Youdao, Inc.

Hey, and welcome to the Yodell 2022 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 of Yodell. Please go ahead.

Thank you, operator. Please note that discussion today will contain forward-looking statements. related to the 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, exceptions, 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 this 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 2022 Second Quarter Financial Results news release 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 the UDAO senior management is Dr. Feng Zhou, our chief executive officer, Mr. Lei Jin, our president, 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 directions.

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 the M&B, unless otherwise specifically stated. As you may have noticed, in Q2, regional COVID-19 resurgence significantly disturbed the macroeconomy, especially in April and May. By June, the economy began to recover and our business followed suit. Despite the challenges, Q2 net revenue was largely stable year over year at RMB 956 million. we narrowed our net loss to RMB 461 million in Q2, a 12.3% improvement year-over-year. Besides, operating cash flow reached positive RMB 104 million in Q2, the highest we've achieved in any second quarter period since our IPO, mainly due to the strong sales performance of our new services and smart devices. One metric we tracked is Digital content services, defined as sales of new digital non-hardware services released after the double reduction policy. Sales of digital content services reached over RMB 200 million in Q2, with gross margins exceeding 50%. With persisting demand, we expect digital content services to keep growing for the next few quarters. Because of the quick ramp-up of our new products and services in the first half of the year and relatively strong demand from consumers across our business lines. We believe our prospects for the second half of the year are strong. With that overview, I would now like to share more color on our strategy and progress in the second quarter. Technology and innovation are the cornerstones of our business and directly deployed to our smart devices. Net revenues from smart devices reached RMB $239.9 million for the second quarter, up 16.3% year-over-year. Despite the pandemic's impact on the delivery of smart devices in Q2, this demonstrates the resilience of our business and popularity of our newly launched products, particularly those that have hit the markets over the course of the last year. Udall Dictionary of Pain continues to lead its categories, For the third consecutive year, it topped the charts on JD.com and Tmall during the June 18th Shopping Festival with the most sales volume and number of units sold in its category. Our You Got Listening pod, which was released last year, also grew quickly in Q2. During the festival, it led its category on JD.com with the highest sales volume and number of units sold. More recently, after Q2, we had two significant product launches. One is U.Dictionary Pen X5, an all-new dictionary pen that brings more possibilities to the dictionary pen category. With support for more than 100 languages, double the word database size, note-taking features, and a new design, it is again leading the market and helping even more language learners everywhere. We have a video about the new UDAO Dictionary Panex 5 on our IR website, and I encourage you to view it. The other new product is UDAO Smart Learning Pad. This marks our entry into the learning tablet market. The learning tablet market is interesting because it is a growing market that is undergoing a fundamental technological change. The learning tablets are going from video content-based to AI adaptive learning technology base. And of course, we are good at applying AI technologies to learning, which is exactly what has made UDAW Dictionary PAN and UDAW listening pods successful. With our experience in learning technology and device designing, our teams are bringing important innovations to this product form factor and making a lot of learners learn more efficiently. Turning to the learning services segment, our strategy is to create unique and comprehensive experiences for curious minds by using our sharp technology edge. Applying our cost offerings across more scenarios and creating more synergy between our proprietary courses and apps. Net revenue from learning services was RMB 564 million, down 7% year over year. mainly due to macro headwinds and different seasonality after double reduction. However, sales of learning services performed well in Q2, and total sales were up significantly year over year. So looking at the full year, we expect Q2 learning service revenue to be a one-time event. Moreover, we are making good progress on growing new learning services. Net revenues generated from STEAM courses grew to over 20% of our total net revenue. Since double reduction, the compound quarterly growth of gross billings from STEAM courses surpassed 70%. This goes well for our future growth process. We continue to leverage our strong capabilities in AI functions to enhance our courses by further integrating AI into your dog chess, for example. Second quarter gross billions from the course rose over 60% quarter over quarter. Similarly, the compound monthly growth rates of daily active users from UW Board Game Academy app rose over 130%. Gross billions from graduate school entrance exam courses grew by triple digits year over year in Q2, led by upgrades to our one-stop service. The unit economics for these courses improved as well. Demand also soared for vocational education. Our data analysis course was a standout for the period, with gross billings up over 1,000% year over year in Q2. Demand for our English course also began to grow, particularly in June with the market's return, along with our upgrades to enact a more immersive first person learning scenario. Gross billings from our English courses rose by over 30% quarter-over-quarter, despite the pandemic's impact. Our other business lines have progressed smoothly. Net revenue from online marketing services reached RMB 152.8 million, up 25.9% quarter-over-quarter, despite headwinds from pandemic. We released a new campus sports education digital solution in Q2, and it had a good start. Q2 marks the completion of our product and service transformation since the introduction of the double reduction policy. Looking at the year-over-year trend, it is clear that our diversified and technology-driven business model has allowed us to weather the storm more resiliently. Our revenue structure changed also reflects the effectiveness of our strategy. Net revenues from the new services and devices initiated post the double reduction policy already accounted for over 40% of our total net revenue in Q2. Looking ahead, our focus will be on upgrading products and services with the support of technology and innovation. While we navigate the short-term macro challenges, we will continue to build up and strengthen our long-term competitiveness. We're confident in our prospects for the second half of the year, bolstered by the support of our new products and services. We're on the right track with the right technology and the right service offerings to advance technology-powered learning. With that, I will turn the call over to Supong to give you more details on our financial performance.

