the 4th data center on our main Shanghai campus.
The Shell and Core were built to suit by a property development company. We aim to bring the data center into service by the end of 2017. All of our major cloud customers are present on this campus as well as over 100 FSI and large enterprise customers. We already have significant demand in hand for the capacity in Shanghai We regard acquisitions as one strand of our sourcing strategy. As William mentioned, we are in the process of taking over a data center, which is currently under construction in Shenzhen.
It is a large new building, particularly well suited to use as a data center in a central location with a very substantial amount of secured power capacity. When developed, it will provide us with 10,000 square meters of high powered net flow area, which is already 50% pre committed on a long term basis to a major cloud service provider. The acquisition is subject to satisfactory completion of due diligence and we aim to close it by the end of the current quarter. It's rare to find a data center of this size and power in such a good location in a Tier 1 market and it will be a very value enhancing addition to our portfolio. Turning to Slide 15.
At year end 2016, our gross debt was $4,290,000,000, and our net debt, including the net proceeds of the IPO, was rmb 2,400,000,000. Before discussing our 2017 funding plans, I'd like to provide some explanation of our debt capital structure. Our gross debt can be cash priced into RMB 1,100,000,000 for capital leases. Which are almost entirely leasehold interest in properties, where the underlying cash flows will be incurred over periods of up to 20 years. 1,000,000,000 of convertible bonds held by our strategic shareholder ST Telemedia Global Data Centers and by Ping An Insurance.
The bonds are due in December 2019 if not converted beforehand, and if all the bondholders have the option to extend the maturity by 1 year. The balance of RMB 2,100,000,000 is mainly project term loans working capital loans and mezzanine loans. Out of this total, RMB 580,000,000 relates to data centers, which are immature, with breakeven EBITDA in aggregate. At year end 2016, our net debt to last quarter annualized adjusted EBITDA was 6.7 times. However, if we exclude the debt related to the immature data centers, with breakeven EBITDA, the multiple was 5.1 times.
If we also exclude the capital lease obligations related to the same immature data centers, the multiple was 3.7 times. In the coming year, our business plan required us to raise around RMB2 billion in B and nearly $300,000,000 in new debt facilities, the majority of which we expect to draw by year end 2017. We have a long track record of successful debt financing and with our high levels of pre commitment, and long term contracts with some of the largest companies in China and the world, we are confident for achieving our financing objectives. Turning to Slide 16. As mentioned by William, we had a great year for sales.
Our total area committed increased to over 61,000 square meters, yielding a backlog of about 23,000 square meters. Out of this total backlog, around 16,200 square meters related to area under construction, and 6800 Square Meters relates to area and service. The average selling price or ASP for the contract backlog was almost the same as the monthly service revenue or MSR for the area utilized. On our last earnings call, we told you about a churn event. It took effect in early January 2017.
The good news is that we are going to receive a RMB46 million termination fee, which we expect to book as service revenue in 1Q 2017. The further good news is that we have already reallocated all of the space to other customers, and it is all currently in the contracting process. We have therefore been able to insulate ourselves from this event During 2017, we have contract renewals for around 8200 square meters of capacity, of which around 4200 Square Meters relates to a single customer at a single data center. This customer is in the process of renewing for a further term of 6 years. At the time of renewal, the customer will change out their IT platform and we will also undertake some research.
The implementation plan is currently being worked out. However, we anticipate that during the change out period, there may be some interruption to our billing. Looking further ahead, we do not have any other large contracts up for renewal the next couple of years. On Slide 17, as Wayne mentioned, Our first objective for 2017 is to sign up new business, which exceeds last year's level. Based on our current sales pipeline, backed up by our secured development plan, we are confident of achieving this target.
With regard to revenue, Our huge backlog gives us visibility to future revenue growth. However, revenue recognition is a function of how quickly customers move in. Based on our view of customer moving schedules, We expect full year 2017 revenue to be in the range of RMB1.475 billion to 1,575,000,000. That's $220,000,000 at the midpoint. For the avoidance of doubt, This includes the termination fee and the potential interruption of billing, which I just talked about.
