Youdao, Inc.

and welcome to the YoDAO 2020 Second Quarter Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Pei Du, Investor Relations Director of YoDAO. Please go ahead.

Thank you, operator. Please note, the discussion today will contain forward-looking statements related to future performance of the company, which are intended to qualify for the safe harbor from liabilities as established by the U.S. Private Securities Navigation 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 would 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 Udall's business and financial results is included in certain filings of the company with the Securities and Exchange Commission, including our annual report filed on Form 20F. The company doesn't undertake any obligation to update this 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. For the definition of non-GAAP financial measures and the reconsolidation of GAAP to non-GAAP financial results, please see the 2020 second quarter financial results news release issued earlier today. As a reminder, this conference is being recorded. A webcast replay of this conference call will be available on Udall's corporate website at ir.udall.com. Joining us today on the call from Udall Senior Management is Dr. Feng Zhou, our Chief Executive Officer, Mr. Lei Jin, VP of Operations, Mr. Peng Su, our VP of Strategy and Capital Markets, and Mr. Wen Li, our VP of Finance. I will now turn the call over to Dr. Zhou to reveal some of our recent highlights and strategic directions.

Thank you, Lupe, and thank you all for participating in today's call. Before we begin, I would like to remind everyone that all numbers are based on renminbi. Our business continues to grow at a rapid and healthy pace. Our second quarter shows the strength of our online education courses and products. And despite the current uncertainty of macroenvironment, the online education industry's transformation is well underway. Your dollar is well positioned to emerge as a leader among this change. First, looking at online courses, our gross billings have more than tripled year-over-year, reaching RMB 542 million in Q2. Gross billings from K-12 reached RMB 307 million up to 29% year-over-year and up 60% quarter-over-quarter. Driven by strong retention and larger-scale marketing, In addition to junior high school math and physics that are strong, several other courses contributed significantly to our second quarter growth, primarily high school Chinese and primary school math. Our retention rate also improved by 1,000 basis points in the April to May retention season due to more and better courses and more streamlined services. Summer enrollment for high school students, which used to start in Q2, will push back to Q3 due to COVID-19 as the semester ended later in most cities in China. Birth buildings from our adult segment also increased to RMB 150 million, up 189% year over year. based on the strong performance of our Practical English courses. We've released another new Practical English course title in Q2, bringing the total to five courses, catering to different customer groups. Young, white-collar workers are increasingly looking to learn English language and other skills online. We're working hard to capture this opportunity and drive growth by focusing on creating high-quality content. Building up our servicing capacities is a current priority for the company. As we work to significantly scale our business this year, in Q2, the total number of tutors increased to 2,699, in part to prepare for summer enrollment. This is also three times the number of tutors we had in Q1. Our new tutors have been integrated smoothly as we focused on leveraging hiring managers and improving our experienced tutors last year to prepare for a larger team this year. We also significantly increased our ability to offer more personalized service in Q2 by offering stratified services to students within different grades. For the second quarter, gross margins for learning services were flat with Q1 at 2%. 52%. While we continue to benefit from economies of scale, margins were partially offset by expenses from more servicing personnel. In the meantime, with improving unit economics, we maintained the positive operating cash flow for the second quarter in a row, which came in at just under RMB 93 million. We continue to invest in product and technology innovation. We are in a year-long process of rolling out more interactive large-class features to more subjects and more grades. In our high school Chinese courses, we launched a feature called Intelligent Memorization Plan, Zhileng Beisong Jihua, using ASR technology. This is highly integrated with course content, and students can practice efficiently at their own pace. This contributed significantly to our double-digit increase in retention in high school Chinese. Similarly, our primary school's math has highly tailored interactive exercises that can be generated real-time for different levels of students, all based on feedback data. For instance, in order to develop kids' number fluency, we offer interactive exercises using the vertical strategy playbook gamified roll our play-to-player games, or our fill-in-the-blanks equation solver. After we made these upgrades, our conversion rate in primary school math increased by 4%. Turning to our intelligent learning devices, sales in this category also did well, reaching RMB 86 million, up 2.5 times year-over-year. We released the Dictionary Pen 2.0 Pro, in June, with more premium content and Japanese and Korean language support, which were the number one requested features. Our Dictionary Pen 2 Pro also carries a higher selling price than its early versions. During the online shopping festival on June 18th, the Yudao Dictionary Pen 2 series were ranked the number one electronic dictionary in terms of sales by both JD.com and Tmall. As for our learning apps, in Q2 we grew our MAU to 122 million, up 11% year-over-year. We continue to build our UDAL dictionary app to incorporate more comprehensive offerings as we work to bring this popular tool into the realms of super apps in the learning category. Some of the new features include an English oral proficiency assessment feature, an English listening mock test, and a postgraduate admission In addition to launching a number of new features, we have strengthened the connection between our dictionary and our premium courses. In Q2, gross billings of new paid enrollments from internal traffic increased by 127% year-over-year. Turning to our marketing business, our online advertising revenue reached RMB 103 million, down 28% year-over-year. up 4% from Q1. We expect to see continued volatility in this segment with the ongoing impact of macro uncertainties. Looking ahead, the summer enrollment season is already underway. Our experience shows that customers acquired in the summer are more willing to pay for more courses and renew in the future. And our data in the first half of this year shows that the positive change in online learning is accelerating. regardless of the fluctuating impact of COVID-19. With this in mind, we are moving ahead with the summer campaign we talked about in Q1. We plan to significantly increase our paying customer base this year, and Q3 is an important quarter for achieving this goal. We're taking a threefold approach to this campaign. First, a dry marketing campaign with TV ads, residential community ads, and et cetera. Second, we are engaging in online multi-channel performance-based customer acquisition activities. And third, user conversion on our owned and operated assets. Our goal with our marketing activities in the second half of the year will be to acquire significantly more customers and increase our brand equity while maintaining a focus on healthy unit economics and return of investment over the longer term. The investments we are making Now, I design to support our stable and sustainable growth as we build our student community and brand reputation. With that overview, I will now turn the call over to Supong to review our financial results. We will then open the call up for questions. Supong.

