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GDS Holdings Limited (NASDAQ:GDS)
Q2 2020 Earnings Call
Aug 18, 2020, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Hello, ladies and gentlemen. Thank you for standing by for GDS Holdings Limited Second Quarter 2020 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 will now turn the call over to your host, Ms. Laura Chen, Head of Investor Relations for the company. Please go ahead, Laura. Thank you.

Laura Chen -- Head of Investor Relations

Thank you. Hello, everyone. Welcome to 2Q 2020 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; Ms. Jamie Khoo, our COO, is also available to answer questions.

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.

William Wei Huang -- Chief Executive Officer

Thank you. Hello, everyone. This is William. Thank you for joining us on today's call. I'm pleased to report that we had another very strong quarter. We achieved record organic sales with over 26,000 square meter or 60 megawatt of new customer commitments. We stepped up our development activities. We now have 17 data centers under construction, our largest ever.

Area utilized increased by over 14,000 square meter, nearly double the moving for the prior quarter. We grew adjusted EBITDA by 48% year-on-year and our EBITDA margin crossed 47% for the first time.

The operating environment in China is now almost back to normal and despite the escalating tensions between China and the U.S., we see no adverse impacts on our business.

Turning to our sales achievement on Slide 4. In the first half of 2020, our organic sales totaled over 48,000 square meter. Our original target for the full year was 80,000 square meter organic. But we are clearly on-track for a higher number. And since then, I'm confident that we can deliver over 90,000 square meter organic in FY '20, which is a big step up from last year.

Demand has clearly gone to a higher level. This is not a temporary blip. If the continuation of a stronger digitalization trend, China is already far advanced in some area of the digital economy. But there are many other areas which are just getting started. New technologies such as 5G, AI, blockchain, IoT and the digital currency can meet demand multiple year. Chinese government policy is giving us stronger push, leading Chinese companies and increasing their focus on the domestic market. For all of these reasons, we believe that demand will be sustained long into the future.

Let's turning to Slide 5. In 2Q '20, we obtained four organic hyperscale orders, each of which highlights the competitive advantage of our platform.

Turing to Slide 6. Earlier this year, we acquired a large site in Shanghai, which we felt was particularly well-suited to hyperscale development. We have now obtained an anchor order from the leading CSP customer, who was attracted by the location and the ability to expand on the same site.

Turning to Slide 7. In 4Q '19, we signed a Framework Agreement with the government to set up a new data center campus in Changshu, serving the Shanghai market. The campus has a developable net floor area of around 65,000 square meters.

In 2Q '20, we entered into a sales MoU with a leading CSP customer for around 30,000 square meter or nearly half the entire campus. 6,000 square meter is already committed and the balance of 24,000 square meter will be committed over the next two years. By enabling hyperscale customers to learn and expand in this way, we get high visibility into future years sales.

Turning to Slide 8. We established our first data center project in Langfang, near Beijing, in 2Q '19. Within a short period of time, we have gone from one data center in Langfang to eight data centers in service or under construction, for which we have obtained over 48,000 square meters of commitments from several of our top-10 customers.

We have secured a lot of land and power for expansion in Langfang, and have more coming in our pipeline. This will enable our customers to expand within our Langfang cluster.

Turning to Slide 9. Our top-two customers continue to grow with us both in Tier-1 markets and the remote locations. We fulfill about 30% of their incremental requirement. It's a great foundation for our business. And at the same time, we see a lot of growth potential, more than we realized from the next wave of hyperscale customers. The demand from some of them could be almost as big as the top-two. It's a strategic priority for us to expand this part of our franchise, further develop our ecosystem and diversify our customers' relationships.

We already have significant relationship with almost all of the hyperscale cloud and Internet companies in China. However, until recently, we were missing a few desirable names. I'm therefore very pleased to report that in 2Q '20, we obtained our first order from ByteDance. And in the current quarter, we obtained our first order from the PDD. ByteDance is one of the hyperscale order shown on Slide 5.

On the enterprise side, we have recently signed up a number of notable new customers, including Talsa [Phonetic], Starbucks, Yum China, BlackRock; and Gia [Phonetic], a world leader in commercial gems.

We won these customers because of the unique ability to set up hybrid cloud architecture and access multi-cloud resources across our platform. We are also starting to see innovative industry cloud development. For example, we are working together with the technology company and one of our major cloud customers to set up a dedicated cloud for the auto insurance sector. We believe that the hybrid -- hybrid cloud on our platform could drive significantly enterprise growth.

