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.

Thank you, Dr. Zhou. And hello, everyone. Today I will be presenting some operational and financial highlights from our 2021 second quarter. We encourage you to read through our press release issued earlier today for further details. Dr. Zhou introduced strategic and operational change to our tutoring business and our new priority just now. Then I will add more color on the operating side into two. First of all, in terms of the adult segments of training courses, the revenue accounts for 21.5% of the total net revenue in Q2. The Extraordinary Memory course was the biggest one from the world's speeding perspective in Q2. In the meantime, an upgraded version of the Practical English course has been launched recently. English for All Enjoyment Camp offers immersive teaching from the first-person view. It optimizes the education and training model based on the learning characteristics and the learning habits of the adults. Furthermore, the upgraded course presents language learning scenario by using AI technology and the integrated learning practice and tasks to improve the concentration of students. The intelligent assessment system tracks the students' learning conditions to help them customize their learning process accurately from the five major dimensions. In short, enhancing service by AI technology has made education and training easier. That's why China University MOOC means massive open online course, the leading MOOC platform in China, and also the major online courses platform for Chinese university students. 137 courses have been certified as the national level premium online courses for vocational education by Ministry of Education. Looking at our Yu Dao dictionary app, we added a new function named High Reading in Q2. It is the first learning app that supports real-time assessment of oral English and professional sound monitoring in China, making oral English learning more efficient. As for the WuWu community, WuWuQuan, we launched in Q1. It grew fast with MAU of more than 10 million in Q2. The monthly active users of our learning apps in Q2 reached more than 113 million. Besides, core speeding from new users contributed by organic traffic increased by 97.3% year-over-year, and core speeding from the total organic traffic accounted for 28.4% of all core speeding in Q2. Then I will be presenting the financial highlights in Q2. Total growth speeding for our online courses reached RMB 1.1 billion for the second quarter, up 99.7% year-over-year. And the growth speeding for our premium courses rose to RMB 1 billion, up 124.1% year-over-year. Growth speeding for our K-12 segments account for 76.7% of the total growth speeding in second quarter. Paid student enrollments for premium courses were up by 129% year-over-year. Paid student enrollments from our K-12 and adult segments account for the 86.6% and 13.4% of the paid student enrollments for premium courses, respectively. For the second quarter, total net revenue reached a record RMB $1.3 billion, all-U.S. dollar $200.3 million. This represents an increase of 107.5% from the second quarter of 2020. Looking at this growth by segment, net revenue from our learning services will be $921.1 million. For U.S. dollars, $142.7 million, up 112.4% from the same period in 2020. We attribute this growth to the increased revenue generated from our online courses, which were further driven by the increase in pay-to-learn enrollment for both K-12 and adult courses of UDAO premium courses. Net revenue from our learning products were RMB $206.3 million, for U.S. dollars $32 million, up 138.8% from the same period in 2020, driven by the substantial increase in UDAO dictionary pen sales volumes. Net revenue from our online marketing services were RMB 166 million, or US dollar, 25.7 million, representing a 60.8% increase from the same period in 2020. For the second quarter, our total gross profit reached RMB 676.7 million, for U.S. dollar, $104.8 million, up 140.4%, compared with the second quarter of 2020. Course margin for learning services increased to 57.9% for the second quarter of 2021, up from the 51.7% for the second quarter of 2020. The increase was driven by the improved economics of scale and ongoing optimization of UDAOs faculty compensation structure. Gross margin for learning products increased to 43% for the second quarter, from 32.4% for the same period in 2020. The improvement was mainly attributable to the substantial rise in sales volume of UDAO Dictionary Pen Series 3, which carries a higher gross margin than other learning products. Gross margin for online marketing services was 32.7% for the second quarter of 2021, compared with 28.5% for the same period in 2020. The increase was mainly attributable to higher sales of performance-based advertisements through third-party internet properties, which had an improved gross margin profile over the last year. For the second quarter, the total operating expense was RMB $1.2 billion, or US$189.1 million, compared with RMB $564.6 million for the same period last year. With that, for the second quarter, our sales and marketing expense was RMB $973.2 million, compared with RMB $445.2 million in the second quarter of 2020. Research and development expense were RMB $180 million compared with RMB $91.4 million in the second quarter of 2020. Our operating loss margin was 42.1% in the second quarter of 2021 compared with 45.4% for the same period of last year. For the second quarter of 2021, our net loss attributable to ordinary shareholders was RMB 524.4 million, or US dollar 81.2 million, compared with RMB 257.8 million for the same period of last year. Non-GAAP net loss attributable to ordinary shareholders for the second quarter was RMB 500.5 million, for the U.S. dollar, 77.5 million, compared with RMB 250.5 million for the same period last year. Basic and diluted net loss per ADS for the second quarter was RMB 4.29, or US dollar 0.66. Non-GAAP basic and diluted net loss per ADS for the second quarter was RMB 4.09, or US dollar 0.63. Our net cash used in operating activities for the second quarter was RMB 249.1 million, or US dollar 38.6 million. Looking at our balance sheet, as of June 30, 2021, our contract liability, which mainly consists of the deferred revenue for our online courses, were RMB $1.4 billion, or $US $213.1 million, compared with RMB $1.4 billion as of December 31, 2020. At the end of the period, our cash, cash equivalent, restricted cash, time deposit, and short-term investments totaled RMB 1.9 billion, or US dollar 294.4 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.

