Youdao Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 24, 2023

There are 10 speakers on the call.

Operator

Good day, and welcome to the UDAO 2023 Second Quarter Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Jeffrey Wang, Investor Relations Director of Yudao. Please go ahead.

Speaker 1

Thank you, operator. Please note the discussion today will contain forward looking statements related to the future performance of the company, which are intended to qualify for the safe harbor from liability established by the U. S. Private Securities Litigation Reform Act. Such statements are not guarantees of the future performance and are subject to certain risks and uncertainties, assumptions and other factors.

Speaker 1

Some of these risks are beyond the 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 Yudao's business and financial results is included in certain filings of the company with the U. S. Securities and Exchange Commission. The company does not undertake any obligation to update this forward looking information, except as required by law.

Speaker 1

During today's call, management will also discuss certain non GAAP financial measures for comparison purpose only. For the definitions of non GAAP financial measures and reconciliations of GAAP to non GAAP financial results, please see the 2023 Q2 financial results news release issued earlier today. As a reminder, this conference is being recorded. Besides, a webcast replay of this conference call will be available on Yudao's property website at ir. Yudao.com.

Speaker 1

Joining us today on the call from Youdao's senior management is Doctor. Feng Zhou, our Chief Executive Officer Mr. Lei Jin, our President Mr. Peng Xu, our VP of Strategy and Capital Markets and Mr. Wayne Li, our VP of Finance.

Speaker 1

I will now turn the call over to Doctor. Zhou to review some of our recent highlights and strategic direction.

Speaker 2

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 all numbers are based on renminbi, unless otherwise specifically stated. In Q2 2023, our net revenues came in strong and reached RMB1.2 billion, representing a year over year increase of 26.2%. Loss from operations narrowed to RMB289.1 million, marking a year over year improvement of 36.5%. Net cash provided by continuing operating activities stood at RMB133 1,000,000, reflecting growth of 27.6 percent year over year.

Speaker 2

We are on a clear path to achieving profitability. As for our business segment, learning services and online marketing services continue to be our current main driver of growth, both reaching record levels of sales. In the meantime, we're making solid progress in learning devices R and D, and we are leading the charge to apply AIGC in education by rapidly releasing applications of generative AI. In the first half of the year, we see an overall positive trend in key financial indicators. Net revenues amounted to RMB2.4 billion, indicating an increase of 9.9 percent year over year.

Speaker 2

Loss from operations in the first half reduced to RMB 484.9 million, improving by 16.4% year over year. Net cash used in continuing operating activities reached RMB304 1,000,000, marking a 5% year over year improvement. For our learning services segment, Q2 sales of digital content exceeded RMB800 1,000,000 reaching a record high. Customer retention rate across the services was over 60%, leading to over RMB200 1,000,000 in operating cash inflow for this area. In addition to our learning content, we launched an AI university application advisor, AI in Q2 to support students in their college selection process.

Speaker 2

Users were quick to adopt this tool leading to over 2,000,000 page views. Online marketing services maintained the rapid growth momentum over the last two quarters. Net revenues reached RMB303 1,000,000 in Q2, a historical high, representing an increase of 98.7 percent year over year. Moreover, gross profit margin improved by 4.2% year over year. These achievements were primarily due to advancements in our ad platform driven by AI algorithms.

Speaker 2

First, we use proprietary AI technology to effectively identify and track the topics and products, matching the audiences of specific key opinion leaders, with accuracy rates approaching 90%, resulting in more precise athletes. Secondly, AIGC not only reduced the time for producing ad materials by more than 80%, which drove better user satisfaction, but also reduced production costs for certain ad materials by over 90%, driving the improvement in gross margin. Positive trends in video content services and online marketing services in Q2 is expected to continue in the second half. Regarding our STEAM courses, on the policy front, the Ministry of Education announced that starting from June 20 this year, primary and secondary schools will add new programming courses to their curriculum. This new policy is expected to further expand the demand for programming content and services from families.

