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.