Thank you, Dr. Zhou, and hello, everyone. Today, I will be presenting some financial highlights from our 2022 quarter. we encourage you to read through our press release issued earlier today for further details. We continue to scale our operation in second quarter, achieving considerable year-over-year growth across our business. We are well poised to continue to our growth trajectory, supported by our strong technology and the curriculum. And as we amplify our marketing effort to further bolster our student base for the second half of the year, For the second quarter, total net revenue were RMB 623.3 million, or US dollar 88.2 million. This represents an increase of 93.1% from the second quarter of 2019. Looking at this growth by segment, net revenue from our learning services and products grew 190% year-over-year to RMB 520.1 million, or US dollar 73.6 million. we attribute these growth to a sharp uptake in case of paid student enrollments and growth speeding for paid student enrollments of U.S. premium courses on a year-over-year basis. Net revenue for online marketing services were RMB $103.2 million, for U.S. dollar $14.6 million, a decrease of nearly 28.1% compared with the same period of 2019. For the second quarter of 2020, our total gross profit greatly improved reaching RMB 281.5 million, or US dollar, 39.8 million, up 165.4%, compared with the second quarter of 2019. Gross margin for learning services and products improved to 48.5% for the second quarter of 2020, up from the 29.5% for the second quarter of 2019. The large margin growth was primarily attributable to improved online courses margin, better economics of skill, and the further optimization of our business and the faculty compensation structure. Gross margin for online marketing services was 28.5% for the second quarter of 2020, compared with the 37% for the second quarter of 2019. The decrease was mainly the result of the lower gross margin revenue generated from the increased distribution of advertisements through the third party's internet properties. For the second quarter, total operating expense were RMB $564.6 million, or US dollar $79.9 million, compared with RMB $189.2 million for the same period last year. We continue to invest in technology, student acquisition, and acquiring talented teachers to support our growing business over the long term. In tandem with this investment, we are increasing our top line, structuring our model to become more efficient and recognizing economics of scale. With that in mind, sales and marketing expense for the second quarter were RMB 445.2 million compared with RMB 122.2 million in the second quarter of 2019. Research and development expense for the second quarter were RMB 91.4 million compared with RMB 56.3 million in second quarter of 2019. Our operating loss margin was 45.4% in the second quarter of 2020, compared with the 25.7% for the same period of last year. For the second quarter of 2020, our net loss attributable to ordinary shareholder was RMB 257.8 million, or US dollar 36.5 million, compared with our loss of RMB 87.6 million for the same period of last year. Non-GAAP net loss attributable to ordinary shareholder for second quarter was RMB 250.5 million, for U.S. dollar, 35.5 million, compared with a loss of RMB 86.2 million for the comparable period last year. Basic and diluted net loss for ADS for second quarter was RMB 2.3, for U.S. dollar, 0.33. Non-GAAP basic and diluting net loss per year for second quarter was RMB 2.23 or US 0.32. Our net cash generated from the operating activity for second quarter was RMB 93 million or US dollar 13.2 million. Looking at our balance sheet as of the June 30, 2020, our contract liability, which mainly consists of the deferred revenue for our online courses, were RMB 711.5 million. For US dollar, 100.7 million. Compared with RMB 456.8 million as of December 31st, 2019. At the end of the period, our cash, cash equivalent, time deposit and short-term investment totaled RMB 1.8 billion. For US dollar, 253.4 million. This concludes our prepared remarks Thank you for your attention. We would now like to open the call to our questions. Operator, please go ahead.