Speaker 2

Youdao recently hosted the 7th Wisdom Computer Programming Contest for primary and secondary school students in Beijing's Haidian District in Q2, which showcased Youdao's influence in the field of programming. In addition, both programming and Go courses performed well with retention in Q2, with the retention rates for the advanced classes approaching 70%. Besides, the students from the champions class won the Gold Camp Championship at Jiangsu Mine Sports Games. In terms of the smart devices, total revenues of smart devices were down by 7.4% in Q2 year over year. We're still in a transitional period for our devices business, mostly due to sluggish consumer spending in recent months and our stricter sales and marketing budget control.

Speaker 2

Both Yudao Dictionary 10 and Yudao Listening part performed well during the June 18th shopping festival, topping the chart for 4 consecutive years and 2 consecutive years, respectively, on jd.com for both sales volume and number of unit sales in this category. In addition, Yudao Listening pod was updated to support Yudao Learning Aware, featuring additional apps such as Chinese Children's Encyclopedia, Collins Big Cat Reading and Yudao AI Listening, further enriching users' experiences. More recently, in August, we released the Yudao Dictionary PEN X6 Pro and the Eudad Listening Pad Pro. We believe in the long term prospect of learning devices as they are convenient, helpful and affordable for consumers. We're focusing on 2 things to drive growth and profitability.

Speaker 2

1 is new products, which we will have more to be released in Q4 and second is optimization to our marketing and sales, which is underway. Then let's discuss our progress with AI. As a leading education technology provider in China, we have always been proud of our capabilities in technological innovations. We believe large language models and AIGC presented a great innovation and growth opportunity for us. In July, we announced our proprietary large language model, Xinyue, optimized for education application and have successfully deployed it to 6 applications starting from the Q2.

Speaker 2

We believe we are among the fastest in adopting LRM and making the most solid business for us in this area in China. I'm happy to report that one of Zuvia's applications, the AI Box feature in Niudan translation has already driven nearly 100% year over year growth of translation subscription and over 200% year over year growth of subscription fee. AI Box provides very convenient in application AI features like sentence refinement, grammar correction, writing suggestions and summarization. In July, we also launched the 1st digital human language coach in China named Echo. Echo teaches spoken English 1 on 1.

Speaker 2

And thanks to large language model technology, she understands the learner very well, is fun to talk to and provides high quality feedback and really helps the learner improve their language acquisition. ECCO made its debut at the World's Artificial Intelligence Conference in Shanghai, receiving great enthusiasm from the audience and media. 2 weeks later 2 weeks ago, Echo became generally available in Yudao Dictionary 10 X6 Pro. The reviews so far are great and we expect Echo to and more AIGC launches to drive our business growth in the coming months. Looking ahead, we believe education could be among the top verticals for large language models.

Speaker 2

This technology provides great potential for personalization of the learning experience, effective guidance throughout the learning process and integration of knowledge across subjects. That summarizes our business operations in Q2. At a high level, our strategy this year is twofold. First, we prioritize driving healthy growth by offering high quality digital content services. Secondly, we dedicate efforts to accelerate the innovation of generative AI into our products and services.

Speaker 2

In Q2, our teams made significant progress in both areas. The user demand for high quality learning products and services remain consistently high, Leveraging our strength in content creation, user understanding and technological capabilities, we are committed to continuously delivering exceptional products that address the needs of our users. Finally, I would like to share Youdao and NetEase Group have both approved a proposed amendment to the aforementioned US300 $1,000,000 revolving loan facility to extend the maturity dates of the facility, including loans already drawn from it until March 31, 2027. In addition, we announced that the Board of Directors have approved an amendment to the foregoing program to increase the total authorized repurchase amount by additional US20 $1,000,000 This demonstrates the long term support from NetEase and the confidence from Yudao's management. Thank you.

Speaker 2

Now, it's Sookong to give you an update on our financials.

Speaker 3

Thank you, Doctor. Zhou, and hello, everyone. Today, I will be presenting some financial highlights from the Q2 of 2023. We encourage you to read through our press release issued earlier today for further details. For the Q2, total net revenue of RMB1.2 billion or US166.4 million dollars representing a 26.2% increase from the same period in 2022.

