GDS Holdings Limited: FY2017 Form 20-F Summary
Business context and reporting period
GDS Holdings is a Cayman Islands holding company that develops and operates carrier- and cloud-neutral data centers in China, providing colocation, managed hosting, managed cloud and consulting services. The filing is an annual report for the fiscal year ended December 31, 2017, prepared under U.S. GAAP. The source does not provide standalone fourth-quarter results; the requested “2017 Q4” period is covered within the full-year filing.
- At year-end, the company had 101,258 sqm in service, 24,505 sqm under construction and approximately 45,945 sqm held for future development.
- In-service capacity was 91.8% committed and 60.9% utilized; construction capacity was 39.0% pre-committed.
- The company served approximately 500 customers, primarily cloud service providers, Internet companies, financial institutions and telecommunications or IT service providers.
- Cloud services, Internet and financial-services customers represented 57.9%, 21.2% and 13.1%, respectively, of total area committed.
Financial performance and key metrics
| RMB in thousands, except percentages and per-share data | 2016 | 2017 | Change |
|---|
| Net revenue | 1,055,960 | 1,616,166 | +53.1% |
| Gross profit | 265,674 | 408,472 | +53.7% |
| Gross margin | 25.2% | 25.3% | +0.1 point |
| Income from operations | (42,374) | 82,229 | Turned positive |
| Operating margin | (4.0%) | 5.1% | +9.1 points |
| Net loss | (276,412) | (326,900) | Loss increased 18.3% |
| Net loss per ordinary share | (RMB1.35) | (RMB0.42) | Improved, partly due to share growth |
| Adjusted EBITDA | 270,545 | 512,349 | +89.4% |
| Adjusted EBITDA margin | 25.6% | 31.7% | +6.1 points |
- Service revenue increased 58.7% to RMB1,591.9 million and represented 98.5% of total revenue. Colocation revenue rose to RMB1,219.1 million, or 75.4% of total revenue; managed-services revenue rose to RMB364.4 million, or 22.6%.
- IT equipment sales declined to RMB24.3 million from RMB52.9 million.
- Cost of revenue increased 52.8% to RMB1,207.7 million. Utility costs rose 60.5% to RMB363.3 million and depreciation and amortization rose 67.1% to RMB345.4 million.
- Operating expenses increased only 5.9% to RMB326.2 million, falling to 20.2% of revenue from 29.2%, partly because share-based compensation declined to RMB59.8 million from RMB64.2 million.
- Net interest expense increased to RMB406.4 million from RMB263.2 million. Foreign-exchange results shifted from a RMB18.3 million gain to a RMB12.3 million loss.
- Accumulated deficit increased to RMB1,185.6 million at December 31, 2017 from RMB858.7 million.
Cash flow, liquidity and debt
| RMB in thousands | 2016 | 2017 |
|---|
| Cash at year-end | 1,811,319 | 1,873,446 |
| Net cash used in operating activities | (150,228) | (174,612) |
| Net cash used in investing activities | (1,147,064) | (2,035,778) |
| Net cash provided by financing activities | 2,128,614 | 2,346,767 |
| Total liabilities | 5,217,392 | 8,669,055 |
| Total shareholders’ equity | 2,986,474 | 4,475,512 |
- Capital expenditures excluding acquisitions increased to RMB1,760.2 million from RMB987.8 million. Investing cash outflows also included RMB275.6 million of acquisition payments.
- Total consolidated indebtedness, including borrowings, capital leases and other financing obligations, was RMB6,651.2 million, or approximately US$1,022.3 million, at year-end.
- Short-term debt was RMB888.4 million and long-term debt was RMB5,762.8 million, including capital lease and other financing obligations.
- Loans and borrowings totaled RMB4,250.2 million, including RMB790.5 million classified as current. The company had RMB5,371.6 million of working-capital and project-financing facilities, of which RMB986.9 million was unused.
- Management stated that available cash and expected operating cash flows should fund current obligations, debt service, working capital and planned capital spending for at least the next 12 months, while acknowledging potential need for additional debt or equity financing.
- Contractual obligations totaled RMB12,068.3 million, including RMB4,746.9 million of capital lease and other financing obligations, RMB760.4 million of operating leases, RMB1,065.6 million of capital commitments and RMB291.0 million of other liabilities.