Thank you, Dr. Zhou, and hello, everyone. Today, I will be presenting some financial highlights for the second quarter of 2022. We encourage you to read through our press release issued earlier today for further details. For the second quarter, total net revenue were RMB 956.2 million. For US dollar, 142.8 million. This represents a decrease of 2.4% from the second quarter of 2021. Net revenue from our learning services were RMB 560.2 million. 3.6 million, or US dollar, 84.1 million, representing a 7.3% decrease from the same period in 2021. I will attribute this decrease to the decline in revenue from the adult courses resulting from the decrease in demand due to the resurgence of COVID-19. Net revenue from our smart devices were only 239.9 million, or US dollar, 35.8 million, up 16.3% from the same period in 2021, driven by the popularity of the newly launched products since last year. Net revenue from our online marketing services for RMB 152.8 million, for US dollar 22.8 million, representing an 8% decrease from the same period in 2021. The decrease was mainly attributable to the curtailed advertising budget of partially advertising customers. For the second quarter, our total gross profit was RMB $409.7 million, or $61.2 million, representing an 18.1% decrease from the second quarter of 2021. Gross margin for learning services was 52.2% for the second quarter of 2022, compared with 58.8% for the same period in 2021. Gross margin for smart devices was 30.6%, for the second quarter of 2022, compared with 43% for the same period in 2021. Gross margin for online marketing services was 27.7% for the same quarter of 2022, compared with 32.7% for the same period in 2021. For the same quarter, total operating expense for RMB $864.9 million. For US dollar, $129.1 million. compared with RMB $755.1 million for the same period of last year. With that, for the second quarter, our sales and marketing expense for RMB $596 million compared with RMB $555.1 million in the second quarter of 2021. Research and development expense for RMB $208.4 million compared with RMB $145.8 million in the second quarter of 2021. Our operating loss margin was 47.6% in the second quarter of 2022, compared with 26% for the same period of last year. For the second quarter of 2022, our net loss from continuing operation attributable to ordinary shareholders was RMB $453.9 million, or US dollar $67.8 million, compared with RMB $234.9 million for the same period of last year. Non-GAAP net loss from our continuing operation attributable to ordinary shareholders for the second quarter was RMB $435.8 million, or $65.1 million, compared with RMB $215 million for the same period of last year. Basic and diluted net loss per EDS from continuing operation attributable to ordinary shareholders for the second quarter of 2022 was RMB $3.67, or $0.55. Non-GAAP basic and diluted net loss from continuing operation per EDS for the second quarter was RMB 3.52, or US dollar 0.53. Our net cash provided by the continuing operation activity was RMB 104.2 million, or US dollar 15.6 million, per the second quarter. Looking at our balance sheet, as of June 30, 2022, our contract liability, which mainly consists of deferred revenue, generated from our loading services were RMB $1.1 billion, or US $168.1 million, compared with RMB $1.1 billion as of December 31, 2021. At the end of a period, our cash equivalents, restricted cash, time deposit, and short-term investment totaled RMB $1.3 billion, or US $188.1 million. This concludes our prepared remarks. Thank you for your attention. We would now like to open the call to your questions. Operator, please go ahead.

Thank you. We will now begin the question and answer session. To ask a question, you may press star, then 1 on your touchtone phone. 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, It is star and then one to ask a question. Our first question today will come from Elsie Cheng of Morgan Stanley. Please go ahead with your question.

