Q1 2022 Youdao Inc Earnings Call
Good day and welcome to the yoga checked all of it in 'twenty two first quarter earnings conference call.
Today's conference is being recorded.
At this time I would like to turn the conference over to Mr. Jeffrey Wong Investor Relations Director for Yoga out. Please go ahead.
Thank you operator. Please note the discussion today will contain forward looking statements related to future performance of the company, which are intended to qualify for the safe Harbor from liability as established by the U S. Proudly of Securities Litigation Reform Act such statements.
Announced guarantees of future performance and are subject to risks and uncertainties assumptions and other factors. Some of these risks are beyond the company's control and could cause actually balance to differ materially from those mentioned in today's press release and this discussion.
A general discussion of the risk factors that could affect <unk> business and financial results include a install the filings of the company with the Securities and Exchange Commission.
The company does not undertake any obligation to update forward looking information, except as required by law. During today's call management will also discuss certain non-GAAP financial measures for comparable comparison purposes, only for the definitions of non-GAAP financial measures.
Reconciliations of GAAP to non-GAAP financial results. Please see that so anything to fourth quarter financial results news release issued earlier today.
As a remainder these conference is being recorded.
Aside of bypass a replay of this conference call will be available on <unk> corporate website at IR Dot dot dot com joining us today on the call from you at all senior management, a Doctor Fung, Joe Our Chief Executive Officer.
Mr. Lei Zhang VP of operations, let me start putting them through our VP of strategy and capital markets and meet your way and lead our VP of finance.
Now I'll turn the call over to Dr. Joe <unk> to review some of our recent highlights.
She takes the ratchet.
Thank you Jeffrey and thank you all for participating in today's call before we begin I would like to remind everyone that the financial information and non-GAAP financial information mentioned in this release is presented on a continuing operations basis and our numbers are based on that I mean, b unless otherwise specifically stated.
We're pleased to report solid performance in the first quarter of 2022, following the cessation of our K two nine academic S tea business with record high revenues and overall gross margin as well as a significant improvement in operating loss.
Q1, net revenue was RMB, one 2 billion up.
Up 26, 6% year over year, and 14, 5% quarter over quarter.
A new record high.
We also achieved an overall gross margin of 53, 5% another record high.
Given the disposal of canine academic S. T business retrospective adjustments to the historical statements of operations have also been made for the previous periods, which provides a consistent basis of comparison for the financial results of the continuing operations. Furthermore, we narrow.
The operating loss by 41, 6% year over year to RMB $125 1 million.
From a loss of RMB $214 3 million in Q1, 2021.
These results amid a challenging macro environment clearly reflects our strengthening fundamentals as well as the effectiveness of our strategy.
Liquidity wise, we have adequate funding for long term growth.
First as of March 31, 2022.
<unk> cash cash equivalents restricted cash restricted cash and time deposits and short term investments totaled RMB, one 2 billion seconds.
Secondly on controlling shareholder in that Eastgroup has been supporting our long term growth until the date of this release Youll Dol has received the various financial support from them that a school among others, including RMB 878 million short term loans and U S dollar 300 million revolving loan facility.
In support of Eurodollar future business that each group has agreed to provide financial support for our continuing operations.
Now I'd like to share more details on our first quarter progress.
First let's look at it.
Learning devices a.
Q1 device revenues was RMB $253 2 million, representing an increase of 25, 4% year over year. This is a remarkable growth given the.
The COVID-19 related supply chain and sales channel challenges in total we sold 430000 devices in Q1.
As we discussed in past quarters devices are a key growth area for us.
An important priority this year is to drive growth and synergy by scaling up R&D updating existing product lines and shipping new products.
We strictly followed our strategy in Q1.
We added new dictionary databases to yield out externally.
Well, we already have the most comprehensive pictionary database.
We added 11, new seriousness of English textbooks to Utah listening part with a total reaching 19.
In terms of new products more recently in early April we launched the yodle small light.
In development for over a year.
Small light is a smart that's claim with integrated AI learning features.
All of that by our advanced algorithms and automatically analyzes users' hand, and body movements, while sitting at the desk, allowing the user to seamlessly access a host of AI learning functionalities, while they are reading writing all doing homework.
One point to an English words to look it up on top of centers to habits right to you.