Thank you. We will now begin the question and answer session. To ask a question, you may press star then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. As a reminder, if you wish to ask your question in Chinese, Please repeat your question in English for the benefit of all participants on the call. At this time, we will pause momentarily to assemble the roster. The first question today comes from Brian of Citigroup. Please go ahead.

I will translate myself. Thanks a lot, management, for taking my question. Congratulations on the solid results. I have two questions. First is regarding how is the new format of interactive bid classes progressing? And the second is regarding the summer promotion like the student enrollment and the student acquisition cost.

Thanks. So for the first question regarding interactive bid class, model features. So this is one of our most important projects on the product side this year. So we actually have a video presentation about this on our IR website. So I encourage you to go take a look. So essentially, after two quarters of actually releasing features on this front, we We are more than encouraged. We have routinely seen the percentages of students participating in these interactions and also participating in these classes increased by participating in these classes increased by 20-30%. So that's really good because more participation leads to more satisfied customers and leads to more better retention. So naturally, we've seen retention rate up significantly in some of these classes. So let me give you two examples. One is in high school Chinese. We added, I just talked about in the preparing box, a feature called intelligence memorization. So this is essentially... to help students memorize a lot of the Chinese content they need for their exams. So we use ASR for that. And this really helps the students. And overall, our high school Chinese retention rate has been increased by double digits. So that's one. Another example is for primary school math. So we added, remember in Q1, we already have interactions during my class for primary school math. But in Q2, we added more types of questions. So right now to actually over 20 different types of questions. Because of this, the conversion rates of primary school math has increased by more than 4%. So if you have time, go take a look at the video. Thank you. Yeah, the second question regarding the summer campaign. Yeah, so I can say a few words and maybe Supong can add to that. So basically what we did in Q2 is that we talked about we allocated resources, allocated budgets for the summer campaign in Q1. And what we did in Q2 is that we collected a lot of data, did some trials, and then essentially decided that we would go ahead with the plan to use that budget because the data supports doing this really. It's a really good time to get students, acquire students for online courses. And of course we also see that some offline tutoring centers see actually students turning to online courses. So it's a really good opportunity. And for the summer we are focusing mostly on junior high school courses in high school. So we used to focus on these segments and we're still focusing on these two segments for this summer. We really like junior high school because it's a large segment for us, and our teams are really good at making high-quality courses here, and also we can, when students kind of retain, they become high school students, and this is really nice. And also we have some primary school students acquired this summer. So we have grade six and grade five math class that's really getting fantastic feedback. So that's a quick update. And I don't know, Supong, if you have anything to add.

Thank you, Doctor. We believe the summer enrollment season is already underway, I think, as the doctor mentioned in the article. And we believe, as we mentioned, we expect to significantly increase our paying customer base in this year, especially in the kickoff segment. So I think the summer is the key period for these goals. And we are, in the Q1 and Q2, we are refining our models and we are just leverage up our quality of our classes. And I think we'll be ready for that. And by now, we think if you need some colors, we think right now it's so far so good. And for all the summer marketing campaigns. And I believe you have, probably you have seen a lot of advertisements through the brandings as well as advertisements through the different channels. We think we are on the way. And right now we see the positive feedback from the market. So we think because it's a very special year for this in the 2020s, the whole industry changed a lot because of the COVID-19. So we expect that we'll take these opportunities to grow our business.