Turning to Slide 10. One of the keys to achieve higher sales is to have the right kind of datacenter capacity, in the right place and the right time. Over the past five quarters, we haven't -- we have stepped up our construction program from 78,000 square meter to 133,000 square meter. And at the same time, we pre-commit -- our pre-commitment rates have remained over 60%. This demonstrates how our business is demand driven.

In order to manage this level of construction, shorten lead times and the low -- lower cost, we have made significant progress in offsite prefabrication and the modular construction. We are also working closely with strategic customers and joint procurement and the supply chain management. We believe that our units capex is the lowest in the market.

Turning to Slide 11. In order to maintain continuous supply, we have built up our pipeline in all Tier-1 markets. Currently, we have nearly 350,000 square meter of highly marketable capacity held for future development, and we are still adding to it. We believe that this is far more than any other company and it gives us a significant competitive advantage.

Following the government's new infrastructure policy, we have not seen any change in the allocation of resource in urban Beijing. Shanghai is continuing with its quarter system, which is calibrate to demand. Shenzhen may open up to a small extent. In the edge-of-town areas, more land and power will be allocated for data centers, but the entry barrier is too high because of -- because the government is very selective and it maintains strong controls.

We have to be creative in order to generate a new supply, particularly in the urban areas of Tier-1 markets. This is the story behind the Beijing 13 project, which we recently announced. The opportunity was brought to us by a private equity fund. We will work with them and with the original project and the landowners, during the development phase, and then by the -- all front.

The deal looks a bit complicated, but we have total control. This is highly marketable capacity for which we will obtain a 100% pre-commitment in the near future. We are working on several other opportunities in urban Shanghai and Shenzhen that will also give us highly marketable capacity.

Turning to Slide 12. We continue to ramp up the development program for our JV with GIC. We expect to cash for the first project during the current quarter. We have also won our first order for a remote site from our secondary customer. This remote site are a totally different proposition from our core business.

Our customer set up these remote sites themselves and then look to also at the data center development and operation. It could be a high-volume opportunity and we are -- we want to pursue it for strategic reason. But in terms of returns, it's not the best use of our capital. We think that asset-light approach is the way to do it and we are working on further innovative -- innovations to optimize our cost of capital.

Lastly, on Slide 15, I would like to say a few words about that, about what makes GDS fundamentally different from other player in China. As of today, GDS has nearly -- have nearly 60 [Technical Issues] connected [Technical Issues].

Operator

Excuse me presenters, the line for our speaker is disconnected. Please takeover, Daniel.

Excuse me, presenters, the line for Mr. William has disconnected. The other presenter can please take over. Meanwhile, I will connect to them. Thank you.

William Wei Huang -- Chief Executive Officer

Okay, sorry. The lines has just come back again.

Daniel Newman -- Chief Financial Officer

Go ahead.

William Wei Huang -- Chief Executive Officer

Yes, OK. Sorry. Oh, it's the --

Operator

Excuse me presenters, yes, we have the speakers back.

William Wei Huang -- Chief Executive Officer

Okay. Sorry. So, let's -- turning to Slide 15. Lastly, on Slide 15, I would like to say a few words about our -- about what makes GDS fundamentally different from other players in China. As of today, GDS has nearly 60 interconnected data centers, casted in strategic locations in all of China major economic, financial and network hubs. Within these data centers, we host all the major public clouds which are -- which are accessible over all the major telecom networks.

The scale of our facilities, expansion capacity and the market presence, together with software to find the connectivity and the multi-cloud ecosystem, add up to platform which is unique and far ahead of the pack. This is obviously, patented, interested in the data center opportunities in China.

But from a competitive perspective, nothing has changed for us. Our customers are looking for a total solution provider to adjust all their needs in an integrated way. This is exactly what we offer. We have established our market position over many years and are clearly differentiated by our value proposition. We're confident that we will continue to build on our competitive advantage and further extend our leadership.

With that, I will hand over to Dan, for the financial and operating review.

Daniel Newman -- Chief Financial Officer

Thank you, William. Starting on Slide 18, where we strip out the contribution from equipment sales and the effects of FX changes. In 2Q 2020, our service revenue grew by 8.3%. Underlying adjusted NOI grew by 8.5% and underlying adjusted EBITDA grew by 9.1% quarter-over-quarter. Our underlying adjusted EBITDA margin was 47.8%.

Turning to Slide 19. Service revenue growth is driven mainly by delivery of the committed backlog. Net additional area utilized during 2Q '20 was 29,324 square meters, including organic move-in were 14,336 square meters.

