Youdao, Inc.

And welcome to the UDAL 2023 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 UDAL. 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 safe harbor from liability established by the U.S. Premier Securities Litigation Reform Act. Such statements are not guarantees of the future performance and are subject to certain 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 UDA's 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 reconciliation of GAAP to non-GAAP financial results, please see the 2023 second 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 www.ir.udah.com. Joining us today on the call from UDAH's senior management is Dr. Feng Zhou, our chief executive officer, Mr. Lei Jin, our president, Mr. Peng Xu, 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 RMB unless otherwise specifically stated. In Q2 2023, our net revenues came in strong and reached RMB 1.2 billion representing a year-over-year increase of 26.2%. Lost from operations narrowed to RMB 289.1 million, marking a year-over-year improvement of 36.5%. Net cash provided by continuing operating activities stood at RMB 133 million, reflecting growth of 27.6% year-over-year. We are on a clear path to achieving profitability. As for our business segment, learning services and online marketing services continue to be our current main driver of growth, both reaching record levels of sales. In the meantime, we're making solid progress in learning devices R&D, and we are leading the charge to apply AIGC in education by rapidly releasing applications of generative AI. In the first half of the year, we see an overall positive trend in key financial indicators. Net revenues amounted to RMB 2.4 billion, indicating an increase of 9.9% year-over-year. Lost firm operations in the first half reduced to RMB 484.9 million, improving by 16.4% year-over-year. Net cash used in continuing operating activities reached RMB 304 million, marking a 5% year-over-year improvement. For our learning services segment, Q2 sales of digital content exceeded RMB 800 million, reaching a record high. Customer retention rate across the services was over 60%, leading to over RMB 200 million in operating cash inflow for this area. In addition to our learning content, we launched an AI university application advisor, AI Zhiyuan Tianbao Xitong, in Q2 to support students in their college selection process. Users were quick to adopt this tool, leading to over two million page views. Online marketing services maintained the rapid growth momentum over the last two quarters. Net revenues reached RMB 303 million in Q2, a historical high. representing an increase of 98.7% year-over-year. Moreover, gross profit margin improved by 4.2% year-over-year. These achievements were primarily due to advancements in our app platform driven by AI algorithms. First, we used proprietary AI technology to effectively identify and track the topics and products, matching the audiences of specific key opinion leaders. with accuracy rates approaching 90%, resulting in more precise ad placement. Secondly, AIGC not only reduced the time for producing ad materials by more than 80%, which showed better user satisfaction, but also reduced production costs for certain ad materials by over 90%, driving the improvement in gross margin. Positive trained in digital content services and online marketing services in Q2, is expected to continue in the second half. Regarding our STEAM courses, on the policy front, the Ministry of Education announced that starting from June 20th this year, primary and secondary schools will add new programming courses to their curriculum. This new policy is expected to further expand the demand for programming content and services from families. UDAR recently hosted the 7th Wisdom Cup computer programming contest for primary and secondary school students in Beijing's Haidian District in Q2, which showcased the Yeodao's influence in the field of programming. In addition, both programming and Go courses performed well with retention in Q2, with the retention rates for the advanced classes approaching 70%. Besides, the students from the Champions class won the Go Championship at Jiangsu Mind Sports Games, In terms of the smart devices, total revenues of smart devices were down by 7.4% in Q2 year-over-year. We're still in a transitional period for our devices business, mostly due to sluggish consumer spending in recent months and our stricter sales and marketing budget control. Both UDAW Dictionary 10 and UDAW Listening Pod performed well during the June 18 shopping festival. popping the chart for four consecutive years and two consecutive years, respectively, on JD.com for both sales volume and number of unit sales in this category. In addition, UDAO Listening Pod was updated to support UDAO Learning Aware, featuring additional apps such as Chinese Children's Encyclopedia, Collins Big Path Reading, and UDAO AI Listening, further enriching users' experiences. More recently, in August, we released the UDAH Dictionary Pen X6 Pro and the UDAH Listening Pod Pro. We believe in the long-term prospects of learning devices as they are convenient, helpful, and affordable for consumers. We're focusing on two things to drive growth and profitability. One is new products, which we will have more to be released in Q4, and second, is optimization to our marketing and sales, which is underway. Then let's discuss our progress with AI. As a leading education technology provider in China, we have always been proud of our capabilities in technological innovations. We believe large language models and AIGC presented a great innovation and growth opportunity for us. In July, we announced our proprietary large language model optimized for education applications, and have successfully deployed it to six applications, starting from the second quarter. We believe we are among the fastest in adopting LRM and making the most solid business in this area in China. I'm happy to report that one of the year's applications, the AI box feature in your translation, has already driven nearly 100% year-over-year growth of translation subscription and over 200% year-over-year subscription fee. AI Box provides very convenient in-application AI features like sentence refinement, grammar correction, writing suggestions, and summarization. In July, we also launched the first digital human language coach in China named Echo. Echo teaches spoken English one-on-one And thanks to large language model technology, she understands the learner very well, is fun to talk to, and provides high quality feedback, and really helps the learner improve their language acquisition. ECHO made its debut at the World Artificial Intelligence Conference in Shanghai, receiving great enthusiasm from the audience and media. Two weeks ago, ECHO became generally available in UDAW Dictionary PAN X6 Pro. The reviews so far are great, and we expect ECHO and more AIGC launches to drive our business growth in the coming months. Looking ahead, we believe education could be among the top verticals for large language models. This technology provides great potential for personalization of the learning experience, effective guidance throughout the learning process, and integration of knowledge across subjects. That summarizes our business operations in Q2. At a higher level, our strategy this year is twofold. First, we prioritize driving healthy growth by offering high-quality digital content services. Secondly, we dedicate efforts to accelerate the integration of generative AI into our products and services. In Q2, our teams made significant progress in both areas. The user demand for high-quality learning products and services remained consistently high. Leveraging our strength in content creation, user understanding, and technological capabilities, we're committed to continuously delivering exceptional products that address the needs of our users. Finally, I would like to share Yodal and Nettie's group have both approved a proposed amendment to the aforementioned US dollar 300 million revolving loan facility to extend the maturity dates of the facility, including loans already drawn from it until March 31st, 2027. In addition, we announced that the Board of Directors have approved an amendment to the foregoing program to increase the total authorized repurchase amount by additional U.S. dollar 20 million. This demonstrates the long-term support from NIDIS and the confidence from U.S. management. Thank you. And now it's Supong to give you an update on our financials.