GDS reports solid Q2 with 12.4% revenue growth and strategic asset monetization positioning for future AI demand.

OPERATOR - (00:00:00)

Results may be materially different from the views expressed today. Further information regarding these and other risk considerations is included in the Company's prospectus. As filed with the US 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 Holdings earnings press release and this conference call includes discussions of unaudited GAAP financial information as well as unaudited non GAAP financial measures. GDS Holdings press release contains a reconciliation of the unaudited non GAAP measures to the unaudited, most directly comparable GAAP measures. I will now turn the call over to GDS Holdings Founder, Chairman and CEO William Huang. Please go ahead.

William Huang - Founder, Chairman and CEO - (00:00:47)

William: Okay, thank you. Hello everyone, this is William. Thank you for joining us on today's call. We delivered a solid second quarter, growing revenue by 12.4% and adjusted EBITDA by 11.2%. Year on year. We raised the net proceeds of US$676 Million through the issue of convertible bonds and equity in the international capital market, strengthening our Holdco balance sheet. More recently we achieved a significant milestone in our onshore asset monetization strategy with the successful completion of our SEA REIT IPO. The units of our SEARIIT are now trading on the Shanghai Stock Exchange at. Implied cap rate of below 5%. This is a major breakthrough giving us access to China equity capital market on highly advantageous terms. Our goals moving during 2Q25 was around 20,000 square meters, which is consistent with the level over the past five quarters. Our utilization rate has continued to climb reaching 77.5%. Moving over the next few quarters will remain solid, driven by delivery of the 152 megawatts order which we signed in 1Q25, we expect to deliver 35% of our total current backlog in the second half of 2025. In 2Q25 gross new bookings were 23,000 square meters, mainly from traditional Internet and the cloud business. With a good mix of customers and locations, AI demand was relatively quiet due to the uncertainty of chip supply in China. Customers have a number of options across both imported and domestically sourced chips. Complicated metrics of performance, technology availability and other considerations. We think that it will take some time for customers to decide which way to go. We are very confident about AI driven demand over the medium and long term. However, we are still in a period of wait and see. We should have a clear view after a few more months. During this period we think that the most important thing is for us to be ready to respond ready in terms of developable capacity and ready in terms of access to capital. On the capacity side, we have around 900 megawatts of power lan held for future development in and around Tier one markets. We believe the coming waves of AI demand is going to be mainly for inferencing. This kind of demand is latency sensitive and will require relatively large sites distributed across the Tier one markets. For operational reasons, customers will seek to deploy capacity for inferencing within established cloud regions and availability zones. We have multiple sites suitable for AI inferencing around the Beijing, Shanghai, and Shenzhen. We have undertaken preliminary site preparations so that we can develop with a short lead time. This is an important consideration for customers. We believe there is a good chance that we will develop all of these 900 megawatts and more over the next few years. The issue is only the timing of takeoff. On the financing side, we completed the first ever data center ABS transaction in China in late March. We then followed this up with the first ever Data Center REIT IPO in China in August. By pioneering these transactions, we have proven our ability to recycle capital from stabilized data center assets. This comes at a perfect timing time as we can use the proceeds to fund new investment opportunities. Furthermore, the terms on which we have monetized asset established a benchmark for the value of our stabilized asset data center in Tier one markets, creating potential to unlock more value for shareholders. Our power of the land and our monetization vehicles are unique in China and give us significant competitive advantage as we enter into the AI era. Lastly, I would like to share some operation updates for our equity investment in day one in 2Q25 day one added a phenomenal 246 megawatts of new commitments which brings its total power committed by customers to over 780 megawatts. The new order in Q25 included an anchor customer commitment for its Thailand project. More recently, Dayuan announced that it has secured a second campus site in Finland. Building on its successful market entry. Dayuan is well ahead of schedule to meet the target of 1 GW of total power commitments within 3 years. I will now pass on to Dan for the financial and operating review.