Speaker 3

Net revenue from our learning services were RMB680.9 million or US93.9 million dollars representing a 20.8% increase from the same period in 2022, primarily driven by the strong sales performance of digital content services compared with the same period of 2022. Net revenue from our smart devices were RMB222.2 million or US30.6 million dollars down 7.4% from the same period in 2022, primarily due to the decreased demand for the intelligent learning products in the Q2 of 2023. Net revenue from our online marketing services were RMB303.6 million or US41.9 million dollars representing a 98.7% increase from the same period in 2022. The increase was mainly attributable to the increased demand for the performance based advertisement through the 3rd party's Internet properties. For the Q2, our total gross profit was RMB567.2 million or US78.2 million dollars representing a 38.4% increase from the Q2 of 2022.

Speaker 3

Gross margin for learning services was 57.4% for the Q2 of 2023 compared with 52.2% for the same period in 2022. Gross margin for smart devices was 35.8% for the Q2 of 2023, compared with 3.6% for the same period of in 2022. Gross margin for online marketing services was 31.9% for the Q2 of 2023, compared with 27.7% for the same period in 2022. For the 2nd quarter, total operating expense were RMB856.3 million or US118.1 million dollars compared with RMB864.9 million for the same period of last year. With that, for the 2nd quarter, our sales and marketing expenses were RMB587.7 million, compared with RMB596 1,000,000 in the Q2 of 2022.

Speaker 3

Research and development expense were RMB205.5 million, compared with RMB280.4 million in the Q2 of 2023. Our operating gross margin was 24% in the Q2 of 2023 compared with 47.6% for the same period of last year. For the Q2 of 2019, our net loss from continuing operations attributable to ordinary shareholders was RMB299.2 million or US41.3 million dollars compared with RMB453.9 million for the same period of last year. Non GAAP net loss from continuing operations attributable to ordinary shareholders for the Q2 was RMB283.6 million or US39.1 million dollars compared with RMB435.8 million for the same period of last year. Basic and diluted net loss from continuing operations per ADS attributable to ordinary shareholders for the Q2 of 2019 was RMB2.45 or US0.34 dollars Non GAAP basic and diluted net loss from continuing operations per ADS attributable to ordinary shareholders for the Q2 was RMB2.32 or US0.32 dollars Our net cash provided by the continuing operating activities was RMB433 1,000,000 or US18.3 million dollars for the same quarter.

Speaker 3

Looking at our balance sheet, As of June 30, 2023, our contract liability, which mainly consists of the deferred revenue generated from our learning services, were RMB1.2 billion or $167,300,000 compared with RMB1.1 billion as of December 31, 2022. At the end of the period, our cash, cash equivalents, restricted cash, term deposit and short term investments totaled RMB 680 1,000,000 or 93.8 million dollars This concludes our prepared remarks. Thank you for your attention. We will now open the call to your questions. Operator, please go ahead.

Operator

And our first question today will come from Brian Gung with Citi. Please go ahead.

Speaker 4

Good evening, management. Thanks for taking my questions. I have a very quick one on our plan on AI GC technology. What AI applications will be launched in the second half of this year? And what impact will they have on our business in your view?

Speaker 4

Thank you.

Speaker 2

Hi, Brian. Yes, this is Zhoufeng. Yes, we announced our proprietary large language model, the UF for education in July. We are looking to leverage this breakthrough technology to drive both short term and future growth. So we have plans for both the coming months and also for the longer term.

Speaker 2

So in the short term, we've already launched 6 applications of Xinyue, including our digital human language coach named Echo, AI Box 2.0 and AI Translation, etcetera. So the first line of work for us is to deploy these applications to more of our services, apps and devices and start to drive business growth with these new capabilities. So in fact, it is already driving growth as early as in Q2. For example, AI Box 1.0 already drove nearly 100% year over year growth of translation subscriptions and over 200% year over year growth of subscription fees in Q2 as we just discussed in prepared remarks. We've also launched Echo, our digital human language coach and English grammar instruction feature in the latest Yudao dictionary game X6 Pro launched earlier this month.

