Press Release

GDS Holdings Limited Reports Third Quarter 2016 Results

Date:Dec 5,2016
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GDS Holdings Limited (the “Company”) (NASDAQ:GDS), a leading developer and operator of high-performance data centers in China, today announced its unaudited financial results for the quarter ended September 30, 2016 (“third quarter” or “3Q2016”).

Financial Highlights

• Net revenue increased by 56.6% year-over-year (“Y-o-Y”) to RMB297.2 million (US$44.6 million) in the third quarter of 2016 (3Q2015: RMB189.8 million).

• Service revenue increased by 58.4% Y-o-Y to RMB266.9 million (US$40.0 million) in the third quarter of 2016 (3Q2015: RMB168.4 million).

• Net loss was RMB52.6 million (US$7.9 million) in the third quarter of 2016, compared with a net loss of RMB23.1 million in the third quarter of 2015.

• Adjusted EBITDA (non-GAAP) increased by 82.7% to RMB78.0 million (US$11.7 million) in the third quarter of 2016 (3Q2015: RMB42.7 million). See “Non-GAAP Disclosure” and “Reconciliations of GAAP and non-GAAP results” elsewhere in this earnings release.

• Adjusted EBITDA margin (non-GAAP) increased to 26.2% in the third quarter of 2016 (3Q2015: 22.5%).

Operating Highlights

• Total area committed increased by 69.6% Y-o-Y to 58,627 sqm as of September 30, 2016 (September 30, 2015: 34,572 sqm).

• Area utilized (or revenue generating space) increased by 63.0% Y-o-Y to 34,369 sqm as of September 30, 2016 (September 30, 2015: 21,083 sqm).

• Area in service increased by 29.7% Y-o-Y to 48,822 sqm as of September 30, 2016 (September 30, 2015: 37,645 sqm).

• Commitment rate for area in service was 93.8% (September 30, 2015: 84.5%) and utilization rate was 70.4% (September 30, 2015: 56.0%).

• Area under construction was 37,194 sqm as of September 30, 2016 (September 30, 2015: 13,163 sqm).

• Pre-commitment rate for area under construction was 34.5% (September 30, 2015: 21.1%).

Initial Public Offering (“IPO”)

On November 2, 2016, the Company successfully completed its IPO of 20,070,735 American Depositary Shares (“ADS”) (including 820,735 ADSs purchased upon the partial exercise, on December 2, 2016, of the underwriters’ over-allotment option), each representing eight of its Class A ordinary shares, at a price of US$10.00 per ADS for a total offering size of approximately US$200.7 million. Upon completion of the IPO, 349,087,677 preferred shares were automatically converted into 349,087,677 Class A ordinary shares on a one-to-one basis.

“We are pleased to report our earnings for the first time as a public company,” said Mr. William Huang, Chairman and Chief Executive Officer of GDS, “In the third quarter, we made great progress in growing our customer base, developing data center resources and delivering financial results. Internet, e-commerce and cloud are driving significant demand for high-performance data centers in China. With our established customer relationships, strategically located data center portfolio, and outstanding operating track record, we are well positioned to capture significant share in this growing market. We believe our successful IPO on Nasdaq is an important milestone which will further strengthen our brand recognition and financial position.”

“Our third quarter results continued to demonstrate robust growth in our business,” said Mr. Dan Newman, Chief Financial Officer of GDS, “We achieved a revenue growth of 56.6% year-over-year during the third quarter, while continuing to improve both our area committed and utilization rates. The significant increase in our total area committed further reflects the enormous market demand and provides great visibility for our future revenue growth. We are confident in our ability to continue this strong momentum in the future.”

Financial Results

Net revenue in the third quarter of 2016 was RMB297.2 million (US$44.6 million), a 56.6% increase over the third quarter of 2015. Service revenue in the third quarter of 2016 was RMB266.9 million (US$40.0 million), a 58.4% increase over the third quarter of 2015 and a 14.1% increase over the second quarter of 2016. The increase in service revenue over the previous quarter was mainly due to (i) an increase in area utilized from 32,152 sqm as of June 30, 2016 to 34,369 sqm as of September 30, 2016 as customers with commitments moved into the data center area and (ii) an increase in revenue generated by our Guangzhou 1 (“GZ1”) data center which we acquired during the second quarter of 2016 and from our Shenzhen 2 (“SZ2”) data center which commenced operations during the second quarter of 2016. Revenue from IT equipment sales was RMB30.3 million (US$4.6 million), compared with RMB21.3 million in the third quarter of 2015 and RMB2.0 million in the second quarter of 2016.

Cost of revenue in the third quarter of 2016 was RMB222.5 million (US$33.4 million), a 60.2% increase over the third quarter of 2015 and a 27.1% increase over the second quarter of 2016. The increase over the previous quarter was mainly due to (i) a 15.7% increase in utility costs as a result of the increase in area utilized, (ii) a 26.4% increase in depreciation and amortization costs as a result of the completion of SZ2 data center during the second quarter of 2016, and (iii) RMB25.5 million (US$3.8 million) of IT equipment costs, compared with RMB1.9 million in the second quarter of 2016.

Gross profit was RMB74.6 million (US$11.2 million) in the third quarter of 2016, a 46.8% increase over the third quarter of 2015 and a 22.6% increase over the second quarter of 2016. Gross profit margin was 25.1% in the third quarter of 2016, compared with 26.8% in the third quarter of 2015 and 25.8% in the second quarter of 2016. The slight decrease over the previous quarter in gross profit margin was primarily due to the higher level of IT equipment sales for which the gross profit margin was lower, while our gross profit margin on service revenue was unchanged.