Dan - (00:08:20)

Thank you, William Turning on slide in 2Q25 Revenue increased by 12.4% year on year. This resulted from an increase in total area utilized of 14.1% and a decrease in MSR per square meter of 1.7% as compared with 2Q24. In 2Q25, adjusted EBITDA increased by 11.2% year on year adjusted EBITDA margin for 2Q25 was 47.3% compared with 47.8% in 2Q24. Following completion of the ABS transaction in late March, we deconsolidated the underlying projects for the whole of 2Q25. Following completion of the sale of stabilised data centers to the C REIT in late July, we will deconsolidate these projects during 3Q25 as we report earnings over the next 3 to 4 quarters, the reported revenue and EBITDA growth will be impacted because the comparison will not be apples to apples. We estimate that the apparent year on year growth rate without making adjustments to normalize for the asset monetizations will be about 6 percentage points lower. We will continue to call this out on future earnings calls so the underlying trend is clear starting with 2Q25. Without the ABS transaction, the year on year adjusted EBITDA growth rate would have been 13.9% as compared with the reported 11.2% as shown on slide 17. The ABS transaction took place on an EV to EBITDA multiple of 13.3 times based on the maximum potential sale proceeds and the projected stabilized ebitda. This was a good start considering where GDS is trading as a listed company on NASDAQ and the Hong Kong Stock Exchange. However, for the SEA REIT IPO we achieved an even higher multiple of 16.9 times at the IPO price of 3 RMB per unit. The units started trading on the Shanghai stock exchange on 8 August. The closing price yesterday was 4.04 RMB per unit, about 35% up from the IPO price. At this level, the SEA REIT is trading on 22.8 times the projected 26 EBITDA disclosed in the Offering Memorandum. This is close to double the current year trading multiple for GDS China business after adjusting for the assumed value of our equity investment in day one on a sum of the past basis. Under the current SEA REIT regulations, we must wait 12 months before undertaking the first post IPO asset injection. We started preparing some candidate assets of various sizes to give us the flexibility to dimension the next monetization in accordance with our financial requirements. It's important that we continue to grow and diversify the SEA REIT so that it remains a viable option for us to recycle capital when it is in our interest to do so with the SEA REIT platform in place. If we assume that that we invest in new projects, ramp up, operate and monetize after five years at a cap rate in say the 5 to 6% range, the return on investment is at a very acceptable level. Turning to slide 18, when we gave CapEx guidance earlier this year we spoke of 4.8 billion RMB of organic CapEx less 500 million RMB net proceeds in the current year from the ABS transaction resulting in capex guidance of 4.3 billion RMB. We are now deducting a further 1.6 billion RMB net proceeds from the C REIT transaction which was not previously factored in. This brings our CapEx guidance down from 4.3 billion RMB to 2.7 billion RMB on slide 19 In 2024 we achieved positive cash flow before financing with the benefit of some capital recycling from day one back to GDS in 2025. Despite the fact that our organic capex is much higher than for the past few years, we expect our cash flow before financing to be close to break even with the contribution from our asset monetization transaction. Turning to slide 20 during the second quarter we raised US$535 million through the issue of a seven year CB with 2.25% coupon and 35% conversion premium. We also raised US$142 million through a simultaneous follow on equity offering. One of the main purposes of this capital raise was to enable us to repay short term debt at holdco level and to either repurchase if possible or potentially redeem a CB issued in 2022 which is currently out of the money and putable in March 2027. Our net debt to LQA adjusted EBITDA decreased from 6.6 times at the end of 1Q25 to 6.1 times at the end of 2Q25. The reduction in consecutive quarters was partly due to the cash proceeds of the ABS which were received during two Q25 and to the cash proceeds of the follow on equity offering as shown on slide 21. If we take account of the C REIT transaction on a pro forma basis, the net debt to LQA adjusted EBITDA ratio will come down to 5.9 times. If we further adjust for the value of our reinvestment in the ABS and C REIT listed securities, the ratio will come down to 5.7 times. On slide 22. We have already used part of the proceeds of the offshore capital raise to repay a working capital loan due in 2026. As you can see we now have three CBs outstanding. As I mentioned, the 2022 CB is out of the money hence we show the maturity based on the potential put in 2027. The liability is covered by cash which we are holding on Reserve. The 2023 CB and the recently issued 2025 are both in the money and hence the maturity is shown based on the final maturity dates in 2030 and 2032 respectively. Turning to slide 23 when we gave guidance earlier this year, we already assumed that the ABS will BE deconsolidated in 2Q25. However, the creit transaction, which we completed during late July, was not factored into our 2025 guidance at all. Nonetheless, we are maintaining FY25 revenue and adjusted EBITDA guidance unchanged notwithstanding the deconsolidation of the SEA REIT assets while we are making mathematical adjustment to CAPEX guidance to deduct the C REIT cash proceeds finishing on slide 24. Day one power utilized jumped from 143 megawatts at the end of the first quarter to 213 megawatts at the end of 2:25. This contributed to revenue growth of 244% and adjusted EBITDA growth of 265% year over year during the second quarter. Considering its fast expansion, including the recently announced second campus in Finland, day one is currently working on a Series C equity raise. We'd now like to open the call to questions Operator.

