Q3 2023 Youdao Inc Earnings Call
[music].
Good day and welcome to <unk> 2023 third quarter earnings Conference call Today's conference is being recorded.
Time, I would like to turn the conference over to Mr. Jeffrey Wong Investor relation director of a few though please go ahead.
Thank you operator. Please note the discussion today will contain forward looking statements relating to future performance of the company, which are intended to qualify for the safe harbor from that entity.
Established by the you ask Travis Securities Litigation Reform Act.
Such statements are not guarantees of future performance and are subject to certain risks and uncertainties assumptions and other factors. Some of these rigs up young company's control and could cause actual results 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 is included into his findings of the company.
<unk> Securities and Exchange Commission.
Company. It does now entertain any obligation to update these forward looking information except as required by law. During today's call management will also discuss certain non-GAAP financial measures for comparison purposes only.
The definitions of non-GAAP financial measures and reconciliations to non-GAAP financial results. Please see the Chinese twenty-three third quarter financial results news release issued earlier today.
Remember this conference is being recorded besides a webcast replay of this conference call will be available on <unk> corporate website at IR Doc you without dotcom.
Joining us today on the call from <unk> Senior management.
Doctor Some Joe our Chief Executive Officer.
Certain aging our president he's sharp Helen Xu, our VP of strategy and capital markets and Mr. Wang Li VP of finance.
I will now turn the call over to Dr. Joe to review with some of our recent highlights and strategic direction.
Thank you Geoffrey.
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 those numbers are based on I mean, b unless otherwise specifically stated.
In Q3, we achieved a record high net revenues of RMB, one 5 billion, marking a year over year increase of nine 7%.
Loss from operations narrowed by 73, 7% year over year to RMB $57 7 million net.
Net cash used in continuing operations operating activities amounted to RMB.
$294 7 million largely stable with the same period of last year.
We're clearly making steady progress towards achieving profitability.
In Q3, excluding the Cummins Lossmaking Smart devices segment net revenues of our business lines copper there combined cost and operating expenses.
Before looking at the results from our various business lines, let us first discuss our progress on the artificial intelligence.
Technology, specifically large language models represents an unprecedented opportunity for education technology. It is becoming clear that this technology has fundamentally revolutionize access to many formerly highly valuable but cost prohibitive services for learners schools.
Families.
We are already witnessing accelerated changes in this domain.
We're very excited about the opportunities presented by last Winter's models.
Sure.
Always playing a leading role in the rapid advancement of L. O M and they all applications in education.
Recently, we achieved a notable milestone with the receipt of relevant filings for our proprietary E. L. O M. So as of yet this months this underscores that.
All elements of our picking up technological capabilities by regulatory authorities.
On the product front, we introduced the world's first digital human language coach named HEICO.
It was launched on Euro Dictionary Pen X six Pope in August that made its way to a mobile app stores in October.
Happy to share that echo has already accumulated more than 100000 registered users quick uptake.
Additionally, we continue to enhance a box in euro translation and introduced they are writing alongside other features driving over 160% year over year close in translation subscription fees in Q3.
Moreover, I am thrilled to share that we will host an event in Beijing next months to introduce more products and features.
Next I will quickly outline key business developments in Q3.
As for the learning services.
Revenue comes in at RMB 950.
Point 8 million, representing a 7% year over year growth will continue to focus on user satisfaction and healthy close in line with our goal to achieve profitability sales of digital content services exceeded RMB 400 million in Q3 with gross margin ratio exceeding seven.
80% that's hit a record high.
In Q3.
We released and I, Chris recommendation feature which presents personalized quiz questions. After students watch instructional videos to help improve learning and assess results.
Students finished over 7.6 million Chris questions in Q3.
Additionally, we launched they are writing the assignment in Q3 effectively reducing the time required for detailed assessments and refinement of students writings by 50%.
Regarding our steam causes the gross billings of programming courses grew by over 30% year over year in Q3.
Our programming and informatics courses have high user satisfaction, mainly due to our one stop services that provides comprehensive learning competition preparation and post the competition score estimations. Furthermore, we once again collaborated with the Chinese wage She association.
To successfully hold the second national children's outweighed She open championship.
Turning to the online marketing services, we continue to see strong growth momentum in Q3.
Net revenues of online marketing services reached a historic high of RMB, $336 1 million, marking a 113, 5% year over year increase in four quarters of over 50% where we.
