Datasea Intelligent Technology Ltd. Q4 FY2022 Earnings Call

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

Thank you, Rob. Good day everyone and welcome to Datasea's fiscal year 2022 financial results conference call. With us today are Fu Liu, Founder and Chairman of the Board of Directors of Shuhai Beijing, Cathy Sun, Chief Financial Officer, and I'm Annabelle Zhang, the Principal IR contact based in the U.S. This call is also being webcast from the website. A replay of the call will be available later today. Please refer to the press release for more details. Now allow me to go over the Safe Harbor. 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 detailed discussion of these risks and uncertainties, please refer to our latest fiscal year report on Form 10-K 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 obligations to update these statements except as required under applicable law. In addition, during today's call, Cathy and I will give the prepared remarks in English. During the Q&A session other than Cathy and I, Mr. Fu Liu is also open to taking questions and he'll answer in Chinese. All translations are here for convenience purposes only. In the case of any discrepancies, management statements in the original language will prevail. With that, now I will turn it over to Cathy, who will walk you through the details of our financial results. Cathy, please go ahead.

Good morning, everyone. My name is Cathy Sun, and I'm the CFO of Datasea, Inc. It's my pleasure to discuss the 2022 financial highlights. Datasea is a leading provider of products, services, and solutions in three converging and innovative industries: 5G messaging, acoustic intelligence, and smart city for enterprise and retail customers. We had revenues of $17.08 million and $0.17 million for the year ended June 30, 2022 and 2021 respectively, which shows a $16.9 million or 9,653% increase compared to the same period of last fiscal year. The increase in revenue was mainly due to the expansion of the company's business towards 5G messaging. For the year ended June 30, 2022, revenues mainly consisted of service fees from our 5G SMS service platform. From July 2021 to June 30, 2022, the company generated $17.08 million from revenue which consisted of 5G messaging business amounting to $17.02 million, including $11.93 million from 5G SMS and $1.8 million from 5G IN MP, and $3.26 million from aggregating the message cloud as value-added services, and $56k from the Smart City project. On top of that, Blue Chip customers, our accumulated exponentially business model was well-proven, and a strong cash flow was generated. One reason the revenue increased rapidly is because the investments are necessary for providing a wide range of products to solve customer needs. Also, the high growth rate of artificial intelligence adoption creates a tremendous demand for 5G messaging. In addition, the company's marketing strategy is effective and excellently crafted for reaching target customers from different industries. Furthermore, the brand recognition and strong customer loyalty are very helpful to retain old customers while developing new markets across the country. The original customers of the company are distributed in dozens of provincial administrative regions in China, including Beijing, Liaoning, Jilin, Heilongjiang, Jiangsu, Shanxi, and Guangdong. During the reporting period, the company continued to expand in Quicho and other provinces through its 5G messaging and acoustic intelligence business and signed 5G messaging sales and service agreements with more than 11 industry customers, including those in enterprise, logistics, internet, chain fitness, and education. The proportion of the company's service customers covering China's provincial administrative divisions continues to increase and the breadth of service customers is expanding. The gross margin is 5.6% for the 12 months ended June 30, 2022, as the company proceeded into the later stage of the 5G messaging business. Three factors will help equip the company with more flexibility in pricing and improve the gross margin. First, costs will be reduced by economies of scale over a large number of customers. Second, by adopting a differentiation strategy, growing brand recognition and customer loyalty will strengthen the company's pricing power. Third, after the commercialization of 5G messaging in the Chinese market expected in the fourth quarter of 2022, the target customers and products will be expanded. We incurred R&D expenses of $1.26 million and $0.85 million during the year ended June 30, 2022 and 2021 respectively, which shows a $0.41 million or 48% increase compared to the same period of last fiscal year. The increase in R&D development has brought the company products that are more in line with customer needs. The rich product line, technical advantages, and characteristics of the products are one of the main factors supporting the company's increase in sales revenue. The company's R&D performance includes but is not limited to the following. First, co-products of 5G related, such as 5G IN MP and Smart Push have been launched on the market and continue to receive