Okay, great. Thank you very much.

I hope that sounds okay.

The next question comes from Sheng Yong of Morgan Stanley. Please go ahead.

Hi. Thank you for taking my question. My first question is about the growth spilling. Q2, we still see a very strong growth spilling growth. While the momentum compared with last two quarters seems slightly slowed down. So wondering, can you share more color about this growth? and what the outlook for the growth momentum in next two quarters this year. This is first question. And second question, Dr. Zhou mentioned that the K-12 retention rate improved by double digits. So wondering if you can share with us what the referee range now And except for the technology improvement, I believe the teacher assistance should be a very important part of this. So wondering if you can share something about your teacher assistance numbers now and what the further hiring plan. Thank you very much.

Yeah, thank you, Zhongsheng. Yeah, so regarding gross billing, so... Yeah, so if you look at our K-12 first billing, so it's $307 million, up 229% year-over-year, and up 60% QOQ. So we think this is healthy for Q2, seasonally Q2 is a little bit weak, but we think this is good for Q2. And yeah, so for our adult segment, because in Q1 we had this very positive push from a lot of white collar customers staying at home and some of them go look for opportunities to learn online. So we had a really strong second quarter for our adult courses in Q1. And in Q2, if you look at year-over-year, we are still quite strong. It's RMB 150 million, up 189%. year over year. So we still really like the segment and we think we added a new course so up to five courses now so we expect our adult segments to continue to have healthy year over year growth in the coming quarters. A couple of more points for K-12. One of the key focus for us is that we look at our subjects, our courses, and decide on their competitiveness. We have this so-called class A subjects internally, which means really competitive and unit economic was really working well in these courses. So we have added new class A subjects in Q2. We have a couple more courses that achieve the Class A status and we think this will really help with our growth in the coming quarters. For Q3, we are quite bullish. We think what we see is that demand in the summer is really strong. In Q1, we can look at it both ways. Maybe it will be strong or maybe not. Now we know that the demand is really strong. Overall, we think the summer campaign is going on really well. We are really seeing parents actually move to online courses, a lot of them at quite large scale. So we are trying to capture this opportunity. So we'll basically double down on the summer. I'll talk about the tutors first and we can talk about retention. So the number of tutors has grown substantially if you look at it. 800 to over 2,500. So it's about 200% growth. So we've actually added new operating centers in Hangzhou and in Jinan, in addition to the existing four of them. So we used to have Xi'an, Nanjing, Xinxiang, and Zhengzhou. Now we have two more, Hangzhou and Jinan. So So we think things are going smoothly. So we expect to continue to grow that tutor team and to train more personnel and to pay them well and meet the increasing the band of servicing and the conversion. So in Q2 there were some projects actually getting positive results like we improved the collaboration between the tutors and the instructors. We designed new mechanisms for them to work better. Kind of the first time a new course is released the tutors will already be very ready to service the students. And we also talked about we have improved our stratified or tiered servicing strategy so that for different students with different levels of learning, they get tailor-made service based on their learning level. Yeah, so that's for the tutors. At some point, you can talk about the retention.

Yes, thank you, Doctor. And as Doctor mentioned, we increased substantially of our tutors from 865 to over 2,000. And I think in this year, we expect to provide more services to our clients to enhance our retention rate. And especially in this year, we are dedicated on what we call the graduate class. That means the grade 6, grade 9, grade 12. So I think we are improved. a lot about the great class retention rates in our business. For example, our grade 6 to grade 7 retention is around 60% during this retention period. We expect to improve more in the next retention season. I hope that answers your question. Thank you.

Yeah, grade six and grade seven. So this is basically going from primary school to junior high school. Yeah, so this is kind of a more challenging grade to have retention on. So we think our number there is really competitive. And, yeah, maybe I can give another data point is that – Yeah, so we really like our, so this is not a curriculum course. We really like our kids programming course. So in, with adding more interaction and more features, we've been able to achieve actually over 85% of retention for these courses because of our collaboration between the instructor and the tutors and also with the interactive large class model. Now, so that's one data point we can share. Yeah, thank you.

Thank you very much. That's very clear.

