Datasea Intelligent Technology Ltd. Q2 FY2022 Earnings Call

Greetings. Welcome to Datasea's Second Quarter Fiscal Year 2022 Financial Highlights and Updates. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. Please note this conference is being recorded. I'll now turn the conference over to Annabelle Zhang. Annabelle, you may now begin.

Okay, thank you so much, and good day, everyone. Welcome to Datasea's second quarter fiscal year 2022 financial results conference call. With us today are Zhixin Liu, Chief Executive Officer; Cathy Sun, Chief Financial Officer; and Annabelle Zhang, I'm the Principal IR Contact, in the U.S. This call is also being webcast from the website. A replay of this call will be available later today. Please refer to the press release for more details. Let me quickly go over the safe harbor statement. So, today's discussion may contain forward-looking statements. Forward-looking statements involve inherent risks and uncertainties that may cause actual results to differ materially from our current expectations. For a detailed discussion of the risks and uncertainties, please refer to our latest quarterly report, on Form 10-Q, and other documents filed with the U.S. SEC. Any forward-looking statements that we make on this call are based on assumptions as of today, and we do not undertake any obligation to update these statements, except as required under applicable law. In addition, during today's call, Zhixin will read the prepared remarks in Chinese first, and a translator will provide consecutive translation in English. A team member will give the prepared remarks in English. During the Q&A session we will take questions in both English and Chinese, and the translator will provide the consecutive translation. All translations are for convenience purposes only. In the case of any discrepancies, management's statements in the original language will prevail. With that, I will now turn the call over to the CEO of Datasea, Zhixin Liu. Zhixin, please go ahead.

Good morning, everyone. My name is Zhixin Liu, and I am the CEO of Datasea. Thank you for joining us for our second quarter earnings report conference call. Datasea was established in Nevada in September 2014 and went public on NASDAQ in 2018. Our goal is to become a well-recognized high-tech multinational corporation, and our mission is to deliver advanced artificial intelligence technologies, including 5G messaging, acoustic intelligence, and digital smart city solutions, to customers around the world. Thanks to our team's hard work, Datasea has emerged as China's leading provider of 5G messaging services. We intend to leverage our first mover advantages to enhance our brand visibility, foster customer loyalty, and increase our market share. Additionally, by harnessing the synergy between our proprietary technology and our business operations, Datasea has collaborated with the Ministry of Industry and Information Technology and the Cloud Computing and Big Data Institute of the China Academy of Information and Communications Technology to publish the first whitepaper on China's acoustic intelligence industry. Our range of acoustic intelligence products is expected to generate significant demand, transform work and living environments, and drive an industrial revolution. The smart city sector is poised for explosive growth as society evolves. To achieve our strategic goals, we will aggressively promote our 5G messaging services and create competitive advantages in the acoustic intelligence space through innovation and product differentiation in both domestic and international markets. We will partner with technology institutions worldwide to enhance our research and development capabilities, accelerate the creation of next-generation products, and secure international intellectual property rights to boost our brand recognition and business reputation. We also plan to enter international markets, such as high-consumption western countries and rapidly growing Southeast Asian nations, while optimizing our capital structure and reducing financing costs. Furthermore, we aim to establish strategic alliances through mergers and acquisitions or joint ventures, and ensure exceptional customer service, unique customer experiences, and transparent marketing practices to cultivate strong customer loyalty. Our management team believes that the current government policies are very market-friendly, particularly concerning 5G messaging services. The 14th five-year technology innovation plan, the MIIT's initiatives to promote and expedite 5G applications, and new-generation artificial intelligence strategies are all highly advantageous for Datasea's various business segments. Our business aligns well with China's goal of achieving 5% to 6% GDP growth through industrial upgrades and transformations. Government policies are undoubtedly the primary driver of our domestic growth. Moreover, our potential as an international enterprise is based on our 5G and acoustic intelligence technologies and their wide market applicability, enabling us to provide solutions to customers globally. The management team holds an optimistic view of the industry's future, driven by the substantial demand arising from diverse applications due to the world's largest population. As reported by Dow Insight, the market sizes for smart cities, 5G messaging, and acoustic intelligence are projected to reach approximately RMB 400 billion (about $62.9 billion), RMB 300 billion (about $47.2 billion), and RMB 1.1 trillion (about $172.9 billion) by 2025, with a cumulative annual growth rate exceeding 25%. This growth rate surpasses that of the overall economy and many other sectors. Before I pass it to our CFO, I would like to invite our representative from the New York office to share the company's key advancements in 5G messaging, acoustic intelligence, and other areas during the second quarter. Thank you.

