Earnings Transcript for DTSS - Q2 Fiscal Year 2022

Operator: 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. [Operator Instructions] Please note this conference is being recorded. I'll now turn the conference over to Annabelle Zhang. Annabelle, you may now begin.

Annabelle Zhang: 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] [Ph] 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 Web site. 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 the 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. [Indiscernible] team member will give the prepared remarks in English. During the Q&A session we will take questions in both English and also Chinese, and the translator will provided the consecutive -- the translation. All translations are for convenience purposes only. In the case of any discrepancies, managements' 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.

Zhixin Liu: [Foreign Language] Good morning, ladies and gentlemen. My name is Zhixin Liu. I am the CEO of Datasea. Thanks for joining us today for the second quarter earnings report conference call. [Foreign Language] Datasea was incorporated, in Nevada, in September, 2014, and listed on NASDAQ in 2018. Our vision is to become a well-known high-tech multinational corporation. Our mission is to provide cutting edge artificial intelligence, including 5G messaging, acoustic intelligence, and digital smart city, to both commercial and retail customers globally. [Foreign Language] Through the great efforts of the team, Datasea became China's leading 5G messaging service provider. And we will continue to build on the first mover advantages to enhance brand awareness, build customer loyalty, and drive market share. [Foreign Language] In addition, benefiting from the great synergy between our proprietary technology and business lines, Datasea, together with MIIT, Ministry of Industry and Information Technology, [indiscernible] Laboratory stands for artificial intelligence key technology application evaluation and [informatization] [Ph], and the Cloud Computing and Big Data Institute of CAICT, China Academy of Information and Communications Technology, jointly released the first whitepaper on China's acoustic intelligence industry. At the same time, the companies series of acoustic intelligence products will create huge demand, change how people work and live, and drive the industrial revolution. The smart city will also enter explosive growth period with the development of the society. [Foreign Language] To achieve this strategic objective, we have set the following plans. Continue to aggressively promote our 5G messaging services, establish competitive advantages in the acoustic intelligence segment through innovation and product differentiation, both in the domestic and international markets. [Foreign Language] Team up with domestic and international technology institutions to strengthen our research and development capabilities, and accelerate development of the next-generation products, and lay the groundwork for international intellectual property rights to enhance our brand awareness and business goodwill. [Foreign Language] Expand into overseas markets, such as high consumption rate western countries, and high GDP growth in Southeast Asian countries, and optimize our capital structure, and lower our financing costs. [Foreign Language] Create strategic alliance with potential partners via M&A or joint venture activities, and provide outstanding customer service, exclusive customer experience, and appropriate transparency in the marketing to build strong customer loyalty. [Foreign Language] The management team believes that current government policies are extremely pro-market, including the 5G messaging services. For example, the 14th five-year technology innovation plan, the MIIT's announcement on promoting and accelerating 5G applications, and the new generation artificial intelligence plans, are all highly favorable to all business segments at Datasea. Our business is highly aligned with China's key object of 5% to 6% GDP growth, for industrial upgrade and transformation. Government policies are no doubt the most significant driver for Datasea's domestic growth. [Foreign Language] In addition, our potential to become an international enterprise is built on our 5G and acoustic intelligence technology, and their broad market applications to provide solutions to customers on a global scale. [Foreign Language] The management team is optimistic about industry outlook based on the tremendous demand generated from various types of applications driven by the largest population in the world. According to the statistics released by Dow Insight, the market size of smart city, 5G messaging, and acoustic intelligence will reach respectively RMB400 billion approximately $62.9 billion, RMB300 billion approximately $47.2 billion, and RMB1.1 trillion approximately $172.9 billion in 2025 with a total 25% plus CAGR. The growth rate outpaces the overall economy and the majority of the other industries. [Foreign Language] Before I hand the phone to our CFO, I would like to ask our representative from the New York office to introduce the company's key progresses in 5G messaging, acoustic intelligence, and other businesses during the second quarter. Thank you.