customer orders. Second, Datasea's acoustic intelligence has passed the certification of a third-party authoritative institution that has proven to achieve a 99.83% efficiency in nine seconds against COVID-19. Currently, a complete set of the acoustic intelligent protection system has been implemented. Third, R&D investment has led to a continuous increase in intellectual property rights. As of September 28, 2022, the company owns 27 patents and 77 software copyrights including 20 patent applications pending in core technology. We intend to invest approximately $10 million in technological development over the next three years. The debt-to-equity ratio is 1.34 and 49.12 as of June 30, 2022, and June 30, 2021 respectively, which protects management on credit sales and credit procurement. As of June 30, 2022, accounts receivable is $259,000, and accounts payable is $197,000. The amount of accounts payable is approximately the same as accounts receivable, which means the weighted average cost of capital is optimally leveled for financing current assets and achieving perfect maturity matching of the short term. As of June 30, 2022, the total liabilities of Datasea are $2.1 million, which shows a 43.52% decrease from previous periods. The decrease in liability is due to matching accounts payable with accounts receivable. The level of working capital is always optimally well-positioned. The fiscal year 2022 has surpassed the performance of the last two years; the management of the company is confident for the development of the new fiscal year. In 5G messaging business, from June to August 2022, Datasea announced a total of $41.72 million procurement agreements to supply 5G messaging services. The agreement demonstrates Datasea's capability to provide rich messaging experiences through 5G at scale and revolutionize the way enterprises interact with customers for acoustic intelligent businesses. The air and environmental disinfection protection series have been completed along with the rich research and development and the prototype production of ultrasonic air sterilizers with over 16 models. Our sales agreement has been signed, and pursuant to the agreement, a major client agreed to purchase no less than 10,000 units of the ultrasonic sound air disinfection equipment by September 2023, with a total purchase value of no less than RMB 35 million, approximately $5 million. Zhuifeng has placed the order for the first tranche, and 1,000 units of two models of ultrasonic sound air disinfection equipment will be delivered by the end of 2022. Let's have a brief discussion about the impact of the recent global economic situation, which is of concern to many investors. While domestic outbreaks were high in the second quarter of 2022, China's economy has shown resilience and the impact of policy stimulus. According to the National Bureau of Statistics, China's GDP growth reached 2.5% in the first six months of 2022. As the proportion of COVID-19 cases continues to decline, the Chinese government has cut taxes, reduced interest rates, and accelerated infrastructure investment to recover the national economy. As of August, the country's economy has gradually stabilized and the main indicators show positive changes. First, the service industry continued to recover. In August, the National Service Industry Production Index increased by 1.8% year-on-year, 1.2 percentage points higher than the previous month. Second, the recovery of market sales accelerated, with the accumulative growth rate of total retail sales of consumer goods turning from negative to positive. In August, total retail sales of consumer goods reached a year-on-year increase of 5.4%. Third, consumer prices were basically stable, and industrial user prices continued to fall. Although the current external situation is still complicated and the domestic economic recovery still faces minor difficulties and challenges, we believe that the fundamentals of China's economy are improving in the long term and the factors supporting high-quality development have changed. The follow-up theories of economic stabilization policies and successful measures will be released faster, and the Chinese domestic economy is expected to recover and operate within a reasonable range. The market environment for the company's domestic development remains positive. Meanwhile, the company is accelerating its global business development strategy. We are planning to expand our overseas market exposure, including establishing U.S. registered companies as the main body of operation and setting up U.S. business subsidiaries to promote the company's acoustic intelligence-related products to the global market, including North America. Going forward, the company will continue to improve the market expansion of its main business based on existing contracts, including 5G messaging and the market launch of acoustic intelligence. The company's objective is to expand our revenue stream and achieve annual profit in the new fiscal year. Before I finish my remarks, I would like to thank our Founder and Director Fu Liu, and CEO Fannie Liu for their outstanding leadership and great contribution. Thank you.