Okay. Thank you, Sunny, and thank you, Rachael. Sunny just shed some light on Datasea's long-term development strategies. I am going to dive deeper into the recent business developments in the second quarter. Datasea continues to make progress in three converging and innovative business segments: 5G messaging, acoustic intelligence, and smart city in China. Based on our financial results and business developments for the quarter ended December 31, 2021, management believes that our business development is on track and is supported by a strong product portfolio. These three strategic areas will establish solid foundations for Datasea's long-term goal of sustainable growth in the future. Okay, so first let me introduce the business developments in terms of 5G messaging. For the 5G messaging business, this is the fastest-growing business line in Datasea. The company's flagship product is the 5G IMMCP integrated message marketing cloud platform, which aims to unify customer and prospect marketing signals in a single view. The company’s recent business developments can be categorized into three parts. First, client expansion and diversification. Since 2021, as a leading service provider in the field of 5G messaging in China, the company has been engaged for services by over 100 institutional clients from various industries including express delivery, catering, e-commerce, financing, and technology to establish a messaging marketing cloud platform. In terms of marketing and sales expansion from October 2021 to the end of December 2021, the company was engaged in various contracts related to SMS, integrated 5G messaging marketing cloud platform, and value-added services with an over contract value of approximately $14.73 million, among which $9.6 million worth of services has been delivered. In terms of industry recognition, Datasea is becoming a key player in the 5G messaging industry and initiating the industry effort to promote 5G messaging R&D and application. In December 2021, the company assisted ZTO express to complete the first placement order through 5G messaging services in the express delivery industry. The company cooperated with the National Engineering Lab for logistic information technology and continually works to promote the formulation of 5G messaging standards in the express industry. In summary, Datasea is one of the first movers in the 5G messaging industry and has built significant business momentum. Please remember, the market is only at its beginning. We not only provide 5G messaging services to a broad range of institutional customers, but we have also begun to become one of the core suppliers assisting companies in reaching hundreds of millions of mobile phone users in China via 5G messaging. The second strategic business segment for Datasea is acoustic intelligence. The company commits to tapping into acoustic intelligence's full business potential and wields acoustic intelligence across industries in meaningful ways. We are determined to become a leading technology and product provider in the field of acoustic intelligence in China and worldwide. In terms of research partnerships, the Company has entered into partnerships with top-notch institutions in this area, equipped itself with solid R&D capability, and released China's inaugural white paper titled "Industry Development and Technology Application of Acoustic Intelligence in China" with co-authors from the Institute of Cloud Computing and Big Data, China Academy of Information and Communications Technology. In terms of product lineup, currently, the Company has four flagship products to unfold the commercial possibilities of acoustic intelligence in the most wanted areas such as health, security, and environmental protection. These products are first, ultrasonic sound sterilization and antivirus equipment, which is the first-ever sterilization and antivirus equipment that combines ultrasonic sound effects with optics to address COVID-19 disinfecting needs. The second product is Tianer voice recognition alarm, which is a product processing real-time sound data necessary to conduct early warning analysis and respond to emergency incidents and threats. Third is the directional sound recognizer, which is a solution for noise pollution, and last but not least, the sound effect refreshing directional sound device. Datasea has prepared samples, completed lab tests and user pilot tests, and entered mass production to varying degrees for these products, which are expected to be introduced to the market in the fiscal year of 2022. The acoustic intelligence industry is under rapid expansion. In the future, acoustic intelligence will be more mature with extensive application, and with the integration of acoustic intelligence, scenario-based solutions will be enhanced. Technological progress will unlock tremendous business opportunities and potentials in the real economy. The third strategic area for the company to tap into is Smart City. Datasea has visual intelligence algorithms such as face recognition as well as cutting-edge acoustic and non-visual intelligence algorithms. Datasea combines artificial intelligence, machine learning, and data analysis capabilities so that our solutions not only provide visibility, but also identify behavioral patterns. Before that, we provide a digital Smart City application platform that meets the needs of residential communities, schools, and commercial enterprises in the Chinese market. In terms of current expansion, from October 2021 to the end of December 2021, the company was engaged in various contracts related to smart community solutions and the food safety supervision system of the Smart Canteen. In terms of product updates, the company recently laid out a series of upgrades to meet client needs in different scenarios and enhance the system resistance analysis efficiency and integration capability. Technology is a major differentiator between our competitors and us. During the quarter ended December 31, 2021, Datasea has eight newly registered software copyrights and patents and will continue to focus on technology capability building, value creation, and a diversified product portfolio approach to growth. We firmly believe that our strategy and execution will lead to long-term returns for our customers and investors. Okay. Now I will turn it over to Cathy, who will walk you through the details of our financial results. Please go ahead, Cathy.

