Youdao Q4 2023 Earnings Call Transcript

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Provided by Quartr
February 29, 2024

There are 8 speakers on the call.

Operator

Good day, and welcome to the Yodao 2023 4th Quarter and Full Year 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 Yodal. Please go ahead.

Speaker 1

Thank you, operator. Please note the discussion today will contain forward looking statements related to future company performance, which are intended to qualify for the safe harbor from liability as established by the US 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. 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.

Speaker 1

S. Securities and Exchange Commission. The company does not undertake 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 purpose only. For the definitions of non GAAP financial measures and reconciliations of GAAP to non GAAP financial results, please see the 2023 4th quarter and full year financial results news release issued earlier today.

Speaker 1

As a reminder, this conference is being recorded. Besides, a webcast replay of this call will be available on Yuuda's corporate website at ir. Yudao.com. Joining us today on the call from Yudao's senior management is Doctor. Feng Zhou, our Chief Executive Officer Mr.

Speaker 1

Lei Jin, our President Mr. Peng Shu, our VP of Strategy and Capital Markets and Mr. Wayne Li, our VP of Finance. 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, 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. We had a solid financial performance in Q4, producing an all time high income from operations and operating cash inflow. Net revenues reached RMB 1,500,000,000 in Q4, up 1.8% year over year. Income from operations reached RMB 76,300,000, an increase in 209.2% year over year.

Speaker 2

In terms of cash flow, we achieved an operating cash inflow of RMB160.6 million, rising by 91% year over year. For the full year of 2023, our key financial indicators improved significantly. Net revenues reached RMB5.4 billion, up 7.5% year over year. Loss from operations was RMB466,300,000, narrowed by 39.8% year over year. Operating cash outflow amounted to RMB438,100,000, improving 17 0.6% year over year.

Speaker 2

We executed on our strategy of growing our businesses in key growth areas, including digital content services and online marketing services, while at the same time building product leadership and future growth through AI technology. We continue to drive towards profitability and have already delivered 2 major versions of our large language models, solid foundations for both 2024 and an AI driven future. Now, I would like to share more color on our progress in the Q4. First of all, our large language model projects. Last month, we released our 2nd language model for education, year 2, with major upgrades to conversational abilities, knowledge based question answering capabilities, and text processing capabilities.

Speaker 2

Utilizing this new model, we launched HiEcho 2 with extensive upgrades to JIDO human characters, scenarios, conversational abilities, and the all new teaching mode. We also introduced a major new LLM application, Mr. P AI Tutor, a conversation and camera based tutoring app for all K-twelve subjects. The AI tutor extends the application of Zhevia from language learning to real time and multi modality tutoring and covers one of the largest scenarios in K-twelve learning. We are thrilled to be the 1st in China to deliver an all subject AI tutor and look forward to serving more and more users with this technology.

Speaker 2

Additionally, we have open sourced 2 technologies, Emoti Voice and Q Anything. Since Q4, which have so far garnered over 10,000 stars on GitHub, showcasing our technology ability. LRM technology is already driving concrete business growth. For example, our translation subscription fees have grown quickly since we launched LMM features, with over 100% year over year growth for 3 consecutive quarters. Most of the growth comes from the LMM driven AI Box and recently launched LMM translation features.

Speaker 2

As for the learning services segment, net revenues reached RMB784,000,000, largely stable on a year over year basis. Momentum from our digital content services is strong, with net revenues of RMB508.3 million, an increase of 13.4% year over year in Q4. The gross profit margin was above 70%. Furthermore, the net operating cash inflow of digital content services reached over RMB200 1,000,000. Additionally, net revenue in Q4 could cover the costs and operating expenses.

Speaker 2

Departments primarily includes Ling Shi and Youdao Literature continue to improve their products and services for users. In terms of business updates, I'm glad to share that the retention rate of our consultation service for the plan for strengthening basic academic disciplines, was around 75% in Q4. Moreover, since the introduction of AI writing refinements in the Q3, we have efficiently provided over 25,000 high quality refinements, garnering widespread praise from our users. For 2023, net revenues from digital content services reached RMB 2,000,000,000, up 11.7% year over year, also covering the full year cost and operating expenses. Regarding steam courses, our CSP score prediction system for competitive programming had 200% year over year user growth.