I'll ask it two czepiel asthmatic worksheets for Ya.
Even tracks that use a sitting posture.
And we'll alert the user win detecting unhealthy postures. After we launched against our small light. The initial feedback is very positive we plan to grow its popularity over the coming months as we did with the other products. We're also looking forward to introducing additional smart devices. This year as planned.
Now, let's talk about learning citizens.
Our strategy here is to transition from an academic center.
Center business.
Our steam and vocational courses central business at an accelerated pace.
Since Q3 last year Q1 is the third quarter in which our team has scaled up our growth products like the way she courses and graduate school entrance exam classes, while at the same time closing done academic I S. T calls this has been a challenging process and we have continued to.
Deliver a steady progress in Q1.
Our new courses are growing quickly, which partially offsets the loss of revenue from academic S. P. Clauses net revenue from learning services reached RMB 826 million in Q1, 2022.
36, 1% year over year.
If we were to compare with their learning service net revenue, including canine academic S tea business in Q1, 2021.
It declined by 17, 3% year over year.
That's what we were positively impacted by seasonality.
Because Q4 was a major renewal season, and a large part of gross billings generated in Q4 were recognized as net revenue in Q1.
As for steam causes you without chess expanded particularly fast.
With its gross billings, increasing a 170% quarter over quarter.
We established a strategic partnership with the heightened chest Association.
In addition to of course is our goal and chest user community has been growing at a fast pace peer we have to you without ballgame Academy.
Now where users can play against others. All learn go a chess with the help of our proprietary AI technology.
Every day about 200000 go or chess games I played on the yoga ballgame economy App.
And our other assets this approach of combining courses and our community and the payout based on op expense.
It's a major competitive advantage for us.
It causes in the App drive each other's close in addition.
Has it become an official online testing and certification sites for weight, she academies in Beijing and angry province.
Throughout.
Through the tests users can receive certifications for their SKU by the Chinese wage Association or Beijing, which association.
Let's turn to vocational and adult education classes in Q1, we upgraded our graduate school entrance exam closest targeting to offer a one stop service for our customers.
We also explored online merge offline courses.
To increase the learning efficiency efficiency and effectiveness.
With ongoing upgrades the gross billings from the graduate school entrance exam courses grew by over 160% quarter over quarter.
We also saw growing demand for other vocational courses such as constructor certification courses and accounting courses with gross billings, increasing over seven times year over year in Q1.
Our other endeavors, including education, Digitization business Dictionary and translation ops and our charity initiatives are also progressing smoothly in Q1.
Looking ahead, we continue to implement our strategy our four growth pillars.
Smart devices MAU steam clauses vocational education, and education Digitization. The first two devices and steam costs. Those are at a larger scale and already a significant part of our business. The latter two are making good progress in product development and business model validation.
Expect to see challenges, including this new wave of Covid in China.
We intend to overcome them through our diversity of businesses large user bases and deep technical routes for innovation.
That's how we'll turn the call over to Sue Paul to give you more details on our financial performance so far.
And frankly with Doctor, Phil and Hello, everyone. Today, I will be presenting some financial highlights for the first quarter off of a pretty funny to be private deal today through our press release issued earlier today for further details.
First quarter total net revenue were RMB, one 2 billion.
Dollar, while hungry and 89 were implemented.
Representing an increase of 26, 6% from the first quarter of 2021.
At this growth by segment net revenue from our learning services were RMB $826 million or U S. Dollar 103.3 minute increased by 36, 1% in front of us impurity in 2021.
We attribute this growth to the increased revenue generated from our learning services reached a workforce that's driven by both growth in active users compared with less impure.
Right.
Net revenue from our smart devices were RMB, 253, 2 million or U S. Dollar 39, 9 million increased by 25, 4% promise impure what.
Driven by the increase in sales volume of erotic two new patents in the first quarter of.
Net revenue from online marketing services were RMB 121.4 million or U S. Dollar 19 point that really drove us entering our top quintile in person Chris process impurity in 2021.
For the first quarter. Our total gross profit reached RMB 641.8 million or U S. Dollar 101.2 million increased by 29, 3% compared with the first quarter after a tiny tiny what of.