Thank you, management, and congratulations on the 2Q results. I have a question on your view of the second half. You mentioned that you have a strong view on the second half. Could you elaborate more on why we are confident on the outlook and which areas do we particularly see the potential? Thank you.

Thank you, Elsie. This is Zhoufeng. There are a number of factors that give us confidence in the second half. Firstly, we have mostly completed our products and offerings transitions after the double reduction last year. So our revenue structure, you see, have changed very dramatically. So net revenue from new services and devices, as I just talked about, launched after double reduction already accounted for over 40% of our total net revenue in Q2. So we basically went from 0% to 40 plus percent in less than a year. And the rest, 60%, are pretty stable businesses, including some devices that we launched before double reduction. and also our online marketing business and everything else. So this quick ramp up of new business gave us confidence that we can actually continue to grow new revenue going forward. So we see this trend extend to second half of the year. So that's one. So secondly, sales of our smart devices continue to grow. So Q2 was actually a very challenging quarter for our device team because of COVID, because of the logistics difficulties and the surprising factor of the pandemic situation in April and especially in April and May. So despite that, revenue for our devices Smart devices were up 16% in the quarter to RMB 239 million. So if you look at per month trend, April and May sales of devices were actually down multiple double digits percentage. So a lot of challenge. However, during sales rebounded very quickly to achieve for the overall for the whole quarter year-over-year growth. So we may I think we may still see challenges from COVID down the road but as I think the government gets better at local governments gets better at handling these situations and also Also, the growing demand for our devices and our new device that we launched after Q2 and Q3. So we think we've already shown that the demand for our learning devices is strong. And if you look at the whole learning device market, Frost and Sullivan, they estimate that the smart learning devices market to be R&D, 66 billion in last year, 2021, and expected to grow to 145 billion in 2026. So we think we have a pretty long runway to grow here. And finally, our new digital content services are growing rapidly, and we expect to see continue the fast growth in the second half of this year. As I said, the growth billings for digital content services reached over 200 million in Q2, and the gross margin was over 50%. So we expect this sector, digital content service, that's basically new services and products, not including the hardware, to keep the momentum in the second half of this year. Yeah, I hope that helps. Thanks.

Yeah, it's very helpful. Thank you.

Our next question today will come from Brian Gong of Citigroup. Please go ahead.

Thanks, management, for taking my question. I noticed we just mentioned that we plan to introduce smart learning paths Can Matthew give some more elaboration on this product? And what's the reason we launched this product? And what's our expectation for this product over the long run? Thank you.

Yeah, thank you, Brian. So the YoDA Smart Learning Pad was launched a couple of weeks ago. So it's already launched. So I think what's interesting here is that There's a clear generational transformation that is taking place in the learning tablet or education tablet market. That's going from content-based or recorded video-based learning experience to an AI adaptive learning technology-centered experience. So of course, we all know that whenever there is this kind of generational change, either in technology or in business model, there is opportunity for new players, for newcomers. So that's basically what we are trying to leverage here. And the whole learning tablets segment is a pretty popular product segment. So overall, we think it's a good opportunity for us. So talking about the product form factor a little bit. So the AI adaptive learning technology can be very effective if it is done right. So in the U.S. market, a lot of companies are offering adaptive learning products for school learning. and including, I think, Google, Khan Academy, and Pearson, and other companies. So in China, our view is that home learning is actually the most promising market, the adaptive learning technology to have a great impact, because sort of the tradition of actually parents buying home learning devices. So with the Udall Learning Path, the AI can diagnose a learner's weak points either within six minutes of quick quizzes or by actually mapping a picture of the learner's school test papers. So then, this is very convenient. Then the learner's learning efficiency can be increased by learning in a more personalized way with videos and exercises. This is a very attractive value proposition for learners, and that's the key benefits of the new technology. We are banking on that for the product to be successful. We view learning tablets to be a very good vehicle for delivering the technology because parents are already buying a lot of tablets. Again, for us in Sullivan data, they expect the Chinese education tablet markets to be RMB 26 billion in 2026. So it's a sizable market. So we think learning tablets presents a significant opportunity for us, and we expect to launch more products in this line in coming quarters. And I just want to add that adaptive learning technology is hard. Take the scenario I just described. So take six minutes of quizzes or snap a picture of a school test paper to be able to diagnose a learner's weak points. This was technically not feasible just 10 years ago. Now we can do it, but it still takes a lot of research and engineering. So we basically leverage technologies and experience we accumulated over the last 10 years, including the video-based text processing and everything else. And I think very few companies in the market can actually do this well, and we believe we're one of them. So we believe we can be very competitive in this space. Yeah, thank you.