Speaker 2

The retention rates for advanced level programming courses and goal courses reached approximately 70%. In 2023, 340 students of our programming courses received awards in the CSP competition, among them 106 students won the 1st prize. This achievement highlights the quality of our courses and services. In addition, Youdao Zhonghang was awarded the 2nd prize in the China New Information Consumption Competition of 2023. As for our online marketing services, in the Q4, the net revenues surged to a historic peak of RMB 474,100,000, an extraordinary year over year growth of 96.9 percent.

Speaker 2

Online marketing services have recorded over 50% year over year revenue growth for 5 consecutive quarters. This was primarily attributed to our cutting edge AI technology and enhanced data infrastructure, empowering us to upgrade our RTA technology capabilities, broadening our client base and expand the range of applications. AI is playing a larger and larger role in our advertisement service. In fact, about 20% of our current advertising materials have already incorporated AI workflow. In addition, net revenues from online marketing services of gaming, entertainment, sports, and O2O Industries in Q4 rose by over 2 100% year over year.

Speaker 2

With regard to the smart devices segment, net revenues amounted to RMB222.4 million, declining 45.3% year over year. Our efforts to optimize low return of investment sales channels continued to reduce overall channel inventory, impacting the 4th quarter revenue. At the same time, the overall financial health of this segment has improved on a quarter over quarter basis. We have finished our sales channel reshuffling, so that is behind us. Product wise, we recently launched the Youdao Smart Learning Path X Training, featuring Mr.

Speaker 2

P AI tutor powered by our LLM, Zhiwei. This is the industry's first learning path with an LLM based all subject AI tutor. We believe the headwinds of the devices segment are temporary. In fact, on February 21st, we launched Yudao Dictionary pin A6 Pro with more AI and LLM features. I am happy to report that A6 Pro sold over 50,000 units in the 1st week, making it our number one launch with the most units in the 1st week in our history.

Speaker 2

As you can see, we are accelerating our product launches. In past years, our new products were mostly launched in the summer. This year, we started the year strong with the H6 Pro and E6, and our work on AI is paying off. Our devices have more attractive features and differentiations than any time before because of AI technology. Exclusive features like AI Grammar Instruction, AI Word Instruction, and Mr.

Speaker 2

P AI tutor are liked by more and more users, and only Youdao products have them. These features are driving high user satisfaction and growth. This is why the new products are selling well. So, we remain confident in the future of learning devices. For education digitalization solutions, we reached a major milestone in 2024 of over RMB100 1,000,000 contract sales.

Speaker 2

Additionally, since the launch of Youdao Fan Sports, it has been adopted by over 100 schools with a current utilization rate of over 95%. Looking ahead, let's take a high level view of the business. First, we see that users demand for digital learning content and services across subjects and across age groups are increasing steadily since last year after COVID. Youdao is in a good position to capture this opportunity. With our experienced teams and established content, our digital learning content business is already on a multi quarter growth trajectory.

Speaker 2

This year, we continue to drive growth by focusing on key strong content areas, mainly including Ling Shi and Literature, and developing new content. Another important factor at a high level is our unique strengths in AI technology. We continue to build upon our leadership in educational LOM in 2024. For a technological tidal wave like the LOM, 1st movers enjoy significant leverage. NMC impact on business shows in the accelerating fashion over time.

Speaker 2

We are a first mover here and had a quick ramp up in 2023 for our technology and products. We released our own model and multiple industry first products quickly. As we gain more understanding of the technology, this year we believe LN will contribute more to product leadership of our products, including learning devices, online marketing services and learning apps. From this high level view, we believe we are a good position to lead in building a new generation of AI powered, high quality content based learning and other experiences for people around the country and over the world. Thank you.

Speaker 2

And now is Sook Hong 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 Q4 and the full year of 2023. We encourage you to visit our press release issued earlier today for further details. As Doctor.

