GDS Holdings Limited (GDS) Earnings Call Transcript

Hello, ladies and gentlemen. Thank you for standing by for GDS Holdings Limited's Second Quarter 2026 Earnings Conference Call. [Operator Instructions] 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.

Thank you. Hello, everyone. Welcome to the Second Quarter 2026 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 CEO, who will provide an overview of our business strategy and performance. Mr. Dan Newman, GDS CFO, will then review the financial and operating results. Before we continue, please note that today's discussion will contain forward-looking statements made under the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward looking statements involve inherent risks and uncertainties. As such, the company's results may be materially different from the views expressed today. Further information regarding these and other risks and uncertainties is included in the company's prospectus as filed with the U.S. SEC. The company does not assume any obligation to update any forward-looking statements, except as required under applicable law. Please also note that GDS earnings press release and this conference call include discussions of unaudited GAAP financial information as well as unaudited non-GAAP financial measures. GDS press release contains a reconciliation of the unaudited non-GAAP measures to the unaudited most directly comparable GAAP measures. I'll now turn the call over to GDS Founder, Chairman and CEO, Mr. William Huang. Please go ahead, William.

Hello, everyone. This is William. Thank you for joining us on today's call. AI is transforming our business. Our sales momentum is the strongest we have ever seen. In the second quarter, we achieved 260 megawatts of new bookings, bringing our total for the first half of 2026 to a record 470 megawatts. During the current quarter, we are well on the way to securing further major business wins with leading customers. We are confidently raising our full year sales target to 1 gigawatt. All of our sales agreements, including -- include a binding take-or-pay commitment. This is a metric which we disclose as bookings. The sales agreement specified delivery date, which is up to 4 quarters after bookings. This allowed us to invest based on secured commitments. Following the delivery date, there is an agreed ramp-up period, usually another 4 quarters, which gives us visibility to the timing of new billings. Alongside the new bookings, our customers also request us to reserve deployable capacity at the same site for their future needs. Reservation has become an integral part of our sales agreements. So far this year, we have secured an additional 600 megawatts of reservations for our -- from our customers. We expect to end this year with over 1 gigawatt of new reservations. This provides us with high visibility for new orders in the next couple of years as customers convert reservations to binding commitments. China's tech giants and emerging AI leaders are driving the adoption of advanced agentic models. This has led to a structural upgrade in the demand for computing power and AI infrastructure. GDS is uniquely positioned to address this opportunity as a result of our strategic customer relationships presence across all key markets in China, track record of execution and financing capabilities. The strength of our platform is clearly evidenced in the composition of our first half bookings. We won significant new business from each of the 3 largest hyperscale customers. At the same time, we started to establish relationships with a group of emerging AI leaders, which have the potential to generate incremental demand in the future. Our new business wins are diversified across the markets. For the first half of the year, around half of our bookings came from the established markets and half from new markets, including the Ulanqab and Horinger in inner Mongolia and Shaoguan in Guangdong province. We are progressing well with customers for our Changshu campus in Jiangsu Province, which is another new market. This new sales success validates our differentiated resource strategy. At the midpoint of this year, we have total binding commitments for over 2 gigawatts plus a further 600 megawatts of reservations. On the capacity side, we have around 3 gigawatts of developable capacity, which is not yet committed or to -- under reservation. It is mostly in new markets. In view of our current sales momentum, we are actively adding to the deployment pipeline in the markets where demand is growing. While pursuing our ambitious target, we remain selective in terms of customers and the contract terms. We invested against binding long-term commitments for -- from the customers, and we are committed to maintaining financial discipline. I will now pass on to Dan for the financial and operating review.

