Youdao, Inc.

Good day and welcome to the YoDAO 2021 Second Quarter Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Jeffrey Wong, Investor Relations Director for 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 fund liability as established by the U.S. Private Securities Litigation Reform Act. Such statements are not guarantees of the future performance and are subject to certain risks and uncertainties, assumptions, and other factors. 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 UDAO's business and financial results is included in certain filings of the company with the Securities and Exchange Commission. 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 definitions of non-GAAP financial measures and reconciliation of GAAP to non-GAAP financial results, please see the 2021 second quarter financial news release issued earlier today. As a reminder, this conference is being recorded. Besides, a webcast replay of this conference call will be available on UDAO's corporate website at ir.udao.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 Market, and Mr. Wayne Lee, our VP of Finance. I will now turn the call over to Dr. Zhou to review some of our recent highlights and strategic directions.

Thank you, Jeffrey, 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 limits. Q2 was another solid quarter for us. Total net revenue were RMB $1.3 billion, representing a 107% increase from the same period in 2020. Revenue from our three segments, learning services, learning products, and online marketing services, grew by 107%. 12%, 138%, and 60% year-over-year respectively. Loss from operations for the second quarter of 2021 was RMB 544 million. That translates to margin of loss from operations improvement of 330 basis points from the same period in 2020. As you all know, significant regulatory changes regarding after-school tutoring were introduced recently in China after our fiscal Q2 concluded. Our remarks will be two parts. I will first talk about the double reduction policy, its impact on us and our plans. Then we will go over our future results in more detail. Regarding the double reduction policy, we saw four major points most relevant to us. First, publishing of AST advertising is banned on most media platforms. Second, access to capital markets is severely limited. For example, ASTs are not allowed to pursue IPOs. Third, tutoring timing limitations. For example, no school subject academic tutoring on weekends or holidays. Fourth, academic ASTs are required to register as non-profit going forward. We have been exploring strategic and operational changes to our tutoring business and setting new priorities for the whole company since the regulation was published on July 24. First, as always, we are committed to embrace and fully comply with these laws and government policies. We have already made changes to our business, like stopping academic classes during the summer holidays, and we are actively communicating with regulators on further changes like the nonprofit requirements, as these have a major impact on our future operations. Therefore, we expect academic AST business will be severely limited in the coming quarters. But that's it. AST is not our sole business. The K-12 AST made up about 41.2% of our Q2 total revenue. We believe our other businesses, which contributes over half of our revenue, are not directly impacted by the regulation. And we have several high growth business lines in non-AST part of Yodah. So while we step on the brakes on the AST side, we will be driving more growth on the non-AST side of our business. Ultimately, we think our deep technology roots and large user base gives us options and diversity much needed in this kind of challenging scenario. Overall, when we add the two sides up, I expect this to be a speed bump in our journey, a headwind for a few quarters. Looking to the future, I see four pillars of growth in our non-AST business. Learning devices, adult education, STEAM courses, and education digitization solutions. We have talked a lot about the learning devices and adult education opportunities in past course, and our team will keep innovating in these areas. In Q2, both these businesses are doing well. We released Yota Dictionary and K3, designed to be more friendly to elementary school and pre-K kids, more affordable, and supports learning of arithmetic in addition to English and Chinese. As for the third growth area, STEAM courses, it is an area that is made more attractive now that the students have more time. I would believe we have a competitive advantage in online STEAM courses because we have been operating STEAM courses ever since 2018, and our teams are good at content creation, applying technology, and also monetization in this area. Youdao Weiqi continued scaling up nicely. Net revenue of Youdao Weiqi increased by 180% quarterly. We also launched advanced level small class courses of Weiqi for students that play more competitively. As for our programming courses, the retention rates reached all-time high of nearly 90% in Q2. STEM education is a great area, and we will continue to launch more courses in coming quarters. The last of the four growth areas is education digitization solutions. By that, we mean any product or service delivered in a business-to-business fashion or business-to-government fashion that uses digitization to improve learning and education. The customer could be schools, universities, or enterprises. This is the first time we discuss education digitization solutions on our call. We think it has huge potential. It fits your dog very well, and now is the right time to do it. According to Huatai Securities, the expected market size for education digitization is over RMB $650 billion in 2023. As for Yodal, with our expertise in AI, smart devices, design and manufacturing, as well as a deep understanding of teaching and learning, we believe we are well positioned to seize the opportunity in the rising education digitalization market. Right now, we also have an innovative product in this area, Udall Intelligent Learning Terminal. It is an appliance that automates paper-based homework processing and provides learning diagnosis through AI technology at schools. It works by integrating scanning, printing, and AI diagnosis in a single appliance. Your DAO helped Binjiang District in Hangzhou to facilitate education digitization, and our intelligent learning terminal was praised for helping instructors analyze students' learning and knowledge points and improve teaching quality and efficacy. We also continue investing in R&D to build up our learning technology. In Q2, we released the Yudai Intelligent Practice System, our first fully adapted practice and learning system. This is already in production using our junior high school math courses, and we plan to integrate it with our learning devices in the future. Going forward, here are our immediate action plans right now. First, we have been streamlining our workforce for K-12 AST business. We have been following the guidance from the government regarding how we are supposed to operate this segment in the future. Second, for the online courses segment, we will focus on adult courses and STEAM courses that are in line with the policy direction. As I just talked about, K-12 students have more free time after double reduction we believe demands for STEAM courses will significantly increase. Regarding adult education, we have seen a strong growing demand for professional certificates and interest-based courses, and we continue to offer competitive products to drive sustainable growth in this area. Thirdly, for learning products, we will continue leveraging our advantages in edtech and innovation to further drive growth. We always hold the view that smart learning devices present a great opportunity for growth, We already have achieved scale and profitability in our dictionary pain products, and we will continue to launch more new products to strengthen our leadership in learning products. Fourthly, for education digitization solutions business, as I introduced just now, there is a huge demand, and it is in line with the government's policy direction. We will leverage our advantages to meet the rising demand from public schools, universities, and et cetera. Looking ahead, we are very confident with our plans. As we have a strong team, we offer high-quality products, and so we have long-term support from our parent company, NetEase. NetEase today announced that it has adopted a share purchase program of up to $50 million of Udall's outstanding ADS system. for a period not to exceed 36 months beginning on September 2, 2021. Under the terms of this program, NIDIS may purchase U-DOS ADS in open market transactions on the New York exchange. The purchase program may be suspended or discontinued at any time. Along with continuing optimizing our business, we are also dedicated to fulfilling our social responsibilities as a corporate citizen. We always strive to help where we can, leveraging our strengths to help communities in need. For instance, facing the recent hefty rainstorm in Henan province, Yudao joined hands with public welfare institutions to provide post-disaster reconstruction, and instructor support for 10 to 15 schools and kindergartens. These activities are expected to support at least 10,000 students in affected areas. We will continue making ongoing contributions to society in the future. With that overview, I will now turn the call over to Supan to review our operational and financial results in Q2. We will then open to questions. Supan.