Speaker 3

Toh mentioned, for the Q4, total net revenue were RMB1.5 billion or US208.5 million dollars representing a 1.8% increase from the same period of 2022. Net revenue from our learning services were RMB784 1,000,000 or 110,400,000 representing a 2.8% decrease from the same period of 2022. Net revenue from our smart devices were RMB222.4 million or US31.3 million dollars down 45.3 percent from the same period of 2022, primarily due to our continuous efforts to a streamlined marketing channel with low return on investments for the intelligent learning products in the Q1 of 2023. Net revenue from our online marketing services were RMB474.1 million or $66,800,000 representing a 96.9% increase from the same period of 2022. The year over year increase in revenue from the online marketing services were mainly attributable to the increased demand for the performance based advertisements through the 3rd party Internet properties.

Speaker 3

For the 4th quarter, our total gross profit was RMB 738,800,000 or US104.1 million dollars representing a 4.6% decrease from the Q4 of 2022. Gross margin for learning services was 63.6% for the Q1 of 2023 compared with 64.1% for the same period of 2022. Gross margin for smart devices was 38.3% for the Q1 of 2023 compared with 46.2% for the same period of 2022. Gross margin for online marketing services was 32.7% for the Q1 of 2023 compared with 29.2% for the same period of 2022. For the 4th quarter, total operating expense were RMB662.5 million or US3.3 million dollars compared with RMB RMB750 1,000,000 for the same period of last year.

Speaker 3

Looking at our expense in more detail, our sales and marketing expense were RMB441.4 million, compared with RMB515.9 million in the Q1 of 2022. Research and development expense were RMB168.1 million compared with RMB179.5 million in the Q1 of 2022. Our operating income, EHA margin was 5.2% in the Q1 of 2023 compared with 1.7% for the same period of last year. For the Q4 of 2023, our net income from continuing operations attributable to ordinary shareholders was RMB 56,500,000 or US8 $1,000,000 compared with RMB 12,300,000 for the same period of last year. Non GAAP net income from continuing operations attributable to ordinary shareholders for the Q1 was RMB69.3 million or US9.8 million dollars compared with RMB31.1 million for the same period of last year.

Speaker 3

Basic and diluted net income from continuing operation per ADS attributable to ordinary shareholders for the Q1 of 2023 was RMB0.47 or $0.07 non GAAP basic and a dilute net loss. Net income from continuing operations per ADS attributable to ordinary shareholders for the Q1 was RMB0.58 or US0.08 dollars From net cash provided by the continuing operating activities was RMB160.6 million or US22.6 million dollars dollars for the Q1. Turning to our full year results, our total revenue for 2023 increased by 7.5 percent to RMB5.4 billion or US759.1 million dollars Net revenue from our learning services for 2023 were RMB3.1 billion or US443.4 million dollars keeping flat for the 2022. Net revenue from our smart devices for 2023, down by 27.6% year over year to RMB909.2 billion or US128.1 million dollars Net revenue from our online marketing services for 2023 were up 98.1 percent year over year to RMB1.3 billion or US187.6 million dollars Total gross profit for 2023 was RMB2.8 billion or US389.8 million dollars compared with RMB2.6 billion in the 2022. Total operating expense for 2023 decreased to the RMB3.2 billion or $455,500,000 compared with RMB3.4 billion in 2022.

Speaker 3

Net loss from continuing operations attributable to ordinary shareholders for 2023 was RMB549.9 million or US77.5 million dollars and the basic and diluted net loss per ADS from continuing operations attributable to ordinary shareholders for the 2023 was RMB4.53 or US0.64 dollars Looking at our balance sheet, as of December 31, 2023, our contract liabilities, which mainly consists of the deferred revenue generated from our lending services, were RMB1.1 billion or US148.3 million dollars compared with RMB1.1 billion as of December 31, 2022. At the end of the period, our cash, cash equivalents, restricted cash, time deposits and short term investments totaled RMB 527,100,000 or $74,200,000 This concludes our prepared remarks. Thank you for your attention. We would now like to open the call to your questions. Operator, please go ahead.