Cathy, thank you for your remarks. Okay, I'm going to dive deeper into the recent business developments in fiscal year 2022, and address questions investors may be interested in under the current environment. I'm very proud to share that Datasea had a very strong end to the fiscal year in the midst of an incredibly dynamic environment. Compared with the fiscal year of 2021, 2022 marked a significant inflection point to scale and transform Datasea underlining the robust growth and competitive building in the 5G messaging business, the long-term strategic planning by adding the acoustic intelligence business and proof of great synergies and diversified revenue streams among the innovative business sectors, which are 5G messaging, acoustic intelligence, and also the Smart City business. In fact, Datasea set several records with performance this year. Datasea delivered the strongest annual revenue, record contracts and orders growing product portfolio, ongoing innovation in research, and expanded industry leadership. These important metrics illustrate the company's growth momentum, diversified revenue streams, and great business potential, which also provide us with enhanced visibility and resilience about Datasea's business. Datasea's primary operational goals are to first provide best-in-class products and solutions in 5G messaging, acoustic intelligence, and Smart City. Second, maximize long-term sustainable growth of earnings and operating funds. Third, generate cash flows and return to the shareholders. Such objectives will be accomplished by diversifying the product portfolio, improving operating efficiency, achieving superior risk-adjusted returns through diligently allocating capital, accelerating market reach, and client acquisition. In today's environment, Datasea is focusing on four things, which are not only business initiatives that Datasea values, but also vital to help us achieve operational goals. First, Datasea is well-positioned to help organizations deliver on their digital imperatives. Datasea's 5G messaging solutions improve the ways in which people and businesses communicate while delivering brands opportunities to engage, convert, and nurture buying relationships efficiently. Datasea aims to assist all kinds of companies regardless of their size and industry to meet marketing needs. Datasea's Smart City solution provides near-real-time awareness of issues requiring attention, and data collected and analyzed from these services can be used to optimize city operations. Smart City solutions can improve basic services, enhance public safety, increase sustainability, and improve planning and decision-making in different scenarios. Datasea's offerings are customizable and also cost-efficient to empower all companies. When we communicate with customers, it is very clear that there is a real opportunity to help organizations in every industry leverage 5G messaging to overcome today's communication challenges and emerge stronger, while using Smart City solutions to make cities safer, more livable, and sustainable. That's what Datasea is here for—to create connections that make the impossible possible, empower businesses, and improve the quality of life with a sustainability focus. Second, Datasea invests to gain market share and build new businesses in categories where we expect to have long-term structural advantages. Datasea is one of the first movers in the 5G industry in China, having built a comprehensive 5G messaging product portfolio with high brand recognition. The company's 5G messaging business continues to be recognized and engaged by customers in various sectors, and revenue in 2022 continues to grow. In 2022, Datasea added an acoustic intelligence business and committed to realizing the full business potential of acoustic intelligence across industries in meaningful ways. Datasea has formed research alliances with top-notch institutions to unlock the full potential of acoustic intelligence in commercial applications. Top applications include healthcare, medical, beauty, agriculture, smart homes, smart cities, environmental protection, manufacturing, among others. To date, Datasea has completed the technology development, product design, supply chain management, and marketing plans for a series of hardware products powered by acoustic intelligence. For instance, Datasea's ultrasonic sound sterilization and antivirus equipment has achieved 99.83% disinfection against COVID-19 in just nine seconds, and