The next question comes from Alex C of Credit Suisse. Please go ahead.

Hi, management. Congratulations on the very strong growth momentum. I have two questions. So my first question is about the enrollment and ASP. It seems to me that ASP, in terms of gross billions divided by student enrollment, decreased. And would you please share if there's any particular reason for that? Did you change the, say, the definition for enrollment? And what's the actual ASP? after adjusting such changes. Secondly, I would like to know more about your plan to further, say, improve your GP margins of your online courses. Do you have a target, say, in the future or in the long term what kind of GDP margin can you achieve? So maybe I'll just ask the first question in Chinese again. So I see that our flow rate, in terms of people, in KSHR, the average pay has dropped a lot. I don't know if it's because of the low pay for people, If you look at the actual unit price of the human army, what would be the level?

Thank you. The K-12 enrollment growth is very fast. It was over 300% growth in Q2. And This is mostly driven by the number of students enrolled, especially in our junior high school segment. There are also some impacts from maybe two other reasons. One is the enrollment split. Last year, the regulator issued a requirement on the cost duration, so we split the summer and fall courses into two or more enrollments to be in compliance. Also, we add some, as Dr. Zhou mentioned, the Class A subjects. It makes more cost-effective for students as well.

Right. Yeah. So and also one additional comment for ASP. So for this year, for the first half of this year, our price increase, if you look at per hour per session price, so our price increase is really modest. So we didn't increase per hour price. for our courses a lot. So, and if you look at the splitting effects due to compliance, and yeah, so that's why you see ASP lower a little bit.

Yeah. Yeah, and also, Alex, and we think, and also in the Sprint Masters, we also offer a different type of products for our students. We launch some that we call the short-term class, and concentrated class and there will be less shorter than our regular we call semesters. So that's the total package will be cheaper than the regular price. So I think that's the combined reason why you see the average AFC going a little bit down compared with the last year.

Okay. This is Wayne. I would take your second question. Regarding to the In 7 quarters, our gross margin for learning service was 52%, significantly improved when compared with last quarter, 29%. Going forward, we still expect an improvement on our learning service on any basis, based on three primary drivers. from economics of skill were expected. We believe our large-class teacher model will continuously gain more benefits as we achieve even more economics of skill. For example, we expect to have bigger class size due to our increased case-dealing enrollment from our summer campaign. more room to achieve the higher ASP. Just mentioned by Dr. Zhou, our ASP is modest and the average selling price for ASP for our premium courses was around 1,140 in second quarter, up 30% year over year. However, ASP was relatively cheaper when compared with some of our online and offline peers. This summer, we understand that our peers such as YuanTiKu and Zuo YeBang charge 10 to 8% premium price compared with last year's ASP. So we still have a lot of room to charge higher price for our courses as well. In addition, Even for some of our courses with higher ASPs, we're receiving excellent feedback from our users. For example, key program courses where the relevance retention rate was over 80%. Finally, better compensation structures. The better compensation structure we've aligned ourselves with will help us to get better GP margin as well. Although the CC margin may be affected by more to the causes in the short term, usually our CC margin will rise to an industry average level in the longer term. I wish this is helpful. Got it. Thank you.

Thank you. All right. Next question.

The next question comes from Thomas Chung of Jefferies. Please go ahead.

谢谢管理层接受我的提问。 我有两个问题。 第一个问题呢,想请教一下就是我们看这个 operating cash flow 未来几个季度或者是明年的话呢, 会不会有什么的吸引。 然后就是这个 timing to profitability 呢,我们会怎么看这个选点呢。 第二部分呢是, I have two questions. The first one is about our operating cash flow. Can management comment about the direction that we should think about in terms of the cash flow as well as the timing to profitability? And my second question is about our synergies with our existing product offerings. Given the fact that our Yao Dao dictionary also demonstrates very good results, how should we think about our strategies in generating synergies with our K-12 going forward? Thank you.