Good morning, everyone. My name is Cathy Sun, and I am the CFO of Datasea. It's my pleasure to introduce the Q2 financial highlights. Firstly, the total revenue of Q2 increased rapidly compared to last quarter, which recorded a 900% growth. Additionally, blue-chip customers are accumulating. This model is proven, and strong cash flow is generated. This marks the net income change to positive for the first time ever in the most recent three-month period. Secondly, Datasea established a leadership position in the Acoustic Intelligence industry in terms of innovation and the allocation of resources. Recently, a white paper was jointly released with our partnerships of leading institutions. Finally, the business segments of Datasea are policy-driven by the central government, as demonstrated by the 14th five-year plan and the notice of the Ministry of Industry and Information Technology regarding Made in China 2025. From July 2021 to December 2021, the company generated revenue of $9,650,609, which consists of 5G business with an amount of $9,916,811.12, including $7,786,104.56 from 5G SMS, $1,830,706.56 from 5G IMMCP mobile projects on the cloud as value-added services, and $33,797.88 from smart city projects. The three major business lines have started full operations while the 5G messaging segment is developing rapidly with an unprecedented growth rate over 900% compared to the immediate prior quarter ended September 30, 2021. The sales amount of $8,979,479 for the three months ended December 31, 2021, was generated, which is a 7,016% increase from the same period of last year. This consisted of $7,786,104.56 from 5G SMS and $1,830,706.56 from 5G IMMCP. This growth is due to the expansion of the company’s business towards 5G messaging in fiscal year 2021. For the three months ended December 31, 2021, revenues mainly consisted of service fees from the 5G SMS service platform as the company progresses into the later stage of the 5G messaging business. Three factors will help equip the company with more flexibility in pricing and improving the gross margin. First, costs will be spread over a larger number of products as the company continues to scale the customer base and increase productivity. Second, growing brand recognition and technology capabilities to serve clients with complex needs will help strengthen the company's pricing power. Third, after the commercialization of 5G messaging in the Chinese market, expected in the first quarter of 2022, the target customers and product forms will be expanded. For example, the company will provide the 5G IMMCP as SaaS software, customization, and value-added services to improve profit margins. Undoubtedly, the overall management is extremely active and effective compared to the size of Datasea. The total assets of Datasea are $11,873,723, which shows an increase of 16.77% from the last quarter. As of January 1, 2022, the total liabilities of Datasea are $6,802,163, which shows a 78.8% increase from the previous period. The surge in liabilities is attributed to matching accounts payable with accounts receivable. The level of working capital is optimally well-positioned. As indicated in the balance sheet, the total equity is $5,071,560, a decrease of 20.33% from the last quarter. It is notable that the amount of equity is decreasing while the scale increases. Major shareholders hold low-key rights by taking advantage of adjusting the capital structure. As shown, the total assets are $10,168,614. Besides the cash received from seasoned offerings, the total amount of asset groups increased constantly quarter by quarter due to the increase in accounts receivable from the performance of generating low sales. The fixed assets did not undergo much change as the majority were obtained a year ago and the production is also outsourced. As of December 31, 2021, accounts receivable amount to $5,223,231, and accounts payable is $5,365,756. The amount of accounts payable is approximately the same as accounts receivable, which means the weighted average cost of capital is at an optimal level for financing current assets, and the maturity margin of short-term debt is perfectly achieved. The Q1/Q2 cash flow of operating activities is negative $3,824,622, which shows a 73.19% decrease from previous periods. Cash flow for investment activities is negative $284,124, indicating a 2,900% and a 3.15% decrease from previous periods. Cash flow from financing activities is $6,237,254, which shows a 114.04% decrease from previous periods. Going forward, as the 5G messaging business gains increased penetration by customers, the Acoustic Intelligence product begins mass production, and the digital smart city business captures more market share, the third-quarter revenue of this fiscal year is predicted to be $36,435,415, indicating a 300% growth rate from the previous three months. Before I finish my remarks, I would like to thank our Chairman, Zhixin Liu, for his outstanding leadership and the great contribution to making 2022 successful. Thank you.

