Youdao, Inc.

Good day and welcome to the YODO 2020 third quarter earnings conference call. Today's conference call is being recorded. At this time, I would like to turn the conference over to Regina. Regina, 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 Litigation Reform Act, such statements are not guaranteed of the future performance and are subject to certain risks and uncertainties, assumptions, and other factors. Some of those 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 your DAO's business and financial results is included in certain filing of the company with the Securities and Exchange Commission, including our annual report filed on Form 20-F. The company does not 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 reconciliation of GAAP to non-GAAP financial results, please see the 2020 Third Quarter Financial Results News Release Issues earlier today. As a reminder, this conference is being recorded. Besides, a webcast replay of this conference call will be available on UDOT's corporate website at ir.udot.com. Joining us today on the call from UDOT's senior management is Dr. Feng Zhou, our chief executive officer, Mr. Lei, 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 the strategic direction.

Thank you, Regina. 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 the NIMBY. Online education is more relevant today than ever before, and it is profoundly transforming how people learn. We accelerated our rapid growth momentum in the third quarter and generated total revenue of RMB 896 million. Growth billions from online courses reached RMB 965 million, up to 28% year-over-year, and 76% quarter-over-quarter. supported by our large-scale marketing and branding campaign during the summer. Growth in our K-12 segments was particularly strong, reaching a record high. Growth fillings from this group were RMB $676 million, up 369% and 120% year-over-year and quarter-over-quarter, respectively. K-12 paid enrollments reached $499,000, up 52% quarter-over-quarter. The K-12 gross billing proportion of UDOT premium courses increased to 77% from 67% in the same period last year. ASP for the K-12 segments was slightly down, primarily due to the increased proportion of primary school enrollments, which have relatively lower ASPs than our high and junior high school courses. 22% of all newly enrolled students' gross billings came from organic traffic for Q3, which grew 188% year-over-year. Gross margins also continued to improve with product improvements and larger scale. Overall gross margin was 45.9%, and the gross margin for our learning services was 53.9%, up to 20 basis points from Q2. We expect to maintain this growth momentum of our GP margin, mainly due to further improvement of economy of skill. We continue to strengthen our STAR instructor and teaching assistance team. More than 70% of our current instructors come from Tsinghua University, Peking University, or a top 50 university in the world. This year, we hired only about 0.3% of all instructor candidates. We are committed to continue hiring elite instructors and to offer high-quality courses. Regarding TA teams, we continue to expand our capacity. Total TAs reached 3,368 at the end of Q3 at operation centers around the country. On the product side, our K-12 math courses made significant progress in Q3, The number of paid enrollments for math students in grades 1 to 12 increased in the third quarter by over 800 a year. For primary school, we added more interactions in classes for key knowledge points. For junior high school, we started to offer regional and textbook-specific courses. For high school, several newly recruited staff teachers are available for students to meet diverse demands. We released a new set of kids' programming courses, including Python programming and a custom hardware programming kit in Q3. Student retention of the programming courses exceeded 85%. Q3 is the main quarter for our summer marketing campaign. The campaign included online performance advertisements, TV sponsorships and ads, and et cetera. We expect this marketing campaign to be the largest for fiscal year 2020. In Q3, brand and performance advertisement spending on courses amounted to RMB 881 million. Although increased spending led to more short-term losses, it helped drive scale and was done under strict unit economics requirements. We looked at front-loaded marketing spending in this quarter and the total of expected returns over the next several quarters for each project to make sure it is healthy. Turning to our adult segments, growth buildings increased to RMB 201 million, up 185% year-over-year and 34% quarter-over-quarter. We continue our twofold strategy here. One, we focus on high-value courses such as skill learning and interest-oriented courses and shift away from low-value courses such as college English. Second, we leverage our expertise in content development in this area to launch and quickly iterate new cost offerings. Our staple courses continue to do well. For example, Logic English grew over 100% in gross billing year-over-year. Practical English courses released this year including English recitation camp and oral English training have ramped quickly, which become the major component of our adults with over five times growth year-over-year in gross balance. Our intelligent learning devices also grew at an accelerated clip in Q3, with revenues reaching RMB 163 million, up to 89% year-over-year. and 89% quarter-over-quarter. We shipped about 250,000 units of our dictionary pen too, up 59% from Q2. Over 70% of our dictionary pens were purchased by or for a K-12 user. We continue to integrate software and hardware here to deliver even more seamless experience. For example, you can now scan words or phrases with your dictionary pen and read the results on your phone screen, which is even faster than using the pen alone. In Q4, we are launching a new dictionary pen, and we are confident that it will further strengthen our leading position in intelligent learning devices. Let me say a few more words about how we look at learning devices. During the last two years in the market, we have clearly witnessed the introduction of a flourishing set of smart learning devices that parents and kids both love. We believe every kid will eventually own one or more of these devices. And these devices will be more and more tightly integrated with online learning services, leading to important cross-selling and other opportunities. As adults, with our expertise in AI, learning content, hardware design, and brand recognition, we believe we are well positioned to lead this fledgling area. Overall, our strategy this year is to seize key expansion opportunities. One important principle we base many decisions on is the principle of value accumulation. We have put a lot of effort into ensuring that, along with revenue growth, we also accumulate a large amount of value regarding product innovation and ability, customer base expansion, teaching expertise, learning content, learning-oriented AI technology, distributing channels, and on the ground, and et cetera. Accumulating all this value enables us to offer constantly better courses now and long into the future to a huge population of parents willing to pay for high quality education products. With that overview, I will now turn the call over to Supong to review our financial results. We will then open to questions. Supong.