On the last earnings call, I said that we expected organic move-in during 2Q of 10,000 to 11,000 square meters. The recovery in 2Q exceeded our expectations. We are now at a level of move-sin which we expect to sustain over the next two quarters.

Our MSR per square meter was down by 3% quarter-over-quarter. But if we exclude the revenue and area utilized, the BJ10, BJ11, BJ12 which closed 25 days before the quarter-end, the MSR per square meter was down by 1%. We expect the MSR per square meter to remain at a similar level in the second half of the year.

Slide 20 and 21 show the quarterly margin trends. Due to seasonally high power consumption, utility cost was 1.8 percentage points higher than in 1Q '20. Nonetheless, we were able to sustain our adjusted NOI margin. Our adjusted EBITDA margin has improved much faster than we expected during the first half of the year. Some of this was due to government concessions and reduced corporate expenses.

In the second half of the year, the government concessions will be less; and with the recovery, we expect a step-up in our corporate activities. Taking all of this into account, we expect our adjusted EBITDA margin to remain around 47% in the second half of the year.

Turning to Slide 23. 1H '20 capex paid was around RMB3.9 billion, RMB1.3 billion related to the purchase of the Pujiang land and buildings; RMB337 million related to acquisitions, mostly the initial equity consideration for BJ10, BJ11, BJ12, and a further RMB215 million arose from the joint venture data centers.

Up until June 30, 2020, we spent RMB485 million cumulatively on the joint venture data centers, most of which will be recovered as and when we transfer the equity interests in the project companies to GIC.

In 2H '20, we expect organic capex to be more than double what we spent in the first half of the year, reflecting the higher level of sales and construction. We also anticipate spending around another RMB600 million on land bank and RMB1.3 billion on acquisitions, most of which is deferred consideration for Beijing 10, Beijing 11 and Beijing 12 and consideration due on the closing of BJ9.

Turning to Slide 24. Our construction program has been growing fast and around half of our projects are now being filled, which means longer construction timelines. Although work on our construction sites is back to normal, in a couple of locations we are experiencing some short delays in activation of power supply. The delivery schedule at those locations has been pushed back by a couple of months. We have a lot of capacities scheduled to enter service in 2H '20, particularly in the last few months to the year.

Turning to Slide 25. When we announced the BJ10, BJ11 and BJ12 acquisitions last December, two data centers were in service and one was under construction. The overall utilization rate was 50%. As of to-date, all three data centers are in service and the overall utilization rate has increased to 75%.

BJ10, BJ11 and BJ12 contributed around RMB29 million [Phonetic] in revenue and around RMB15 million in NOIs during the during the 25 days post the acquisition closing in 2Q '20.

Looking forward, we have a number of potential M&A deals on our radar screen. There's one at quite an advanced stage, which involves taking over project under construction at a very reasonable premium. There's more competition for M&A opportunities these days and multiples have gone up. Nonetheless, I'm confident that we can continue doing highly accretive deals.

Looking at our financing position on Slide 26. We raised $505 million from Hillhouse and STT GDC, through equity private placement in June. We felt that this capital raising was necessary given where sales and construction are heading. We also put in place a $300 million revolving credit facility at the HoldCo level to give us more flexibility in how we fund our investments.

All told, we competed RMB6.7 million or equivalent of $940 million of new debt financing and refinancing facilities during 2Q '20. For the onshore portion, the weighted average tenant was eight years and the weighted average all-in costs was 6.1% based on the current LPR reference rate. This continues the trend of extending the tenure and lowering all-in costs of our onshore debt.

Next, on Slide 27, our contract backlog now stands at 140,000 square meters, equivalent to 72% of our revenue generating area. Our backlog per area under construction has gone up from 51,000 square meters to 82,000 square meters over the past five quarters, which reflects increased area under construction, sustained high pre-commitment rates and longer construction period for Greenfield.

Our backlog for area in service now stands at 57,000 square meters, is trending up. We typically deliver 20% to 25% of the backlog for area in service in each quarter. However, in 2Q '20, it was 30%.

Finishing on Slide 28. Today, we are confirming the full year guidance for revenue and adjusted EBITDA. However, as I've already indicated, we are raising our capex guidance from RMB7.5 billion to RMB10 billion.

With that, I will end the formal part of my presentation, and we'd now like to open the call to questions. A.J., please?