Operator

Thank you. We will now begin the question and answer session. The first question is from Brian Gung with Citigroup.

Speaker 4

Thanks management for taking my question. I have a question on our large language model. Youdao is pretty committed to AI and we also launched our own large language model, Zhiyue. Can management share mean monetization channels for Zhuyue? Thank you.

Speaker 2

Hello, Brian. Yes, I'll take this question. Yes, first, there is a consensus in the AI industry that education is one of the most important areas for large language model applications. Saul Maltman talks about it. Bill Gates also talks about education and healthcare are the most important areas.

Speaker 2

So the overall focus is, I think, to capture kind of really important use scenarios in education and then monetize that. We basically think about this in 2 ways, 2 kinds of LRM projects. 1 is value adding projects to our existing businesses. 1 is completely new things. So, for the 1st category, we have a couple of channels.

Speaker 2

So, obviously, one of them, a very important one is smart devices. I think one trend is quite clear. So, ARM features are quickly becoming kind of major selling points for our devices. So, for example, features like AI grammar instruction, for explaining sentences and word instruction, for explaining separate words or phrases. These features have become the most used features and major selling points for for Yudao Dictionary PIN since last year.

Speaker 2

I compare this to Yudao Dictionary, not the dictionary pen, the app, Yudao Dictionary, how we won the dictionary market. So, that was done with 2 features. 1 is web interpretation, the other is machine translation. So, when you have something that really works for specific learning scenario that users really care. And also, when you only you have that and the other players don't, then it is a very good way to gain more market share and also monetize the technology.

Speaker 2

Of course, we also have the more recent Mr. P AI tutor, Xiaopilao Shi. We think that will also be popular. So this is one way we monetize the technology through smart devices. Of course, we also monetize through app subscriptions.

Speaker 2

We talked about for our dictionary and translation, AI Box has become a key feature too, driving over 100% growth subscription year over year for the last three quarters. And it also contributed to our growth of online marketing significantly. So, right now over 20% of our advertising materials, they go through somewhere in the process, they go through a generative AI workflow. So, that's already pretty significant. 1 out of 5 ad materials are generated from using AI technology or is processed using AI technology.

Speaker 2

So, that's the first category, how we apply AI to our existing businesses. The other one may be more important for the longer term is completely new products. So, of course, we have High Echo, the English learning app. So and also, yes, we will have Mr. P AI tutor as a standalone product too.

Speaker 2

So, Mr. P AI tutor as a standalone product is upcoming. It's a future product. If we look at these apps, these products, I think they cover large use scenarios. For example, the English language learning, spoken English language learning scenario is a pretty significant business in itself.

Speaker 2

And in fact, if you look at our peers, the Korean app Speak has, I think, around US20 $1,000,000 annual revenue already. So, I think there's a bright future for AI powered language learning there. And if you look at Mr. P AI tutor, it covers an even larger scenario. That is the home tutoring scenario.

Speaker 2

If the student is learning at home and doing drills and exercises and have a question, then the AI tutor can answer that question much better than parents or the students herself. So I think it is a profound idea, I would say. It's a profound idea because this is one of the most important scenarios in home education. So if we can have an AI to answer questions for all the subjects that the students learn And if the AI can answer that question in a really instructional and high quality fashion, then I think that will create a lot of value. So, in summary, I think the 2 channels, the 2 categories are the ones that we are looking at.

Speaker 2

One has an immediate impact on the business. The other one longer term, but probably larger in scope. So, I'm very optimistic about the impact LMM will have on our business going forward.

Operator

The next question is from Kelly Wang with CICC.

Speaker 5

Thank you for taking my question. So my question is, we can see that our learning services revenue in 2023 is kind of flat compared to 2022. So I'm just wondering what is the focus for the our learning services segment in 2024? Thank you.

Speaker 2

Yes, so I'll take this too. So, in 2023, if you look at data content services, so this is a major contributor of net revenue in our learning services content. So, we define digital content services within the learning services sector by any new service that's launched after and according to the policy change. So these primarily include Ling Shi and Yudao Literature and some other smaller courses, not including things like adult courses. So, in 2023 net revenues from video content services reached RMB2 1,000,000,000.