Mingzhou Sun: Okay. Thank you, Sunny, and thank you, Rachael. Sunny, just shed lights on the 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

Mingzhou Sun: 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 increase the rapidly compared to last quarter, which recorded a 900% growth. On top of that, blue chip customers are accumulated. This model is proven and the strong cash flow are generated, the net income change positive first time ever in the most recent, three months period. Secondly, Datasea established the leadership position in the Aquatic Intelligence industry in terms of innovation and the results allocation. Recently, the white paper was jointly released with the partnership of [indiscernible] entity institution. Finally, the business segments of Datasea are policy-driven by the central government, 14th five-year plan, notice of the Ministry of Industry and Information Technology made in China 2025. From July 2021 to December 2021, the company generated revenue of $9,650,609 consisting of 5G business with 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 service, and $33,797.88 from smart city projects. The three major business lines have started full operations while the 5G messaging segments is developing rapidly with attenders 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 the December 31, 2021 was generated which is 7,016% increase from the same period of last year. It consisted of 5G SMS $7,786,104.56 and 5G IMMCP and $1,830,706.56, the search 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 fee from the 5G SMS service platform as the company proceeds 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 keeps scaling the customers and increasing the 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 margin. No doubt, the outside management is extremely active and effective comparing to the size of data value. The total assets of Datasea is $11,873,723 which [indiscernible] the increase 16.77% from last quarter. As of January 1, 2022, the total liabilities of Datasea is $6,802,163 which shows a 78.8% increase from previous period. The surge of liability is due to matching the account payable with account receivable the level of working capital is optimally well position. As indicated in the balance sheet. They receive total equity is $5,071,560 a 20.33% decrease from last quarter. It is amazing that the amount of equity is decreasing when scale increases. The major shareholders held badly control in terms of low key rights by taking advantage of adjusting the capital structure. As shown, the total assets is $10,168,614. Besides the cash received from seasoned offering, the total amount of assets group increased constantly quarter-by-quarter due to the increase in accounts receivable from the proposed of generating low sales. The fixed assets didn't have much change because most of the patients were obtained a year ago and the production is also to third-party. As of December 31, 2021 account receivable is $5,223,231 and accounts payable is $5,365,756. The amount of accounts payable is approximately the same as the accounts receivable, which means the weighted average of cost to capital is in optimal level for financing current assets and the maturity margin of short-term debt is perfectly achieved. So, Q1/Q2 cash flow of operating activities is negative $3,824,622, which shows a 73.19% decrease from previous tariffs. Cash flow for investment activities is negative $284,124 that indicates a 2,900 and a 3.15% decrease from previous periods. Cash flow from financing activities is $6,237,254, which shows 114.04% decrease from previous periods. Going forward as the 5G messaging business getting more penetrated by customers, the Acoustic Intelligence product starts mass production under the digital smart city business gains more market share. The third quarter revenue of this fiscal year is predicted to be $36,435,415, which is a 300% growth rate from last three months. Before I finish my remarks, I would like to thank our Chairman, Zhixin Liu for our outstanding leadership and the great contribution for making 2022 successful. Thank you.

Zhixin Liu: Now I transfer to our holder, Annabelle Zhang.

Annabelle Zhang: Yes, so, just -- we already finished all of our English remarks. And going forward, we can do the Q&A session. And so, if you're only and you have any questions to raise about the company, if you access, by the webcast, for this Q&A session, below. And there's a -- if you call, there's already like instructions beforehand to give you some instructions on the Q&A session so you can proceed to with any questions for the company.

A - Annabelle Zhang: And [indiscernible] we have some questions that has already been proposed. Okay. So, this question is proposed by [Scott] [Ph] [indiscernible] which is from the Morgan Capital. And his first question is for the CEO. Does the CEO feel confident to keep the growth rate, [so there is color] [Ph], and what made you [indiscernible] from this type of growth? So, can CEO address that? Before that, can the translator please translate this question in Chinese, for the CEO? Thank you. [Foreign Language]

Unidentified Company Representative: Annabelle, you mentioned there was a second question, could you repeat the second one. The first one is about confidence.