We will now begin the question and answer session. To ask a question, you may press star, then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then 2. Once again, that was star, then the number 1 to ask a question. At this time, we will pause momentarily to assemble our roster. And our first question comes from Shang Dong of Morgan Stanley. Please go ahead.

Thank you for taking my question. My question is, after you mentioned that with current regulatory environment, you will focus more on the non-K-12 space. My question is wondering what this means for K-12 to trade business. Will you keep it or gradually exit this market? And if you have any operation adjustment plan, can you share with us? That would be great. Thank you.

Right now, we are following guidance from the government at a working level. For example, we stopped summer courses, we removed courses scheduled on weekends, and things like that. Going forward, we will see more changes like this. of our service will be different. In the process, we will follow guidance from the government. One thing is that we see that the national policy, Beijing policy, and other local policies regarding AST, they are they are actually quite consistent in their content. So our current thinking is we expect the measures in these policies, some are already implemented, some are not implemented yet, but we expect them to be executed, implemented in the coming months. So we're still in the process. So some of the timing is not clear yet. And the schedules, the government schedules could be moved around. But basically, we will follow the government's instructions. And so this is our current view. And so I think it's still early for a very clear pay to travel adjustment plan from us. Again, As we said, we do expect the measures to have significant impact on our existing federal tariff cost business, and these impacts will come in the coming quarters. Let me take this opportunity to talk a bit more about where we are from a more macro perspective. So first, I think the policies are designed for the long-term development of China's education. So let kids have more free time, let them develop more extracurricular interests, and put more resources into schools. These are all designed for the long-term. Therefore, we fully embrace these changes, these policies, and we'll be compliant as our original intention to do education business is is actually very consistent with the reform. Yeah, so there's actually a Chinese saying, 施者传道受业解惑业, Teachers are those who teach us values, teach us skills, and dispel doubts. I think it's a fitting one right now. Because it is our purpose to do these things, teach us values, teach us skills, and dispel doubts. And we use technology to do that. And the final purpose is to empower the kids, the children, to get brighter futures. Yeah, so this is why we fully embrace the policy. Second, regarding non-keruchal, we also see that the governments are embracing and actually driving digital transformation in many fields in the economy, including education. Digitization is a powerful force. It really increases productivity and transforms a lot of the fields. And the government understands that and will not stop doing it, including education. So, for example, in July, six ministries jointly released a guiding opinion on education new infrastructure building, 教育新基建, mainly to promote more deployments of digital technology in education. So education technology in China, in our view, is definitely moving forward. The online AST, of course, is part of education technology, but there's a lot more to ATT&CK than AST. So as I've talked about in our preparing marks, so we will focus on the four streams, four pillars of growth. learning devices, team courses, adult courses, and education digitization solutions. These are all in line with the overall government direction. And already, it's not something that we... come up after the policy reform. It's something that we've been working on for some time. And these four areas are all high growth areas for us, if you actually look at the numbers. So that is what is clear for us right now. And that's also what many of our teams are hard at work focusing on. Yeah, I hope that answers your question. Thanks again.

Thank you very much.

The next question comes from Brian Gong of Citi. Please go ahead.

Thanks management for taking my question. My question is about the competition of learning devices, adult education and STEM education. Do you think the competition of those areas will become more intensified since after the new regulation, new policy, other AST names are also You know, some of them are also looking, you know, to come into this area to find new growth drivers. Yeah, that's my question. Thank you.

