Datasea Inc. (NASDAQ:DTSS) Q4 2022 Earnings Conference Call September 28, 2022 9:00 AM ET
Company Participants
Annabelle Zhang – IR
Mingzhou Sun – CFO
Fu Liu – Founder and Chairman of Shuhai Beijing
Conference Call Participants
Operator
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. [Operator Instructions] 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.
Annabelle Zhang
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 take 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.
Mingzhou Sun
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 the solutions in three converging and innovative industry: 5G messaging, acoustic intelligence, and smart city to enterprise and the 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 by comparing with 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 [ph] to June 30, 2022, the company generated $17.08 million from revenue which consisted by 5G messaging business with amount of $17.02 million, including $11.93 million from 5G SMS and the $1.8 million from 5G IN MPP [ph] and $3.26 million from a aggregating the message cloud as value added services and $56k from 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 investment are necessary for providing a wide range of product to solve the problem of the customer needs. Also the high growth artificial intelligence adoption penetration rate creates a tremendous demand for 5G messaging. In addition, the company’s marketing strategy is effectively and excellently for reaching the target customers from different industries. Even more, the brand recognition with strong customer loyalty is so helpful to retain old customer, meanwhile, 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 [ph] and other provinces through 5G messaging and acoustic intelligence business and signed 5G messaging sales and service agreements with more than 11 industry customers, including enterprise, logistics, internet, chain fitness, education, etc.
The proportion of the company’s service customers covering China’s provincial administrative divisions continues to increase and the industry tips and the breadth of the service customers increased.
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 improving the gross margin. First, costs will be reduced by economic of scale over large number of customers fixes and the increase of production. Seconds by adopting differentiation strategy, growing brand recognition and the 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. For example, the company will provide the 5G IN MPP across software customization and value added services to improve profit margins.
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 by comparing with 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, the technical advantages and the characteristics of the products are one of the main factors supporting the company’s increase in sales revenue.
The companies R&D performance include but not limited to the following. First, the co-product of 5G related such as 5G and MPP, 5G IN MPP and the Smart Push were launched on the market and continued to receive customer orders. Second, Datasea’s acoustic intelligence that have passed the certification of the third party authoritative in the institution that has proven to achieve a 99.83% efficiency in nine seconds against COVID-19. At present, a complete set of acoustic intelligent protect system has been performed.
Third, R&D investment has also led to a continuous increase in intellectual property rights. As of the date of September 28, 2022 the company owns PRC rejected [ph] 27 patents and 77 software copyrights including 20 patent applications pending in core technology. We intend to invest approximately $10 million in technological protect development over the next three years. That debt to equity ratio is 1.34 and 49.12 as of June 30, 2022, and June 30, 2021 respectively, which protect 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 account receivable which means the weighted average of cost of capital is the optimal level for financing current assets and the maturity matching of short term that is perfectly achieved. As of June 30, 2022 the total liabilities of Datasea is $2.1 million, which shows a 43.52% decrease from previous periods. The decrease of liability is due to matching the account payable with account receivable. The level of working capital always is optimally well-positioned.
Fiscal 2022 has surpassed by and the performance the last two years, the management of the company is confident for the development of the new fiscal year. For 5G messaging business from June to August 2022 Datasea announced totally $41.72 million procurement agreement 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 business.
The air and the environmental disinfection protect series has completed, the rich research and development and the prototype production of ultrasonic air sterilizers in full capital growth [ph] and more than 16 models. Our sales agreement has been signed. And pursuant to agreement, one major client agreed to purchase no less than 10,000 units of the ultrasonic sound air disinfection equipment by September 2023. And the total purchase value and agreement would be no less than RMB35 million, approximately $5 million.
Zhuifeng [ph] has placed the order of the first tranche and the 1,000 units of the two models of ultrasonic sound air disinfection equipment will be delivered by end of 2022.
Let’s have a brief discuss the impact of the recent global economic situation, which is also 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 the 2.5% in the first six months of 2022. As the proportion of the COVID-19 continues to decline the Chinese government has cut taxes, cut interest rates and accelerated infrastructure investment to continue recovering the national economy.
As of August, the country’s economy has gradually stabilized and the main indicators show the 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% points higher than the previous month. Second, the recovery of market sales accelerated and the accumulative growth rate of total retail sales of consumer goods turned from negative to positive. In August, the 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 continue to fall. Although the current external situation is still complicated, and the domestic economic recovery still faces minor difficulties and challenges however, we judge that the fundamentals of China’s economy are improving for a long time and the factors supporting high quality development have now changed. The follow up theories of economic stabilization policies and successful policies and measures will be released faster, and the Chinese domestic economic is expected to recover and operate within a reasonable range.
The market environment for the company’s domestic development is still positive. Meanwhile, the company accelerated its global business development strategy. We have been planning to expand our overseas market exposure, including taking the U.S. registered company as the main body of operation and set-up U.S. business subsidiaries and promoting 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’d like to thank our Founder and director Fu Liu, CEO, Fannie Liu, for their outstanding leadership and the great contribution. Thank you.