Questions and Answers:

Operator

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

Jon Atkin -- RBC Capital Markets -- Analyst

Thanks very much. I wanted to ask first about a slide, the slide that shows a lot of your hyperscale orders, Slide 5. It would appear that a lot of the demand is in North China. And I wondered if you would have any kind of comment about where you expect most of the demand in the market to come from? Is it -- a lot of it also happening elsewhere that it just happens to be the ones that you got for kind of weighted toward the north?

And then maybe related to that, is the overall pace of demand notably different now -- market demand, not just your share -- compared to, say, six months or 12 months ago? Thanks.

Daniel Newman -- Chief Financial Officer

Hi, Jon. It's Dan here. I'll take the first question. I think the third-party market research is -- gives some very different indications. But my own estimate, I think Beijing and Shanghai together account for around 60% of the market opportunity in Tier-1 markets. And if you look at the websites of the leading cloud players in China, you'll see that they have most of their availability zones and most of their cloud parts in both of those two places.

So, I don't think it's that surprising given that we try to be strategically positioned across where the market opportunity is, that Beijing should be such a significant part of our new business. It also so happens that the Beijing market is probably the most constrained in China. And our early move, our first move to Langfang, and the scale that we've set up there has been very instrumental in enabling us to win so much business. We've significantly increased our market share in Beijing.

To be clear, when I talk about Beijing and Shanghai, so that would include the surrounding areas. Once again, if you look at the cloud websites, you'll see that there are regions defined around Beijing and Shanghai which include availability zones, which could be on the outskirts of those cities. So, places like Langfang, Kunshan and Changshu in relation to Beijing and Shanghai are within that same low latency to qualify as being within same region. Now, places like Zhangbei or Feilai, further away from Beijing, they are in a different -- a different region.

Jon, can please repeat the second part of your question?

Jon Atkin -- RBC Capital Markets -- Analyst

Yes, I mean, I was just interested that the pace of demand or the volume of demand in the market, is that similar to what it was six months or 12 months ago, or has that ticked up, market demand for data center space?

Daniel Newman -- Chief Financial Officer

William would you like to answer that? Unfortunately, today, William is in Shanghai -- I mean, Hong Kong. So, it's a little more difficult to coordinate.

William Wei Huang -- Chief Executive Officer

In general, I cannot describe the exact number of the market size right now, because there is always change. But if the change is big -- the change is a good thing because what we can see the change and compare with lots of 12 months ago -- is obviously in the next three years or five years, the demand is definitely accelerate. So, that's why I think its very nature, we will -- we still catch up with this trend, right? Compared with last year, we stepped up the new normal. It's 700 square meter per year by organic. So, this year looks like we get it -- definitely, not look like -- definitely, we can deliver over 90,000 square meter new sales. That's by organic, so it's --

Jon Atkin -- RBC Capital Markets -- Analyst

Great.

William Wei Huang -- Chief Executive Officer

Yes, it's obviously -- right.

Jon Atkin -- RBC Capital Markets -- Analyst

And then my last question, just any update on Hong Kong with the construction, market demands and kind of what are you expecting there from that project?

William Wei Huang -- Chief Executive Officer

Yes, I think we had -- we bought two piece of land in the last 12 months and we already started construction. And we hope -- everything is on schedule right now, and the first data center we plan to launch by the middle of the 2022, and the another one maybe eight months or eight months later, right? This is our current schedule. Looks like the demand is very active in Hong Kong market, especially from the Mainland China, from our customer install base.

So, I think we don't expect any other new customer in Hong Kong. We definitely will get -- we will get anchor customer from our existing customer right now. And we are -- we hope and we're confident to get the most of the commitments before our first data center official launch.

Jon Atkin -- RBC Capital Markets -- Analyst

Thank you very much.

Operator

Thank you. We have our next question from the line of Yang Liu from Morgan Stanley. Please go ahead.

Yang Liu -- Morgan Stanley -- Analyst

Thank you for the opportunity to ask questions. I have two questions here. The first one is, we saw a pretty big upward revision in term of the full-year capex initiatives and bigger than the sales upward revision. Could management elaborate more on where the biggest delta coming from, especially given capex increased pretty big?

The second question is, imagining an update in term of the investment return profile, in places like Langfang and Changshu etc., especially given the demand supply, they're growing very fast. And could management update us in term of the overall asset level are in those places? Thank you.

Daniel Newman -- Chief Financial Officer

Yes, Yang, it's Dan here. The increasing capex, our estimates in terms of land and building acquisitions and organic growth. The land and buildings to some extent, that is pulling forward capex, because we're paying for large sites. We've seen case of Pujiang, Changshu and so on, where the development scheduled to take place over two or three years, but we incurred the cost of acquiring those sites upfront.