Of course, Margaret a whole lot in services was 63, 9% for the first quarter of 2022 compared with 63, 4% for the same period in 'twenty one.
Gross margin for smart devices was 33.7% for the first quarter of 122 compared with 44.1% for the same period in 2021.
Gross margin for online marketing services was 23, 7% for the first quarter of two compared with 16, 4% for the same period in 2021.
For the first quarter total operating expenses were RMB $766 9 million.
S dollar by 121 bidding.
I'm here with RMB $710 8 million for the same period of last year.
With that for the first quarter, our sales and marketing expenses were RMB $506 4 million compared with RMB $548 7 million in the first quarter of Honeywell.
And the development expenses were RMB 203 million compared with RMB 127 points I've made it in the first quarter of 2021.
Our operating loss margin was 10 410, 4% in the first quarter of 'twenty, two compared with 22, 6% for the same period of last year.
For the first quarter of Counterparties, who are in that loss from our continuing operations attributable to ordinary shareholders was RMB $95 4 million or U S. Dollar.
15.9 billion compared with RMB $219 3 million for the same period of last year.
GAAP net loss from continuing operations attributable to ordinary shareholder for the first quarter was RMB $17 9 million or U S. Dollar 11.2 minutes.
Compared with RMB 204.8 million for the same period of last year.
Basic and diluted net loss per yes from continuing operations attributable to ordinary shareholders for the first quarter of 'twenty thing too was RMB Euro point 77 O U S.
Your appointment bunch, who knows.
non-GAAP basic and diluted net loss from continuing operation prayed, yes, but the first quarter was RMB euro clean fresh tablet or U S. Dollar zero point of view we're not.
On that cash you'll see in continuing operation activity was RMB $425 6 million or U S. Dollar 67 9 million for the fourth quarter.
Looking at our balance sheet, that's off the March 31st 2022 hour contract liability, which mainly consisted of 34 revenue generates power services were RMB 729, 5 million or U S dollar, but I agree that 15 point by many.
Compared with RMB, one 1 billion as of December 31st plenty of anyone.
At the end of the period, our cash cash equivalents restricted cash deposit and short term investment totaled RMB, one 2 billion or U S dollar Bill hungry and eighty-three omitted.
This concludes our prepared remarks, some people for your attention.
I would like to open the call to your questions.
Peter Please go ahead.
[noise].
Yeah.
We will now begin the question and answer session.
To ask a question you May press Star then one on your telephone keypad.
If you are using a speaker phone.
Please pick up your handset before pressing.
To withdraw your question. Please press Star then two.
If you would like to ask your question in Chinese we ask that you. Please repeat it in English for everyone on the call.
Once again Star then one to ask a question at this time, we will pause momentarily to assemble the roster.
Yeah.
And our first question will come from Elsie Sheng from Morgan Stanley . Please go ahead.
Yeah.
Thank you management for taking my question. So I'd like to ask you about the dumb at Danville or does the Cortez business could you give us more color in terms of the program.
Business and also the competitive landscape in this business. Thank you.
Yeah, Hi, I'll see yeah. This is a telephone I'll take your question as I discussed in our prepared remarks.
Making good progress here, yeah steam causes a achieved a rapid growth again in Q1.
And as you probably know go in chess.
Strong area for US Yeah, we've operated.
<unk> causes for how did together for about two years now so our teams are experienced and we have a differentiated product strategy. Yeah. So again that is to combine excellent teaching staff with polished interactive cost materials and also with our AI tutoring and.
Online community.
In terms of our progress in Q1.
We are already a market leader for Goldcorp, and we keep getting new customers every.
Every quarter the chest was a particularly a lifestyle spots for Q1 as I said gross billings, which has seen Q1 increased by over 170% quarter over quarter.
So so chest caters to a smaller.
Probably smaller than go but a more affluent population compared to go. So we believe both are good businesses for us So we will.
Focus on both these clauses.
Again, all of course is Oh.
Very differentiated from our peers. So we provide an integrated experience to our users.
So and.
And we made particular progress Oh with the AI and the online community this quarter.
So.
Oh, so so we upgraded the op experience so that the.
Small helpful. When when the students actually go review they are their chest games and they are.
Oh wait she all those games. So this improves their learning and we improved the.
