Youdao, Inc.

Good day and welcome to the YoDAO 2021 Third Quarter Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Jeffrey Wang, Investor Relations Director of YoDAO. Please go ahead, sir.

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 liability, as established by the U.S. Private Security 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 UDAF business and financial results is included in the 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 recalculations of GAAP to non-GAAP financial results, please see the 2021 Third Quarter Financial Results News release issued earlier today. As a reminder, the conference is being recorded. 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 UDAO's 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. 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 direction.

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 Renminbi. The third quarter was a good quarter for us with some development of our non-tutoring business. With the announcement of sweeping industry changes in late July, we quickly evaluated our business and set out steps to better align with the PRC's latest regulations. On September 30, we anticipated to terminate and announced a plan to dispose of the after-school tutoring services for academic subjects included in China's compulsory education system and apply to the competent local governments to approve the proposed disposal. We expect the disposal to be completed by the end of 2021, subject to regulatory approval. There can be no assurance regarding the ultimate timing or that the transaction will be completed. Due to the execution of the double reduction policy, gross billings from academic subjects included in China's compulsory education system decreased by approximately 70% year-over-year in the third quarter. Gross billings including adult courses decreased by 33.9% year-over-year to RMB $631 million in the third quarter. Total net revenues of third quarter were RMB $1.4 billion, representing a 54% increase year-over-year, with approximately 25% of our total revenue derived from academic tutoring for compulsory education. Operating loss decreased significantly to RMB 129 million, and the operating loss margin was 9.3%, a sharp narrowing compared with 99% for the same period of last year. As we mentioned in the last call, learning products, adult and vocational courses, team courses, and education digitization solutions are the four core pillars for our future growth. Now, let me walk you through the progress of each segment. First, our learning product segment maintains strong growth momentum. Q3 learning product revenue reached a record RMB 254 million, a 56% increase year-over-year, and a 23% increase quarter-over-quarter, led by our industry-leading dictionary claim. We continue to upgrade the dictionary pen and launch the People's Education version in collaboration with People's Education Electronic and Audiovisual Press in September. The product marks our first significant partnership with PEEAP, whose parent company publishes basic education textbooks directly under China's Ministry of Education. Through the upgraded dictionary pane, we provide over 4,000 recordings of listening and speaking training textbook content. In Q3, we shipped approximately 400,000 dictionary panes. We also launched Yudao Dictionary Pa, Yudao Tingli Pa, powered by our new generation adaptive AI learning technology. Features like AI subtitles, real-time speech scoring, and pronunciation correction facilitate students' more effective English learning. The first batch of Youda listening pods were sold out within one week, reflecting strong demand. We encourage you to view a related video on our IR website to get a more complete picture of Youda listening pods. Now let's look at a theme course. Youda Weiqi or Youda Go is becoming more and more popular each quarter. In Q3, revenue from your WHE again increased by more than 30% quarter over quarter. We upgraded our WHE AI system and launched a WeChat mini program, which supports assessments and interactive features so that students can check their learning progress at any time. As for our youth programming product, iCode, we launched a new Python course, which our users have asked for a lot. Also, a lot of middle school and high school students are learning coding to participate in programming contests like the CSP or NOIP, the most popular youth programming contests in China. Youdao iCode provides a CSP assessment tool, allowing students to better understand how well they are doing. It has become quite popular and is now used by more than one-third of all CSP contestants. Finally, China Computer Federation, the organizing body of CSP and OIT contests, officially announced that Yoda Aiko has become a programming trainer accreditation PTA member in the third quarter, combining efforts in promoting programming teacher training. Overall, team is already a very active area for us, and we are seeing good results. Moving on to adult and vocational courses, Gross billings were RMB 182 million with a slight decline of 9% year-over-year. The decrease is mainly due to relative weakness in English learning courses for reasons including COVID. The memory training course, Extraordinary Memory, is doing very well. It's retained the leading position in the segment with gross billings approaching RMB 100 million in Q3. Recently, NetEase Cloud Classroom officially launched about 100 digital training courses of Amazon Web Services in Chinese. It is created by Amazon Web Services experts, and we promise to provide these courses complementary to the whole society to help learners improve their cloud-related skills. On a more general level, there are increasing consumer needs. for adult learning and vocational training courses. It is also an area supported by government policies going forward. Our teams have a lot of experience in creating popular learning contents like the extraordinary memory courses. We will release more self-developed courses in the coming quarters and drive growth in this area. As for education digitization solutions, the Ministry of Education and other departments jointly issued guidelines on this initiative called New Infrastructure for Education in Q3. The guidelines proposed constructing an intensive, efficient, safe, and reliable national new education infrastructure by 2025. The initiative requires the comprehensive application of new technologies such as 5G artificial intelligence, big data, cloud computing, and blockchains. We believe our products and expertise fit this and other recent policies very well. In Q3, we launched Udall Smart Learning Terminal 2, an AI-driven appliance that helps classrooms process homework and learning materials digitally. It supports high-speed scanning of paper-based homework and tests, automatic grading of the student's work, and generation of in-depth analytics for students, teachers, schools, and school districts. It is the first of this kind product that seamlessly bridges paper-based learning and digital intelligence, which we believe is both easy to deploy and truly helps teaching a lot. Since last year, the first generation of the adult smart learning terminal has been deployed in many schools. We look forward to working with more schools and educators on the adoption of the second generation. Looking at other parts of our business, in Q3, Yodar Dictionary launched an academic search function in its mobile app, supporting searching for academic papers and one-click translation. We also extended its search functionality to content like learning videos. Yodar Dictionary reached a milestone of 900 million cumulative users in Q3. Moreover, as an intelligent learning company with a mission to help all learners achieve more efficient learning, Udall Dictionary started to provide accessible feature services for visually challenged users. This feature aims to support users with disabilities to enjoy the benefits of technological advancements and expand their learning boundaries equitably. We also help those in need when we can. we helped the customers of some tutoring companies going out of business by exchanging course hours on these companies for UDAOs. UDAO was commanded by the China Association for Non-Government Education for these industry mutual assistance efforts. So far, we have helped customers from over a dozen AST institutions. The last few months have been a period of introspection, planning, and implementation for us. In July, we started on a journey in transforming our company to a new growth trajectory. As we finished Q3, we have made good progress. As always, we are committed to running the business within the scope of laws and regulations and taking on corporate responsibilities for our community and the society at large. We believe we have a solid growth plan and the right teams to execute it. We look forward to helping a lot more users learn better through all our efforts and products. With that, I will hand over to Supong to give you more updates on our financials. Thank you.