Speaker 2

Echo is the first large language model based digital human language coach in China. So this is a groundbreaking product. It is liked a lot by our customers from our feedback. And our AI grammar instruction feature is also the first of its kind in learning devices. Our users tell us that they really like these 2 new features because they are really helpful and engaging.

Speaker 2

We will continue to upgrade these features over the coming months and we plan to launch and monetize them on other platforms, for example, on phones. So Echo and other features will be on phones too. One of the strengths of AIGC product from our observation is that consumers are willing to pay for them because they are really useful and helpful. This has been shown to be true by the tremendous growth of products like Midjourney and Chargebee T itself. So we do not need to go through the free to use model to kind of indirectly monetize these products.

Speaker 2

Instead they could be monetized directly from day 1. So this shortens the investment cycle of these products. Regarding entirely new applications, I am also happy to share that we plan to launch more LLM based applications in Q4 this year. There are other aspects of the English language learning that AIGC can really help with, not only grammar. And there are other subjects that we should provide AIGC products for.

Speaker 2

Our teams are now more familiar with how these language models work and have accumulated substantial experience in their applications. So we are able to quickly iterate and build more applications. So more applications will come in Q4 this year. So in short, we are off to a good start with the 3 year project. So we entered the market early and it is already driving growth and it has a great long term potential.

Speaker 2

So looking further ahead, generative AI represents a transformative opportunity for the education technology sector, as well as a lot of other industries, as we all know. So it has the potential to allow much more personalized learning and to increase the productivity of the overall education process. So we are also starting early in L and M with the aim to drive long term future for us. So for that purpose, the basic LMM technology is important. And we believe what's more important is the application scenarios.

Speaker 2

We are looking at a lot of the different scenarios in education and because we are early into the game, our teams have more experience. So we believe we can maintain the early lead that we already have enjoying in this area. So overall, we are bullish about combining large language models in education and we'll keep innovating in this area. Thank you.

Speaker 4

Thank you. That's very helpful.

Operator

Our next

Speaker 5

Good evening management. This is Tanya Wang from CICC. Thank you for taking my questions. So in terms of the smart devices, since we have released the Yu Dao Dictionary PEN X6 Pro and Listening POP Pro earlier this month, So would you mind provide an update on the user feedback for these new smart devices? And also, as we saw a slight decline in revenue in the smart devices sector this quarter, does management still maintain a confidence in the long term prospects of this business?

Speaker 5

Would you mind give us more color on this? Thank you.

Speaker 2

Yes. Thank you. Yes, this is Zhoufeng again. As we mentioned, we launched the Dictionary PAM X6 Pro and without listening to Pod Pro earlier this month. So let me provide fixed updates.

Speaker 2

For the X6 Pro Dictionary 10, this is our flagship product and the most popular features were the 100 day ultra long standby time, English grammar instruction, little human language coach and test and lab analysis from the popular 5 series Wusan, Wian Gaofa, Sunny Moon. So these are the 4 most popular features we got from user feedback. The users like these features very, very much. So what's exciting for us is that the AIGC language approach is actually among the most popular features. It's the number 3 feature.

Speaker 2

So it's one of the most popular features. So we're happy to share that for the 1st 20 days of August, driven by the popularity of X6 Pro and S6, new dictionary pen activations were up by more than 20% year over year. So that's for the new dictionary paying product. As for the listening platform, the most popular features from user feedback is the AI player and AI dialogue. These two features are the most popular.

Speaker 2

As from kind of new product sales activation, so we've observed that year over year increase in new activations of our listening product line. So this year is higher in activation than the same period last year. That's also for the 1st 20 days in August. And as I discussed in prepared remarks, we will have new devices to be released in Q4. So we are looking forward to bringing more new products to our customers in Q4 this year.