Thank you, William. I'll start from the backlog buildup on Slide 10. We started the current year with a backlog of 450 megawatts. By the middle of the year, our backlog had increased substantially to 757 megawatts. Based on the pricing in the contracts and our operating cost benchmarks, we estimate that we can generate RMB 2.2 million of adjusted EBITDA per megawatt on average from this backlog. Our booked but not billed adjusted EBITDA was therefore around RMB 1.6 billion. By year-end, assuming we achieve our sales target, we expect the backlog to increase further to over 1 gigawatt. Turning to Slide 11. During the first half of 2026, our net move-in was 145 megawatts. During the second half, we forecast move-in of another 90 megawatts, making 235 megawatts for the full year. The move-in pattern over the course of 2026 reflects the timing of bookings last year. For 2027, we forecast move-in will increase substantially to more than double the number for 2026. The move-in will be heavily weighted to the second half of 2027. Assuming we sustain our sales momentum, 2028 should see another step-up in move-in. Turning to CapEx on Slide 12. Our unit CapEx for the new capacity, which we are constructing averages around RMB 20 million per megawatt. As we just raised our sales target for the current year, we are also raising our guidance for CapEx paid from RMB 9 billion to RMB 10 billion, most of which is in the second half. Our plan is to continue financing new investments with around 60% debt and 40% equity at the project level. Assuming we can generate a stabilized cash yield on new investments of 10% to 11%, this implies leverage of around 5.5 to 6x at the project level. Our primary source of debt is onshore RMB-denominated long-term bank borrowings. The onshore bank market remains highly supportive. During 2Q '26 alone, we were able to complete RMB 4.9 billion of new debt financing and refinancing. For the project equity, we have various sources. We have cash of nearly RMB 20 billion on our balance sheet, and we have delevered down to 4.7x net debt to last quarter annualized adjusted EBITDA. We have operating cash flow, which continues to strengthen. And we have our onshore asset monetization program, which we are building up in a very deliberate way. Following our successful C-REIT IPO, the first post-IPO asset injection is currently under regulatory review. Turning to Slide 16. We are revising upwards our full year revenue and adjusted EBITDA guidance to reflect a more accurate financial outlook for this year, which includes the onetime items disclosed in 1Q '26. Turning to Slide 17. In order to put our first half '26 financial performance and revised full year '26 guidance into context, we have made some pro forma adjustments. Starting from reported revenue and reported adjusted EBITDA, we deduct the onetime items in 1Q '26. For consistency, we also deduct recurring income in prior quarters, which was restructured into the onetime payment. and we deduct the revenue and adjusted EBITDA contributed by the monetized assets prior to their deconsolidation. These adjustments establish a clean basis for comparison. For the first half of 2026, our pro forma adjusted EBITDA increased by 12.7%. Taking the midpoint of our revised guidance for full year '26, the implied growth rate of pro forma adjusted EBITDA is 6.5%. We'd now like to open the call to questions. Operator?

[Operator Instructions] And our first question comes from the line of Yang Liu from Morgan Stanley.

Congratulations on the upward revision of full year guidance. I would like to ask about the future potential move-in. I think that there's a lot of debate on your customers' CapEx and also the availability of GPU in the market and also the constraint of computing power. We also see that you expect your move-in to improve dramatically next year. What could be the downside risk for that? And if there's any concern or a delay in one customer getting the GPUs, will the take-or-pay contract protect GDS revenue?

Yes. Thank you. I think dynamics of the demand from the different dimension. I think, of course, the key driver is still the GPU. But the GPU, I think in terms of the domestic GPU, the supply is catching up. I think it took a while in the last couple of quarters, right, as we mentioned. But now it looks like on track to catch up. This is number one. But in the meanwhile, I think they also drive a lot of traditional cloud growth. What we have seen is the new order quite a big number is driven by the CPU. So it will not impact in terms of the supply, it's no issue. So I think this is all positive. So that we take a more positive way to look at the current or future chip supply. So that's our view. If you look at the other -- a lot of the traditional cloud business, they are still raising their target and the growth is very significant as well. So I think let's be clear there.

How about the take-or-pay term protecting the GDS revenue?