Thank you, Brian. This is Supong. Yeah, the first is we always believe that the intelligent learning devices will provide the huge opportunities for the tech companies. And, you know, in China, there's nearly about 200 million kickoff students, as well as even more lifelong learners. aspire to improve their learning efficiency. Also, parents right now are ready to invest in their education. Indeed, with growing demand, probably many of the other companies have already entered the segment. However, what we think about is that for the intelligent learning products, there are some really technical barriers to the entire process. including the development, production, and sales. Well, we think that UDAO has made substantial inputs in the area for a long time and achieved exceptional results. If you go back to two years ago, we released our dictionary pens series 2 in the August 2019, we thought we had established a good market reputation and recognition. And we think we have made an impressive message in parents' minds. So we think we are definitely the leading one, at least we are the leading one in the learning device sectors. So we are pretty confident to face all the competition in these sectors. The second thing is about the adult education products. If you see about the numbers, net revenue from our adult education business is about over 100% year-over-year in Q2. And also we have successfully operated the two different SQO content of the products. in our pipeline. First, it's about the record practical English, the English product. It's a language learning product. Second, it's about the extraordinary memory that kind of helps people to train their memory capabilities. So they are two entirely different products with different core values to our users. So we are capable of developing and operating the two entirely different SKUs at the same time with our adult education team. And secondly, for this part, because we are always trying to leverage our organic traffic from our core asset, the dictionary app. So as we mentioned, we have launched several new functions in the first half of this year. as well as a new high-rating program. So we think about the way through that program we can learn a lot of the user's behavior through these two different functions, and we expect we can know more their demands through their activity in our apps. So we can just provide the more products for their demands. So we think about it because we have this, we can always have this organic traffic product. So we think about, we will definitely, we will be, have a leading position for this in this adult education sector. Yeah, we think that's the, that's the, that's the way we think about it. Thirdly, it's about, in addition, as the doctor mentioned, we find another very great opportunity in 2B services and 2B business. It not only has huge demands, but it also consists of its policy directions. We call it the digitalization education business. We think it's providing a new opportunity to improve education in classrooms, enhance the management of the education system, but also consider innovative model of delivery. Our innovative intelligence learning terminal boosts digitalization for primary and high schools across China. And we adopt intelligent educational solutions to help the self-study and the personal teaching. Thus, we think about improving the efficacy and the reduced burden for both teachers and students. Yeah, we hope that answers your question. Thank you, Brian.

Let me add a few words. The question is about competition in these new areas. Of course, we will see a lot of competition and we already see companies coming up with new products and services already. The way we think about it is that it's we view ourselves as a product company. And we think we have product-focused companies and service-focused companies in education. And both are good. Both models are good. But I think for some products, for some things, So this will lead to different ways of doing things and different competitiveness. And for hardware, for devices, it's obviously products because you actually hold the product. So we think for devices, we... we absolutely have advantage here, because we've been doing it for a couple of years, and we have very strong teams, very strong product teams. So defining, meeting, refining, and selling these products. And also for Steam, We think we are stronger online. So that's why we've always been focusing on the online side of tutoring and education. And for STEAM courses, we will also focus on online. And it's a bit different from the academic courses in the sense that STEAM courses, at least they should be more attractive and more friendly to the students because it's extracurricular, right? So we think we have good experience and good track record in creating really attractive STEAM courses like the Weichi, the Go game courses. So we think we will be able to create more of these really successful SKUs. I hope that's helpful. Thank you.

Yes, thank you very much. That's very helpful.

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

Hi, Benjamin. Thank you for taking my questions. My first question is about your customer acquisition strategy and customer acquisition costs. I think you'll shift your business focus to the non-Q12 segments. How should we think about them in the future? And my second question is about the probability of your non-Q12 business lines. Would you please share with us some of your ideas about what kind of margins could your Monkey 12 business achieve in your business plan. Thank you.