Speaker 2

So, it is up 11.7 year over year. And the gross margin was around 70%. So, this part of the business met our expectations. So, in 2024, we think digital content services will be the focus of our learning services. So let me give you a few points regarding our priorities.

Speaker 2

So, first is consumer needs are quite strong in this area and we are improving the services to satisfy different user needs. So, our is already leading in the industry. Our literature course is also quite popular as we gain more and more users. So one of the key areas is we will provide more personalized services to users. So, Lingxi recently introduced a small class course format for students with more advanced learning needs.

Speaker 2

So, this is actually different from the past small class experiences. The new format is offered with mostly pre recorded video content and our experienced tutors to provide the service. So, feedback is very good for this new format. Yudao Literature, Yudao Boen also launched a new major revision of the course, broadening to more age groups and provide more choices with how much the user wants to how much time the user wants to spend on the course. So essentially, as these products establish leadership positions in the industry, we can improve the products to cater to more personalized needs of different cities, different age groups and different spending plans.

Speaker 2

So, we think we have good opportunities on this front. 2nd, there will be new SKUs this year. The learning needs of families in China have been changing very quickly in the last 2 years because of the macro environment, the policy and trends like AI. So naturally, our teams, we see opportunities of new SKUs. The focus will be on non curriculum learning of K-twelve students.

Speaker 2

The services aim to provide high quality learning content and services to broaden their learners' scope and cultivate interests in important STEM and humanitarian areas and strengthening their lifelong competencies. So, for new projects, we take an agile and lean approach, yes, so start small and grow organically. So there are a few of these new projects already going on and going through the incubation process right now. So we will see fruits from these projects in the coming quarters. Thirdly, one important area we put our efforts in is we apply AI to differentiate our products and increase productivity.

Speaker 2

With our large language model technology, there's a lot in this area we can do, like AI diagnosis, AI tutoring, AI personalized exercises and on and on. The key thing of applying AI, of course, is to focus on learning results and productivity. So, we believe the most fundamental challenge in learning apart from motivation, yes, motivation is obviously one area that a human teacher is really, really good at to make the students more motivated, want more to learn. But the other very, very important area is the teaching is a very labor intensive activity. So, we focus on activities that are really important for learning results and also require a lot of labor from teachers.

Speaker 2

If we can do that, then we can get good results. For example, that is the idea behind AI writing refinement. For Yudao Literature, we already refined 25,000 writings from students in just one quarter. So if each one saves like half an hour, then that is over 12,000 hours saved for the teachers. So, that's really significant.

Speaker 2

A lot of writing skills improvement delivered. So, this is a very important win win, both for kind of the unique value we can add to the course and also increase the productivity from the company's perspective. So, we have more projects like this going on, and so I think it will have more and more important impact on the business this year. So, that's yes, Xu Poon, if you have anything to add.

Speaker 3

Yes, I'll just add more color after Doctor. Crow's comments on the digital kind of services. And I believe most of people knows news about 8 province has confirmed the implementation of the reform in math exam for the exam in this year and the reform including a reduction in the number of questions, adjustments in the question score and another innovative approach in the problem solving. So I think if you see the trend in the past and every single time when the college entrance exam has been updated for the new format of the test And we expect about the demand for the consulting for how to deal with the new test format will grow up in the following years. And internally, we have been we have upgraded our digital content services, including the consulting and otherwise and teach them how to prepare in the family scenarios and for this update for the college entrance exam.

Speaker 3

And in addition, we think that's also the further opportunities for the plan, for the strengthening basic academic discipline. We are sophisticated in this consultation services and we think we have built a very strong reputation in domestic universities and high school. And we think that will be the kind of the driving of the growth of digital hand services in the 2024. Thank you.

Operator

The next question is from Thomas Chong with Jefferies.

Speaker 3

Hi. Thanks management for taking my questions. Following the rapid growth for online marketing services in 2023, what are the new growth drivers that we should expect in 2024? Thank you.

