Youdao, Inc.

Good day and welcome to the UDAO 2022 Third Quarter Earnings Conference Call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, we will have a question and answer session. To ask a question, you may press star, then one on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. 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 investor relations of Yodal. Please go ahead.

Thank you, operator. Please note the discussion today will contain forward-looking statements related to the future performance of the company. which are intended to qualify for the sleepover 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 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 UDOT's business and financial results is included in certain findings of the companies with the U.S. 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 purpose only. For the definitions of non-GAAP financial measures and reconciliations of GAAP to non-GAAP financial results, please see the 2022 Third Quarter Financial Review News release issued earlier today. As a reminder, the 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, 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 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 operating basis, and all numbers are based on M&B, unless otherwise specifically stated. We had a strong third quarter with solid financial and operating results. Our net revenue 1.4 billion, up 35% year over year. Total gross margin climbed to a record high of 54.2%, improving 1.6% year over year. These results were attributable to strong performance of our new services and smart devices. Sales of the JITO content services reached over RMB 400 million, with gross margin ratio exceeding 60%. For smart devices, the first 100,000 units of the newly launched UDAW Dictionary Pen X5 have been sold out, propelling net revenues from smart devices to RMB 356.5 million in Q3, a new record. In fact, net revenues from UDOT Externally PAN series in Q3 this year have grown tenfold compared with Q3 2019 after UDOT Externally PAN 2 was launched. The first 10,000 units of UDOT Smart Learning Path Y10 released in August have also been sold out, reflecting strong demand for this new category. In terms of our operating loss, it narrowed to RMB 219 million, with operating loss margin narrowing by 6.1% year-over-year to 15.6%. We have improved the margin structure of business lines while growing their top lines at the same time. For example, in Q3, for digital content services, U.D.A. dictionary pen and U.D.A. listening pod, their net revenues could cover their costs and operating expenses, respectively. Today we announce that the Board of Directors has authorized the company to adopt a share repurchase program in the near future in accordance with applicable laws and regulations for up to U.S. dollar 20 million of its Class A ordinary shares including in the form of ADS during a period of up to 36 months. We are bullish about the future growth of the business. With that overview, I would like to share more color on our business lines in Q3. Smart devices revenue reached RMB 356.5 million in Q3, a new record for the sector and up 40.1% year-over-year. Growth margin of smart devices reached 40.4%, up 6.7% year-over-year, mainly due to the launch of new products. The application of advanced AI technology and unique learning content make us confident that the gross margin of smart devices will be around 40% in the long run. Our new flagship dictionary pen, UDAL Dictionary Pen X5, is a great showcase of our strength in R&D and product innovation. In fact, in September, we cannot make enough X5s due to the strong demands. Not only did X5 feature even better translation precision, support for over 100 languages, and a whole new design, it also includes the world's first smart dictionary pen operating system. It allows users to download apps to customize the dictionary pen to their liking with endless possibilities. Many top content providers were already on board, including Shimalaya RFM, RAZ English, NetEase Cloud Music, and Kaishu Storytelling, Kaishu Jiang Hushu. They all created apps using our easy-to-use software development kit and offered them on UDAO Dictionary Pants, creating a unique ecosystem that will grow stronger when more consumers and developers join in. Recently, we launched UDAO Smart Learning Pad X10, our second learning pad product. with significantly improved AI precision learning, larger screen, more storage, and other improvements. In the long term, the learning path has significant market potential. According to Frust and Sullivan, expected volume of education tablets are likely to reach 7.26 million units in 2025, with total sales of RMB 25.2%. Our AI-adapted learning feature provides high-quality, personalized learning for students and has received very positive feedback from consumers. Over time, we expect the Udall Smart Learning Pad to become as popular as our Udall Dictionary Pad. Then let's turn to learning services. Net revenues from learning services reached a record high of RMB $888.5 million in Q3. up 37.2% year-over-year, with a relatively flat gross margin of 64.5%. Breaking this down a bit further, net revenues from STEAM courses increased by more than 200% year-over-year and accounted for over 25% of the net revenues of this segment. We continue to make progress on the UDAO GO course in collaboration with the Chinese Weiqi Association and the Jiangsu Chess Sports Association, we held the National Children's Weichi Open Championship in Q3, which was highly recognized by the General Administration of Sports of China. As for adult courses, we see a downward trend in gross margins year over year, mainly due to the macro environment. We are actively realigning our resources to focus on growth areas in this segment. Graduate school entrance exams and vocational courses are two bright spots. Their gross billings increased by over 150% and over 200% year-over-year, respectively. Looking forward, we are confident in our operations in Q4. The transition from regulatory changes last year is mostly finished. For the last four quarters, we have maintained our investment level for our business, kept innovating in challenging times. and this allowed us to gain share in the market. It was made possible by the long-term investment in AI technology and a diversified product portfolio, and also by firm support from our parent, Netease Group. Going forward, we believe we are in a good position today to achieve sustainable growth and drive towards profitability with a portfolio of strong products and businesses. Our team continues to capitalize on tailwinds, including the quick adoption of smart learning devices, digital content services, and Steam courses. We look forward to bringing our products and services to more and more consumers. With that, I will turn the call over to Supong to give you more details on our financial performance. Supong.