Hello, ladies and gentlemen. Thank you for standing by, for the GDS Holdings Limited 4Q'17 and FY'17 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 call is being recorded. I would 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 4Q'17 and full year 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'll 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 will now turn the call over to GDS founder, Chairman and CEO, William Huang. Please go ahead, William.

Thank you, Laura. Hello, everyone. Thank you for joining today's call. We have now completed one full year since our IPO and it was a year of great achievement. We made tremendous progress across our business, delivering all that we said and more. Our market position today is even stronger than a year ago. We see a substantial high level of demand for data center capacity in China, and the growth estimate has been raised. Our business outlook is the best that we have ever known. The first highlights of 2017 was our sales performance. Total area committed by customers increased by almost 70%. The net addition now to our contract portfolio is worth over US$200 million in terms of annual recurring revenue with an average contract life of around 5 year. This represents over US$1 billion of total revenue secured in a single year. With this belief, it's an industry record, and what is more, the sales momentum is continuing very strongly into 2018. We always say that we serve the customers who matters. As the demonstration of this, over 80% of our new business in 2018 came from existing customers. A critical fact behind this sales achievement was our ability to continuously expand capacity. We started the year with 13 self-developed data centers in service or under construction and ended it with 20. As of today, we are up to 23. Sales and capacity growth is flowing through to our financial results. We started the year with a backlog of 24,000 square meters. We delivered the backlog, driving total value growth of over 50% and adjusted EBITDA growth of nearly 90%. We ended the year with an even larger backlog of 41,000 square meters, providing high visibility for future growth in 2018 and beyond. Every one of our…

Thank you, William. Total revenue and adjusted EBITDA close came out higher than the flash financials, which we disclosed in January and higher than the top-end of the guidance for last year. Let's look more closely at this, starting on slide 12, where we strip out the contribution from equipment sales and the effect of FX changes. In 4Q'17, our service revenue grew by 16.7%, now underlying adjusted EBITDA grew by 17.9% quarter-on-quarter. For FY'17, our service revenue grew by 58.7%, now underlying adjusted EBITDA grew by 111.7% year-on-year. Turning to Slide 13. The main driver of revenue growth in 4Q'17 was the 11,000 square meter increase in area utilized of which, 5,000 square meters paying from the backlog and 6,000 square meters paying from the acquisition of Guangzhou 2 data center completed in October. The monthly service revenue or MSR per square meter for the past four quarters has being in a defined range and remain so in 4Q'17. The average selling price in the backlog is similar to our current MSR, so as the backlog is delivered we do not expect the MSR to change materially. As shown on Slide 14, profit margins are on an upward trend, but it's not a straight line. As a data center level, which is illustrated by NOI margins there were two things going on. Data centers are filling up and reaching optimal profit levels, which typically means an NOI margin of around 55%. The same time, we are in rapid expansion mode with new data centers acting as a temporary growth track. In 4Q'17, we brought a lot of capacity into service, 3 data centers, Beijing 3, the first phase of Shenzhen 4 and Shanghai 4, which together account for around 17% of our total area in service at year-end. The…

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] We have the first question from the line of Jonathan Atkin. Please ask your question.

Thanks very much. I wanted to follow-up on the last point that Dan made about acquisitions of either shell capacity or maybe fully built out data centers. It sounds like the guidance contemplates some -- one of those projects. And can you tell us a little bit about what does the supply looked like for those sorts of M&A activities through the year. Is it too numerous to count or are they kind of situational in certain metros that provides -- I'd would be interested in your perspective on that? And then, the other question I had relates to the Cloud Connect hub. Sounds like you're starting to deploy it. Are there additional product features that you are looking to introduce and how would you characterize customer demand for that product or is it still at a very early stage? Thank you.