Thanks so much. I will take your first question. This is Wayne. In terms of the chain in operating cash flow, we have positive operating cash flow in first quarter and this quarter, totally over $140 million in the first half year, which can be attributed to our overall improvement to our business fundamentals. For example, the higher DMV level achieved, the better margin and more healthy unique economic effects are realized. While we don't provide any quantitative guidance on our operating cash flow, it is safe to say that our increased marketing and promotion advantages to acquire more users during the summer promotion season will place pressure on our operating cash flow for the next one or two quarters. We think this digital fluctuation is acceptable for the online learning market. We are keen to take advantage of the growth opportunity in the online learning industry and we expect a healthier, longer-term or green cash flow in near future. For the profitability, I'd like to give you some colors without giving any positive guidance which we don't provide. You can see our business fundamentals have improved across the board just mentioned. We increased our GMV as well as our opening cash flow. We are also realizing the increased benefits from economic outfield quarter order. At our current growth stage, profitability is not our first priority. We believe now is the time to continue to invest more in our technology and marketing activities. and continue to improve our service capability to enhance our user learning experience. Thank you.

Thomas, for your second question about the synergy between our apps as well as how we are with our courses. So I think if you recently open our dictionary, for example, if you recently open our dictionary apps, you will see that it's not only everything we've just uploaded, a new page for our dictionary thing. We've just added more functions on that. It's not only for the translation in future. It will be more useful for the students who are looking for the learning information and the material to help them to find more information. So we think we will hold more seminar things online and help them to know more about the learning as well as the test information. That will help us to know the profile of students and it will be more easier for us to convert them from our learning apps to our online courses products. On the other hand, for our hardware, for example, for our dictionary pen, most of our customer is the student from the primary school to high school. So I think that will be the same users too with our online courses. We are on the way to develop more functions for our hardware to friendly them to convert them from our hardware to our online courses products. And I think that will be the next step in this year. We will show you more data in the second half of this year. Thank you so much.

Thank you.

The next question comes from Vinnie Wong of HSBC. Please go ahead.

Hi, good evening, management. Thank you for taking my questions. Just a question about Zhou Zhong. Remember, I think last quarter, also since our IPO, we talked about more in terms of your doubt is really differentiated with this technology, using the AI-driven interactions, and also provide more personalized exercises. Is that one of the reasons that we have seen an improvement in the conversion rate because we see an uplift in the conversion rate this quarter? And then how do you see where we can use technology even more to drive up, to lift up the conversion rate because our conversion rate is still lower and then we can see there's a lot more room we can deepen the conversion here. So that is my first question. And the second question is on the sales and marketing. It seems that the sales and marketing dollar per student, if I just look at the sales and marketing efficiency, it seems that it's getting higher and higher. Is that just because of a network base, because our user base is getting bigger, so that's why the incremental marketing dollar spend will be higher, or is that because competition for users has been intensifying again and again and again because we have been seeing like the industry, everyone is stepping up in sales and marketing, in online education. So how do we see the rest of the year, and how does our profession differently? Thank you so much for the call.

Thank you, Vinny. You're absolutely right. So we view technology as one of our key differentiation factors to compete in this industry, and we We truly believe that the long-term competitiveness of any online education company, technology is a key factor there. We are called the tech industry for that reason. It's the key thing. If you look at our projects that we talked about, so last year we actually talked a lot about the smart pane that we use. And we have shifted more and more smart panes to our students last year and more this year. And this year, the interactive large class model is actually sort of an upgraded version of the SmartPen project last year. So it contains more ways to improve the students' and parents' experience. So we talked about improved retention, improved conversion. I can give you one more example is in the programming course I talked about. So we've actually successfully deployed some of the special made hardware for students to program on. And that's what helps us achieve the over 85% retention rate for that particular course. So you can imagine that the dynamics within the teams when they look at these numbers and when they do these projects and improve the retention, improve the conversion and the parents are generally thanking our instructors for providing them with this experience. So we think this is a really good direction and it will take quarters and years, but we think this is what kind of gets up, what every one of us gets up to work thinking about every day. So we think this is a really good point. So about sales and marketing, yeah, so maybe Sufong can talk a little bit and I can add.

For the sales marketing efficiency, as you mentioned, if you see the numbers, for real, it looks like efficiency is going down compared with the first quarter. But there are two things, an impact for this one. First, it's about just like you see the number of computers increase a lot, and in the Q2 compared to Q1, we also, to prepare for the summer campaign, we also have to in advance have more sales in our team to prepare for the summer promotions because we expect there will be more students coming out in the summer time. On the other hand, and also for the marketing side, because you know for the kick-off, June will be the first season to spend the money for the marketing to acquire the new users. So we have to For the marketing, we have to spend the marketing dollars in advance to convert them in the next few weeks after we spend the marketing dollars. So that will show in the June, we're spending the money, and they will show the results in the July. And I think that also impacts our quarterly numbers of all the sales marketing. So I think that's the two factors we believe impact on efficiency.