Speaker 2

So that's a quick update on new products. Now let's discuss our thinking with regards to the current market environment. Recently, the consumer electronics industry exhibited overall weakness due to the mostly the macro cycle. The demand for smart learning devices, although relatively resilient compared to other categories, was also affected to some extent. We are continually monitoring the market condition and optimizing our operation.

Speaker 2

Right now, for Q2 and Q3, we are focusing on user satisfaction and profitability. 2 things, user satisfaction and profitability. In Q2, we moved out of some low return on investment sales channels and reduced our costs. So this contributed to the slightly lower year over year device. We believe this is a right approach in this market, given our overall objective of sustainable growth and moving towards company wide profitability.

Speaker 2

We're also actively adjusting the price points we have. For example, the new S6 X Pickering Pen is priced at RMB499, a relatively low price one. The product has very good experience and also very good profitability for us. So this is one example of us kind of covering adjusting our the price points we cover. So the X6 is very popular right now along with the very popular flagship X6 Pro.

Speaker 2

So that's a quick summary of our current operating tactics regarding smart devices. So we're focusing on user satisfaction with our best product and also driving profitability of the business, not absolute scale growth. And we are doing all this by actively managing our R and D process and also very importantly sales and marketing costs with discipline. Now looking ahead to the long term, I believe learning devices do have a relatively low penetration rate, representing a significant opportunity for growth. And the market size growth observed in the overall market over the last few years indicates that this upward trend is there.

Speaker 2

Yes, according to a research report released by the Internet Society of China, in July this year, The market size of learning devices is projected to increase from RMB24.9 billion in 2019 to an estimated RMB 43,100,000,000 in 20.22. Yes. So Youdao is poised to be a leading brand in this space with our expansive user base, strong product design capabilities and also commitment to advanced technologies like the large language models. So we believe the slowdown is temporary and we are optimistic about the long term opportunity. Yes, I hope that answers your question.

Speaker 3

Yes. And Tianyi, this is Hong. I just only one point added after Doctor. Ro's comments. And we think the actual call is totally different or innovative, the most well, the most innovative dictionary pen compared with all the in the past years.

Speaker 3

It's because it used to be the hardware for students to learn the English more efficiently. And right now, we think we not only just enhance the features of the dictionary functions. And at the same time, we also added about the service content like the echo, the interactive, the language training program as well as the grammar instruction program. That will be the most useful features the student when they learn the language. So we believe after the added advanced services, they can create more interactive between the users and our hardware that we can help us to know more about their demand for the in the long run.

Speaker 3

So we think that will be the totally different product compared with the past one. So we are still confident about that SKU gross growth in the midterm and long run. And like Doctor. Zhu mentioned, we expect within our future products, we can enable more features of the transformative large language models into the world hardware.

Speaker 4

Thank you.

Speaker 2

Yes, more exciting products coming later Q4.

Operator

Our next question is from Thomas Chong of Jefferies. Please go ahead.

Speaker 6

My question is regarding the online marketing side. What were the driving factors behind the rapid growth in revenue from online marketing services over the past 3 quarters? Furthermore, what are the key direction for the later half of this year? Thank you.

Speaker 7

Hi, this is Leijing. The online marketing service has already have robust growth for the 3 quarters in a row with a surge of nearly 100 percentage for Q2. And Q2 is the Q4, which online marketing revenue exceeded RMB300 1,000,000. Internally, there are mainly 2 factors that drive the growth. Firstly, the advancement of AI technology has improved matching accuracy in our AD platform dialogue.

Speaker 7

QL can successfully reach the users of various major platforms. Our in house AI technology allow us to accurately identify the relevant things associated with the QL, achieving accurate rate of nearly 90%. This enables us to deliver highly processed advertising and help our clients reach their target audience faster and more accurately. Secondly, we upgrade the data analytics abilities of our AD platform. This more and more confident, we can enhance and optimize the traffic and advertisement materials based on our effectiveness and the result in improved advertising performance.