The matching between the <unk> between the players so that they have a better experience when they are when they are when they go to the app and they get to matched with a player with similar skill levels and this improves their learning experience.
<unk>.
So as always our approach is to really to pick good areas to work on and patiently.
Our produce the best product in that area. So we did that with our devices we did that.
With the with the wage and we are doing that with our with chess. So we believe that is the recipe for success. We we don't intend to to work list could.
Got to have too many closer.
We want to be focused.
A powerful go and check we we actually plan to pick one or two other areas to also be our focus going going forward in this in this non academic.
Area so.
We will share more information.
With the new products went with when we have them. Thank you.
The next question comes from <unk>.
Oh with CLSA.
Please go ahead.
Thanks for taking my question.
Congratulations for the good.
Oh My God. My question is can you give us more color on the new car that Oh, Smart Tonight, and how how much does the format.
Momentum for this new product compared to that gets junior any Paul Thank you.
Essentially this is Paul I will take this question.
Firstly, if I just try to emphasize that got bought numbers after Q1.
Mr Report four months off our smart device that says they catch up favorably been though softer new schools mass opening and generates revenue off the RMB 253.2 million, representing an increase or almost 25% year over year from smart devices segment in the first quarter.
And for the Smart life will go back to a question. We have is kind of the AI desk lamps and has been welcomed by the customer first.
And we think that was the first weekend Charlotte number its share some shares at a couple of months here about the first batch of smart life. That's been sold out within the first month since its launch in early April reflecting the.
Great performance, reflecting up all the demands from the market and we think we we think about the the reason behind that why because we see the very positive feedback from the market is so volatile we think of all these are we are.
We did create a lot of some different all the innovative Ah.
Experience our products.
For example, we are apparel for peripheral ratio off the N J J D Stockholm until now.
Fingertip water search and there's a sentence the intensive readings and Oh, we I think we are the top two functions that we all mentioned that's why I asked the price Spike Oh about customers. We think about that's the that's what we are what we might what we do they assess just like we are always insist on it falls, but we always try to.
Why it's a high quality product to the market to meet the demands of the customers and the way to think about the way they will keep moving on.
To upgrade more functions to outsmart the lines. When you think about it will be a very possibly feedback around the market. Although right now it's still in the very early stage and we think we ought to people who have a long way to go end of and we are confident about the performance of these new products in the long run.
We expect that we can share more information on the number or the and data.
With you in the second quarter earnings that we think about that we have enough time to another.
Analysis of all the feedback for all customer and that we can provide more products to the market.
Okay.
The next question comes from Brian Gong of Citigroup. Please go ahead.
Good evening, Thanks management for taking my question. This is Katrina asking on behalf of Bryan. So my question is how should we look at the margin trend for the second quarter of 2022 and the full year.
Have we done any cost optimization measures and how should we think about the cost control.
Alright, thank you.
Thank you Katrina. Thank you for your question. This is the win I will add some color for you.
My didn't change the board pun intended to.
And you've seen in this quarter, we achieved a new high records in overall gross margin at 53%. Therefore, we are very confident about the improvement in our gross margin in the wrong.
Paul for lending survey sentiment, which is.
And I, just stack them and from revenue perspective, and we have always seeking to optimize the cost structure and to achieve economic skills to get.
The gross margin.
On a full year basis we.
That's it.
Average gross margin of learning services before.
You too will keep stable.
When compared with last year.
Meanwhile, we also noticed that disease, she didn't know front tuition on a quarter over quarter basis.
Gross margin is due to the seasonality of the because of nice revenue.
Yeah.
The multi vitamin sentiment, which he and the others that significant sentiment are where.
And we continue to invest in R&D and other resources.
We step to achieve some growth on a year over year basis.
The lockdown policy caused by the pandemic have been making a significant impact.
The production and the delivery of our smart devices, which further resulting in more uncertainties on both sales and the gross margin for the second one.
We improved the gross margin of smart devices.
The realization of greater economic power.
We need to keep close eye on.
The uncertainty around imagine all smart glasses.
Considering the margin of smart devices, either entity lone routes and the learnings of it.
Segment at current stage.
Our higher revenue portion from smart elastic Skus are achieved the overall gross margin level is expected to be lower.
Hum.
As for operating margin on one hand, we put.
