Youdao, Inc.

Good day and welcome to the YoDAO 2022 First 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 the certain risks and uncertainties, assumptions, and other factors. Some of these risks are beyond the company's control, and could cause actual rebounds 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 overlooking 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 2020 Fourth Quarter Financial Results 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 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 Jin, VP of operations, Mr. Peng Su, our VP of strategy and capital markets, and Mr. Wayne Lee, 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 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 Renminbi, unless otherwise specifically stated. We're pleased to report solid performance in the first quarter of 2022, following the cessation of our K-9 academic AST business with record high revenues and overall gross margin, as well as a significant improvement in operating loss. Q1 net revenue was RMB 1.2 billion, up 26.6% year-over-year and 14.5% quarter-over-quarter. a new record high. We also achieved an overall gross margin of 53.5%, another record high. Given the disposal of canine academic AST business, 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. Furthermore, We narrowed operating loss by 41.6% year over year to RMB 125.1 million from the loss of RMB 214.3 million in Q1 2021. These results amid a challenging macro environment clearly reflects our strengthening fundamentals as well as the effectiveness of our strategy. Liquidity-wise, we have adequate funding for long-term growth. First, as of March 31st, 2022, Yodao's cash, cash equivalents, restricted cash, time deposits, and short-term investments totaled RMB 1.2 billion. Secondly, our controlling shareholder, NetEase Group, has been supporting our long-term growth. And to the date of this release, Yodao has received various financial support from the NetEase Group. Among others, including RMB $878 million short-term loans and US dollar $300 million revolving loan facility. In support of UDAO's future business, NetEase Group has agreed to provide financial support for our continuing operations. Now I'd like to share more details on our first quarter progress. First, let's look at smart learning devices. Q1 device revenues was RMB 253.2 million, representing an increase of 25.4% year-over-year. This is a remarkable growth given the COVID-related supply chain and sales channel challenges. In total, we sold 430,000 devices in Q1. As we discussed in past quarters, devices are a key growth area for us. An important priority this year is to drive growth and synergy by scaling up R&D, updating existing product lines, and shipping new products. We strictly followed our strategy in Q1. We added new dictionary databases to Udall Dictionary PEN, while we already have the most comprehensive dictionary database. We added 11 new series of English textbooks to UDAO Listening Pod, with a total reaching 19. In terms of new products, more recently in early April, we launched UDAO Smart Light, a product in development for over a year. UDAO Smart Light is a smart desk lamp with integrated AI learning features, powered by our advanced AI algorithms. It automatically analyzes users' hand and body movements while sitting at the desk, allowing the user to seamlessly access a host of AI learning functionalities while they are reading, writing, or doing homework. You can point to an English word to look it up, or tap a sentence to have it read to you, or ask it to check your arithmetic worksheet for you. It even tracks the user's sitting posture and will alert the user when detecting unhealthy postures. After we launched the UW SmartLight, the initial feedback is very positive. We plan to grow its popularity over the coming months as we did with other products. We're also looking forward to introducing additional smart devices this year as planned. Now let's talk about learning services. Our strategy here is to transition from an academic AST center business to esteem and vocational courses center business at an accelerated pace. Since Q3 last year, Q1 is the third quarter in which our teams scaled up our growth products, like the Weichi courses and graduate school entrance exam courses, while at the same time closing down academic AST courses. That has been a challenging process, and we have continued to deliver steady progress in Q1. Our new courses are growing quickly, which partially offset loss of revenue from academic AST courses. Net revenue from learning services reached RMB $826 million in Q1 2022, up 36.1% year-over-year. If we were to compare with the learning service net revenue including K-9 academic AST business in Q1 2021, it declined by 17.3% year-over-year. Note that we were positively impacted by seasonality, because Q4 was a major renewal season, and a large part of gross billings generated in Q4 were recognized as net revenue in Q1. As for steam courses, Yeodao Chess expanded particularly fast, with its gross billings increasing 170% quarter-over-quarter. Besides, we established a strategic partnership with the Haidian Chess Association. In addition to courses, our Go and chess user community has been growing at a fast pace. Here we have the Yudao Board Game Academy app, where users can play against others or learn Go or chess with the help of our proprietary AI technology. Every day about 200,000 Go or chess games are played on the Youdao Ballgame Academy app and our other assets. This approach of combining courses and a community and AI-based app experience is a major competitive advantage for us. The courses and the app drive each other's growth. In addition, Youdao has become an official online testing and certification site for Weichi Academies in Beijing and Anhui province. Through the tests, users can receive certifications for their skill by the Chinese Weiqi Association or Beijing Weiqi Association. Let's turn to vocational and adult education courses. In Q1, we upgraded our graduate school entrance exam courses, trying to offer a one-stop service for our customers. We also explored online-merged offline courses. to increase the learning efficiency and effectiveness. With ongoing upgrade, the gross billings from the graduate school entrance exam courses grew by over 160% quarter over quarter. We also saw growing demand for other vocational courses, such as constructor certification courses and accounting courses, with gross billings increasing over seven times year over year in Q1. Our other endeavors, including education digitization business, dictionary and translation apps, and our charity initiatives are also progressing smoothly in Q1. Looking ahead, we continue to implement our strategy of four growth pillars. That is smart devices, STEAM courses, vocational education, and education digitization. The first two, devices and STEAM courses, are at a larger scale and already a significant part of our business. The latter two are making good progress in product development and business model validation. We expect to see challenges, including this new wave of COVID in China. We intend to overcome them through our diversity of businesses, large user bases, and deep technical roots for innovation. With that, I will turn the call over to Supong to give you more details on our financial performance. Supong.