We continue to deploy enhancements to both AI and matching technology and more industry specific data.
The continued growth of the business also provided our technical teams.
Access to more data to do more precise audience targeting and real time traffic shooter.
These upgrades has in turn improved conversion rates customer satisfaction and our revenue.
As for the smart devices segments net revenues were RMB $251 9 million in Q3 done by a 29, 3% year over year.
The decline was mainly due to our continued efforts to reduce low return of investment sales channels, leading to a reduction in overall, China inventory that's impacted Q3 revenue.
Our channel optimization efforts will continue in Q4, we expect a continued short term negative impact in this segment before the optimization is likely to conclude.
By the end of the year.
I would like to stress that these channel optimizations improve the businesses long term growth and profitability potential.
On the product front.
It is in place, our new products, including the Euro Dictionary Pen X six Clos and Yudof listening Pottsville, leading to a year over year increase of over 10% in smart devices sellout RMB amount.
Additionally, paying X six pro our flagship with Allo and features.
Exhibited over 50% higher usage frequency, there and get out dictionary pen six in Q3.
Reflecting the popularity of its new features among customers.
Our other efforts are also progressing well.
For educational digital digitalization solutions we.
Successfully secured a project bids in jumps to cancel and other regions in the third quarter.
Education Digitize the nation is a big focus for the overall public education sector and we aim to build this line as a growth segment and steadily.
Looking ahead.
We are committed to delivering top quality education content products and services to our customers.
Moreover, our leading proprietary large language models.
Various opportunities for many novel applications, which is crucial in the appaloosa analyzed revolutionizing.
Learning on a wider scale.
We are very excited about the opportunities and cannot wait to serve our customers with more innovative products. Thank you and now it is pump so to give you an update on our financials.
[noise] central doctoral and Hello, everyone today, I will be presenting some financial highlights from the quarter of 10 country. We encourage you to read through our press release, you said already today for further details.
For the third quarter total net revenue of RMB, one 5 billion.
O U S dollar 210.9 billion, representing a 19, 7% in Chris promised computer after a tiny tiny too.
Revenue from our learning services were RMB 950 people in eight minutes or U S. Dollar 133 minutes, representing a 7% increase from the same period of 2022 pardon.
Primarily driven by the strong sales performance of the digital kind of services compared with the same people that are all still plenty of funding to.
Net revenue for our smart glasses were RMB 12, 1.9 minutes or U S. Dollar. So a full point in five minute stock 29, 3% from the shipyard often tied to.
Primarily due to the our continuous efforts to streamline marketing channel with low return on investment for the intelligent learning products in the third quarter of <unk>.
Net revenue for our online marketing services were RMB 236, clean one minute.
S. Dollar please explain why meda, representing about 113.5% and interest for the same period of time too.
The increase was mainly attributable to the increased revenue bonds up a whole bunch space advertisements. So it was a third party internet of properties.
So quarter, our total gross profit was RMB 859, 6 million or U S.
Well I had we had $17 8 million, representing a 13.1% of interest from third quarter of 92.
Of course market for learning services was 67, 8% for the so called home, sometimes three compared with 64, 5%, but the same people write offs along last year.
Of course BARDA Smartwatch. This was 42, 6% for the so called to advance rate compared with 44% for the same people at all of a sudden too.
Gross margin for online marketing services was 31, 9% for the third quarter, often history compared with 27, 1% for the same here are often hidden who.
Fourth quarter total operating expenses were RMB 917 points for a minute.
Mm 125.7 million compared with RMB 979, 2 million for the shipyard of philosophy.
For the fourth third quarter, our sales and marketing stuff why it would be 674 2 million compared with RMB $709 8 million in the third quarter all of sudden find too Richard.
Research and development expense were RMB, 187, 3 million compared with RMB 212, 9 million in the support all put in Vancouver.
Our operating loss margin was three 7% in the quarter oftentimes free.
It was 15, 6% for the same period of last year.
For a full quarter of those tiny country, all net loss from continuing operations attributable to ordinary shareholders was RMB 129 million or U S. Dollar 14, playing by minute compared with RMB $183 9 million for the same people out of last year.
non-GAAP net loss from continuing operations attributable to ordinary shareholders was so quarter was RMB 67.3 made it well.
And I put in two minutes compared with RMB 164 point for a minute for the same people or the philosophy.