Efforts on improving the efficiency.
Sales and marketing as well as staff costs on the other.
The hand, we continuously strengthen our.
Technical and R&D investment to keep our tech knowledge technical advantages and you'll see our improved operating margin achieved in this quarter and we have tried to seek a better performing.
Operating margin in the long run.
That's helpful. Thank you.
Okay.
Okay.
Our next question comes from Linda <unk> of Macquarie. Please go ahead.
Hi management. Thank you for taking for my question.
My Christmas.
He brought that makes sense.
Pandemic.
Don't know that the COVID-19 situation remains weak.
How is the impact from the recent pandemic outbreak like.
Shanghai and Beijing.
And if the city Lucked out what does social distancing restrictions I remember them do we have the Amy like contingency plans to mitigate the impacts so if that would be great. If the management can elaborate.
And the learning services business. Thank you very much.
Linda This is football I have I'll take this question and.
Indeed.
Recently, a colgate issue in some serious in China actually have some impact on our business.
We also come out with some of the contingency plan and to try to mitigate the volatile impact.
And we will divide it into that into two parts because with.
With the different impact on this business and I suppose the learning services segments, that's why all the majors.
We have a new generation generator generated from and I think all words.
Firstly, it's all of our asphalt services, it's primarily you deliver via the Internet. So we don't need that really the physical contact with all customer with most of our services have been offering or the old way out the online online channels is that helps us Gulf Island East out of the Ultra line centers. So let's think about it we have a very limited.
If I read a very limited impact.
On the on the learning curve on landlord and somebody says with business.
And so that's the that's the first part and secondly, it's volatile.
They do have some impact on what we're smart about I say segments, and it's because of the smart devices, whatever they purchase online or they brocade. So on the retail store, we have to deliver to us our products we offer to the to our customer. We are that's the real beauty related logistics transportation. He sells so we think all the right on India desktop.
We have some challenging things regarding antitrust.
Transportations vault products to the customers.
But we think about that that's what it'll be the we hope is a short term impact in the long run, but we don't think are by now we don't think about it.
Any impact.
The impact on the demand order from the customer regarding all the services.
Provided the fight to our smart devices, probably without because we are we see a very strong momentum in the demand from customers in the last several quarters regarding you had you kind of see up all growth rates and the growth trend of our AR smart glasses specialists.
In the last several quarters.
So, saying listen about the so I think in the long run that's what I'll go back to the normal and indeed, we do by no way out.
We definitely are doing something to mitigate the impact of short term short term and a quick examples really all we are we do we are setting up setting up the new warehouse in Tianjin Chengdu and the other area you mainland China and to delivering the smart devices directly to the region distributors. So we're think about what that is.
What we did and we hope we can mitigate the impact certainly caught up and we expect that we can see the debates we expand please see the reason to go back to normal right after the impact the.
Kuwait has been called I think basketball weekend, we expect ran all of Africa, and the middle of Q2, and we expect to share more information. After we finish off with the Q2 sees us. Thank you.
Yeah.
Thank you very much just a very quick follow up how do you see these backend logistic disruption obviously, she is getting better all right you could remain similar in pain.
Yeah, we think of all those guys Scott.
It's getting better and better, especially with the times times going and there's times going and Oh.
But that's still depend on the regions I think that's because they end up with different regions to obtain policy regarding on the call. It easily covered impact so but in general we see that it's getting better and we expect that that trying to be able to keep moving on the weekend, just with even more products to our customers.
Okay I got it. Thank you very much much appreciate it.
Thank you Linda.
Our next question comes from Thomas Chong of Jefferies. Please go ahead.
Hi, Good evening, Thanks management for taking my questions I'm going to ask.
I'll ask about the updates agitation digitization strategy and then adjustable market.
I would like to highlight.
Decent album, located by 19, no macro policy this year.
Included in new infrastructure or education jobs.
14, five years digital economy, developing Nash she was at 85 degree.
No.
I'm not looking for that.
Yeah.
Yeah.
We are not.
Oh boy, you're hunting investments excuse me.
Clear.
Problems.
Uh huh.
The central government and hope to improve the quality of it.
You don't have to school approach.
You would also use our own software hardware yeah.
Good job teaching Jeremy to have a public school.