OPERATOR - (00:19:02)

Thank you Dear participants, As a reminder, if you wish to ask a question, please press star 11 on your telephone keypad and wait for a name to be announced. To withdraw a question, please press Star one and one again. Please stand by will compile the Q and A roster. This will take a few moments. For the benefit of all participants on today's call, please limit yourself just to one question. If you have more questions questions, please re enter the queue. Thank you so much for understanding and now we're going to take our first question and it comes from Lan of Yan Liu from Morgan Stanley. Your line is open. Please ask your question.

Yan Liu - Equity Analyst - (00:19:41)

Thanks for the opportunity and congratulations on the very solid result. I would like to ask about the future strategy in term of the asset monetization in China after the successful SEA REIT IPO. In terms of future injection, does management benchmark the previous set target of 5 times net debt to EBITDA as a long term operation target for GDS leverage or or you are more keen to go a little bit more aggressive towards the asset-light model to achieve better investment return via the five year development cycle? How to think about your future strategy here? Thank you.

William Huang - Founder, Chairman and CEO - (00:20:43)

Thank you for the question. There are a number of different considerations in the Asset Monetization Strategy 1 of course is the value at which we can monetize assets. And the benchmark which has been established in the ABS transaction and then at a higher level in the SEA REIT transaction remains far above the level at which GDS shares the training in the international capital markets. The implication of that is that every asset monetization is highly accretive to our shareholders. And I think that alone would be a strong rationale to monetize assets. Secondly, we described in the prepared remarks we feel like we are on the threshold of the start of another growth phase, multi year growth phase in this industry which should present some very good investment opportunities. The return on investment potentially is enhanced now that we know that we will be able to monetize assets at cap rates which are certainly higher than what we used to assume in our internal underwriting case. The implication is that if we can monetize assets and reinvest, then we can create more value for, for our shareholders. You mentioned the consolidated net debt to EBITDA ratio. I did check back. I think in 2023, I mentioned that we would target it five times within three years, which would be give me about another one year. I think, I think we're approaching that level already. But we're now, as I mentioned, at a stage where some attractive new investment opportunities could present themselves. I don't think it's necessary for us to be too aggressive about deleveraging if those opportunities arise. If they don't arise, then we monetize on accretive terms. Deleveraging will naturally happen.

Yan Liu - Equity Analyst - (00:23:25)

Thank you. I have another question if I may regarding the development of day one. Given the companies believe that the previous 1 gigawatt target will be achieved far ahead of schedule. What is the current new target? For example, by the end of this year or next year in term of the total area committed or megawatt? Committed. Thank you.

UNKNOWN - (00:24:00)

Yeah.

William Huang - Founder, Chairman and CEO - (00:24:01)

I think based on current our footprint, we build each growth engine in the different region right now. So Finland is a very good example. In Europe and in Asia Pacific we.