Thank you, Dr. Zhou, and hello, everyone. Today, I will be presenting some highlights from our 2020 third quarter. We encourage you to read through our press release issued earlier today for the further details. We continue to scale our operations in third quarter, achieving considerable year-over-year growth. Our strong technology, curriculum, and supporting intelligent devices, and apps, avail exponential growth as we pursue additional marketing and branding activities to support our growth. For the third quarter, total net revenue was only $896 million. For U.S. dollars, $132 million. This represents an increase of 159% from the third quarter of 2019. Looking at this growth,

Pardon me, we have had a disconnect. If you could please stay on the line. Thank you. Thank you. . . . . . Thank you. . . . Thank you. Thank you. Thanks for watching! Thank you. We have rejoined the speakers. You could go on. Thank you.

Thank you for patience, and I will start it again. Sorry for disconnecting from the call. Today I will be presenting some financial highlights from our 2020 third quarter. We encourage you to read through our press release issued earlier today for further details. We continue to scale our operations in the third quarter, achieving considerable year-over-year growth. Our strong technology, curriculum, and supporting intelligent devices and apps are well-suited for the exponential growth as we pursue additional marketing and branding activity to support our growth. For the third quarter, total net revenue were RMB $896 million, or US dollar $132 million. This represents an increase of 159% from the third quarter of 2019. Looking at this growth by segment, net revenue from our learning services and the products grow 239.1% year-over-year to RMB 763.5 million, or U.S. dollar, 112.4 million. We attribute this growth to a sharp update in K-12 paid student enrollment and the growth speeding per paid student enrollment of U.S. dollar premium courses on a year-over-year basis. Net revenue for online marketing services will RMB 132.6 million, or US dollar 19.5 million, an increase of 9.8% compared with the same period of 2019. For the third quarter of 2020, our total gross profit greatly improved, reaching RMB 411.6 million, or US dollar 60.6 million, up 361.2% compared with the third quarter of 2019. Gross margin for learning services and products improved to the 48.8% for the third quarter of 2020. up from the 27.5% for the third quarter of 2019. The larger margin growth was primarily attributable to improved online courses margins, factor economics of scale, and the further optimization of our business and the faculty compensation structure. Course margins for online marketing services was 29.5% for the third quarter of 2020, compared with the 22.6% for the third quarter of 2019. The increase was mainly the result of more revenue contributions from grant advertising services, which carry higher margins. For the third quarter, total operating expense for RMB 1.3 billion, or US dollar, 192.3 million, compared with the RMB 324 million for the same period last year. We continue to invest in our future and the top-line expansion. In addition to our investment in technology, and acquiring talent teachers to support our growing business over the long term. We greatly ramped our sales and marketing efforts, focused on student acquisition, expanding our brand awareness. This was especially important to accelerate during our busy summer campaign. This investment had immediate positive impact on our growth, which we expect to be long lasting. In tandem with this investment, we are also structuring our model to become more efficient and recognizing economic scale, we will continue to invest in our future growth as appropriate. With that in mind, sales and marketing expense for the third quarter were RMB 1.1 billion, compared with RMB 231 million in the third quarter of 2019. Research and development expense for the third quarter were RMB 121 million, compared with RMB 74.9 million in the third quarter of 2019. Our operating loss margin was 99.8% in the third quarter of 2020, compared with 67.9% for the same period of last year. For the third quarter of 2020, our net loss attributable to ordinary shareholders was RMB $877.8 million, or USD $129.3 million, compared with a loss of RMB $242.2 million for the same period of last year. Non-GAAP net loss attributable to ordinary shareholders for the third quarter was RMB $865.7 million, or US dollar $127.5 million, compared with a loss of RMB $238.8 million for the comparable period last year. Basic and diluted net loss per ADS for the third quarter was RMB $7.73, or US dollar $1.14. Non-GAAP basic and diluted net loss per ADS for the third quarter was RMB 7.63, or US dollar 1.12. Our net cash used in operating activities for the third quarter was RMB 593.4 million, or US dollar 87.4 million. Looking at our balance sheet, as of September 30, 2020, our contract liability, which mainly consists of deferred revenue for our online courses, were RMB 1.1 billion, or US dollar, 156.9 million, representing an increase of 133.3% for RMB 456.8 million as of December 31, 2019. At the end of the period, our cash, cash equivalent, time deposit, and short-term investment totaled RMB 1.1 billion, or US dollar, 166.9 million. 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.

