Youdao, Inc.

Good day and welcome to the Yodel 2022 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 Wang, Investor Relations Director of Yodel. Please go ahead.

Thank you, Officer. Please note the discussion today will continue forward-looking statements. related to the future performance of the company, which are intended to qualify for the State Harbor Farm 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 differ materially from those mentioned in today's press release and this discussion. A general discussion of risk factors that could affect UDAF business and financial results is included in certain filings of the company 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 purposes only. For the definitions of non-GAAP financial measures and recalculations of GAAP to non-GAAP financial results, please see the 2022 fourth quarter and full year 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 UDAO'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.

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. Our financial performance in Q4 was strong, producing record high net revenues and achieving our first ever income from operations. Net revenues soared to a record RMB 1.5 billion in Q4, up 38.6% year-over-year. Income from operations reached RMB 24.6 million, compared with the lost farm operations of RMB 248.3 million in the same period of 2021. Total gross margin climbed to 53.3%, rising by 11% year-over-year. In terms of cash flow, we achieved an operating cash inflow of RMB 84.1 million. These results were primarily driven by the solid performance of our new services and smart devices. Sales of digital content services reached over RMB 600 million. Besides, the gross margin has been above 60%, and their revenues have covered the cost and operating expenses for two consecutive quarters. As for smart devices, strong new product sales drove approaching 100% year-over-year growth on November 11, shopping festival and facilitated the growth of net revenues from this segment to the best level of RMB 407 million in Q4. Then let me walk through the key financial metrics for second half 2022. Net revenues reached RMB 2.9 billion in second half of 2022, increasing 36.8% year over year. was 53.7 percent, improving six percentage points year-over-year. Loss from operations reached RMB 194.4 million, narrowing by 59 percent year-over-year. Operating cash outflow improved to RMB 210 million, a decline of 63.8 percent from the second half of 2021, which included discontinued operations. For the fiscal year of 2022, our key financial indicators improved significantly. Net revenues reached RMB 5 billion, up 24.8% year-over-year. Our gross margin was 51.6%, improving two percentage points year-over-year. Loss from operations was RMB 774.7 million, narrowed by 17.9% year-over-year. Operating cash outflow improved to RMB 603.1 million, a decline of 55.2% from 2021, which included discontinued operations. Then I would like to add more color to our business progress in Q4. Net revenues from smart devices hit RMB 407 million, up 28.1% year-over-year. Dictionary pen sales exceeded 400,000 units, the majority of which were the new products launched in 2022. Product-wise, we launched the UDAH dictionary pen P5 in Q4, specifically designed for professionals. Updated with 5 million professional terms in 16 professional fields, it provides translation into over 100 languages. and enhances recognition accuracy by more advanced natural language processing. We also launched UDAO Smart Learning Path X10 in Q4 with an upgraded AI-supported learning dashboard for better personalized learning experiences. After we entered the field of education tablets in Q3, the compound monthly growth rate of sales units exceeded 100%. Moreover, For the first three months after we launched the Learning Paths X10, its compound monthly growth rates of sales units was nearly twice that of the Y10 for the same period. As for learning services, net revenues reached RMB 806.3 million in Q4, up 39.2% year-over-year. Growth margin of learning services climbed to 64.1% improving 13 percentage points year-over-year. We have been exploring digitization of our learning services and have made significant progress. In Q4, we upgraded Youdao Literature Creative Writing, which was co-developed by Youdao and Minecraft Education Edition. The digitized content effectively enhances learners' interaction and engagement, making learning materials easier to understand and more attractive. I encourage you to view the video on our IR website. In addition, the champion class of Yodao Go was released in Q4 with a teaching team led by world champion Ke Jie. The Yodao Go courses create a learning path starting from entry level to advanced level, followed by champion level classes. The successful adaptation of these Progressive courses drove the gross margins up by over 50% year over year in Q4. Besides, the retention rate of the advanced level class reached over 70%. In terms of adult courses, we released upgraded solutions to the postgraduate entrance exams. It offers comprehensive solutions from target consultation to hybrid tutoring by AI and humans. Students are thrilled with these new features, leading to gross margins up by nearly triple digits year-over-year in Q4. Meanwhile, gross billions from vocational courses such as IT and Internet and constructor courses increased over 100% year-over-year in Q4. Looking back, we stuck to customer-oriented philosophy and enhanced the customer experiences with upgraded services and smart devices facilitated by technology and innovation in 2022. We released the world's first dictionary pen OS and launched digital content services that enhanced learning efficiency and effectiveness, which was supported by customers and ultimately reflected in our financials. Moreover, the share repurchase program demonstrated management's confidence in future growth of the business. Looking ahead, we will continue to leverage our cutting-edge technology and innovation to promote the sustainable development of smart devices, digital content services, and Steam courses, further improving our business healthiness and financial performance. With that, I will turn the call over to Supong to give you more details in our financials. Supong.