Basic and diluted net loss from continuing operation attributable to ordinary shareholder, but so quarter. After a plenty finished REIT was RMB eight five or U S dollar euro put them on to <unk>.
non-GAAP basic and diluted net loss from continuing operation.
Prady S attributable to ordinary shareholder plus a quarter was RMB Euro 0.550 U S dollar to your point you're right.
Our cash provided by continuing operating activities were RMB 294.7 minutes, we've got dollar 40, playing for a minute so quarter.
Looking at our balance sheet, that's off of a September 30th plenty Penske I'll call kind of our ability which consist of 34 revenue generate from Orlando San Francis were RMB 900, I'm, sorry, $1 6 million or U S. Dollar 127 planes haven't made it compared with RMB, one 1 billion as of December 31st 10 time too.
Eddie I know Purion, Oh cash cash equivalents restricted cash term deposit and short term investment totaled RMB 206 people in one minute.
Dollar putting that point for a minute.
This concludes our prepared remarks, some people to our attention we would now like to open the call to your questions. Operator. Please go ahead.
Ladies and gentlemen, we will now begin the question answer session if.
If you wish to register for a question you May Press Star one.
And you touched on the telephone.
If you want to withdraw from the queue you compress starting to.
The first question come from the line of Brian <unk> with Citigroup. Please go ahead.
Yeah, Oh can you and you had mentioned in sense for taking my question.
Good question of all of our product would have loved you know our Oh, yeah product high I called for a while so what's the.
The user feedback you have received so far and are there any plans for contract date. Thank you.
Okay.
Thank you. Thank you.
So higher coal the mobile app.
In October and.
And so far we are very happy with its performance I use the feedback has been very positive.
As we discussed in our prepared remarks are the high priority has over 400000 registered users and.
And in a month yeah. So so it's only for them for a month and almost all of the 100 and thousands of registered users come through organic channels and from this we can see that our users are really attracted to sort this out.
Our users really like.
Like the free from a conversation so they they told us some sort of the feedback as.
As well as they they also like the.
Any categories H scenarios and 60 different topics that they can choose from if they already have a topic. They wanted to discuss them in mind.
And another feedback we receive you stopped you just tell us that the and if competition reports that the App provides about they are about the language.
They used to use as a joined up conversation and also how to improve them.
A really helpful for them to improve their pronunciation and also.
Grammar and of the language skills yeah.
So.
Uh huh.
So it basically based on the feedback Oh, we can see that the.
The product the idea behind the higher coal is a is a pretty pretty Sunday one yeah. The idea is that for a lot of users the biggest the largest obstacles.
In learning their language is the lack of a really a high quality language environment.
So.
The idea of a higher core you stopped Oh, we are finally able to leverage the ability of our large language models to create this high quality learn a language environment in a very cost efficient way and Oh. So it is a it is a breakthrough.
Very useful in in language learning.
And another point is that.
Now that we have I received a regulatory approval for its yeah, and it's really just underlying language model behind the high alcohol.
It's a we would be able to increase distribution off the product and they drive more user growth.
So.
This is a great opportunity fly at a higher cost because our users' interests in a language model.
<unk> based products are really high.
And there are not many are kind of high quality competitive education language model based apps on the markets. Currently so so we are kind of half a time window that we can try to do a distribution.
So to a larger a much larger audience. So we will try to do that.
Yeah.
We are also on track to release the next major version of higher coal by the end of this year.
We don't want to talk too much about it in the best what I want to share is that it'll be a significant updates.
The benefits of actually being first to market, which is the case for a higher co is that are you gain a deeper understanding of their users are true needs.
What they like what they don't like what makes them come back and what helps them learn learn better and what leads them to pay so we will update the product. According to these understandings.
And these will go into the major version I I I just mentioned and.
And we will also have some pleasant surprises so far users that the higher co team has been working on for quite some time. So we look forward to sharing the new version with you soon.
And I hope that answers your question. Thank you.
Yeah, that's very helpful. Thank you.
Yes.
The next question is from Kelly Wong with TICC. Please go ahead.
Okay.
Hey, good evening, Thanks for taking my question.
So my question is related to our services.
Goodbye.
Okay.
Good morning.
Yeah.
Thank you.
Uh huh.
It takes a question first and in this country. We believe it's a little bit a different course, when compared with the last four years and of course, they swallow those people don't have all of them.