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're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then 2. For the benefit of all participants on today's call, if you wish to ask your question to management in Chinese, please immediately repeat your question in English. We'll pause momentarily to assemble our roster. The first question today comes from Brian Gong with Citigroup. Please go ahead.

Thank you for accepting my question. My question is mainly focused on how we see the latest competitive situation in the industry. How much is the marketing dollar for the next four seasons? And how much is the budget for next year? Thanks, management, for taking my questions. My question is still about the competition. Management gives some updates on recent competitive landscape and the outlook, and how does management see student acquisition cost trend to be for first quarter and for next year? And what would be our marketing budget for 4Q and the next year? Thank you.

Yeah, this is Zhou Feng. So first, a couple of points on the competitive landscape. So I think what's obvious is the sector as a whole is growing quickly, probably quicker than last year. And the sector is investing money, not earning money yet. So I think players are willing to invest because of two things. parents are willing to pay for really high-quality education. So profitability in the long run is very much there. And the second is total market size potential is huge. So these two factors, they remain true. They're very much true in 2020, and that's why we invested in marketing in the summer, and that's why I think what everyone is thinking about. So we're bullish about the future. Yeah, so that's one. And the second is I think we see greater concentration in 2020 compared with last year. So in the sense that we only have five, six main players kind of doing Keto 12 large courses. So with the investment we made in marketing in Q3, we significantly increased our customer base. So I think with very competitive customer acquisition cost. So this gives us better reach and more leverage. So, yeah, I don't want to comment too much on our peers. So that's for us. Thirdly, I think in terms of in the future, Q4 and how everyone competes and how fierce the competition is, I believe it is important to appreciate the fact that we're still in the early days. So early in how we create content and present it, we're early in how we Acquire customers. We're early in how we deliver and monetize the content. So expect a lot of these things to change, a lot of new ways to do these things. And we are doing performance ads to acquire new customers. And we're also looking at OMO and other ways and kind of expansion on the ground in that. So it is not a simple math question of putting money on one side and acquiring that many students. So our approach is to look at this as a dynamic process and innovate and focus on healthy and robust growth. So I'll just say that's very high level. And regarding marketing, maybe Supong you can talk a little bit in details.