Now I transfer to our holder, Annabelle Zhang.

Yes, so we already finished all of our English remarks. Going forward, we can do the Q&A session. If you are online and have any questions to raise about the company, please access the information for this Q&A session below. If you're calling, there are already instructions provided beforehand regarding the Q&A session so you can proceed with any questions for the company. And we have some questions that have already been proposed. The first question is for the CEO. Does the CEO feel confident about maintaining the growth rate, and what are the factors that influence your confidence? Can the CEO address that? Before that, can the translator please translate this question into Chinese for the CEO? Thank you.

Annabelle, you mentioned there was a second question. Could you repeat the second one? The first one is about confidence.

Yes, the second question is what factors influence your confidence in maintaining the level of growth?

I am extremely confident about our projected growth in the next quarter and beyond. In terms of our growth prospects, I remain very confident about our growth. However, there are potential risks to consider, such as government policies, which are beyond our control. From what we understand, the government policies we've observed so far are very supportive of the market.

Okay. So, that's everything the company wanted to share regarding the first question, right? Just want to confirm. If that's all for the first question, we can proceed with our Q&A session. The next question is also from the analyst from Morgan Capital. The question is, the company delivered over 7,000% return growth, but the company is still at a loss. What is the cause, and when does the company expect to be profitable? I believe this question is better suited to be handled by the CFO.

I just want to add to the previous question regarding potential risks that could impact our growth. I want to reiterate, we are extremely confident about the government policy. We believe the policy will remain in its current direction to be really pro-market, promoting 5G services in China. Therefore, even though it is a factor beyond our control, we don't consider it a significant risk factor due to the government's current direction.

Okay, thank you. And I will repeat the second question. This question is from the analyst at Morgan Capital. The second question is, the company delivered over 7,000% return growth, but the company is still at a loss. What is the cause, and when does the company expect to be profitable? Yes, I think this question should be handled by the CFO.

Yes, I acknowledge that we are currently experiencing a negative profit. This situation can largely be attributed to our substantial investments in research and development. We anticipate that in the upcoming third quarter, we will reach a break-even point, and by the fourth quarter, we expect to achieve profitability.

Okay, CFO, is that everything for this question, or do you have more to add?

In 2021, we completed the revamping of our strategic positioning and have decided on three major segments in our business lines. We expect that in 2022, both our acoustic intelligence solutions and our 5G messaging services will experience exponential growth. Just to confirm that number because CFO. Yes, to summarize, the total revenue from Q1 to Q3 will reach $36 million. We expect the 12-month cash flow to reach $4.6 million.

Okay, CFO, do you have more to add?

Yes, I will speak in English. For the 5G SMS and the 5G IMMVP and value-added services, the company formally entered the 5G messaging and its related business markets last fiscal year. As the 5G messaging industry is still in the early stage, to attract the initial users, we adopted a competitive pricing strategy to secure our first mover advantage and gain market share as early as possible. As the company progresses into the later stages of 5G messaging business, three factors will help equip the company with greater stability in pricing and improve our gross margin. The first is that costs will be spread over a larger number of products as the company continues to scale its customer base and increase productivity. The second is growing brand recognition and technology capabilities to serve clients with complex needs will also strengthen the company's pricing power. The third factor is the expected commercialization of 5G messaging in the Chinese market in the first quarter of 2022, which will expand the target customers and product forms.

Okay, thank you, CFO, and thank you to the management team. As we are coming to the end of this call, I would like to extend our gratitude and thanks to all the investors who are paying close attention to Datasea. I really appreciate that. Going forward, there might be some questions we will not be able to address today. However, you can always reach out to our IR team, and our contact info is also attached with this presentation. If you have any questions, please feel free to reach out, and again, representing the company, I thank you for joining this call. That's all for today's call.

Thank you. This concludes today's conference. You may disconnect your lines at this time. We thank you for your participation.