Annabelle Zhang: Yes, the second one is what made you [indiscernible] from the type of growth.

Unidentified Company Representative: Got it, thank you. [Foreign Language]

Zhixin Liu: [Foreign Language] I am extremely confidant about our projected growth in the second quarter -- in the next quarter, and beyond. [Foreign Language] In terms of our growth project, as I said, I'm extremely confident about our growth prospect. But in terms of potential risks out there, obviously, government policies is a factor that's beyond our control, but from what we understand or have seen so far, the government policies, as mentioned earlier, extremely pro market.

Annabelle Zhang: Okay. So, that's everything the company wants to share in terms of the first question, right? Just want to make sure? 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 the Morgan Capital. And the question is, the company delivered over [7000%] [Ph] return growth, but the company is still at a loss. What's the cost, and when will the company expect to be profitable? I think this question is better to be handled to the CFO.

Mingzhou Sun: I just want to add to the question asked earlier about the potential risk would impact our growth. Just want to reiterate, we are extremely [actually] [Ph] confident about the government policy. We are confident the policy will stay in its current direction to be really pro market, promoting 5G services in China. Really, so, even though it's something beyond our control, but overall, we don't really consider that a risk factor because of the direction that the government is currently taking.

Annabelle Zhang: Okay, thank you. And I will repeat the second question. This question is from the analyst from the Morgan Capital. The second question is, the company delivered over 7,000% return [growth] [Ph], but company is still at a loss. So, what's the cause, and when will the company expected to be profitable? [Foreign Language] Yes, I think this question should be handled to CFO.

Mingzhou Sun: [Foreign Language] Yes, I recognize that we have negative profit. And a lot of that reason could be traced back, in the beginning; we spent a significant amount in our R&D activities. And what we expect is, in the coming quarter, Q3, we will be able to breakeven and in Q4, we should turn profit.

Annabelle Zhang: Okay, CFO, is that all for this question or you do you have more to add?

Mingzhou Sun: [Foreign Language] In 2021, we completed revamping of our strategic positioning. And we have decided three major segments in our business lines. And, we expect that in 2022, both our acoustic intelligence solutions as well as our 5G messaging services will experience exponential growth. [Foreign Language] I'll just phonetically confirm that number because CFO -- [Foreign Language]

Mingzhou Sun: Yes, followed.

Annabelle Zhang: Okay.

Mingzhou Sun: The total revenue from Q1 to Q3 will reach $36 million. And we expect the 12 month cash flow will reach $4.6 million. [Foreign Language]

Annabelle Zhang: Okay, CFO, do you have more to add?

Mingzhou Sun: Yes, so I'll speak in English. Also, 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 5G messaging industry is still in early stage, to attract the initial users, [indiscernible] complications, and gain market share as early as possible, our company adopted a competitive pricing strategy to expand the first mover advantage. As the company proceeds into the later stage of the 5G messaging business, the three factors will help equip the company with more [indiscernible] stability in pricing and improving the gross margin. The first is cost will spread over a large number of products as the company keeps scaling the customers and increasing the productivity. The second is growing brand recognition and technology capabilities to serve client-based complex needs will help strengthen the company's pricing power. The third is after the initialization of 5G messaging in the Chinese market expected in the first quarter of 2022, the target customers and product [forms] [Ph] will be expanded. That's all.

Annabelle Zhang: Okay, thank you, CFO, and thank you the management team. As we are coming to the end of this call, I like to extend our like gratitude and thanks to all the investors who are paying close attention to the Datasea, and I really appreciate that. And going forward, there might be some question we will not be able to address today. But, you can always reach out to our IR team and our contact info also like attached with this PPT. And going forward if you have any question, please feel free to reach out, and again, representing the company I thank you for joining this call. And that's all for today's call. Operator?

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