Thank you, Doctor. Brian, for your questions, first of all, the colors for the marketing stance for the upcoming quarters, I think, first of all, we don't give any official guidance to the market in line with the 90s group as the first. But usually, we can share this while the Q3 will be our biggest investment season due to the summer campaign. So on the full year basis, indeed, we significantly enhance our marketing and investment in the Q3 this year. But we believe it's highly valuable for us to acquire the amount of new students with healthy unit economics. Because it is not one-time, for the K-12 business, it's not really the one-time charge model for the K-12. Think of the lifetime value of the K-12 students. We expect those users will stay with us for a long time. And we estimate to cover all the sales and marketing costs. with the one to two times for the repurchase from our K-top users for Burlap. So we achieved a great outcome through the summer marketing campaign. And as Dr. Jung mentioned, the payroll pay enrollment increased over 400% during the Q3. And if you discover the growth of the subject, our mass product increased over eight times year over year in terms of the pay enrollment. So we are dedicated to continue our fast, healthy growth, we think. And we will not hesitate to keep investing in our top-line expansion for those projects with the healthy, unique economics. And on the other hand, we believe because of our pretty unique product mix, and we do not rely on the social marketing to expand our business, we can also rely on our apps. And like Dr. Mitchell mentioned, for our intelligent devices, we shipped about over 250,000 units for our dictionary pen version two. In those users, over 70% of our dictionary users were purchased by the, or for KTOP users. And I think that we can, in the future, we will deploy, discover more synergy between our intelligent devices and our online services. I think for the last question about student acquisition cost, I think I just mentioned about the summer campaign season, it really was with higher users acquisition cost due to the increasing customer demand and also then the cost went down after summer season. But during the semesters, the student and parents typically will wait until the winter season or the close to winter season to choose after through children's products. And we also, I think, actually we're trying to use the multi-customer acquisition channels to attract users like ground marketing, e-commerce platform, and the social network. I think the new paid enrollment marketing via the ground marketing will grow about several times compared with the same period of last year. So we will keep close monitoring about the customer acquisition cost to keep the healthy growth for our whole business. So I hope that answers your question. Thank you, Brian.

Yep, definitely. Thank you. Very helpful.

The next question comes from with Morgan Stanley. Please go ahead.

Hey, good evening. Thank you for taking my question. I have a couple of small questions. The first one is a follow-up about the internal MAU customer conversion. So you have a quick MAU growth and also you have smart devices shipment to students. So can you show the number how much percent of your enrollment is from your internal traffic and do you have any expectation on this number going forward? And secondly is you have a very strong gross margin improvement in past few quarters, especially the premium online courses. So what's your view about the normalized gross profit margin for your online courses? And sorry, the last one is a quick one. Maybe it's too early, but can you share some color on your retention rates from this fall semester to winter courses. Thank you very much.

Thanks, Songshan. So regarding converting MAUs from organic traffic to paying users, so I can give you one data point is 22% of all our billings in Q3 come from internal traffic. Yeah, so that's 188% growth over the same period last year. So in terms of long term, yeah, you can do the math here. So if you compute that number, the enrollment number, as a percentage of NAU, which is over 100 million, so it's still very low. It's lower than 1%. there's still a lot of room for growth. So the end state, long-term potential, I think the short answer is we believe a couple of percentage points is doable. To explain why, so first remember, we do have a big price gap. So on one side, it's free product, the dictionary. On the other side, it's a course of several thousand yen. So it is non-trivial to do the conversion. So on the other hand, we have become quite experienced at this. So we do have the advantage that our dictionary users are quite loyal. They come back a lot. And we have many opportunities to touch them. So we use ways like free trials, of course, We did the introduction of customization features, letting users tell us who they are, things like that. And they have been quite useful in increasing the conversion. So the data, our data we have, including the trajectory, shows that a couple of percentage points is credible, what part number, in a few years. So we are always experimenting with ways to offer users more relevant courses and other services. So it could be higher. Yeah. And you also mentioned the learning devices. Yeah, we believe it's also a very good source of organic conversion. So a lot of these devices are purchased by K-12 students. And they're over $250K. of dictionary payments sold in Q3. It's already a sizeable number. We will look at this properly in the future. The second question regarding gross margin in the long run, I think the short answer is right now we are at around 50%. We think 60, 70 is completely doable. But there's a lot of factors playing into that, so we will see. And last question is regarding retention. We're still early, but we did start signing up current students for winter and spring courses in late October. It is an ongoing process that extends into Q1. But what I can share with you is preliminary data shows that in general we've been able to significantly increase both the number of new students and improve the retention rate at the same time over the same period last year. So we feel good about the final results at the end of the retention period in January. Yeah, I hope that answered the question. Thank you.