UNKNOWN - (00:24:22)

Already.

William Huang - Founder, Chairman and CEO - (00:24:25)

Built up very solid and sustainable growth resource, land, bank and power. Right. So our growth will be very.

UNKNOWN - (00:24:40)

Very.

William Huang - Founder, Chairman and CEO - (00:24:40)

Solid in the next few years. So in general we target every year, let's say at least at. Let's say 500 megawatt. Yeah, this is some internal internal KPI. But we are we coming to the market at least 300, right? The internal target is 500. That's our. But now we have the very, very solid base to talk about this kind of number because we are not just growing in One country, one region, we have two region and in the next couple of quarters maybe we will enter some new region as well. So that will deeply allow us to can talk about more big number, more high growth.

UNKNOWN - (00:25:36)

Yeah.

Yan Liu - Equity Analyst - (00:25:37)

Thank you very much.

UNKNOWN - (00:25:40)

Thank you.

OPERATOR - (00:25:42)

Thank you. Now we're going to take our next question and the question comes to the line of Sarah Wang from ubs. Your line is open. Please ask your question.

Sarah Wang - Equity Analyst - (00:25:54)

Hi. Thank you for the opportunity to ask a question and again congratulations on the solid results. I have one question regarding the customer profile. So given the second quarter, broad movement or new orders sign are still quite solid despite all the uncertainties around US GPU export. So may that ask who are the key customers, like separately for the movings and also for the new orders. And then what kind of workload do we expect for these new orders to carry? Is it mostly CPU or gpu? And then like if it's cpu, is it because the oversupply in the industry has been digested? Or if it's gpu, does that mean the domestic substitution has achieved quite meaningful progress so that the supply chain uncertainty going forward should be mitigated? Thank you.

UNKNOWN - (00:26:57)

Customer profile. Customer profile and the workloads.

William Huang - Founder, Chairman and CEO - (00:27:00)

Yeah, I think the first question about customer profile, as I just mentioned, there's a traditional Internet company plus a cloud service provider and also. So this is some new order which we get this year. Right. And in terms of workload there's both I think GPU type and conditional so CPU cloud growth as well. So I think this is quite hybrid.

UNKNOWN - (00:27:32)

Right.

Sarah Wang - Equity Analyst - (00:27:37)

I see maybe a quick follow up on the demand side. Do we see any signs of price increase or MSR increase in the industry? The reason I'm asking because I saw in second quarter the MSR decline continued to narrow year on year and even increase quarter on quarter. But if we assume the contract length is maybe five years on average, so meaning the contract renewed this year were mostly signed five years ago. That was when the industry MSR or industry rental price was peaked in 2020 or 21. But as we renew the contract this year we still maintain a stable msr. So what's the key reason behind?

Dan - (00:28:28)

Thank you. First of all, let's talk about the market price. It's been stable since the middle of last year which is quite satisfactory. As I mentioned in my prepared remarks, if we evaluate new investment using a five year cycle from inception to exit, and even if we use exit cap rates which are aiming quite a bit off from where our ABS and seaweed transactions were done, we can generate a very acceptable return. I think that's important because there's many industries in China which are suffering inflationary environment. But the economics of our business remains very solid. The MSIs are no series. You asked quite a few times in previous earnings calls. The MSR reduction is partly a reflection of the reduction in the market price we're talking about on a like for like basis. But it's also due to the change in mix. You go back five years. At that point, most of our new business was coming from edge of town sites, Langfang around Beijing and Jiashan around Shanghai. And those were relatively early years for that kind of large edge of town campus. And there was a significant price differential as there was a significant development cost differential as compared with our sort of downtown colocation data centers. So the MSI is not purely an indication of the reduction in market price. It also reflects the change in the location mix. Over the next couple of years we'll continue to see our MSR decline. Most of it is due to the price reset of contracts. Like you say, you gave an example five years ago. Five years ago, 2020, 2021, the market price had already come down. I think in 2021, 22 it came down further. So we can calculate bottom up on our own contract portfolio. We know a pretty good idea of what the dilution is going to be from price reset over the next couple of years and then that will get reflected in our msr. So the MSR will continue to climb by a few percent if we take a quarter compared with the same quarter the prior year. It will continue to decline by low single digits percent for the next couple of years. Beyond that, I think we'll start to see much reduced drag and our growth rate will then reflect quite purely the volume growth in our business.