Thank you. That's very helpful.

The next question will come from Lai-Ping Zhao of CICC. Please go ahead.

Good evening, Dr. Zhou and Susan. Thanks for taking my questions. I noticed the theme causes gross billing achieved 70% compound quarterly growth rate post double reduction policy. Could you please share the growth strategy for your steam cost sector, and what's your doubt competitive advantage in this business segment? Thank you.

Thank you, Brenda. This is Supong. I will take the questions. And the first is about we think we achieved a fast and sustainable growth of steam process. And the growth variance increased over 90% year-over-year in Q2. We think that's basically from the numbers you can see that we just build up a very strong momentum for the business growth. I think as Dr. Wu discussed in the prepared remarks, we think we always try to build up the high quality content and provide that kind of unique or different experience for our customers always. And if you see the, for example, if you see about our Chinese Go program, and there's almost, right now it's one of the biggest, our program, we are operating, operating by us in the same courses. And we, it's almost two years ago, we just released our products to the market. And we are not the only one at that time to offering that product. And we are not even the first one to offering that service to the customers. But if you go back to see the, to see the performance of this product. Right now, you can see we have become at least one of the leading companies in these areas. And maybe the biggest one in this sector. And so I think what we achieved in this sector is because we are not following the routine way to build up that program and create that service. And we leverage our technology edge into the products. It's kind of the gaming part. And we think we have experience and learn a lot from the group and how can we help them to build up a fun and interesting and attractive program for the kids. And we think the kids and our students and the customer can learn from our products and they can achieve the success also in that program. So I think that's the reason why we can achieve the successful in that areas. And as Dr. mentioned, and if you go back to see the Udall Board Game Academy app, which is the platform to provide free services to our customers who play the Chinese Go game over the internet. And you can see that the users and also U.org board games, board academic apps, increased around 10% in Q2. It's mainly attributed to the ongoing update of our features of the apps and the better synergy between the chat-related courses and the apps. We think in the long run, and you know the same process, there's a diversified program, diverse products, and it's not the concentrate into some small area. I think there's a great opportunity potentially in this market for this business. We expect we can provide more high quality products in the long run and there's also some, we think, very interesting and exciting program in our pipeline to offer to the market in the next few quarters. That's what we think about the steam process growth strategy. I hope that answers your question. Thank you.

Thank you.

Our next question today will come from Thomas Chong of Jefferies. Please go ahead.

Hi, good evening. Thanks, management, for taking my questions. Can you share about the progress for our education digitization solutions? Thank you.

Thank you, Thomas. This is Lei. For the education digitization solutions, The main product is U.S. Smart Linear Terminal. It targets a homework scenario with AI functions. In this three-month semester, over 30,000 students use it in the school, and it collected more than 2 million pages of homework. With the diagnosed report from the homework data, teachers could plan their target license more efficiently. With our personalized practice, students could also enhance learning efficiency. Homework digitization solutions have been awarded by the typical cases of using information technology of homework management by the government in the following four areas, Haidian in Beijing, Bingjiang in Hangzhou, Suzhou and Haitang in China. In addition, Zodao smart education was selected as one of the digital trade innovation and excellent application cases of Zhejiang province in 2022 and was the only one outstanding case of the smart education segment. In Q2, we also introduced a new campus smart education digitization product. with our cutting-edge visual analytics technology. It automatically recorded measures and analyzed the performance of the students in the playground without any wearable device. As we know, the SWOT is advocated by the policy, and it has the English to become the third largest during the compulsory education stage. So the demand for the sports teachers has increased. Traditionally, the sports teachers have to cover the thousands of students and manually record their performance one by one. And it also takes lots of time to prepare the sports equipment. With our product, sports teachers no longer need to record and measure repeatedly. but have more time to give students more scientific advice with digital data and diagnostic report derived from the student's exercise. As for students, they have more time to access freely by themselves without very any device. In addition, their parents can better understand their children's physical condition and their growing progress. On the whole, despite the budget control from the government due to COVID-19, we are optimistic to achieve better finance performance for education digitization solutions in the second half of the year. Thank you.