Yes, thank you very much.

The next question comes from Alex D. with Credit Twist. Please go ahead.

Hi, Benjamin. Thank you for taking the questions and congratulations on the quarter scores. And for my question, it will be about the competitive landscape. So several of them players in this market made the comment that the top four players in Q12 Masters 2-3 their advantages and again the non-top four will become bigger and bigger and we also see several players raise the funding in September and recently so what will be the positioning of Yodal in this market and how How do you think about competitive advantages in this kind of competitive environment? Thank you.

This is again about competitive landscape. What I would say is, in general, we are not operating around market share. We think our competitive strengths is threefold. So we focus on high-quality content, product innovations, and great technology, three things, quality, innovation, and technology. So we don't intend to do all the courses and all the grades. Right now, if you look at our offerings, the focus is clearly for K-12 is on junior high and high school, senior high school, junior and senior high school. And so if you look at our track record, so the three things really, we think they really help us. Focus on quality enabled us to deliver bestseller courses like Logic English, Luo Jingyu, and our junior high school Chinese course, 初中的语文. Innovation led us to projects like the Dictionary Pen, where we created entirely new product categories that people really love, and it's growing super fast. And technology innovation like automatic ethic grading, which we talked a little bit about in the past. And they are now being integrated into our services during the summer. We believe these three things are vital to our success. And that's the first point I want to make. Then looking at the operations side, in Q3 we added a lot of students. So we did that because we think the products are ready. They offer a great value and retention potential for our users, for the users. So that's why we did it during the summer. And for us, it obviously increased economy of scale and the impact of our products among the users. So we are quickly expanding in our scale, which we expect to continue to do. And lastly, we are really happy about our product pipeline. So that's pretty important. So for K-12, for preschool courses and also for adult courses. We have nice projects, really strong projects in R&D. So when these projects are ready, we will release and promote them. And I believe this is how we grow the business instead of just spending dollars on sales and marketing.

Thank you, Dr. Zhou. I have a follow-up on this question. Since several leading players raised funding recently, what do you think will be the condition for Youdao to raise funding, or what will be the condition that you won't consider raise funding?

Thank you. We're happy with our current cash position. One thing you want to look at is if you look at our operating cash flow for the first three quarters, it's actually a healthy process for us. That's one. Obviously, we have ways to raise funding if we need. We will, of course, keep that in mind. Lastly, our controlling shareholder, NetEase, has always been very supportive of your Dutch business. They believe fully in the vision. They will always have our back.

Thank you. Got it. Thank you very much.

Next question comes from LePing Zhe with CICC. Please go ahead.

Hello, President Liu. Good evening. Thank you for accepting my question. I have two main questions. One is about our equipment. I see that the level of growth is very strong, more than 300%. I wonder what the company's idea and strategy for this business will be in the future. In addition, from the perspective of the company, how big is the overall market size and how much market share can we have in the future? And the second question is about our profit. This quarter has also improved a lot. I don't know about the K-12 course, how much is the average number of students in each course? And how much is the number of students that our tutors teach now? I will translate it myself. Good evening, management. Thanks for taking my questions. I have two questions here. First, we noticed strong growth of our lending devices. And why is that? And what will be Dow's future strategy on that business? And what's the 10 markets and the overall market share we will have in a stable future? And the second question is related to the DP margins. We noticed that we have a quite big improvement on the CP margin. Can the management share for K-12 courses the average number of students per courses? And in addition, the average number of students served per tutor? Thank you.