Hi, John. On the subject of acquisitions. When we look at the industry landscape and people often ask us about competition. I mean one feature of the last -- a couple of years there's been quite a lot of new entrants who are typically developing one data center or two data centers and looking simply to make a successful project and maybe tend to capture the profit from it. So this is what is giving rise to the acquisition opportunity and frankly, yes, the pipeline of those opportunities is getting larger. But we have very stringent standards, the data center facility needs to fit well with our customer profile and that's not often the case. So we screen out a lot of these opportunities. But what we left with, yes, is that there is good promise I would say for the further acquisitions and we like to do them, one of the data center is still under construction. So that we look at it really as alternative strand of source and capacity.

The second question, Jon, let me answer your question. Last year we deployed the Cloud Connect solution to our customers. It's very early stage of product and the up is almost a half year casting and we're trying to divest more function to our customer to rather improve our user experience. And this is more software defined technology. And I think in the next one or two quarter, we will officially launch this product. But still I say this is also allowing our strategy to try to build and provide home of the cloud and let customer connect our data center more convenience and the user experience much better than before.

Thank you. And then last question about the speed with which customers are moving in. So kind of the backlog to revenue conversion where you have already for service state had sites. And there's a substantial amount of pre-commitment. What is the approximate time lag between delivery of the data center and then occupancy of that committed space?

Yes, John, the -- this is a characteristic of the contracts with the hyperscale cloud and large Internet customers. As you can imagine a very large customer does not deploy 100,000 service on one day. So they secure capacity and something that they find very valuable is having flexibility about the timing of a new business. But that's something that we are prepared and organize to give them as part of our skill to manage timing and phasing of our own CapEx to minimize the some cost before they move in. So the contracts will be based on the delivery schedules which are really a kind of pullback to the minimum. The contracts often give the customers flexibility for 12 to 18 months. But we can't forecast on that basis because almost every single contract is actually moving which is ahead of the contractual minimums. So what we have to do is from a view based on what the customers tell us about their intentions. I would say on the whole they full move in within say four to five quarters.

Thank you very much.

We have the next question from the line of Gokul Hariharan. Please ask your question.

Hey, thanks. Thanks for taking the question. Hi, William and Dan. My first question is on the strategy to move toward Tier-2 strategy as well as the most remote area. Could you talk about the competitive landscape that you encounter, I think if you remember that lot of telco had actually invested in a lot of the smaller tier cities as well as remote areas over the last few years. So, how do you think about the competitive landscape, it seems to pretty different what you encounter in the Tier-1 cities?

Yes. This preface by saying overwhelmingly our business today and our strategy is based around Tier-1 markets. But, we are responsive to our customers and we will go where they where they want us to go. I really think the major distinction is between Tier-1 markets and remote location. So in remote locations there is nothing. So there is a competitive landscape. It is simply a question of build to suit. Tier-2 markets we're not pretty sure what Tier-2 markets are. We formed this partnership late last year with State Development Investment Corporation and the two fixed line telecom companies China Telecom and China Unicom. And I think one of the objectives of that was to pool our strengths. So we're not going up against the telcos. We are partnering with them. And we found that quite an appealing way of establishing a presence in some new markets initially only Tianjin is confirmed, but there could be one other city in a few quarters time. And going forward, we may expand in those markets ourselves, but it's a very low risk way of establishing our market presence. I think partnering with SBIC and the telcos as far as to say that the success is pretty much assured.

Yes. I think to echo Dan's explanation I think -- our strategy to the share to market is probably with the SOE because it's always easy to get to municipal government business commitments. So it will reduce our risk to get into this market.

Okay. Just one other question. The CapEx guidance of RMB2.6 billion to RMB3 billion does that budget or acquisition cost itself or is that primarily helpful and lead us into CapEx?

Yes. It does. It includes one acquisition that I referred to because that acquisition is imminent. And when we acquire a data center which is under construction is essentially we're paying the cost to date net any liabilities and then incurred directly the cost to complete plus there are some small premium. So that is included in the CapEx guidance for one data center. Going back to -- I think the first question from Jon Atkin, there are potentially more than one, but there is only one that is definite enough to include in the CapEx guidance as of today.