And our next question today will come from Candice Chan of Daiwa. Please go ahead.

Good evening, management. Thank you for taking my question. I want to follow up on your earlier comments for the second half outlook, specifically for the vocational and adult courses. Given the current macro and also the COVID situation, demand recovery, and also the growth outlook for the second half? Thank you.

Thank you, Kenneth. It's a super nice question. I think, first of all, there's another diversity that sectors, although they all cause vocational and adult causes, but in these sectors, there are diversified products and services in this area. So right now, we are focusing several different vertical sectors. And the first of all, I think the graduate school entrance exam courses are likely to keep the momentum in the second half as well. And we think that course is our top priority in the adult courses in this year. I think if you see the numbers of the students who register for the graduate school entrance exam in the 2022, it's reaching about over 4.5 million. So increase about almost 800,000 people compared with the same period of last year. So we think about there's a lot of the growing demand from the market. We think that's the reason why we are focused on this area. And I think that also can leverage some of our advantage in this sector. The first of all, definitely will be the users. And we are operating the largest dictionary apps in the world. China and most of the at least we think about roughly about half of the register is above the 18th that means the potential level with the college students and we think we can do that's the first part and then on the other hand we're also operating the largest Chinese university MOOC product and in terms of the number of the number of the register for the college students almost over 40% of Chinese students in the university register for our products. So we think about we have a great potential users pool in our products. So we think we can easily to leverage about our advantage to convert them to our product users in the long run. So we think about that will be the first advantage when we operate that business. And so I think that we can support this healthy with fast growth and with healthy business models. Secondly, in the last year, we restructured our teams and provided more services and merged with our tech features in our products. We think that, just like I mentioned in our products, we think that's also one of our top one of our advantages always in the long run and we think we can provide most specific services to each individual and to help them to analyze about what they need and what they demand and how to help them enhance their academic levels in the visual services. We think that will be a very important part when the students choose the different products in these areas. And finally, we think in the last few years, we started our adult business since about 2016. We have already accumulated a lot of experience in how to produce and how to operate that kind of adult business products. So I think that will be also another differentiation with our peers in this area. That's for the graduate school entrance to exam products. And secondly, vocational training is also another very interesting area starting from the last year. And we saw the very strong demands for these courses in this year and the last year. For example, the gross reading of the illustration courses were about over 700% year-over-year in Q2. So I think that when we build up that product, in one hand, we are definitely focused on the quality and the content of our products, and we expect to provide that kind of high-quality service for our users. And on the other hand, we know about what they need through that service and through that program. We will merge with that internship experience, potentially internship experience, with that product. And for example, like the illustrations program, potentially we do have the internal internship opportunities for all the users, but it still depends on the market change. So we think that's what we will work together with our students, help them to design their career path after they're taking our courses. So that's what we think about in the long run, how to help our students learn more through our services. And finally, we think the English courses are likely to be the further rebound with facts in the second half, subject to the pandemic and other macro conditions. And as I discussed in the prepared remarks, we saw the recovery in demand for the English courses that were experienced racing over 30% quarter-over-quarter in the Q2. And we think, well, that's probably contribute to the of our English courses with an immersive first-person scenario has been welcomed by the users and the booster course has a completion rate to about 50%. And finally, I think in this year, the interest-related courses are likely to continue to face challenges and uncertainties because of the current macro conditions. I think that's our general overviews and outlooks of the vocational and adult courses in the second half of 2022. Thank you. Candice.

That's very helpful. Thank you, Supervisor.

Again, if you would like to ask a question, please press star and then 1. Our next question will come from Linda Huang of Macquarie. Please go ahead.

Yeah. Hi, management. Thank you for your briefing. I have one question regarding for the margin because we saw that the certain have win for the second quarter. But looking into the longer term, how should we think about the normalized gross margin for the different business division? And in terms of the operating profit margin, can you also give us an outlook on what is the normalized level for the longer term? Thank you very much.

