Youdao, Inc.

Good day and welcome to the Udall 2021 Fourth Quarter and Full Year 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 of Udall. 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 Securities Litigation Reform Act. Such statements announce 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 UW'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 reconciliations of GAAP to non-GAAP financial results, please see the 2021 fourth quarter and full year financial results news released issued earlier today. As a reminder, this 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 Senior Management is Dr. Feng Zhou, our Chief Executive Officer, Mr. Lei Jin, VP of Operations, Mr. Peng Su, a VP of Strategy and Capital Market, and Mr. Wayne Lee, a VP of Finance, I will now turn the call over to Dr. Zhou to review some of our recent highlights and strategic directions.

Before we begin, I would like to remind everyone that the financial information and non-GAAP financial information mentioned in this release is presented on a continuing operations basis, and all numbers are based on MMB. unless otherwise specifically stated. We finished the fourth quarter and the whole fiscal year 2021 with strong financial results. Total net revenue reached RMB 1.0 billion in Q4 2021 and RMB 4 billion in 2021 whole year, representing an increase of 22.6% and 58.9% year-over-year respectively in Q4. We achieved positive net income on a non-GAAP basis for the first time since our IPO at RMB 31.1 million. Operating cash flow from continuing operations was positive RMB 142.2 million, mainly due to strong revenue and lower sales and marketing expenses incurred. To be fair, Achieving non-GAAP profitability was helped by favorable seasonality in Q4, including the year-end shopping season. Nonetheless, the year-over-year trend is clear. The results demonstrated that our financials are steadily improving and our business is on the right track to sustained profitability, even under the challenging regulatory environment. Q4 results showed that our strategy of doubling down on new growth opportunities is working. We continue to make good progress on multiple fronts, including the smart devices segment, B2B business, and STEAM education business. In Q4, Youdao has also been added to the MSCI China All Shares Small Cap Index as of market close on November 30th, 2021. We're pleased to be part of this widely recognized global benchmark and recognized our business performance and growth potential. We continue to comply with the updated laws and government policies. We have ceased offering the after-school tutoring services on academic subjects in China's compulsory education system and completed the disposal of this business. As a result, the K-9 academic AST business met the criteria of discontinued operation and retrospective adjustments to the historical statements of operations have also been made for the previous periods, which provides a consistent basis of comparison for the financial results of the continuing operations. I would like to thank all former teaching and operations staff for their contribution to the K-9 academic AST business in the last several years. Now let me walk you through some of the details of our fourth quarter. First, our smart devices segment kept strong momentum. It generated revenue of RMB 317 million in Q4, up 24.8% quarter over quarter and 33.9% year over year from Q4 2020's high base. Dictionary PAN sales exceeded 500,000, a new record. For the full year of 2021, revenue from the smart devices segment reached RMB 980.4 million, representing an 81.6% increase from 2020. In Q4, we entered into a strategic partnership with the commercial press, with the exclusive inclusion of Xinhua Dictionary in Yudao Dictionary pens. In addition, Many of the well-known dictionaries published by the commercial press will also be included in UDAO Smart Devices. The integration of smart AI and classic content makes the dictionary pen a truly indispensable tool for language learning and usage. We also kept improving our core technologies. A new feature called Writing Guide was introduced for the pro version of UDAO dictionary pen. Powered by our proprietary natural language processing technology, the writing guide feature provides personalized assessments for students' English writing, evaluating vocabulary usage, grammar correctness, and then offers suggestions for improvements. This is another novel application of Udall's AI learning technology. Our new category product, Udall Listening Pod, was released at the end of Q3, so Q4 was the first full quarter of sales. We're happy to say it is off to a strong start. The units of UDAO listening pods sold in Q4 was double that of the UDAO dictionary PEN1 in the same period. In Q4, we introduced more licensed textbooks and added AI listening comprehension mock tests to the device. We believe Yodal Dictionary Pod is a strong product compared with its peers from other companies and will gain further popularity in coming quarters. Then let's turn to STEAM courses. The growth buildings of Yodal Weiqi or Yodal Go increased by around 130% year-over-year and over 30% quarter-over-quarter, reflecting the sustainable growth and retaining the leading position in the goal course market. We recently launched the Youdao Ballgame Academy app for our learners to play goal and chess matches online with fellow learners. It matches players with similar skill levels, supports both human to human and AI matches, and provides high quality quizzes for improving skills. Our STEAM courses are also gaining more recognition in the sector. We received two excellent course awards for our STEAM courses from Beijing Association for Science and Technology. In terms of adult and vocational courses, our current strategy is to drive growth in areas that have a large addressable market and fits our expertise. Examples include graduate school entrance exam preparation, and digital skills training courses. In 2021, the Ministry of Human Resources and Social Security released a working plan on enhancing digital skills, focusing on digital skills training such as artificial intelligence, big data, and cloud computing. This is a good fit for us. Those buildings of vocational education courses grew approximately 170% quarter over quarter in Q4. Besides, Youdao was included in a new base of adult education by Zhejiang Province Human Resources and Social Security Department. We believe adult and vocational training have a bright future and we are patient in this area. As for education digitization solutions, we kept rolling out new features for our solutions and signing up new customers and partnerships. In Q4, we signed a strategic partnership with Suzhou municipal government to build smart education solutions in the city. Suzhou is a large and prosperous city, whose GDP is number six among all Chinese cities, right after Chongqing. So Suzhou's endorsement is a milestone for our education digitization business. We're also dedicated to fulfilling our social responsibilities. Your Dao Foreign Language Reading Corner, the public welfare project, benefited over 30,000 people. Besides, Your Dao was awarded as the annual model enterprise of CSR for its special contribution to helping the disabled and CSR China Top 100 Best Brand of Fulfilling CSR of the Year. As we close our books on 2021, we had an eventful year, which I believe will still be special when we look back a couple of years from now. Despite the challenges, our teams were able to drive significant growth of our business at 58.9% of revenue growth, and likely more importantly, our diversified investments in smart devices, steam courses, and others in the last couple of years, and long-term support from our parent company, Netease, have allowed us to navigate the changing environment relatively smoothly and to build a stronger position for us in the market. Looking ahead, we are committed to compliance and the focus on our growth areas, including smart devices, STEAM courses, adult and vocational courses, and education digitization solutions. Education technology is still in its early days, and we firmly believe it has a bright future. I'd like to thank our investors for your continued support, and we look forward to . With that, I will turn the call over to Supong to give you more details on our financial performance.