Thank you, this is Supong. I will take the first question, and I think before I go to your questions, it's about the U.S. commitment to fully comply with the Beijing after school children measures, and similar measures to be adopted by the other local governments, and if any, to implement the requirements of the central government's opinions. And for the customer acquisition strategy for the non-KCOP, other school children business, and the first response for the STEAM and adults' educations, we definitely will leverage existing users' traffic and attach more importance to the conversions and contribute by our organic traffic to boost the conversions rate and expand our users' tool. As for the World Community, we call it World Community, and we mention it in our dictionary. in Q1 grow fast with MAUs of more than 10 million in Q2. And I think that's to show our capabilities to boost our organic traffic volumes in our dictionary apps. So I think for the adult business, I think, first of all, you have to create the high-quality content and products. before you're spending the market dollar for the customer acquisitions. And so we think about Before all the strategies for the customer position, internally, we just try to always try to provide the high-quality process and create the high-quality content to our customer first. And then we just reveal. Before we release to the public, we always reveal. It's a several round about internal tasks for all the content, and we will just refine the content and process. again and again to make sure we provide the high-quality content to our customers. We think that will be the strategy for us ongoing for the adult educations. And for the STEAM products, definitely we will also build up several different new content in our pipeline and to create more cross-setting scenario for the kids over six years old. And we think we will, right now we are offering successful product like Vici, like kids programming. And we expect we will have the others, same courses will be online, will be available for the kids over six years old in the four semesters. We hope we can create the most scenario for them to do the cross-sell between our existing customer. I hope that answers your question. Thank you, Alex. And the second question is about profitability. Yeah, we think about it just like we always emphasize. We always care about a healthy business model and a healthy unique economics, at least, to operate our business. Before it became a successful business model, definitely that will be the healthy business first. And so if you go to the different sectors, you will see our learning devices, and that will be the great example. So we just improved our gross profit margins year over year, and we see the tremendous uptake about our gross margins compared with the last year, in this year, in the learning devices. And also, you can see that we have improved almost all of our operating metrics year-over-year since we became a public company. And we think that we will always keep that trend, and we expect that every single segment in our business has a very bright future, and potentially it's a great opportunity for us to develop our business. So we think about we just keep that on track and keep moving forward and keep improving our operating matrix. That will be the profitable business in the long run. I hope that will be helpful for you. Thank you.

Got it. Thank you very much.

The next question comes from Thomas Shen of Nomura. Please go ahead.

Thank you, management, for taking my question. I have one question about how should we focus the impact from the recent regulations for after-school tutoring. Any colors on the top line or margins will be very helpful. Thank you.

Hi, Thomas. This is Lei Jin. Firstly, UDAO is committed to fully complying with the Beijing AST measures. and similar measures adopted by other local governments, if any, to implement the requirements of central government opinions. In comparison with the Beijing AST measures, they are stopped offering the academic AST classes for weekends, national holidays, and the current school breaking period in Beijing. Such measures are expected to have a material impact on our existing K-12 academic composition. In the first quarter of this year, the revenue from K-12 academic CST classes account for less than 50% of our total revenues. UDAO is an intelligent learning company, not just a totaling company. So we view double reduction as an external process. This does not change our long-term version, and we are totally optimistic about long-term development. In the immediate term, I think this is maybe a 12-month speed bump for us. We will institute a few quarters for transition. The whole K-12 AST makes up about 41% of our Q2 total revenue. And the compulsory education, grade 1 to 9, subjects make up about 24% of Q2 total revenue. At the same time, we run a diversified business with other significant segments. that are not impacted by the regulation. Our non-ASD business is already quite big, at over 50% of our revenue and growing about 100%. So we think we are in a good shape. We will manage the process carefully and prudently. We, your dominant team, have a long-term vision and commitment, and we are confident to navigate the challenges and have a better position in the market. In addition, NetEase has supported us in the long run.

Thank you. Thank you. Very helpful.

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

Hi, good evening. Thanks, management, for taking my questions. May I ask about the outlook in terms of the operating expenses like R&D, sales and marketing, and G&A in the next couple of quarters in particular? About the sales and marketing side, should we expect it will materially slowing down in the next couple of quarters? And on the headcount, any color about what we should expect the headcount by the end of this year? Thank you.

Hi, Thomas. Thank you for your question. This is Wayne. As just mentioned by Dr. Tso, we are stepping on the bricks on the AST side. At the same time, we are driving more growth on the AST side. Our business, such as smart devices, education, digitalization solutions. Therefore, I think it is not easy to have a clear direction for the trend. of the operating expense at the whole financial level. I just mentioned your dog is a tech company, and we have multiple business partners. K-12 AST is not our sole business, and the non-K-12 business revenue for second quarter this year is about 60%, which there is no direct negative impact from the double reduction policy. I'm willing to share two points on the chain of operating expenses for our K-12 AST, which represents part of our financial outlook. First, percent to the government policy, population AST advertising on most media platforms is banned. We stopped AST advertising for K-12. such as feed-in and the branding activity for our classes, which resulted in a sharp decrease in marketing expenses, we expect. Second, we will downsize the K-12 AIC business skill. As you mentioned, the HECAM, considering the limited tutoring time, the salesperson, and the tutoring classes on K-12 will be reduced accordingly. For the R&D investment, I think we are an AI technology company. We will continue to invest a lot in our other business, so the chances will continue to increase for R&D. Finally, I'd like to... emphasize that diversification is one of our advantages. We will try to take any chance to grow our business, but the precondition is to fully embrace and comply with the law and the government policy. Thank you.