Our guidance implies a gross rate for service revenue of over 50% at the midpoint of the range. For the full year 2017, we expect adjusted EBITDA to be in the range of RMB465 million to RMB495 1,000,000, that's $70,000,000 at the midpoint implying year on year growth of over 75% at the midpoint of the range. With regard to CapEx, taking into account the data centers under construction, the acquisition which we have announced today and the projects which we are planning to add, We expect total CapEx for the full year to be around RMB 1,800,000,000, that's $260,000,000. With that, I will end the formal part of our presentation. We'd now like to open the call to questions from analysts and investors.
So operator, please open the
you.
For the benefits of all callers participating in today's call. In English.
First
question comes from the line of Jonathan Ekins from RBC. Please go ahead.
Yes. I was interested in Slide 23, where you list your top 5 customers and, 2 of the 5 in terms of area committed are currently generating revenues. So presumably, these are new logos. And does this tie into the comment that you made about a U. S.
The customer committing in the current quarter, if you can provide a little bit more information about that. Thank you.
Hi, John. Nice to hear from you. Yes, you're right. In the third quarter of 2016, with a tremendous quarter for sales, around half of the sales in that quarter related to 2 new customers, and they immediately entered our top 5. And overall in 2016, because of those 2 different new customers, around 50% of our new business came from first time customers.
In the current quarter, first quarter 2017, what I mentioned in Beijing is that one of those customers who was a new customer in the third quarter of last year has placed a significant follow on order for us. So they will be present in two markets.
Great. And then on the revenues, I'm interested in your 2017 guidance for service revenues? And if you could talk just a little bit about the split between colocation and managed services.
Yes, John. I think the managed service proportion will go down by a few percent simply because we're in a phase where there's very high volume growth. And it's impossible for the managed service business to keep up with the pace of growth of high volume cloud customers. But over time, as we leverage the presence of the cloud customers in our data centers to further grow our enterprise, customer base and add value to them through a kind of managed cloud access product. I think we'll see that proportion from managed services gradually go up again.
The next question comes from the line of Jonathan Shekran from Guggenheim Securities. Please go ahead.
Hi. This is Michael Hart on the line for Jonathan. Thanks for taking the questions. I guess first I really appreciate the color you gave about cloud adoption in China and how you're winning with cloud service providers. I thought was great.
You mentioned a little bit about enterprise kind of coming to meet the cloud supply that you're seeing was wondering if you could talk a little bit more about how you're targeting these enterprises and sort of how your go to market model, works for them to bring them into your data centers consume cloud services? Are you using direct sales channel partners and things like that? And how it could impact your SG and A over time?
Hi, Michael. That's great for you and Jonathan, she'll join this call. Appreciate that. And all of our sales activities are direct sales. So, there is no channel partner or resale effort, like there may be in the U.
S. I think the it's two way traffic between the cloud and the enterprise customers. Our enterprise customers want us to help them AXA access to cloud platforms and our data center. And as a value proposition, that is unique in China. And become a major focus area of our sales and marketing effort to enterprises.
On the other side, our cloud customers Ultimately, they would like to penetrate the large enterprise and financial institution customer segments, which have long been our core verticals. And of course, we have a very substantial presence for those kind of customers in our data center. So that's part of the value proposition to our cloud customers to be there. And I don't want to be too specific because we will make announcements in due but we are developing some ways we say to help the kind of go to market strategy of the cloud customers. To access the enterprise.
Yes, I see the,
first of all, I agree with the against you. I mean, GDS has a long term direct sales track record. Yeah, we are we build our financial institution, customer base and other enterprise and multinational customer installed base use the direct cell So we have the very, very strong direct sales team and to take care of this kind of the significant customer. This is our typical model. I mean, And then mentioning that we have 2 ways.
This is, the, the, in China, a lot of enterprise tried to adapt it to the hybrid model right now. So they want by nature, they want close to the clock, accept the clock, multi clock. So GS is becoming called hard right now. So it's very we are in a very, very unique position to attract them.
Great. Thank you. That's really helpful. I guess the other question I wanted to ask was, about the difference between your total area committed and the total area that's utilized. It looks like there's been a pretty persistent spread between the two.