Speaker 7

Historically, despite the sluggish consumer environment. There is still a strong consumption awareness among the young people aged between 18 35 in gaming, cosmetics and fast moving consumer goods. Our AD clients would like to capitalize the purchasing in terms of young people. As for Youdao, a lot of young people are using our products and we have a deep understanding of them. In the second half year, we will focus on 2 key directions for the ADM.

Speaker 7

Firstly, we will focus on overseas ADM marketing. This is a strong demand. We have advantage of in terms of resources, language capabilities and experience in this field. With our in house AI technology recommendation algorithm and visual network translation. We can connect with over 1,000,000 independent celebrities worldwide, directly reaching more than 2,000,000,000 users in over 65 countries or regions, those assisting Chinese brand to overseas expansion.

Speaker 7

Secondly, we will further enhance our data capabilities. Since the upgrade of our AD platform in Q4 last year, we have seen the huge benefit of the real time and activated data in helping our user decision making and pushing on the AD revenue. By the end of this year, we will strive to further enhance our AD platform to give our client better marketing performance. Thank you.

Operator

Our next question today will come from Candice Chime of Daiwa. Please go ahead.

Speaker 8

Great. Thank you for taking my question. I have a question regarding the Learning Services. Can management talk about our coming focus for the Learning Services in the second half this year, both on the K-twelve and also the adult segments? Thank you.

Speaker 4

So,

Speaker 2

JITO Content Services are the largest part of our Learning Services Business segment. As we mentioned in the prepared remarks, JIITO content services are actually a bright spot. Its sales reached RMB800 1,000,000 in Q2. It's the first time it's a record high. And retention is also at a high level of around 60%.

Speaker 2

So within the digital content category, in Q2, we launched AI University Application Advisor to support students in their college selection process. So this is we think going forward, this is going to be important because it allows us to touch many users. So in this since its launch, it's already gained over 2,000,000 page views, as we mentioned in prepared remarks. So if you look at data content service over the last 5 quarters, so it's actually been growing very heartily over the course over the last five quarters. As our learners keep adopting this new form of interactive online learning, yes, so it's different from online learning before.

Speaker 2

So it's a new form with video materials, the personalized practices and also AI feedback. So it's great for us to see that users more and more users adopt this new form and the business is growing very quickly. Yes, so we're happy to see that. So we expect the digital learning content and learning services as a whole to continue to perform well in the second half. So we will enhance online learning further by investing in educational R and D to create high quality content and also improve our personalized assessment and feedback system, which is a strong feature of our systems.

Speaker 2

Furthermore, our collaboration with the Shaanxi History Museum for immersive learning on Yudao Literature. That project was a great success. So we have more IP collaboration planned for this year, offering users more opportunity to learn about Chinese culture through immersive experiences. So the 2nd category of learning services is the steam courses, including mainly low courses and kids programming. So, that became a GSP of the China Computer Federation in the first half of the year.

Speaker 2

In addition, as an exclusive online education partner, Yudao hosted the 7th Wisdom Cup as we talked about. So, in the second half of the year, we will continue to focus on our strength in the steam area, which is 2 leading online course systems for students enthusiastic about Gao and also competitive programming, respectively. So we already upgraded our programming courses for the summer and we'll move on to upgrade our fall and winter courses in the second half. Another project we have ongoing for Steam customers is we also plan to offer more offline activities and events for our customers. We've had offline events like Go game events and competitive programming events for years.

Speaker 2

And they are particularly popular this summer, because parents and students are eager to go out and participate in community activities and events. So given our huge online learning audience and also our experience in organizing offline theme events, we are working to provide more theme events opportunities to our learners and families in the second half of the year and to drive engagement and growth. Lastly, in terms of adult courses, we made positive progress in Q2 despite macro challenges. We launched dataized product for math preparation for postgraduate entrance exam, which provide knowledge teaching, step by step guidance and personalized practice. So this product has been very well received by users with a next day retention rate of over 50%.

Speaker 2

So in the second half of the year, we will continue to focus on postgraduate entrance exam courses in the adult category because of strong demand. It is projected that college graduates and post graduates exam participate will exceed RMB 12,000,000 and RMB 5,000,000 respectively in 2024, both historical highs. We will strive to further explore and expand our digitalized product with a specific focus on enhancing our English preparation for postgraduate entrance exams. Yes, that's our plans for learning services. I hope that answers your question.