Thank you, Brenda. This is Supeng. We think for the intelligent devices, like the doctor mentioned, I think it's a new sector developed by the UDAO team, and you see the numbers of shift for the dictionary pen in the Q3. I think it's very fast in the numbers. We are fully confident about the numbers growing in the next few quarters, and we will And we also think we expect to build up more hardware pipelines in the future. We think that will be part of the online education in the future. And I think that will combine with intelligent devices or combine with services. So we think the market's potential is tremendous, we believe. And we think we will spend more time and resources to develop more intelligent devices in the

in the in the in the future yeah we'll have a new version on uh december 1st yeah so uh we we we really like the the new version we think yeah we there's a lot of innovation there yeah so uh and uh i think the other thing about these devices is that it's not a just a hardware device it's it's actually device plus content so a lot of our thinking went into it by putting really unique content and technology in it. It has good margins and it's really sticky.

I hope that answers the question about your intelligence devices. Second, for the margin issues, and with yes as you mentioned we are improved a lot about our gp margin in the in this quarter compared with the same period last year we think that's also also leverage from our economic skill as well as the restructuring our compensation structures for our business and faculties in the in the in this quarter and for your questions about average classes i think That's not a really, I think, number of the students for one class. I think it's because we are offering more start teachers in these quarters as well. So I think, thinking about the average number, it's increased a little, but thinking about skills, we are just increasing a lot of the new teachers and the students at the same time. And for the tutors, from the teaching assistant side, I think the average number is also around 200, If you use the total enrollment divided by our total tutors, that will be different because we have to prepare all the tutors before we offer the services to our students. So that means some part of our tutors will be in training process in this quarter. So I think from the operating efficiency for this quarter, we have improved a lot compared with the last year. So we are fully confident to increase our GP margin tremendously. gradually in the next few quarters. I hope that answers your question. Thank you very much.

Thank you. Next question comes from Benny Wong with HSBC. Please go ahead.

Hello. Good evening, management. I have a question regarding on the competitive landscape. How do you see that get evolved into 2021, especially when like Yuan Fu Dao, Zhou Yibang, a lot of these private players have been raising a lot of capital and seems that they're also, you know, spending a lot of, you know, like very low pricing, right, to just try to drive the user acquisition. So I'm not so sure if like into 2020, do you think we will also be stepping up? in terms of the marketing expense to just drive a faster growth or maybe using any strategies that we can use more. And then the second thing is a follow up from the last question is in terms of any like cost selling ratio, right, from the Yodao app, I mean the dictionary app to cost sell into the premium courses. And then we saw the premium course growth actually accelerated to 300% YNY, right, from a 200% growth last quarter. What are some of the key reasons that are structurally we should be aware of and that can last into the next quarter? 我就翻譯一下我的問題,就想請教一下管理層, 就是如果我們看到就是在2021年這個競爭的格局會有什麼一些變化, 因為看到就是很多那些private player, 比如說員輔導啊,作業幫啊, 他們其實都是一個就是融錢就融了比較多的現金, Then after the election, they may also be more aggressive to fight this war. I don't know. In 2021, in addition to the content box, our teacher box, there is an improvement. What things do we see that the economic structure will have some changes? Another one is that I want to ask, we see this, this is the course that has accelerated to the third quarter. The income of the gold industry is increasing to more than 300 points. With the 200 points of the second quarter. So I want to ask what are some structural changes? What are some structural driving forces that we should pay attention to? That is to say, when we look at this number in the future, is it because there may be some, for example, some of our internal transformations are better done? Hi, this is Wayne.

I'd like to ask a question. As just mentioned by Dr. Zhou, for the competition landscape, I think the very quickly, and the competition is more concentrated. You mentioned We believe the company has more cash flow, definitely has the company in a better position than 15 years competition. We are comfortable with our current cash level because we have some positive cash flow in the first two quarters and we have financial support from our parent company, Matthew, just mentioned. And in the long run, we did not expect a huge cash expectation incurred for 2026 year. However, at the same time, you may notice our learning service and the product business expanded very quickly, which improved our business in terms of the competition in user acquisition. I think the market seems to be higher than the current stage due to the good market window. Most of them also are trying to get different user acquisition channels, which will more cost-benefit balance. The market size potential is very huge, and it is more concentrated, as Justin mentioned, So if our unit economic is healthy, I think we will continue to take advantage to get opportunity to build our .