A little bit different summer class indias into summer and the like they always do the traveling domestically.
Domestically and are all the international trip. This summer so I think in the sometimes the more students very last time or the less flexibility will take let's say a fast tool.
So we think that's the that's the first difference and secondly, just to follow on from our company and stuff like Stockholm, I shouldn't have been accrual bowel well I shop, Remodels, We think Liberty, our Oh core document patent companies like I call. It the transition off the counter period off the problems that are pure that's are we call the traditional costco courses format.
The two upgraded to the new formats are supported by a lifetime with volatile and we have already deployed the lifetime modal skills to the.
Ah trial to test system that is where all of the other so read all of it. So if I were to make it a snack scenario tubes are deployed.
It's a technology and we have seen a very critical for myself.
But also.
Technology and also obviously cyber IP.
Feedback from students and weeks that they got help us too.
Chris.
But because our costs are in the long haul and the increased marketing all software.
And.
I think that's the that's the.
Sometimes we think be possibly items without the transition P. A reorder rate.
Ill just limit his job on that and.
Take a little bit.
Our last investment in our traditional courses on the content investment into summer nights because of personnel as well as customer acquisition cost. So I think that's the we think that that's kind of off the overview on the trend that we believe all of them. So they appeal to you.
He doesn't have all the all would be sensible for months after the evidence of it and of course, it and that's because we think we can provide more interactive on the contract signed up more a different format also all of the services. So students in the next few quarters. That's the desk. That's my comments are all the questions and I think that my colleagues are mobile.
Another comments with respect to Nashville.
Uh huh.
And I'd like to add to Macau.
Point being financial aspects here.
First of all we will continue to seek a profitability and positive cash flow from.
The learning services in the long haul.
Inside that before we are more focused on the health of the business has been just fine.
We have reached a new high restaurant margin.
To around 58% and achieved profit from these sentiments.
Another point as we are having the great opportunity to continue lower our costs and improve the efficiency of yeah, Yeah technology.
As mentioned the pain doctors and discipline them, although we do have faith.
Competition from peers and to face challenges from uncertainty.
Operating environment, but we are playing a leading role in the rapid intervention.
Language models and the application indication.
Which give us great vintages, so yeah, very confident our learning services on a going forward basis.
It is helpful. Thank you.
Well, thank you for the comments.
Got it thank you.
The next question from Thomas Chong with Jefferies. Please go ahead.
Hi, Good evening, Thanks management for taking my questions. My question is about our online marketing 10.
My comments about the key driver behind.
Behind the substantial growth of online marketing services in the third quarter. Thank you.
Uh Huh this is.
Thank you for your question.
As for our online marketing services.
Revenue has grown over 50% year over year for the pasta for poker.
Q4 of last year.
Moreover, the growth of the group.
Right.
Throw around a 100%, but lots of to call. This the primary driver behind this growth if it goes to a whole a lot.
Technology.
A key contributor in Q3 of course is the operator.
Yeah, that's our T E capabilities, we began to use.
And what type of business is the end of the last year.
Go Union improvement.
They seem to be a combination from our client partners.
The proportion of archaea application keeps increasing and the union.
Q3 O O conversations with Akshay, you can pull to buy three or four top cut.
So all of a sudden attainment in the gaming and industrial also play the important role for all of our growth.
We saw a huge increase in demand well work hard to do.
I feel.
The RK I'm going to lead to over 100% year over year with all of the net revenues from the entertainment industry and with Q3.
And on top of that the summer season, and what's an important promotion period at this time.
They're both King Allah, Oh, do I tied to AUM.
On a pro forma.
We haven't been trading on various methods to further enhance the adult hygiene packaging it for our clients.
Our data and technology I believe it will help us provide a better idiot somebody says well all the time I know Keith with the Thunderbolt well Ala.
Advertising business. Thank you.
Uh huh.
Sure.
The next question is from you can thing with Citi. Please go ahead.
Hi, Mike.
We can Matt classroom my classroom about it they liked it so what is the user feedback on the addiction and paying extra quote are there any plans to introduce new ask of you before the end of the year. Thank you.
Thank you for the question.
No.
Let me first talk.
Talk a little bit about our business operations and then usually feedback so as I discussed in the prepared remarks on Q3, a smart devices spell out RMB of months actually increased by over 10% year over year.