Annabelle Zhang
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 under the current environment. I’m very proud to share that Datasea had very strong end to the fiscal year in the midst of an incredible dynamic environment.
Compared with fiscal year of 2021, 2022 marked a significant inflection point to scale and transfer Datasea under scoring the robust growth and competitiveness 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 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 also 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 as 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 product portfolio, improving operating efficiency, achieving superior risk adjusted returns, through diligently allocating capital, accelerating market reach and also client acquisition.
In today’s environment, Datasea is focusing on four things, which are not only business initiatives Datasea values, also vital to help us achieve operational goals, which I discussed about. First, Datasea is well-positioned to help organizations deliver on their digital imperatives. Datasea’s 5G messaging solutions increase and improve 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 industries to meet the 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 informed 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’s very clear than never that there is real opportunity to help organizations in every industry, use 5G messaging to overcome today’s communication challenges and emerge stronger and use its 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 take share and build new businesses in categories where we expect to have long term structural advantage. Datasea is one of the first movers in the 5G industry in China, and has 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 the revenue in 2022 continues to grow.
In 2022, Datasea added acoustic intelligence business and commit to take acoustic intelligence full business potential and the world 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 the commercial applications. Top applications include healthcare, medical, beauty, agriculture, smart home, smart City, environment 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 example, Datasea’s ultrasonic sound sterilization and antivirus equipment has achieved 99.83% disinfection with COVID-19 in just nine seconds, and this equipment was developed into several models to be used for public areas like office building, hotels, restaurants, and in home applications. Other than that, Datasea 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 stay ahead of the emerging market trends. These efforts have been taken into fruition and you can not only find our expanding top talents and research partnerships, new launches and upgrades of product, but also the growth in 5G messaging and solid demand signals. For example, in 2022 one of our 5G messaging Smart Push integrates 5G wireless, Big Data and data mining to transform the overall like marketing experiences.
5G wireless is accurate at pinpointing location. When combined with 5G messaging, that means a retailer will be able to tell who is near the store and immediately trigger SMS and video SMS to promote the products or services the customer is standing by very close to. Empowered by data science it might push to even leverage more information and also customer inputs to personalize that messages.
In 2022 Datasea also released China’s first white paper was co-authored 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 also the industry outlook. Datasea’s white paper conduct a systematic forecast on acoustic intelligence evolution and also adoption, demonstrating Datasea’s capabilities to disrupt and also accelerate the applications.
Lastly, we will manage through this period with an intense focus on execution of excellence in our own operations. Datasea’s strategic business expansion to 5G messaging started in early 2021 and to acoustic intelligence in 2022. So these fruitful developments all prove that the company can identify great opportunities in the market and grasp them with execution. Since the product launch in 5G messaging Datasea has been engaged by more than 300 enterprises in terms of 5G messaging with more than $17.02 million revenue in 5G messaging business, and is awarded as a Top 10 Enterprises of 5G messaging in 2021.
In acoustic intelligence, Datasea’s forged relationships with new clients and partners not only make progress in product rollout, sales perspective, but also expand market execution in domestic and also global market.
In the end, I like to address some questions we have been asked a lot recently. We’re aware of the recent market turmoil and investors’ concerns over inflation, rising costs and also the economic growth. The Chinese government has released important policy signals on its commitment to stabilize the economy, and also the job market in response to COVID impacts. They’re calling for better balance between COVID-19 controls and wealth, and a top economic official also vowed support for digital platform companies.
In the long term, we have many multi-year growth opportunities to look forward to, giving Datasea confidence in our future. Long term megatrends such as 5G, cloud, security will likely provide tailwind for Datasea’s growth. As the Datasea growth and also its portfolio is in a strong position to support customers, the company is looking forward to what lies ahead. While our business is not immune to macroeconomic trends, the company will remain disciplined in our business, while benefiting from the strong multi-year investment trends and technological contributions, which I mentioned earlier.
The company’s innovation is helping our customers and partners navigate an increasingly amount of complexity, and there is a greater sense of urgency to leverage leading edge technologies to deliver on their strategic objectives. This means that the company are constantly looking to provide unique and differentiated innovation to help customers advance their most urgent business priorities such as business expansion, and also marketing.
In summary, we have performed very well on our strategy and transformation over a period that remains very dynamic. This led to a strong growth to our fiscal years, setting several records across our business, thanks to the solid execution from our team, our market leading innovation and also continued growth. The company are investing and refocusing our efforts to help clients at this critical time and to take advantage of the massive technological change on the way.
And that will be all I want to share today. Thank you.
Question-and-Answer Session
Operator
Thank you. At this time, we’ll be conducting a question-and-answer session. [Operator Instructions]
Annabelle Zhang
Thank you.
Operator
At this time, we have no questions. And I’d like to say this concludes today’s conference. You may disconnect your lines this time and we thank you for your participation. Have a wonderful day.
Annabelle Zhang
Sorry, Rob. I think I saw some like on the webcast.
Operator
My apologies. My apologies, Annabelle. I’m sorry. Please go ahead. My apologies.