Understood. Yes. That's all I have for now.

Thank you.

We have the next question from the line of Robert Gutman from Guggenheim. Please ask your question.

Hi. Thanks for taking the question. First, I'm not sure if you broke out the revenue from the acquisition that based on the acquisition you made in the expected revenue from the 1 pending. And secondly, I was wondering it seems like there's been this 30% year-over-year increase in enterprise logos. Do you see that -- how long do you see that continuing at that pace?

Yes, the acquisition treated in October and it was unusual because actually this was an acquisition of a data center that was already operational. And I just explained circumstance next door to a data center, which one of our existing data centers, which we acquired nearly 2 years ago. And actually, we had intended to acquire the second data center, the one we call Guangzhou 2, at the same time. But we had to wait because there were certain criteria around power capacity and redundancy that we're not satisfied. By the time we were able to complete the acquisition, the data center was pretty operational. So yes, it did contribute. I think if you want to estimate the revenue contribution, it's a couple of months. The revenue per square meter for that data center is below our average, but revenue per square meters doesn't indicate return and to tell you the cap rate for that acquisition was something like 14%. So yes, I'll leave it to you to make that estimate. But in terms of our sustainability of enterprise customer growth, 30% per annum.

Hey Robert, this is William. I think to grow our -- we know as I mentioned earlier, I mean, we know, we understand the optimal model of data center businesses is that, is to power it to increase your hyperscale customer plus to increase your retail customer, which we call enterprise -- valuable enterprise customer. So to keep grow our enterprise customer is one of the sales strategy. If you look back last 3 years, almost every year, we continue to grow our customer number at 30% annual rate level. So, I think the -- we feel in our resource plan, we still leave a lot of the capacity to bring the -- to let ourselves bring the valuable enterprise customer. This is our topic and we hope -- we expect we still can maintain 25% to 30% of the annual account number growth in the next few years. This is a very strategic and protects our investment return, right?

That's great. Thank you. Just I had one follow on, could you just update us a little bit on some of the initiatives or provide some color on the interaction with CyrusOne?

Yes. I think CyrusOne became our shareholder, we have the -- we'll bring -- we brought our team to visit their data center and they discussed with -- discussed all various business stuff in terms of the design and construction and supply chain management and cross border refer a customer, given all -- objective, we try to achieve. So, but I -- we put this cooperation as a 2 base. One is -- first is case-by-case. We already starting to work together to try to improve our -- help us to improve our design for more cheaper and build more fast. And this is already started to work with some significant or very, very valuable customer already. And on the other hand, we also help our Chinese customer to go to the cell phone data center in the U.S. I believe these too low-hanging fruit will happen in a few months. So this is all case-by-case right now. But we do have the mid-term cooperation try to achieve the -- to reduce our costs and try to standardize our design partially and get the skill to improve our procurement power. We will maybe integrate their procurement and our procurement scale to squeeze our vendor together. This is our midterm target. And we also start to design some new data center in China with CyrusOne support, because this is our -- maybe it's our pilot case to deploy the new design, introduce the new design to the China market. So this All-Star is already start initiated. Yes, give me 6 months or 12 months. This effort will contribute to the company pretty good business -- I mean, benefit.

Great, thank you very much.

We have the next question from the line of Suzie Xu from Citigroup. Please ask your question.

Hi, Hello. This is actually Arthur Lai. And so, first of all, congrats on a record level of customer commitment and also growing by law. So, I have a question on your presentation, Page 8, leverage our partnership. So, you mentioned that the SDIC actually you signed the agreement with them and entered into the Tier-2 market. So from a triangle, I wonder why they choose the GDS? Is it because you guys have uniqueness or because something, interesting? And the second is how we benefit from this alliance. Should we think of it's a service revenue and lower CapEx and higher margin? And also, the third question is probably to Dan, is that, how do you think of the timing of start to model these things? Thank you.