So sellout is our key sales metrics, we focus on our internally because when we when we gauge our business progress and housing is so so basically it is.
Valley of good so to end users through our our channels.
All of them are saying with the channels.
This because because we are adjusting currently experiencing a kind of adjusting period of our sales channels and so the sell out months and also in the final revenue I'm on shops are there they are a little bit different when you look at the the trend there.
It's actually done for this quarter so.
Sue the sellout a metric because we can see that our our devices.
Selling well to the end users.
Despite the current headwinds are displayed by the by the financial metrics.
So this is because we again, we cut back on some sales channels that Oh.
Oh that they're providing.
Providing a not very good return on investment for us and this will.
Have the effect of reducing our sales channel inventory, so that's kind of.
A fuller picture of the device business operations, and and now lets talk about our user feedback so.
Sixth pro was a hit among users owing to stand out features like English grammar instruction.
Did you know human language coach and a impressive 100 days standby time.
First to features I just mentioned are based on a large language models.
The most important metric we look at our is is engagement.
The introduction of these large language model features a significantly boosted using patients with X six approach it it actually extra bits Oh for 50% higher usage frequency than Oh, it's at the other product ethics, which doesn't have large language model features.
In Q3.
So, notably both the English grammar instruction in digital language coach or are powered by our.
Language motto and just to expand in the future a little bit to when a user scans a multiple choice question with X six pro a notch language model well analyzed.
Question and generate step by step audio explanations. So these explanations cover.
Our key points Chinese translations and choice analysis, So quick question.
In deposits between these different stages, just as a Uh huh.
The teacher would explained the question in a classroom setting yeah. So because.
Because of the much higher engagement level, we see that our users really like these new features so so we.
So so we think these are working great and your thoughts about the upcoming products. So regarding our upcoming smart device gets released as we are focusing on harnessing capabilities of the language model to provide the more high value.
Learning services as you can imagine and Oh.
I'll go here is to make the product experience as close as possible to.
What the students in country or win a learning kind of in person with a with a teacher.
This will make these devices are kind of.
In different form factors are vastly more useful a compared to a traditional learning devices.
Boosting our learning efficiency and effectiveness and raising satisfaction. So we have oh, extending plans to launch a multiple skus before the <unk>.
End of this year. So so please stay tuned and we will give you update shortly thank you.
That concludes the question and answer session I would like to turn the conference back over to management for any additional or closing comments.
Thank you once again for joining us today, if you have any further questions. Please feel free to contact us as you don't directly or reach out to <unk> financial communications in China or do you actually have a great day.
Ladies and gentlemen, the conference has now concluded and you may now disconnect. Your lines. Thank you for joining and have a nice day bye bye.
Okay.
[music].
[music].
Yeah.
Yeah.
[music].
Yeah.
Hum.
Yeah.
[music].
Uh huh.
[music].
Yeah.
Yeah.
[music].
Yeah.
[music].
Yes.
[music].
Yeah.
Yes.
[music].
Okay.
[music].
Yes.
[music].
Uh huh.
[music].
Okay.
Yeah.
[music].
Yes.
[music].
Mhm.
Yeah.
[music].
Okay.
Right.
Yeah.
Okay.
[music].
Yeah.
Okay.
Yeah.
Okay.
Okay.
Sure.
[music].
Okay.
Yeah.
Yes.
[music].
Okay.
[music].
Okay.
Right.
Okay.
Yeah.
[music].
Hum.
Yes.
[music].
Sure.
[music].
Okay.
[music].
Yeah.
Okay.
Oh.
[music].
Yeah.
Yes.
[music].
Yes.
[music].
Okay.
Yes.
Hum.
Yes.
Yeah.
[music].
Okay.
Right.
[music].
Mhm.
[music].
Yeah.
Hum.
[music].
Okay.
Yeah.
[music].
Yes.
[music].
Okay.
[music].
Yeah.
[music].
Yeah.
[music].
Yeah.
Yeah.
Okay.
[music].
Yes.
[music].
Okay.
Yeah.
Okay.
[music].
Okay.
[music].
Yeah.
Yeah.
Okay.
[music].
Right.
[music].
Okay.
[music].
Okay.
[music].
Sure.
Yeah.
Yeah.
Yeah.
Okay.
Yes.
[music].
Yeah.
[music].
Yes.
[music].
Okay.
[music].
Okay.
[music].