UNKNOWN - (00:32:15)

Got it.

OPERATOR - (00:32:16)

Thank you. Thank you. Now we're going to take our next question. Just give us a moment. And the question comes to the line of Frank Lawson from Raymond James and Associates. Your line is open. Please ask your question.

Frank Lawson - Equity Analyst - (00:32:32)

Great, thank you. With the Series C round that you're looking at, are you still considering a broader public offering for day one in 2026, which I think you've talked about in the past? And then can you break out some of the growth in day one between Southeast Asia and then Finland or any other EU sites that you're considering?

UNKNOWN - (00:32:54)

Thanks.

Dan - (00:32:59)

Yeah, Frank, I think it's a shareholder plan to have an IPO of day one from GDS perspective in particular is because we would like to be able to have the opportunity to distribute the shares to our shareholders. It remains the case that we Target have an IPO within 18 months. Series C. We didn't anticipate that there would be another equity round pre ipo. But the performance of day one has far exceeded our expectations. It's been phenomenal and that's what's driving the serious C. I mean I can't rule out there'll be other capital raises before the ipo. Day one has a plan to do some mezzanine debt as well. That's still the case. So these pre IPO rounds are a function of the success the business is having. Yeah, second question. I can answer that. Yeah. You asked us to break out Europe. So far our European presence is in Finland, is in the Helsinki area and we have a first campus for which we obtained an anchored customer commitment. And it's, I don't want to be too precise, but it's well over 100 megawatt commitment and I expect that we will build on that quite quickly in terms of getting follow on commitments. The strategy of day one is to be a pioneer in creating new markets. It's not easy to do that. Day one has done it multiple times now, working with different customers in close collaboration to de risk our market entry and then that gives us the opportunity to build on that base. We think that Finland is a very attractive location for data center operations because of the access to renewable energy, the competitive power tariff waste supporting operating environments. So what you see is just the foundations now. De risk market entry, secured resource expansion and the opportunity to add significantly to that.

UNKNOWN - (00:35:56)

Okay, great. Thank you.

OPERATOR - (00:36:00)

Thank you. Now we're going to take our next question. And the question comes to the line of Edison Lee from Jefferies. Your line is open. Please ask your question.

Edison Lee - Equity Analyst - (00:36:13)

Thank you for taking my question. My first question is on day one you have roughly 780 megawatt computer power. Would you be able to give us some color as to the split between Chinese customers and U.S. customers on the 783 megawatt? I think your longer term objective previously mentioned was 50 50. Right. So I just want to know the progress on that. I think frankly speaking the current, I think it is percentage wise not significant improve, but it's because it's a very early stage. Right. Last couple of quarters we experienced this situation because every time we will write some key customer their demand and to build our business and sooner or later we said diversity of our customers, always our direction.

UNKNOWN - (00:37:17)

Right.

William Huang - Founder, Chairman and CEO - (00:37:17)

And so I think this will change. Maybe in the next two or three years we change the whole Profile I think currently like percentage wise, I think I don't remember what the exact number. Maybe it's 30. 70. Right. 30 from the international customer. 70 from let's say Chinese customer. But they are overseas business. Yeah, I see. Okay, thank you. Quick follow up here on your guidance. You haven't changed your revenue and EBITDA guidance this year and the first half is very strong.

UNKNOWN - (00:38:04)

Right.

Edison Lee - Equity Analyst - (00:38:04)

So I'm just wondering what we should, how we should think about the second half growth based on guidance not being.