this equipment has been developed into several models for use in public areas like office buildings, hotels, restaurants, and in-home applications. Datasea has also supplied core acoustic disinfection modules to manufacturers, such as Shanghai Zhuifeng automobile. Third, at Datasea, we firmly believe in using innovation to provide convenience and choice to customers and commit to staying ahead of emerging market trends. These efforts have been realized, and you can find our expanding top talents and research partnerships, new launches and upgrades of products, as well as growth in 5G messaging and solid demand signals. For example, in 2022, one of our 5G messaging Smart Push integrates 5G wireless with Big Data and data mining to transform the overall marketing experience. 5G wireless is accurate at pinpointing location. When combined with 5G messaging, it enables a retailer to identify who is near the store and immediately trigger SMS and video SMS to promote the products or services the customer is standing by. Empowered by data science, it can leverage more information and customer inputs to personalize messages. In 2022, Datasea also released China's first white paper, co-authored by the Institute of Cloud Computing and Big Data, China Academy of Information and Communications Technology, to uncover detailed facts and compelling analysis of acoustic intelligence technology, commercial applications, and industry outlook. Datasea's white paper conducts a systematic forecast on acoustic intelligence evolution and adoption, demonstrating Datasea's capabilities to disrupt and accelerate the applications. Lastly, we will manage through this period with an intense focus on execution of excellence in our operations. Datasea's strategic business expansion into 5G messaging started in early 2021 and into acoustic intelligence in 2022. These fruitful developments prove that the company can identify great opportunities in the market and seize them with effective execution. Since the product launch in 5G messaging, Datasea has engaged with more than 300 enterprises in terms of 5G messaging, generating more than $17.02 million in revenue in the 5G messaging business, and has been awarded a Top 10 Enterprise in 5G messaging for 2021. In acoustic intelligence, Datasea has forged relationships with new clients and partners that progress in product rollout from a sales perspective and expand market execution in both domestic and global markets. In the end, I would like to address some questions we have received recently. We're aware of the recent market turmoil and investors' concerns over inflation, rising costs, and economic growth. The Chinese government has released important policy signals regarding its commitment to stabilize the economy and the job market in response to impacts of COVID. They are advocating for a better balance between COVID-19 controls and economic growth, and a top economic official has also committed to support digital platform companies. In the long term, we have many multi-year growth opportunities ahead, giving Datasea confidence in our future. Long-term megatrends such as 5G, cloud, and security will likely provide tailwinds for Datasea's growth. As Datasea grows and expands its portfolio, the company is well-positioned to support customers, looking forward to the opportunities that lie ahead. While our business is not immune to macroeconomic trends, we will remain disciplined while benefiting from strong multi-year investment trends and technological advancements that I mentioned earlier. The company's innovation is assisting our customers and partners in navigating an increasing amount of complexity, creating a greater sense of urgency to leverage leading-edge technologies in delivering their strategic objectives. This translates into Datasea's continuous search for unique and differentiated innovations to help customers advance their most urgent business priorities such as business expansion and marketing. In summary, we have performed exceptionally well in our strategy and transformation during a period that remains dynamic. This led to strong growth for our fiscal years, setting several records across our business, thanks to solid execution from our team, market-leading innovation, and continued growth. The company is investing and refocusing its efforts to assist clients during this critical time to capitalize on the immense technological changes ahead. And that concludes my remarks today. Thank you.