Okay. Maybe I will answer the questions, maybe you can cover some of that, or lot of it, I haven't cover like within. So, I think why choose GDS, it's I think in China market, it's obvious. If they‘re smart enough, but they do smart. I think first of all, SDIC did a deal traditional state-owned investment joint to invest in all the different kind of the infrastructure, including the power, right? So I think this type of business is their -- they, which they are seeking for some new business. So they also have their, comment their reputation. So, I think they have value to their partner almost 1 year before we signed the MOU and their criteria is very simple. They want a data center company who have the full -- I mean, suit up the capability from the design and the construction and the site selection and operation. And they also like to cut -- like GDS, has the track record in a market, has the best track record in the market, well recognized by their customer. So this is a key criteria what they are seeking their partner, also in variation, I'd say, they made their decision to work with GDS and also invite China Unicom and China telecom to try to form a JV type of company together. So, our pathway is to view the data center in Tianjin first. But, we still discuss some another couple of location, which we can build our data center and serve through the state-owned company and government's system to host government system. And this is what's our plan and currently excluding the discussion how would you -- where we start the business -- there is a project and the how many project we should put in this year or next year.

Yes. Thank you, William.

I apologize sir. [Operator Instructions] Thank you. We have the next question from the line of Colby Synesael from Cowen and Company. Please ask your question.

Great. Thank you. This is Michael Elias on for Colby Synesael. Two questions if I may. Earlier you mentioned the clouds took off from China in 2017. Can you better -- can you help us understand where China stands in the cloud adoption cycle relative to the United States? And second, I believe you mentioned earlier that 50% of the area under construction is pre-committed. Can you help us understand the mix of customers that are pre-committing this space? And if it's a specific vertical or it's more broad based? Thank you very much.

The question was about the where is China in the cloud adoption curve.

Yes. I think as I mentioned I mean last year is the very big year for the China cloud took off. I say if you look into the area with Alibaba, Tencent, they announced a number of the cloud revenue polls. It's all in pre-digital growth period. I think this is just a start because in terms of the -- based on my observation -- the last year the total iCloud will be reached today -- because their financial year is the first quarter of the -- end of the first quarter of this year. So, I think the total revenue will be close to US$2 billion. And they are 50% of the market share. They are market leader. Compared with the U.S. market, I mean it's -- as I mentioned -- it's just 10% of the U.S. clearly. We look at Amazon. Their cloud revenue last year reached 20 billion already. And Microsoft's already reached 20 billion already. So I've just -- this amount to 2 billion. So, it's quite a early stage but it's moved very fast. This is the fact. And we also see a lot of the financial institution they start to use the cloud. So this is a signal that mean that they are excluding -- they are in the testing period. I think -- in this year or next year, I believe a lot of the enterprise we've adapted to the hybrid cloud model.

Question about the backlog and pre-commitment, in almost -- most of the backlog, almost all of it, is the top 5 or 6 cloud service providers and Internet companies in China. The sales cycle and the delivery cycle for enterprises is relatively short. Enterprises may only commit to a data center three months before it comes into service or it's not pre-commitment at all. So naturally the backlog which will descend prices is never going to be that large because they take delivery within pretty short order. So it's really the hyperscale and large internet which has created this huge backlog. And almost all of the new business from that segments pre-commitment. In fact, we said from previous earnings calls that we were doing joint resource planning with our largest customers. They are asking us to align our resource plan with their requirements. And so they often evaluate and give feedback on projects that they are considering taking on. By the time we do decide to move forward we already have a self commitment from them. So when we disclose pre-commitment that's contractual legally binding. We actually have a commitment that we consider to be real quarters before that. Okay.

Thank you very much.

As there are no further questions at this time, I would like to turn the call back over the company for closing remarks.

Thank you all once again for joining us today. If you have further questions, please feel free to contact GDS Investor Relations through the contact information on our Web site or The Piacente Group Investor Relations. Thank you.

Thank you. Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may all disconnect.