Sales and marketing expenses, excluding share-based compensation expenses, were RMB17.1 million (US$2.6 million) in the third quarter of 2016, a 10.7% increase over the third quarter of 2015 of RMB15.5 million and a 9.2% increase from the second quarter of 2016 of RMB15.7 million. The increase over the previous quarter was primarily due to an increase in personnel costs and promotional and corporate activities. The Company recorded share-based compensation expenses of RMB5.1 million in the second quarter of 2016 related to the fully vested share options granted in May 2016.

General and administrative expenses, excluding share-based compensation expenses, were RMB43.3 million (US$6.5 million) in the third quarter of 2016, a 16.2% increase over the third quarter of 2015 of RMB37.3 million and a 16.9% decrease from the second quarter of 2016 of RMB52.1 million. The decrease over the previous quarter was primarily due to a decrease of directors’ fees of RMB8.2 million. The Company recorded share-based compensation expenses of RMB50.9 million in the second quarter of 2016 related to the fully vested share options granted in May 2016.

Research and development costs were RMB2.2 million (US$0.3 million) in the third quarter of 2016, compared with RMB0.8 million in the third quarter 2015 and RMB2.8 million in the second quarter of 2016.

Net interest expenses for the third quarter of 2016 was RMB69.4 million (US$10.4 million), a 134.3% increase over the third quarter of 2015 and a 21.1% increase over the second quarter of 2016. The increase over the previous quarter was mainly due to increased borrowings as a result of the refinancing of our Shanghai data centers and increased interest expenses related to our SZ2 data center which commenced operations during the second quarter.

Adjusted EBITDA (non-GAAP) is defined as net loss excluding net interest expenses, income tax benefits, depreciation and amortization, accretion expenses for asset retirement costs and share-based compensation expenses. Adjusted EBITDA was RMB78.0 million (US$11.7 million) in the third quarter of 2016, an 82.7% increase over the third quarter of 2015 and a 65.2% increase over the second quarter of 2016.

Adjusted EBITDA margin (non-GAAP) was 26.2% in the third quarter of 2016, compared with 22.5% in the third quarter of 2015 and 20.0% in the second quarter of 2016. For more information on these non-GAAP measures, see “Non-GAAP Disclosure” and “Reconciliations of GAAP and non-GAAP results” elsewhere in this earnings release.

Net loss in the third quarter of 2016 was RMB52.6 million (US$7.9 million), compared with a net loss of RMB23.1 million in the third quarter of 2015 and a net loss of RMB115.4 million in the second quarter of 2016.

Basic and diluted loss per ordinary share in the third quarter of 2016 was RMB0.38 (US$0.06), compared with RMB0.24 in the third quarter of 2015 and RMB0.66 in the second quarter of 2016.

Basic and diluted loss per ADS in the third quarter of 2016 was RMB3.08 (US$0.46), compared with RMB1.93 in the third quarter of 2015 and RMB5.32 in the second quarter of 2016. Each ADS represents eight Class A ordinary shares.

Sales

Net additional total area committed was 14,013 sqm in the third quarter of 2016, of which 12,293 sqm related to pre-commitments for data centers under construction. Total area committed at the end of the third quarter of 2016 was 58,627 sqm, compared with 34,572 sqm at the end of the third quarter of 2015 and 44,614 sqm at the end of the second quarter of 2016, an increase of 69.6% Y-o-Y and 31.4% Q-o-Q. The increase was driven primarily by new commitments from large Internet, e-commerce and cloud customers across several of the Company’s data centers.

Data Center Resources

Area in service at the end of the third quarter of 2016 was 48,822 sqm, compared with 37,645 sqm at the end of the third quarter of 2015 and 48,548 sqm at the end of the second quarter of 2016, an increase of 29.7% Y-o-Y and 0.6% Q-o-Q.

Area under construction at the end of the third quarter of 2016 was 37,194 sqm, compared with 13,163 sqm at the end of the third quarter of 2015 and 31,794 sqm at the end of the second quarter of 2016. The increase of 5,400 sqm during the third quarter of 2016 was mainly due to Chengdu 1 data center (“CD1”) Phases 2&3 commencing construction process.

Commitment rate of area in service was 93.8% at the end of the third quarter of 2016, compared to 84.5% at the end of the third quarter of 2015 and 90.8% at the end of second quarter 2016. Pre-commitment rate of area under construction was 34.5% at the end of the third quarter of 2016, compared to 21.1% at the end of the third quarter of 2015 and 1.7% at the end of the second quarter 2016.

Area utilized at the end of the third quarter of 2016 was 34,369 sqm, compared with 21,083 sqm at the end of the third quarter of 2015 and 32,152 sqm at the end of the second quarter of 2016, an increase of 63.0% Y-o-Y and 6.9% Q-o-Q.

Utilization rate of area in service was 70.4% at the end of the third quarter of 2016, compared to 56.0% at the end of the third quarter of 2015 and 66.2% at the end of the second quarter 2016.

Balance Sheet

As of September 30, 2016, cash was RMB798.7 million (US$119.8 million). Total short-term debt was RMB657.7 million (US$98.6 million), comprised of short-term borrowings and the current portion of long-term borrowings of RMB574.5 million (US$86.1 million) and the current portion of capital lease obligations of RMB83.2 million (US$12.5 million). Total long-term debt was RMB3,274.0 million (US$491.0 million), comprised of long-term borrowings (excluding current portion) of RMB1,407.7 million (US$211.1 million), convertible bonds of RMB1,001.7 million (US$150.2 million) and the non-current portion of capital lease obligations of RMB864.6 million (US$129.7 million).

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