The same also applies to some extent to the acquisition. So, example, Beijing 13, we vote out shareholder from a project and inject the capital to take a controlling interest in the land. But that would be 2021 or even 2022 project in terms of when it comes into service.

So, I don't think you can look at our capex exactly in relation to the current run rate of sales. And what you can look at is the pre-commitment rate for the projects that we're initiating, which is consistently in that 60% to 70% range, and you can also look at the pipeline that we build up, which is now 350,000 square meters, equal to more than three years we business at the current run rate. So, I think we're very happy to allocate capital for that purpose.

Your question about customer return profile, yes, this is key, because this is what we target. It's not the selling prices. It's return on investment. And what we've seen so far, we've done a lot of business in Langfang. We got a larger order in Guangzhou. The return on those edgy town sites is well up to the level of return in the downtown or urban areas. The development cost for unit capex is lower, hard to be precise, but let's say maybe around 10% low. Not due to the cost of real estate, but more due to the efficiency at building greenfield, building large scale on a single site and spreading infrastructure cost more capacity.

So, that means that the selling price is also correspondingly lower. But from all deals we've done so far, I can assure you the project returns are well up to our historic levels.

Yang Liu -- Morgan Stanley -- Analyst

Thank you.

Operator

Thank you. We have our next question from the line of Colby Synesael. Please go ahead.

Colby Synesael -- Cowen & Company -- Analyst

Okay, thank you. Dan, I think in your comments you said that net install should be similar in the third quarter and fourth quarter to what we just saw in the second quarter. I think that was around 14,000 organic. Just curious why wouldn't it actually even be higher, particularly in the fourth quarter, given the amount of capacity you have coming online. I guess could you just remind us how much capacity you have coming online maybe in the third quarter and the fourth quarter just to help us there?

And then also thinking William's comments, he mentioned that you guys got 30% of the incremental demand from your top two customers in the quarter. I just wondered if you could unpack that a little bit? I don't know if I exactly understand what that meant and maybe just giving a sense of market share because I think one of the questions I always get from investors who might not be as familiar with the Chinese market is, "What is the market share of somebody like GDS and maybe a just third-party data centers etc.?" But anything on that could be helpful too. Thank you.

Daniel Newman -- Chief Financial Officer

Sure. So, on the net installs, yes, we were expecting this year to be a series of step-ups. And one factor behind that was having new data center capacity, which come into service any quarter that was according to the original development timelines. What has happened is that -- is the first quarter was around 2,000 or 3,000 square meters lower than we had in our budget. In second quarter, I said we're expecting 10,000 to 11,000 that came out at 14,000; and now I'm indicating that around 14,000 or 15,000 should be the case in the third and fourth quarter.

One methodology that you can use to predict this is -- although, it's not totally reliable -- is to look at the backlog for area in service at the beginning of the quarter. So, at the beginning of the third quarter, it was 57,000 square meters. And typically, we delivered 20% to 25% of that number in a particular quarter. So, a 25% of that number would be around 14,000.

So, yes, that's going to be logic there. If you go back to the second quarter and look to that metric, you'll see that we delivered 30% to the backlog there in service that was existing at the beginning of the second quarter.

In terms of the timing of new data centers coming into service, it's 49,000 square meters of new capacity scheduled to come into service during second half of the year. I didn't break it down by quarter, but I can tell you that a significant -- majority of that is going to be in the fourth quarter. And normally, we don't see much movement in the same quarter as when a data center comes into service. So, that's arising too late to really drive increase into this year. But it's a very good base for when we start to look into -- look at next year.

The question about market share, we have our own internal market research. I believe it's a lot more reliable than what we see from third parties. This is used with market research about whether it actually maps the data center business or whether it includes a lot of other telecom value-added services.

We think there's a lot of double counting, because some carry new tools of reselling carrier data centers and some carriers are reselling carrier-neutral data centers. But also, I think the data which comes from the telecom carriers, typically they would include a lot of network revenue, the connectivity revenue to data centers in their numbers. We will endeavor in the near future to publish some market research. And I think it will show that our market share on the carrier-neutral side is in -- our market share carrier-neutral side is in the 20s. Maybe in the Tier-1 markets it's a little higher than that. And as we indicated, with the very largest hyperscale customers, it's more like 30%.

Colby Synesael -- Cowen & Company -- Analyst

Thank you.

Operator

Thank you. We have our next question from the line of Gokul Hariharan. Please go ahead.