And I was wondering, is that just that you keep leasing sort of ahead of development projects or, are there customers who are coming in and saying they would rather prelease future developments instead of taking down space that may be available today? Thanks.
Yes, Michael, this is a phenomenon that's broken up in the last couple of years. And the answer is both of the things that you said. Substantial parts, we call it the backlog. The difference between committed and utilized maybe in the U. S.
You would a lease and occupied is the backlog. A large part of that right now is 16,000 out of 23,000 square meters. Relates to data centers, which are under construction. So obviously, the delivery period has not begun for them. But beyond that, I'd like to say something we have to recognize is the purchasing pattern of these large cloud service providers.
They are securing capacity to support business plan maybe over 12 to 24 months. Pretty much every single large order that goes through the market is for multiple sites. So if you can respond to them in multiple markets, then you put yourself in a different class. Envitably, they had some urgent requirements, very urgent, must have within a few months. But at the same time, they want to retain flexibility so that they only need to take delivery when and where they need it.
And recently, we signed a significant contract with a financial cloud customer where the contract specifies the amount of capacity that that customer is committing to, but it gave them flexibility to select when and where they took that capacity, meaning they could take place it all in Beijing in 3 months time or they could take half in Beijing, half in Shenzhen, however they wish over a cliff front end period of around 18 months. Now, our ability To respond to these and fulfill this kind of requirement is one of the things that makes us quite special in this market. Because in order to do it, as William said, you need to be ready everywhere. You need to have continuous supply of resource everywhere. And you need to be organized so that you can manage your own costs, your own CapEx and your own OpEx, so that you only incur that cost in a short lead time before these customers take delivery.
But really, this is the formula. This is not something that matters a lot to these customers. And I think the way we've been able to organize ourselves to deliberate is really a significant part of our success.
Yes. What I tried to point out is that in China, our competitor, let's say, the 3rd party, they are all regional players. But we are the only one who has asset present in all the key market, which fix the cost service provider requirement. That's our part of our advantage
Great. Thank you very much.
Thank you for We have a question from the line of Albert Hong from JP Morgan. Please go ahead. Elper Holmes from Sidoti and I am asking question, Cocoa Haram, you have. I want to clarify last does the CapEx guidance include the Centimeters Pipe acquisition? And is the CapEx front end loaded or backend loaded leave here?
Yes. Hi, Albert. Yes, the CapEx guidance does include that acquisition. And I should say it includes whatever we do this year, which could be organic or even further acquisitions. And actually is fairly well spread over this year.
I mean, we're in a hurry to develop the resource and bring it to market. There's a lot of pent up demand still.
Understood. And how did you see the depreciation translate here?
Sorry, Albert, can you clarify your question? You mean the depreciation charge in the income statement?
Yes. Correct. Correct.
Well, the speech station goes up every time we bring a data center into service, you have to start depreciating the asset. As a percentage of revenue or service revenue, it should remain pretty similar to where it is now. And then if that's the question that you're asking.
Great, great. Matt, May I ask how did you point to finance your 2017 CapEx? Did you expect to raise more debt or you rely more on the internal cash?
Yes. Well, we have the IPO proceeds. We already had from resources, financial resources before the IPO, but we have the IPO proceeds and we are allocating that to new projects, we certainly have more than enough for everything which is visible today and the acquisition and more. We will be leveraging up our own equity contribution to these projects. In the past, we've leveraged it up at around 60% to 70% of project cost.
And broadly speaking, that's what we will continue to do in the current year. So As I mentioned, we target to raise new debt facilities of about 2,000,000,000 renminbi in the current year that compares with 1,000,000,000 net in B of new debt facilities, which we raised last year. So it's a never ending financing machine.
Great. Thank you. That's all for me. Thank
you
There are no further questions. I would like to turn the call back over to the company for closing remarks.
Okay. Thank you once again for joining us today. If you have further questions, please feel free to call TapGenius Investor Relations through the contact information on our website and or the CSONSE Group Investor Relations.
Okay. Thank you. Yes, before we ended it, we thank you all the investors to support our IPO last year and we will continue working hard to to lead a GM success. Thank you very much.
Ladies and gentlemen. That does conclude the conference for today. Thank you for your participation. You may now disconnect the