Yeah.

Please, yeah. Okay. What's the follow-up question?

Sorry, sorry. As a percentage of revenue, what kind of scale does it reach? Of course, this is a long-term issue, not a specific one. Because I think sales and marketing will fluctuate a lot in the quarter-to-quarter.

Yeah, I think the Q3 is, so we kind of significantly raised our sales and marketing level. And as we talk about, we think Q3 is the largest of 2020, right? So, Obviously, for next year, the next year Q3, the summer, is also a good opportunity to acquire users. I think we're still early in total. We're still small. We will basically, as Wayne talked about, Unieconomics is really key for our decision. I believe in Q1, Q2, we talked about we have prepared the money, we have prepared the budget, but we will really pull the trigger only when we see good UE for us. That reflects our ways of thinking. We're still small. Obviously, if UE is good, we will grow. To kind of repeat, we talked about this many times. So the way we look at a UEA is that the marketing spending is upfront. It's front load. And then we will basically look at the current quarter projected return from these investments next two, maybe three quarters, and then we will do a determination. So if we see good numbers and we see good opportunities to invest, then we will do it. So that's the way we think about it. But the market is dynamic, of course. But we think probably next year we'll also have good opportunities to invest in acquiring users. Yeah, but we'll see.

Yes, and... Yes, indeed, we believe the soft marketing definitely is one of the drivers of our business. But essentially, in the fundamental, like Dr. Liu mentioned, Product quality and the differentiation of the product is also the fundamental issues to define about the structure of the total market. For example, if the student and parent choose your product not because of self-marketing, it's because of what kind of services you can provide to them and what kind of effect and the results or the consequences they can get from these courses. And so that's the key thing. That's the reason why we increased our number of staff teachers as well as the number of teaching assistants and simultaneously with the increase of investment in this summer. So we think that's the content and product fundamentally to change the structure of this competitive landscape or the other things. So that's why we spend more time to develop more of the different devices and services from UDAO. Thank you.

Thank you. Thank you. Thank you so much. Thank you.

The next question comes from Thomas Chang with Jefferies. Please go ahead.

晚上好,谢谢管理层介绍我的提问。 我的问题是有两个。 第一个是关于我们的广告的收入的。 想请问管理层我们现在有不同的devices, 也有很大的一个MAU, 我们会怎么看这个segment在未来的发展? 第二个问题是关于这个fee cash flow的。 Do we have a timeline for our free cash flow to be positive? Thanks, management, for taking my questions. My question is about our advertising services. Given our large user scale, can you comment about how this business line will trend in coming quarters and separately regarding our free cash flow? Can you comment about is there any timeline talking about break-even or positive? Thank you.

Hi, Thomas. In terms of advertising, I'll use Chinese. We can see that the competition for advertising is still very intense. But we can still see a lot of opportunities, including us in this dictionary, including us having a lot of student users, including us having a lot of college students and even young people. These users are very important to us. Then many customers will like our sales activities that we do in these young people. So we will have a lot of brand audiences who will like us very much. If you look at our Q3, in fact, it should be much better than the Q3 of the same period last year. You can see a lot of our new sales activities and new sales products have a good growth after the epidemic recovery. Thank you, Thomas. I will just do a brief translation for Mr. Jin.

And for the advertisement, although it's very still have the also have a very competitive landscape in the advertisement sectors, but everything still we find a very great opportunity especially for the young generations. Although in terms of the revenue and as well as the PP margins, we have improved a lot in this Q3 and compared with last year. So we think we are confident about the healthy growth of our advertisement business in the future. But at the same time, if you see the growth rate of our different segments of our business, you will see our online courses grow much faster than advertising. So we believe in the future, the majority of the revenue is generated from our courses and education-related business, like intelligent devices. So as a percentage, AdWords will keep going down in the next few quarters, but we think that will be a very healthy and great business for us by now. Thank you. Thank you, Thomas.

And this concludes our question and answer session.

I would now like to turn the conference back over to Regina for any additional or closing comments.

This concludes our conference. You may now disconnect. Thank you for attending.