Annabelle Zhang
Yes, we received some questions regarding the company’s operations and also the financial from the webcast. And the first — yeah, this question is from Derick Cole from the Car Capital [ph]. And he has two questions.
The first is how will you describe the company’s competitiveness in the 5G messaging and acoustic intelligence? And the second is also if the Smart City solutions is now generating significant revenue, why the company decide to keep it?
Okay, I will like refer this question to Mr. Fu Liu. I will tell him this question in Chinese.
Fu Liu
To address the question about your like competitiveness in the 5G messaging. So Mr. Liu four things. First, the market in China is very promising and also it’s enlarging. China has 1.6 billion like mobile end users. And through the 5G messaging you can reach every single of them. So that’s quite large market even in the global perspective.
Another advantage or competitiveness Datasea has always is — Datasea has already authorized by the three Chinese major operators, which means that the company can have access to the national market. And the national market, which I just mentioned, they were like 1.6 billion mobile end users. They can interact with 5G messaging. That’s second point.
The third point is Datasea has a very strong and also comprehensive product portfolio. Other than the solutions, I think Cathy and Annabelle they all shared, other than that, Datasea has built its own online cloud platforms such as messaging cloud, so which makes their solutions more comprehensive.
And also, last, I want to mention that Datasea is one of the earliest like movers in this market, especially if you follow the company’s disclosure closely you can tell that the company has already formed very strong relationships with the leading industry leaders such as other express delivery companies, several and also the commonly held strength is competitiveness, especially in the industry applications. Even this is so important in the 5G messaging area and also because this area is in its infancy. So that’s why the Chinese — in China, Datasea helped even involved with some regulation, draft and also propose their ideas about the commercial applications from that in very important conferences and also seminars.
So because of these four reason, first, the very large market. Second, the company has already been authorized to access to the national market. The company has a very comprehensive and also like competitive portfolio. The third, the company is one of the first movers and also has already built up its own competency in this market. Because of these four reasons we think the 5G messaging and the company in this area is very well positioned. Thank you for the question.
Annabelle Zhang
[Foreign Language]
Fu Liu
[Foreign Language]
Annabelle Zhang
So for the second question regarding the competitiveness, about the abilities of acoustic intelligence, Mr. Fu Liu, he thinks that first Datasea really is China’s first white paper with the co-authors, which we mentioned earlier, like Institute of Cloud Computing and Big Data, China Academy of Information and Communications Technology, and also other leading research institutions. This is the first white paper to actually discuss, acoustic intelligence and its commercial applications with a very comprehensive perspective. So that laid a foundation, very solid research foundation for Datasea that Datasea is a trailblazer in this and also a pioneer in this industry.
And acoustic intelligence, not only the Datasea own the technology strength, but also the applications can be very wide. Other than the recent company’s product blowout, for example, we leverage this ultrasonic generation [ph] technology to kill virus such as COVID-19 in 9 seconds with efficacy as 99.83%. Other than this, acoustic intelligence can be applied in so many other areas, for example, agriculture, medical, beauty, and more. So that’s why this technology, that Datasea owns currently with a lot of like patents pending.
And also, this has wide applications and Datasea has already looked through studied through this and even like public white paper to safeguard it. So that’s the area that Datasea is actually staying ahead of the market, Chen. Thank you for that question.
Annabelle Zhang
[Foreign Language]
Fu Liu
[Foreign Language]
Annabelle Zhang
So for the third question, so the company has Smart City business, but it may not generating the significant revenue in the recent years. So why the company start to keep it. So for that question, Mr. Fu Liu feels, first, the company starts with our Smart City solutions. And this is the market that has tremendous opportunities. So the market position itself is very good and promising. And also as companies start to add other business lines, for example, like 5G messaging and acoustic intelligence, in those two areas, there’s a lot of things can happen together, and also reinforced and strengthen Datasea’s solutions in terms of smart cities, or you can tell the synergies among these three businesses are very strong.
Let me give you an example. So in our Smart City solutions Datasea integrates 5G messaging, and it can help the customers to come in with [indiscernible]. And for the acoustic intelligence in the smart city solutions, which in the old model, maybe just focus on those base, like security. But with the introduction of acoustic intelligence, the security can be like taken to another level. For example, the today’s COVID like threatens a threat, and also people’s worries about health, or something like that.
So with the solutions, we are now providing in the 5G and also acoustic intelligence, when we introduced those solutions into the Smart City, the Smart City solutions can be stronger than ever. So that’s why — that’s two main reasons the company doesn’t feel there’s any need to drop it off because of the marketing position and also the other group business, the great synergies there to support the Smart City going forward. Okay, that will be the answer from Mr. Fu Liu about the third question.
Unfortunately, we are running out of time. Actually, there’s still investors questions about the financials, but we will make sure that IR team to write it down, and then we can follow up with the investor raising that question. Okay, well, I think that will be offered today. And please go ahead with the conclusion. Thank you.
Operator
Thank you. This concludes today’s conference. You may disconnect your lines at this time and log off your computers and thank you for participating.
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