Speaker 6

Hi, this is Lei Jun. In 2023, the advertising market is processing with the major domestic player like Tencent, Baidan and Baidu. They are all growing maybe 20% or 25% in their AD business. The rise of the performance based ad is the significant driver of this trend.

Speaker 3

As we look

Speaker 6

at during the development of the AD market, we have integrated AI into our AD business, resulting in much higher growth compared with the average level in the market. We achieved a continuous quarter over quarter growth in every quarter in 2023 and net revenue of RMB1.3 billion for the whole year and an increase of nearly 100% growth year over year. Besides the AVI capabilities, we have a deep understanding of client demand, effective utilization of the data and our strong focus on AD performance. Those internal capabilities are the key drivers to gather great results. In 2024, we will focus on digital advertising, paying attention to the ADE performance, continue to strengthen our advantage just mentioned above and explore the new growth in the following 2 areas.

Speaker 6

First is overseas market. Yudao ADS provides the digital marketing solution for the brand promotion of the Chinese enterprises. Global influencer marketing and overseas AD placement. With our extensive new business and expertise in the translation field, Weidao ABS itself in providing translation services for 108 languages. Moreover, our self developed AI technology, recommendation algorithm and neutral network translation enable us to connect with over 1,000,000 high quality influencers in various industries worldwide.

Speaker 6

This allows us to directly reach more than 2,000,000,000 users in over 75 countries or regions, facilitating the global growth of the Chinese brand. Notably, we have recently become an authorized advertising agency for the TikTok, which will further support our expansion in the international market in the future. Secondly, we explore the potential of the vertical industry, just like our online games. They have several advantages in the serving game class, including capabilities in AD material production, deep understanding of gaming and expertise in content marketing. In the later half of last year, we began to collaborate more closely with NetEase Games.

Speaker 6

Moving forward, we will continue to leverage our robust AI capabilities and aforementioned brand to provide a more comprehensive and tailored service to the client in vertical industries. This is a further tie into the growth arena of the advertisement business. Thank you.

Speaker 2

Yes, this is Zhoufeng. I'd like to add a point. We got asked a lot recently about why and how we achieved this significant growth in the advertisement business. Let me try to answer the question here. I believe the key to our past and future success in ads is our ability to combine strong business operations and deep advertisement technology.

Speaker 2

Yudao's ad business is unique. We are not a monetization team of our on traffic nor a brand advertisement agency. We are a technology based performance ad platform business. So, in addition to our on and upgraded assets and traffic, we also deliver performance ads for 3rd party traffic. So, every page view and every click contributes a tiny bit of revenue.

Speaker 2

So, in this kind of business, efficiency is key to business. That's why our AI and large language model capability is a good fit for this and is very useful in learning and adapting the app delivery process to maximize the efficiency and value creation. So, a lot of ad companies on the market, they have a strong business ability, good at sales and acquiring customers, but not necessarily good at technology. On the other hand, a lot of ad tech teams do not really have strong business operations. So, through the years of experience our team have, so I think we have acquired both skills, so business operations and deep understanding of ad technology.

Speaker 2

So that is why we have seen such growth in the past year. And I believe also whether if we can do those skills better, that also will determine whether we can continue to be successful in the future. This is helpful in understanding how we think about the ad business. Thank you.

Operator

The next question is from Bo Zhang with Huatai Securities.

Speaker 2

Hello. Good evening, management. This is King. Thanks for taking my questions. In 2023, smart device business faced a challenge.

Speaker 2

In 2024, how should we turn to growth? Thank you. I've discussed the recent progress on devices in the prepared remarks. So, let me provide some more details on the most recent product launch and some thoughts on the future directions. The Asics Pro Dictionary Pen, the launch exceeded our expectations.

Speaker 2

As we talked about with over 50,000 units sold in the 1st week. In terms of the product itself, the ASIC Pro Pen has the best screen and the best content within the price range and supports high quality offline translation and AI features like grammar instruction and word instruction. So, moreover, our supply chain team did a really good job of delivering very good quality and good value for a relatively affordable price. So also live video selling on Douyin contributed to the launch momentum. So that's kind of a rough breakdown of the A6 Pro launch.