- Cash flow remained dependent on financing because operating cash flow was negative while expansion-related capital spending was substantial.
Material changes versus the prior comparable period
- Revenue growth accelerated capacity utilization: area utilized increased 66.4% to 61,713 sqm, while total area committed increased 68.0% to 102,528 sqm.
- The company moved from an operating loss of RMB42.4 million to operating income of RMB82.2 million, but higher interest expense and foreign-exchange losses caused the net loss to widen.
- Property and equipment more than doubled to RMB8,165.6 million, reflecting data-center construction, acquisitions and capitalized lease arrangements.
- The company acquired the SZ5 data-center project for a contingent purchase price of RMB312.0 million and the GZ2 project for RMB234.0 million. These acquisitions contributed combined 2017 revenue of approximately RMB68.6 million and net loss of approximately RMB21.1 million for the post-acquisition periods disclosed.
- In October 2017, CyrusOne invested US$100 million for 64.3 million Class A ordinary shares and entered into a strategic partnership.
- In November 2017, US$150 million of convertible bonds plus accrued interest were converted into approximately 97.9 million Class A ordinary shares, eliminating the convertible-bond liability but increasing the share count and equity base.
- Share-based compensation decreased from RMB64.2 million to RMB59.8 million, but unrecognized compensation expense for unvested restricted shares remained RMB81.3 million at year-end.
Guidance, outlook, commentary, risks and unusual items
- Management expects continued expansion of data-center capacity, managed cloud services and connectivity offerings. The filing does not provide numerical revenue or EBITDA guidance.
- Projects under construction were expected to require approximately RMB1,198.4 million of additional investment, and in-service facilities required approximately RMB198.3 million of additional fit-out spending.
- Management expects margins could be pressured by upfront investment in managed cloud services and by the fixed-cost structure of data centers.
- Major risks include substantial leverage, variable-rate borrowings, debt covenants, cross-default provisions and potential accelerated repayment if ownership, control or IDC-license conditions change.
- Data-center operations are exposed to power availability and costs, construction delays, permitting, lease and property-title issues, network outages, cybersecurity incidents, natural disasters and service-level penalties.
- Customer concentration is significant: one customer generated 25.2% of 2017 revenue, and the three largest customers represented 34.9%, 17.7% and 13.5% of total area committed. Contracts covering 8.5% of year-end committed area were scheduled for renewal during 2018.
- Most China operations are conducted through contractual variable-interest-entity arrangements. The VIEs generated 91.0% of 2017 revenue, creating regulatory, enforceability, tax and potential deconsolidation risks.
- The filing identifies possible historical or geographic non-compliance issues involving IDC licenses and authorizations. Penalties could potentially be several times the related service revenue, although no material legal proceeding was identified as likely to have a material adverse effect.
- The company reported no defaults, dividend arrearages or delinquencies and no material pending legal proceedings known to management.
- The company does not expect to pay dividends in the foreseeable future and intends to retain earnings for expansion.
- Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2017; the independent auditor was not engaged to audit internal control effectiveness.
- Subsequent to year-end, the company completed a January 2018 follow-on offering in which it raised approximately US$204.8 million before expenses; selling shareholders received approximately US$110.2 million.
Most important facts for an investor to verify
- Whether revenue growth and committed capacity convert into higher utilization and positive operating cash flow.
- The maturity schedule, interest rates, collateral, covenant headroom and cross-default or ownership-trigger provisions for the RMB6.65 billion of total indebtedness.
- Funding requirements for the RMB1.20 billion of construction completion costs, RMB1.07 billion of capital commitments and continuing acquisitions.
- The sustainability of customer commitments and renewal rates, particularly for the largest customers and the 8.5% of committed area scheduled for 2018 renewal.
- The status of IDC licenses, geographic authorizations, historical compliance matters and the enforceability of VIE contractual arrangements.
- The recoverability of RMB1.57 billion of goodwill, RMB402.1 million of net intangible assets and substantial deferred tax assets supported by operations that remain loss-making.
- The effect of new accounting standards, particularly revenue recognition and lease accounting, on reported revenue, assets, liabilities and covenant calculations.
- The company’s ability to reduce the recurring net loss and negative operating cash flow while continuing capital-intensive expansion.