Gokul Hariharan -- JPMorgan -- Analyst

Thanks for taking my question. First question, could you talk a little bit about the engagements that you are having with some of the new customers that you've added especially ByteDance and Pinduoduo, obviously ByteDance the size of their business, data center needs, compute needs etc., are quite sizable comparable to your two biggest customers. So, how do you see that relationship progress over the next couple of years?

Second, and maybe related question as well, I think William, you mentioned that we've stepped up from that 70,000 sales or area committed organic basis over the last couple of years to definitely 90,000 this year, over and above that you are also making some acquisitions. So, if we think about some of these new customers that you've added, plus growth from your existing customers as well, is that 90,000 number per year the new normally or we should -- we should actually think that it could be higher than that number as well from an organic sales? Acquisition obviously is -- or if you can talk a little bit -- talk about maybe what could full year number, including acquisitions be as we look into the next couple of years given some of these new customers and growth in your existing customer base?

William Wei Huang -- Chief Executive Officer

So, Gokul, it is William. I think I'll take your first question, how we engage with the new customer. I think we are working very hard on to -- it's our key strategy, I mean, since our IPO, how to diversify our customer.

But in the last couple of years, the leading demand is from the two big -- a part of big cloud. So, that's what we already catch up. But what we realize is currently in the last couple of years, the new internet giant grows so fast and we start to engage them in at least two years ago. But unfortunately, we didn't get any opportunity in the past two years, but we still keep -- engage our customers.

And now, I think our customers start to set up their new criteria. They -- when they was a baby company, they maybe had a different criteria to select a vendor. But now, I think their criteria is more close to their standard of the giants, giant standards. So, I think that we have the ability, we have the opportunity, a chance to get this deal.

And so far, I think our customer is still focused on to deploy their data center needs requirement in Tier-1 market plus remote. But everybody know, GDS, our core asset, our core -- our focus is Tier-1 market. So, I think the -- this is the time, it is the first time our customer deployed their server in the Tier-1 market, which we think is our strength and our capability. So, that's why we can gather the deal.

And looking forward, I think those kind of -- so, those customer will in the future, we believe, will grow very fast and they will be our, let's say, next generation of the hyperscale contributor. And as I just mentioned, their number -- if you look at what the server -- total server they procured in this year and in the next couple of years, the level of the server procurement is more exposed to the -- is such close to the traditional cloud payer.

So, we are happy to see that. That means GDS' anchor customer -- in the future, the anchor customer will be more diversified. And this is our key strategy and we will continue on that.

This is the first question. What is the --

Laura Chen -- Head of Investor Relations

Question is on 90,000 --

William Wei Huang -- Chief Executive Officer

Okay, 90,000. Yes, I think the -- yes, we are happy we are -- we can catch up. We will continue to catch up the accelerated -- acceleration of the market demand. So, we don't want to put a big number right now. I think the 90, this year obviously we can achieve. But I think next year, in terms of 90, I think we are confident, but maybe we can do more. But we are not just to pursue the number. We are pursuing the growth quality.

So, we will see, I think, next year 90,000 square meter, I believe, we can continue, right? But we don't want put the big number right now for the next couple of years.

Gokul Hariharan -- JPMorgan -- Analyst

Okay got it. Just one follow-up on the -- are you seeing some of these customers -- you mentioned that they're building Tier-1 data centers for the first time. Do you feel that strategy for some of these customers is still to keep their existing data center providers in remote sites and kind of embrace some of the newer data center providers like you or established in Tier-1 data center providers like you in Tier-1 cities, or do you feel like they are also changing the strategy in terms of pulling demand from public cloud and kind of starting to move toward their own data and their own compute and other services hosted on their own data center?

William Wei Huang -- Chief Executive Officer

Actually, it's not public. I think -- I don't know what's kind of application they deploy in a -- direct to our data center. But we still see the trend. They still use the cloud very -- in a significant way. And they also have another purpose, right? I think I believe different purpose to deploy some dedicated IT infrastructure by themselves. I think this is also the trend.

In my view, they use the public cloud to grow, and they also start to use their -- build their own hybrid cloud strategy right now. So, we are benefiting on both.

In terms of the remote, I think the remote, everybody knows remote site is one of our new product, right, just what we did with GIC. It's not our core business. But for some strategic reason, we still keep doing, we -- but it's not our core business. But I would like to say we are ready to do more and what we can tell is our customer will give us more business. We have more opportunity on this part.

Gokul Hariharan -- JPMorgan -- Analyst

Understood. Thank you.