Our customers to achieve it.
The decision to do so.
Isn't it.
<unk> focused on localizing, Charlie but due to the impact of the timing to finish out of control.
The opportunity to come to school.
Sure.
There are some possible delay in the program.
In Houston.
Believe it is only a short term impact if you're still counting this.
Yes.
All of that.
Although this is.
Early stage and there are some but then it could impact.
We haven't received lots of official economies in Juba Brookstone you at all.
Occasionally on car T system, and you can see that wasn't included.
The first batch of 5000 plus.
Education Palo Alto.
Industrial.
Technology.
Oh got it okay.
Okay.
Secondly, we were also honored to be included in the new vehicle.
Susan.
Facing.
Meaningful size on the technology from Houston.
I didn't mean to say that companies know opinions and stuff.
Amazingly foundation for plasma.
Good day.
Martin and Midland terminal with a selected us as they come into the <unk>.
Turning to anybody outside people hold on to them.
The people at the meeting.
Well I see no reason.
Oh uncover teaching.
According to the statistics from L. B.
Susan.
Well most of them 500000.
Oh LIBOR on the pipe that's M nationwide.
When you think about it.
More than 200, and the 19 million units.
And anything meaningful in the future.
In terms of potential market size also increasing digitization.
I think it will be over RMB.
650.
Chinese industry according to the okay.
Thank you.
The next question comes from canvas Chan of dialogue. Please go ahead.
Great.
Management. Thank you for taking my questions and I would like to ask about your <unk>.
Jason Smith.
How does that growth outlook look like in this year and also can you share a little bit more colors on our.
Device pipeline for this year. Thank you.
Thank you Candice.
The phone.
Yeah first regarding the location within the adult courses. So our current objectives for the teams are to.
She basically upgrade our courses and focus on.
The growth products.
Probably know from her.
From the past few quarters. So the Idaho courses second segment for US has seen some challenges for the past few quarters. So one of the key reason is that demand for English courses, which were a large part of the business was significantly impacted.
By Covid so.
So we are not kind of out of the transitional period, yet yeah. So with that said we have a actually several bright spots in Q1. So we saw good progress on the graduate school entrance exam clauses. So the gross billings front from the graduate school.
Interest exam courses grew by.
Over 160% quarter over quarter.
Another bright spot is a constructor certification process.
So it is a vocational course to help.
Prepare for the exam to to acquire a professional constructor.
A certificate.
The gross billings of of this course increased over actually over 10 times year over year in Q1, although from a low base.
Given the current macro environment.
Government actually very actively promoting vocational education and overall a strong demand from this sector.
So we think that the the prospect is actually quite bright so so we will.
Be patient here and spend time, a growing new products perfecting the clauses. So we believe our vocational and adult courses.
My future.
So that's four application and adult courses and regarding our pipeline for our devices.
So we said that we will have other other new products this year so.
We already had one out so the you without smart light it's in the early early April .
And we expect to launch a.
Another new category of smart device in the second half of.
This year, that's our current plan.
Moreover, we will also continue to upgrade.
Smart devices portfolios.
Portfolios.
Preparation for the sales season of the New school year.
In the September yeah. So.
Our lineup is our it's basically right now it's like this we have to.
Fixing any pain as a flagship product then we have the small light and listening part as new upcoming products and these.
These two two to two products are becoming more and more popular now so.
Yes.
If we compare this with with last year or last year, we only have the dictionary pen and we.
We achieved good growth with it with one category of product.
This year, we have a more comprehensive lineup.
It allows for a larger addressable market and Oh and also internally it allows more sharing of our technology.
Expertise in personnel on Monday.
Among the credit lines. So so we think.
This is a good strategy in our lineup plus and Oh the plan is to have another.
Category of new product in the second half of the year. So yeah I hope that that's helpful. Thank you.
Very clear. Thank you go ahead Joe.
Yeah.
Okay.
Okay.
This concludes our question and answer session I would like to turn the conference back over to Jeffrey Wong for any closing remarks.
Thank you once again for joining us today, if you have any further questions. Please feel free to contact us at you'd out directly or reach out to cheat TPG investor relations in China, or the U S half of them today.
Yes.
The conference has now concluded. Thank you for attending today's presentation and you may now disconnect.
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