Dan - (00:38:11)

Changed in the second half. We have the impact of deconsolidation of the C REIT that wasn't taxed into our guidance, our original guidance at all. And we will be deconsolidating the revenue and EBITDA from late July that will have a material impact in terms of the EBITDA for those five months post deconsolidation. Yeah, I'm aware that the, the implied growth rate for the second half is lower than the implied than the actual growth rate for the first half, but we didn't feel it was. We didn't feel that we should adjust our revenue and adjusted EBIT guidance at this point in time.

Edison Lee - Equity Analyst - (00:39:24)

Does it, does it mean that it's going to be impacted more by moving in the second half and also maybe higher depreciation as you deliver more projects into the second half?

Dan - (00:39:43)

Well, I think let's see what the growth rates actually are and there's a lot of moving parts. Right, right.

Edison Lee - Equity Analyst - (00:39:53)

Okay, no problem.

OPERATOR - (00:39:58)

Thank you. Now we're going to take our last question for today and it comes to line of Gokul Hari Haran from JP Morgan. Your line is open. Please ask your question.

Gokul Hari Haran - Equity Analyst - (00:40:12)

Yeah, hi William, Dan and Laura, thanks for taking my question. First of all, it looks like you have a fairly back loaded delivery schedule this year. Dan, could you outline how that will influence growth probably into next year given most of this is likely not captured in this year or even early next year. So should we expect that there should be a reacceleration in revenue and EBITDA growth sometime maybe Q2, Q3 next year given you're delivering a lot of capacity in second half of this year? That's my first question.

Dan - (00:40:53)

We are delivering a lot of capacity in the third and fourth quarter of this year. The incremental revenue per square meter for that capacity is below our msr. It's edge of town capacity. These are a couple of large sites which are being developed specifically for AI inferencing with a very high power density. And maybe the impact of that is not as great as it would be if this was more traditional cloud business. I think we stick by our call it high level direction that we're targeting high single digit EBITDA growth year on year. We have a backlog that will drive some of that, but we also need to have new bookings to drive that. And for now I think the new bookings are at a healthy level. It's higher than it was in the last few years, but it's not reflecting mega orders like we saw in the first quarter this year. So until that happens, I think our growth rate won't really accelerate. Understood.

Gokul Hari Haran - Equity Analyst - (00:42:31)

And how are you, how are the conversations going with customers regarding some of these AI orders? Given the supply situation, I think definitely seems a little bit more optimistic in Q3 compared to what it was in Q2. Are you seeing a lot more interest from customers and the sticking point is still like your certainty of availability of chips or is there any other factors like the inferential debt Demand is going to come a little bit later within this AI cycle compared to a lot of the remote site training demand that has already happened in the last couple.

Dan - (00:43:12)

Of years we saw in the first quarter. If there's no chip supply issue, we would see much stronger bookings and that gives us a lot of confidence about the future. So it really is an issue around chip supply and that's not an issue that gets resolved very quickly. There have been policy changes and I think right now I think customers are waiting for the new technology in terms of the next generation of Nvidia chip. So it may not just be all about H100, H100, H100. It could be about the next big thing. And I think we'll have a clearer view on that in the next couple years of months. Then we can talk more precisely about the timing of when we'll start to see those large orders. In the meantime, all we can do is get prepared. And I think we're very well prepared. We've had the powered land, we've incurred some capex to prepare that, which shortens the lead time. We know from our previous experience in China and also from observing experience at day one that when customers are deploying AI, they're usually in a hurry. So I think we're very well prepared in terms of developable land and we're well prepared in terms of our access to capital, both the capital we've raised and our ability confidence in being able to recycle more. I don't think there's any other data center companies in China which are as well prepared in both those respects.

OPERATOR - (00:45:29)

Thank you. Gokul. Dear participants, thank you very much for your time. Due to time limit of today's call, we will not be addressing any further questions and at this moment would like to turn the call back over to the company for any closing remarks.

UNKNOWN - (00:45:47)

Thank you very much once again for joining us today and see you next time. Bye.

OPERATOR - (00:45:54)

This concludes today's conference call. Thank you for participating. You may now all disconnect. Have a nice day.