Thank you.

The next question comes from Li-Ping Zhao of CICC. Please go ahead.

Good evening, management. Thanks for taking my question. I have two questions here. First, since the recent policy encouraged students to study at home or at school, will this stimulate the demand for our educational smart devices? and any plans for the new product launch of our smart devices? And secondly, a second question related to the Shared Purchase Program. We noticed that NetEase announced the Shared Purchase Program of US $50 million of U.S. ADR. Could management elaborate a little bit more on the reason behind it? Thank you.

Thanks, Brenda. Regarding the first question about learning devices, you asked about any plans for new products in this area. We actually do have new products very recent time. Tomorrow, you guys will be the first to know. Tomorrow, we will launch a new version of the dictionary pen in collaboration with People's Education Press. So tomorrow, September the 1st, we will launch this new dictionary pen that has features that work directly with the students' textbooks. So this is one of the most asked about feature that the parents and students need. And we have finally been able to work out all the details. And it launches tomorrow. And we are very looking forward to it. I hope you guys will like it. And I think a couple of days after that, we will have another product. that's related to language learning, also language learning, but another side of language learning, not the reading part. You can guess what it's about. How do you learn a language? You read or you do what? We also like that product very much. Yeah, yeah, we think we will know. Yeah, so we will know how the students react to it. But as we talked about, September is the start of school. Yeah, so it's a very important period for any product related to learning. Yeah, so we think that the two new products, along with the existing products dictionary pains that are sitting there a while. Yeah, so we think we have a very good product lineup for this school year. Yeah. Yeah, thanks.

The next question comes from Candice Chan of Daiwa. Please go ahead.

Sorry, operator. I think we have a second question, right? Yeah, so the second question regarding the shared purchase program from Medis. Yeah, so I introduced in that In my prepared remarks, NetEase today announced that there's a share purchase program approved for up to $50 million of U.S. shares. And It starts two days from now, lasting almost three years. So NetEase will purchase your shares on the open market. So NERES announced the Share Purchase Program, and I think on one hand it demonstrates the strong support for your dog's business, for our long-term development. So as you all know, NERES has supported us on multiple occasions, for example, providing us with the with the credit line a couple of quarters back. And this shows, again, their support. I think that's very important in this market scenario. And on the other hand, I think there is certainly hope, would hope, that is, Yodal has a has a good performance in the capital market in the long run. So I think that's for the Shared Purchase Program, and we will provide you with more updates if we have more in the future. Thank you.

The next question will now come from Candice Chan of Daiwa. Please go ahead.

Hi, management. Thank you for taking my question. I just want to quickly follow up on your comments about the downsizing of the K-12 business. Can you just quantify the restructuring cost for this K-12 AST business and how would that impact your cash flow position? Thank you.

Thank you for your question. For Key 12, we believe each player will incur additional costs, such as compensation costs for dismissed staff, cancellation costs for the rental office, and certain impairment loss from prepaid costs and materials. However, I think different players might face different situations. I just mentioned that Dr. Zhou, your dog already has a good basis for non-K12 business. And in the future, we expect to be driving more growth on the non-AST side of our business. Part of K12 talent will join the non-K12 business, such as student courses and adult education. They will continue to create valuation for us. Let's say compared with other tutoring companies, we have relatively low additional cost on the conversation side and we will offer more opportunity to our talent. Second, as an online company, there are fewer fixed costs such as venture fees to be considered during the restructuring. Finally, we believe the restriction cost is closely linked to the final policy of non-for-profit organizations for 2K12. Currently, we are actively communicating with the regulators on the details policy for non-for-profit organizations. But the policy is still underway, so we will fully comply with the government's policy and we still need to wait for the final policy. I wish it is helpful for your question.

Thank you very much.

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

Thank you once again for joining us today. If you have any further questions, please feel free to contact us and reach out directly or reach out to TPG Investor Relations in China or the U.S. Have a great day.

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