Thank you, Linda. This is Win. I will take your question. In respect to our gross margin, we saw a decline from 51% in last quarter to 43% in this quarter. This change was mainly from the seasonality fluctuation due to the seasonality of the recognized revenue of our learning services. On revenue side, new generation of Dictionary 10 X5, those are which potentially improve our gross margin. On cost side, we will continue to explore different ways to optimize our cost structure to improve our margin. Considering the factors mentioned above, we are very confident in our ability to improve our margin over the long term. Let's look at some details on the margin of our learning services and smart devices. For learning services, we expect a much higher revenue base in the second half year with the completion of our learning services transition. The economic skills will start to be back to normal level, and we expect the annual gross margin for our learning services will start to be stable even better than last year. As for smart devices, The lockdown policy causes significant uncertainty on the production and the delivery of our smart devices. Following a relatively slow in April and May, we saw signs of recovery across this business in June. And finally, we achieved a 15% annual increase on a year-over-year basis. Despite the challenge we faced during the COVID resurgence, and a diverse microenvironment, we actively stepped and remain focused on our long-term strategy by continue to strengthen our capabilities in creating value for our customers. The release of our new product series, such as 65 and the Learning Path, make it possible to achieve higher skills and a better profitability in our smart devices category. As for our operating margin, while we dedicate resources to improving sales and marketing efficiency, as well as our start cost, we are simultaneously strengthening our technical and R&D investment to maintain our advantages in technology. As you can see, in this quarter, our net loss narrowed by 12% to R&D $460 million. We have been working on the long-term solution to improve our operating margin. Hope this is helpful. Thank you, Linda.

Yes, very clear. Thank you very much.

Our next question today will come from Lian Duan of Hi-Ti Securities. Please go ahead.

Okay, thanks for taking my question. My question is about, could you please update the proportion of sales channel of online and offline for smart devices? And we understand that there could be some impact on Q2 of the lockdown. And how do you see the momentum of sales of these new products in second half year? Thanks.

Sure. Regarding the different sales channels, right now, over 50% of our devices sales are through online channels. Of course, the major e-commerce services are the key online channels, and also we have the live channels, the live video Chibo channels for sales of these devices, also online. And the offline channels are also very important to us because we have been working with these partners for a long time. And through the Several thousand. We have several thousand sales endpoints across the country. These are actually very important for kind of mid-income areas. Not the tier one cities, but the mid-income areas and mid-income cities. A lot of customers there, they like to buy hardware devices from the offline shops. And the Q2, the impact from COVID, it's actually several factors. Let me explain that a little bit. So one is actually the delivery process. And the impact kind of is The key reason is that when people go online, they want to order our device. When they see that the device kind of takes several weeks or sometimes even longer to arrive, it impacts their willingness to place the order. So that impacts our overall sales process and efficiency. So that's one of the key reasons. Of course, in kind of In Shanghai, where people, they don't have, the delivery cannot happen at all. Of course, there's basically no sales. But for other areas, there's still impact because of the logistic kind of difficulties. And the other impact is for storage and storage for the storage of the devices, that we have some warehouses that's within the impacted area. So that's also another factor. And looking ahead, as I said, I think the local governments are getting increasingly better at handling the the COVID events without actually incurring a lot of logistics troubles. We see that as a factor that will help down the line. Also, we have also rearranged our warehouses so that it's more diversified in terms of locations. We think that should help too. Overall, Overall, we see promising things for the device sales in the coming quarters. And the new Dictionary Pen X5, we think it's a great product. So, yeah, check out the video on our ION website, and I think you will like it. And, of course, we are looking at from... look at this from a very long perspective. So we think our teams have a lot of experience in designing good devices. So the learning tablets, the learning pads are a very important category for us. So we will look at this category very carefully and we will have new devices down the line. So yeah, we'll keep you posted.

Yeah, and just one more point we can add in here is for the online-offline channels questions, we think about this. If you go to the different tier of cities, that will be a little bit different, following those comments. And you will see in the tier one, tier two cities, that they sell more devices through the online channel and e-commerce platforms in that area. But in the three tiers before, we used to sell more. through the offline channel in the tier 3 and below cities. And right now, because of the penetrations of that short videos platform that go in like the others platforms. And as Dr. mentioned, we host that kind of the channels in that platform. And we expect in the long run, that will be changed probably. Probably will be changed another percentage of the online and offline channels in the tier 3 and below cities. That's what we think about. That probably will be the trend in the long run. So I think that's my comments. Hope that answers your question. Thank you.

That's very clear. Thank you.

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 come to us at UDAW directly or reach out to TPG Investor Relations in China or the U.S. Have a great day.

The conference has now concluded. We do thank you for attending today's presentation. You may now disconnect your lines.