Yes. Yes, 2 comments. The first is that in each contract, there is a specific delivery date when the capacity has to be available to move in by the customer and that is a fixed date in each contract. It's up to 4 quarters from when the booking is disclosed. So that part, I think, is unchangeable. After that, there's a move-in period, and it varies from contract to contract. We've been very focused on trying to select contracts which have a shorter move-in period and a fixed commitment. For the purposes of forecasting, we assumed that the move-in will be on average over 4 quarters on a straight-line basis. So that is what our forecast reflects. In reality, it could be faster or it could be slower. But I don't think it will materially deviate from that.

And our next question comes from Sara Wang from UBS.

Congrats on the really solid new order signs. As management just mentioned that there is increasing demand from emerging AI leaders. So just wondering, is there any difference in their demand profile or contract terms compared to established cloud or Internet hyperscale customers we already served for quite some time.

I think we are just starting to build up our team. So far, we are very selective business from some new AI leader. I think in terms of their demand profile, it looks like it's getting bigger and bigger, but we are still very selective. Our main customers and the new business mainly driven by the hyperscale, a couple of large hyperscale. But we think there are some new customer in future, it's the right thing to do to diversify our customer base. So we just start to build some relationship with them right now. So of course, the demand is obviously [indiscernible] in which we believe.

We will now take our next question from the line of Frank Louthan from Raymond James & Associates.

I wanted to get an update on what your new guidance is and what does that imply for the impact of potential action with the C-REIT contribution? Does that include any of that? And what would you expect that to be -- how would you expect that to impact revenue and EBITDA? And then secondly, if you could just address the slowdown in MRR, how should we think about that? And what -- and if we're looking forward, are you signing contracts that should be resulting in an improvement in MRR going forward? How should we think about that?

Frank, first of all, on guidance, to make clear that our guidance does not take account of any further asset monetization. There's a transaction in progress under regulatory review. We can't be any more specific about the timing of that. But to be clear, it's not factored in. For the [ MSR, ] we've provided guidance about the yield in terms of EBITDA per megawatt for the backlog and the new business that we're winning. And I think that will help for forecasting. If we go back to [ MSR, ] I always make the comparison on a same quarter basis. So if we take 4Q '26 compared with 4Q '25, we forecast that it will be down 3% and then maybe by a similar amount next year. Part of that is the change in the location mix because there's a substantial amount of new business in new markets. And part of it is due to the legacy contracts where we have about another 18 months to go before we are through the transition of adjusting all of our contracts to the current market pricing. So our guidance this year and what we indicate in the future will fully reflect that.

I should point out that, I mean, the Tier 1 market, I mean, also the new market, the current price level is stable. It is all about the transition...

And our next question comes from the line of Daley Li from Bank of America Securities.

Congrats on the upward trend for the new orders. I have one question regarding the move-in. I remember in last earnings call, we are seeing a soft move-in rate in Q2, but it seems the number is better than our -- the market expectation. So what will be the -- what has been the key drivers for better move-in in Q2? And secondly, how do we see the demand, supply trend in the data center market in China, considering the power quota approval progress by the government?

I would not read anything into the quarterly fluctuations. Most of the move-in in the current year is the capacity that was booked in 2025 or even before. And if you look at the bookings in 2025, we had a very strong first quarter 2025 and then the second, third, fourth quarter were at a lower -- consistent level. And then from the first quarter of this year, our bookings increased by a very large amount. That's sustained in the second quarter. We gave an indication for the full year that's sustained. So I think you can derive from that the outlook for move-in over 2020 -- remainder of 2026 and 2027, we see a significant increase in move-in in the second half of 2027, which is going to lead to a significant acceleration of EBITDA growth.

I think the current power, there's a couple of key points. Number one is now it's controlled by the central government and the municipal government as well. So basically, if you apply the polish, first step is to go to the municipal level because the local government commitment and their full support, right? This is -- now government is quite selective right now. They try to give some [indiscernible] market leader more allocation. That's why we have built up our land bank in the last 18 months so quickly, right, and take some advantage of the GDS brand, right? So second then we go to the provincial level [ NDRC ] approval, then go to the final approval from the central government, the [ NDRC ] central government. That's the key process of how we get [indiscernible] location.