Thank you. At this time, we'll be conducting a question-and-answer session.

Thank you.

At this time, we have no questions. This concludes today's conference. You may disconnect your lines at this time and we thank you for your participation. Have a wonderful day.

Sorry, Rob. I think I saw some questions on the webcast.

My apologies. Please go ahead.

Yes, we received some questions regarding the company's operations and financials from the webcast. The first question is from Derick Cole from Car Capital. He has two questions. The first is, how would you describe the company's competitiveness in the 5G messaging and acoustic intelligence markets? The second is, if the Smart City solutions are now generating significant revenue, why does the company decide to keep it? I will refer the first question to Mr. Fu Liu. I will translate this question to him in Chinese.

To address the question about competitiveness in 5G messaging, Mr. Liu mentions four things. First, the market in China is very promising and expanding. China has 1.6 billion mobile end users, and through 5G messaging, businesses can reach every single one of them. That represents a significant market even from a global perspective. Another advantage is that Datasea has been authorized by the three major Chinese telecom operators, which allows access to the national market. This large audience of 1.6 billion mobile end users can utilize 5G messaging. The third point is that Datasea has a strong and comprehensive product portfolio. Besides the solutions mentioned by Cathy and Annabelle, Datasea has built its own online cloud platforms, such as the messaging cloud, which makes solutions more comprehensive. Lastly, Datasea is one of the earliest movers in this market. If you follow the company's disclosures, you can see that the company has formed strong relationships with industry leaders such as express delivery companies. These strengths ensure competitiveness, especially in industry applications. The Chinese market is still in its infancy, and Datasea has actively involved in drafting regulations and proposing ideas for commercial applications at important conferences and seminars. Therefore, due to these four reasons—the large market, national market access authorization, comprehensive competitive portfolio, and being one of the first movers—Datasea is well-positioned in the 5G messaging area. Thank you for the question.

The Chinese market is still in its infancy, and Datasea has actively involved in drafting regulations and proposing ideas for commercial applications at important conferences and seminars. Therefore, due to these four reasons—the large market, national market access authorization, comprehensive competitive portfolio, and being one of the first movers—Datasea is well-positioned in the 5G messaging area. Thank you for the question.

The Chinese market is still in its infancy, and Datasea has actively involved in drafting regulations and proposing ideas for commercial applications at important conferences and seminars. Therefore, due to these four reasons—the large market, national market access authorization, comprehensive competitive portfolio, and being one of the first movers—Datasea is well-positioned in the 5G messaging area. Thank you for the question. Annabelle Zhang, Principal IR Contact.

For the second question regarding the abilities of acoustic intelligence, Mr. Fu Liu believes that Datasea is a pioneer in this industry, as confirmed by the first white paper co-authored with the Institute of Cloud Computing and Big Data, China Academy of Information and Communications Technology, and other leading research institutions. This white paper provides a comprehensive discussion of acoustic intelligence and its commercial applications, laying a solid research foundation. Acoustic intelligence technology has wide applications beyond recent product developments, such as leveraging ultrasonic technology to kill viruses like COVID-19 with a 99.83% efficacy in nine seconds. It can be applied in various sectors including agriculture, medical, beauty, and more, showing a clear technological advantage and extensive patent applications, placing Datasea ahead in the market. Thank you for that question. Acoustic intelligence technology has broad applications beyond our recent product developments. For instance, it utilizes ultrasonic technology to eliminate viruses like COVID-19 with an effectiveness of 99.83% in just nine seconds. This technology can be implemented in various industries including agriculture, healthcare, and beauty, demonstrating a significant technological edge and a wide range of patented innovations, positioning Datasea as a leader in the market. Thank you for that question.

Acoustic intelligence technology has wide applications beyond recent product developments, such as leveraging ultrasonic technology to kill viruses like COVID-19 with a 99.83% efficacy in nine seconds. It can be applied in various sectors including agriculture, medical, beauty, and more, showing a clear technological advantage and extensive patent applications, placing Datasea ahead in the market. Thank you for that question. Annabelle Zhang, Principal IR Contact.

For the third question, the company has Smart City business, but it has not generated significant revenue in recent years. So why does the company decide to keep it? Mr. Fu Liu feels that the company started with the Smart City solutions, which has tremendous market opportunities. The market position itself is strong and promising. As the company adds new business lines such as 5G messaging and acoustic intelligence, there are many synergies that can enhance the Smart City solutions. For example, in our Smart City solutions, Datasea integrates 5G messaging, which can help customers communicate more efficiently. Also, with the introduction of acoustic intelligence, the security aspect of Smart Cities can be greatly improved, especially given the current concerns over health threats like COVID-19. Therefore, the strong market positioning and synergy with new businesses justify continuing the Smart City initiatives. This will ensure that our Smart City solutions remain at the forefront of innovation and capability. Thank you for your insights, Mr. Fu Liu.

Unfortunately, we are running out of time. Some investor questions about the financials will be documented, and our IR team will follow up with those raising questions. Thank you. Thank you. This concludes today's conference. You may disconnect your lines at this time and log off your computers. Thank you for participating.