Speaker 2

It is worth pointing out that although the A6 Pro is more affordable for consumers than our higher end products, it actually has a similar gross margin ratio for us compared to our higher priced products. So, we are not sacrificing margin for selling more units. We are able to maintain a competitive gross margin ratio for this product because of our strong in house design abilities and also our close collaboration with our IC supplier with our other supply chain partners. The other product, the listening part E6 also met our expectations. It is the number one selling product in its category right now.

Speaker 2

So, this is a good start for the devices team this year and I expect the team to keep delivering good launches in the coming months. Going forward, we have more device launches in Q1 and Q2 planned. If you look at our products last year and before, we have been mostly focused on higher priced products compared to our peers. The plan going forward is to cover both higher and a little bit lower price points with both with leading products in their category. So, we're able to do this because it is finally possible to deliver premium quality and experience for these slightly lower priced products because of the experience of our team accumulated over time over the years and maturity of the supply chains.

Speaker 2

So, now we believe is the right time to reach more users with this product combination. For future premium products, let me say a few words. So, I believe AI and hardware features, unique hardware features provide a lot of opportunity for creating value for users for more premium products. For example, running large language models on the device itself is very attractive because now that add on features like grammar instruction become popular with our users, naturally users want to run them on device as it is more convenient, the response time is better. So, one of the most asked questions we got for the dictionary pen is actually whether it supports offline translation.

Speaker 2

Of course, all our dictionary pen supports offline translation. But that reflects the thinking of the user that a key deciding factor in their purchase is whether they can support these offline operations. So on device AI and ARM are very interesting. So we think we will have more to share when we have them. So lastly, the sales channel reorganization is done.

Speaker 2

So we've transitioned to a more online focused, more agile sales and supply structure. The recent launch is kind of a first testament to the team's ability. The winning live video sales, the KOL recommendations brought significant momentum to the launch. The team still has a lot of work ahead of them and they need to build out more sales, new sales and marketing channels and also optimize to get good ROIs from the sales channels. Nonetheless, the launch is a very good start.

Speaker 2

So hope that answers your question. Thank you.

Operator

The next question is from Yikung Zhang with Citix.

Speaker 2

Hello, management. Thank you for taking my question. Well, I have only one question. With the improved cash flow observed in 2023, could management provide an outlook for the cash flow in 2024? Thank you.

Speaker 7

Thank you for your question. This is Wen. I will take your question. Operating cash flow is always treated as a key healthy indicator for our company. And we are pleased to note a remarkable improvement in our operating cash flow of 2023 compared with prior period.

Speaker 7

The operating cash outflow in 2023 was narrowed by near 20% year over year. Notably, in the Q4, the operating cash inflow reached a record of around RMB161 1,000,000, rising by net 1% year over year. This indicates that the business is progressing towards a healthy direction. On a segment basis, both the learning services and online marketing services helped achieve the positive operating cash inflow, which makes us more confident in the further improved operating cash flow in 2024. We expect to maintain such good momentum for our operating cash flow in 2024.

Speaker 7

Firstly, we will continue to enhance our ability to generate cash inflow through leveraging AI technology and optimizing business operations. In addition, as to the smart devices segment, improvements in productive performance and the sales channel management are expected to boost the cash generation capabilities from this segment. It is also worth noting that the cash flow exhibits quarterly, but vary with a stronger seasonality in the second and the fourth quarter, preliminary due to user acquisition and the retention activity in the Learning Services segment during this period. Furthermore, from a long term perspective, NetEase has been providing financial support to us. For instance, 3 years revolving load facility amounting to $300,000,000 as disclosed in our annual release with maturity dated on March 31, 2027, which facilitates the development of the U.

Speaker 7

S. Business, especially in the area of our long term investment in core technologies and the resources. In sum, we are very confident in our cash flow for 2024. Thanks.

Operator

And that concludes the question and answer session. I would like to turn the conference back over to the 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 as you dial directly or reach out to Pearson Financial Communications in China or the U. S. Have a great day.

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Earnings Conference Call
Youdao Q4 2023
00:00 / 00:00