Speaker 2

Thank you.

Speaker 8

Great. Thank you very much.

Operator

Your next question will come from Lian Duan of Hu Tai Securities. Please go ahead.

Speaker 2

Good evening, management. I'm Lan Zeng from Hu Tai Securities. Thanks for taking my question. Just a quick one. Will ongoing investment in AI results in the significant increase in the R

Speaker 4

and D expenses in the

Speaker 9

second half of this year? Question. Take your question. In terms of R and D investment, we are prudent on it and we believe our AI investment is continuing at the more focused on education scenarios, not widespread for all scenarios. As just mentioned by Doctor.

Speaker 9

Zhou, our recent AI investment mainly focused on fixed application, such as large language model based translation in English grammar instruction and the AI SE instruction. Just remember that this is not our first time we invested in AI area. YouTao is planning in implementing AI technology and such technologies have been widely applied in our learning services and smart devices. At the same time, we have received the benefit from adopting more effective development methods, which enhance our R and D efficiency. For example, in the first half of this year, although we deployed our proprietary large language model in certain education scenarios, we still experienced around 6% year over year decline in R and D expenses when compared to the same period last year, which mainly contributed from our efficiency improvements with more comprehensive experiences in AI investments and saving costs through applying AIGC technology.

Speaker 9

The introduction of AIGC has resulted in notable enhancement in work efficiency. For instance, the implementation of AIGC has lead to a 50% increase in the efficient of our production content for our courses, teaching materials. We anticipate that such improvements will be continued in the future. Both cost savings in AI investments and the application of AIGC technology enable us to accumulate substantial technological expertise and knowledge for further advancement. By the end of this year, we plan to launch more AI application as well.

Speaker 9

We will continuously balance our investment in large language models and applications. We believe our team will gain more experience on it and will develop a clear understanding on investment here with greater effectiveness. We expect the effectiveness of the application side will continue to improve. Going forward, we are continuously on a clear path to achieving profitability and we will continue to optimize the structure of our R and D investment. For example, eliminating R and D expenditure on those unclear prospective projects so that we can allocate the savings to our preferred AI project.

Speaker 9

Above all, we will enhance investment in AI, but we do not expect a significant year over year increase in overall R and D expense in the second half year. Wish it is helpful. Thank you.

Speaker 7

Thank you.

Operator

And that concludes the question and answer session. I would like to turn the conference back over to management for any additional or closing comments.

Speaker 1

Thank you once again for joining us today. If you have any further questions, please feel free to contact us at Yudao directly or reach out to Pearson Financial Communications in China or the U. S. Have a great day.

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

Powered by Quartr

Key Takeaways

  • In Q2 the company reported net revenues of RMB 1.2 billion, up 26.2% year-over-year, with operating loss narrowing by 36.5% and net cash from operations growing 27.6%, indicating a clear path to profitability.
  • Digital learning services hit record Q2 sales of over RMB 800 million with customer retention above 60%, while online marketing revenue soared 98.7% to RMB 303 million, driven by AI-powered ad targeting and AIGC-enabled creative efficiencies.
  • The proprietary large language model “Xinyue” has been deployed in six applications—including the AI Box and Echo, China’s first LLM-based digital human language coach—fueling nearly 100% growth in translation subscriptions and 200% growth in subscription fees.
  • Smart device revenue dipped 7.4% amid macro softness and tighter marketing budgets, but the newly launched Dictionary PEN X6 Pro and Listening Pad Pro have drawn top rankings and strong user feedback, with further Q4 device rollouts planned.
  • Looking ahead, Youdao will prioritize high-quality digital content, accelerate generative AI integration across its product lines, and benefits from extended financing and increased share buyback capacity backed by NetEase.
AI Generated. May Contain Errors.
Earnings Conference Call
Youdao Q2 2023
00:00 / 00:00