Yeah, what I will add is that for sales and marketing, we take really a disciplined and data-driven approach to this. So because we have more and more data, so we now can have data for every team. For every team, we will look at how long the investment will be made back. What time will it be? profitability horizon we are looking at for each team. So we think this year it's a good opportunity to acquire more users. So that's why we ramp up the spending on sales and marketing.

Yeah, I think the whole marketing team will be dedicated on what we call the healthy unit economics. So I believe that will be the fundamental thing for the whole business.

Okay, thank you, thank you. May I just have a very quick follow-up here? Do you see this year, just on the industry-wide, is it getting more aggressive than last year in terms of spending, or is it rationalizing? Because as all these online players, they probably have been navigating and ready to find an optimal way for them to acquire users. So do you think it's, relatively speaking, just compared to last year, is it rationalizing or more aggressive? And then I guess with that, you'll doubt here is that what is kind of like an ROI level that we are seeing versus our industry? Thank you.

Yeah, I think every company needs to decide for herself. Yeah, so what strategy, what kind of customer acquisition costs they are willing to take, right? So for us, we are essentially looking at the numbers and looking at If we get more users, what value we can provide them? How confident are we we can retain them? Also, with better scale, how much cost reduction can we get? What more data we can get to improve their experience? It's a holistic thing to look at this. Every company, I think, has their own thinking. The thing I would point out is that we are still kind of at the really early stage. So there are over 90% of students in China that are not taking online courses. So the ceiling is really high. So we think given the current market dynamics, our decision is we should... we should take the initiative to acquire more customers. Thank you.

Thank you so much.

The next question comes from Jessie Xu of Numera. Please go ahead.

Thank you for taking my question. I'm just glad that we rolled out more stronger subjects this year. I suppose we can do more combo sales or cross-selling now. So may I ask what is the average number of enrollment per student? Could you share your cross-selling strategy or some of your thoughts here? Thank you.

Thank you, Jesse. Our course retention, course selling, and the sign-up rates for two semesters currently are all in the improving trends. For instance, the number of subjects signed up by the enrollment students in high school increased by over 20% year-over-year, quarter-over-quarter, and 6% year-over-year. We expect the number of subjects signed up by the enrolled students for our middle school segments to continue to increase, with more Class A, we call it Class A subjects, coming out. by using a bundle of the matching strategies. I hope that answers your question.

Thank you. I have a second question. We noticed that the revenue growth of smart devices was pretty strong in 2Q. Could you share with us some updates or more details? Thank you.

Sure. Smart hardware sales were R&D 86 million in Q2, up 250% year-over-year, and 63% quarter-of-quarter. So our supply chain and also sales channels were affected by COVID-19 during January and February in Q1, but was back to normal since March. So mostly back to normal. So in Q2, we also released a new product, Dictionary Pen 2 Pro version. So this is well-received because a lot of our customers actually wanted to learn Japanese and sometimes use and learn Korean language. So these features are really well-received. And therefore, We are able to charge a higher unit price, actually about 1,200 yuan compared to 800 yuan with the original non-pro version. So this is really helpful to contribute actually higher gross margin for the hardware segment in Q2. And well, I guess we're not done yet for this year. So we have more new products coming in the second half of this year. And we think kind of education-oriented and especially AI-enabled. Our dictionary pen is actually AI-enabled, a smart device. So they present a large opportunity for us. Because these students, young folks, they are really kind of digital natives working with smartphones and everything. And when they are learning, sometimes they cannot use their smartphones. The school doesn't allow them to use smartphones. and they need these special devices for them to do that and the parents are really willing to pay for these devices just like parents are willing to pay for courses so they're not price sensitive on that front so we think we really like our product pipeline so in the second half of this year we'll have new products and we will continue to innovate which we think we are kind of quite ahead in this area. So we are continuing to elevate and yeah, so we were bullish on this. Thank you.

In the interest of time, this does conclude our question and answer session. I would like to turn the conference back over to management for any closing remarks.

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