Operator

Thank you. We have the next question from the line of Tina Hou from Goldman Sachs. Please go ahead.

Tina Hou -- Goldman Sachs -- Analyst

Hi. Thank you very much management for taking my questions. I have two. The first one is that, could you help me understand because we're raising our guidance in terms of our floor area sales from -- in terms of organic from 80,000 to 9,000 square meters. However, we're keeping our annual revenue guidance unchanged. So, is this because the acquisition side of thing is lower than what we were expecting previously, or are we just being more conservative on this side?

And then the second question is, in terms of -- we wanted to understand in terms of like big cloud customers, data center vendor strategy, do you see any difference between say Ali Cloud or Tencent Cloud? So, like, normally, how many data centers vendors do they usually pick? Thank you.

Daniel Newman -- Chief Financial Officer

Tina, Dan here. On your first question, there's a cycle from sales, most of which is pre-commitment during the time that data centers are under construction and when the data center comes into service and then over maybe 18 months or even 24 months There is a move-in. So, our sales is a great lead indicator for revenue growth in the future. But it wouldn't affect revenue in the current year. And in fact, when we give guidance, well, if we look forward 12 months at any time, pretty much all the revenue growth looking 12 months forward, would come from contracts which were already signed prior to the beginning of the year.

So, I mean, if I was -- yes, we were talking about raising revenue guidance. I mean, if I was giving revenue guidance for 2022, maybe I'd be raising that on account of -- on account of the higher sales. That's how it works.

William, would you like to answer the question about different strategies of the cloud customers?

William Wei Huang -- Chief Executive Officer

Yes, I think that we have to --- as we talk about it, we already viewed our platform in all the key markets, which have the very significant, I mean, advantage compared with the other. So, I think the -- this is very important to our customer. So, I think our customer, the criteria for them is a continued high visibility on the resource in each region in your platform in all core location. This is very important.

And to continue -- and of course, the operation skill is also very important for them and the cost is also has been the key criteria. And typically, I think the -- historically, there's a top customer, they use a lot of the different data center service provider historically. But in the recently, recent couple of years, they shrink their name and they have their very -- they narrowed their vendor list after many years of business relationship. So, I think the -- typically, the major -- like a customer, they will have three or four substandard. So, this is our current situation what we face.

And our views, as we used to -- we used to talk about the, we signed some -- signed a strategic vendor agreement with our top-two -- our top-three customers so far. So, I think we believe GDS is the major, I mean, vendor in terms of the top three key vendor, right?

Is that your question?

Tina Hou -- Goldman Sachs -- Analyst

Yes. Thank you very much.

Daniel Newman -- Chief Financial Officer

Yes.

Operator

Thank you. [Operator Instructions] We have the next question from the line of Frank Louthan from Raymond James. Please go ahead.

Frank Louthan -- Raymond James -- Analyst

Great. Thank you very much. Can you comment on the trends in MRR per square meter declined a little bit more this quarter than we had modeled. Just, what are the thoughts and the trends on that for the rest of the year?

And then my second question, can you give us an idea just for those of us not in the region as often, about some of the current steps that the government has taken with regards to any future outbreak of COVID-19 and how the -- that policy has evolved? How do you think, going forward, reactions to the virus could impact your business, either your ability to construct or get labor, employees at different locations and so forth? Just talk to us a little bit about what the current policies are? And are they better or worse than they've been over the last six months or so? Thanks.

Daniel Newman -- Chief Financial Officer

Yes. Hi, Frank. It's Dan here. The MSR for -- MSR per square meter for the second quarter, it was down by 3%. The way we calculate is, we take the average of the opening/closing area utilized. So, the Beijing 10, Beijing 11, Beijing 12 acquisition closed on June the 5th. Since we had 25 days revenue contribution, but we included the whole of the area utilized in the quarter-end number. So, if we strip that out, then the MSR decline was just about 1%, which is more than what I indicated kind of a longer-term trend line.

And in the third quarter, we will have a full quarter's contribution from Beijing 10, Beijing 11, Beijing 12. And I think as some analysts, investors calculated when we announced the deals, the MSR of that data centers -- for those three data centers is lower than our average.

So, there will be some dilutive effects in the third quarter and going forward. But I think the MSR will be around that level of -- around two -- yes, around the level it was before adjustments in the second quarter.

I talked earlier about the economics of the edge-of-town sites. The MSR there is lower, the unit capex is lower. I said the returns were very -- highly -- very acceptable. So, yes, there will be continuing a gradual decline in the MSR. And from time-to-time, we will try to highlight what's happening with our internal investment, which is really what we target to sustain. And I think we are indeed doing that.

William, you'll talk about the operating environment in China, what happens when there's -- if there is a resurgence?

William Wei Huang -- Chief Executive Officer

Yes. Fortunately, I'm in Shanghai, after 14 days of quarantine. I feel that everything go back to the normal. So, looks like in terms of the daily life, retail, restaurant, cinema, everything -- yes, entertainment, everything has gone to a normal. So, almost 95% I think, yes, is gone to normal. So, I think the -- from the supply chain point of view and the working permission point of view, everything is go back. So, I think it's come to normal, and we didn't see any impact in the next few months, few quarters.

Frank Louthan -- Raymond James -- Analyst

Okay. Great. Thank you.

Operator

Thank you. The next question comes from the line of James Wang from UBS. Please go ahead.

James Wang -- UBS -- Analyst

Good evening, management. I've got two questions. First question is on supply. So, we're hearing that, for example, steel mills in China, which have very cheap access to electricity, are being converting to data centers. So, just want to get your thoughts on how do you assess the risk of potential capacity other supply, and how would you cope with another supply situation should occur?

And the next question is just in terms of contracting renewed so far this year, what are you seeing in terms of pricing? Is it broadly similar or lower versus the prior term? Thank you.

William Wei Huang -- Chief Executive Officer

Okay. I'll take the first question. I think data center is -- actually, if you look at data center, it's actually a very-very -- in my view, it's a high data read industry. Of course, and recently we see a lot of supply -- a lot of the new player jump to the market. But in terms of our customer profile, OK, our customer need a reliable vendor, right? So, I think that a lot of new player cannot be catch up very -- in a shortened time. So, I think they are way behind us. It's not direct impact to us.

On the other hand, GDS used -- to-date, 19 years build up our value proposition and our position. It's not easy to change our position. So, I think the -- in my view, we are already there and obviously, we are in a better position. And our customer is smart, very sophisticated. So, it will not change our position and our customer. But of course, in terms of the competition, it's more concentrated on the Tier-2 player, even Tier-3, right? So, it will not change any our position in my view.

Daniel Newman -- Chief Financial Officer

James, Dan here. On your question about pricing on contract renewals. Let me answer it in a bigger picture way. We did our first business with our top-two customers in 2014/2015. So, those contracts have come up for renewal and we'll start to see in the next second half of this year and then next few years, more of the kind of cloud and large Internet business come up for renewal.

If you look at the contract renewal schedule which is on Page 42 of our earnings presentation -- roughly, say, in 2020 -- second half of 2020, '21, '22 is somewhere around 50%, 60% plus of that area relates to cloud and large Internet customers. We've already had quite a number of conversations.

We think, overall, the outcome is going to be flat relative to the pricing, the existing contracts and maybe some isolated cases where it comes down and then maybe some where it goes up. But overall, I think it's flat.

I've commented before, this is not actually a reflection of the market, particularly not for these first few contracts, because those early orders were for kind of downtown data centers close to CBD, where the current market price is definitely higher than what it was. So, we can't reset these to market. We have to reset it to where we're doing business with those customers and the overall relationship.

We still have a standard price to our larger customers. It does change from deal-to-deal, from place-to-place, datacenter-to-datacenter, time -- time-to-time. So, yes, when we do these contract renewals, we have to take cognizance of what is the price that we are agreeing with those customers for similar kind of data centers in similar areas. It's a completely new piece of business today. So, yes, I think flat overall, and we leave something on the table in terms of not extracting the full market price.

James Wang -- UBS -- Analyst

Got it. Thank you very much.

Operator

Thank you. As there are no further questions, I would like now to turn -- like to hand the call back over to the company for any closing remarks.

Laura Chen -- Head of Investor Relations

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 in our website or The Piacente Group Investor Relations. Bye. Bye for now.

Operator

[Operator Closing Remarks]

Duration: 70 minutes

Call participants:

Laura Chen -- Head of Investor Relations

William Wei Huang -- Chief Executive Officer

Daniel Newman -- Chief Financial Officer

Jon Atkin -- RBC Capital Markets -- Analyst

Yang Liu -- Morgan Stanley -- Analyst

Colby Synesael -- Cowen & Company -- Analyst

Gokul Hariharan -- JPMorgan -- Analyst

Tina Hou -- Goldman Sachs -- Analyst

Frank Louthan -- Raymond James -- Analyst

James Wang -- UBS -- Analyst

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