Youdao, Inc.

Good day and welcome to the YoDAO 2023 Third Quarter Earnings Conference Call. Today's conference has been recorded. At this time, I would like to turn the conference over to Mr. Jeffrey Wang, Investor Relations Director of YoDAO. Please go ahead.

Thank you, operator. Please note the discussion today will contain forward-looking plans related to future performance of the company, which are intended to qualify for the SIG PAPER from liability. as established by the U.S. Private Security Litigation Reform Act. Such statements announce guarantees of future performance and are subject to certain risks and uncertainties, assumptions, and other factors. Some of these risks are beyond companies' 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 UDAO's business and financial results. It's included in certain findings 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 NANGAP financial measures for comparison purpose only. For the definitions of NANGAP financial measures, and reconciliations of gap to non-gap financial results, please see the 2023 Third 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 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 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 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 operations basis, and all numbers are based on MMB, unless otherwise specifically stated. In Q3, we achieved a record high net revenues of RMB $1.5 billion, marking a year-over-year increase of 9.7%. Lost firm operations narrowed by 73.7% year-over-year to RMB 57.7 million. Net cash used in continuing operating activities amounted to RMB 294.7 million, largely stable with the same period of last year. We're clearly making steady progress towards achieving profitability. In Q3, excluding the current loss-making smart devices segment, Net revenues of our business lines could cover their combined cost and operating expenses. Before looking at results from our various business lines, let us first discuss our progress on artificial intelligence. AI technology, specifically large language models, represents an unprecedented opportunity for education technology. It is becoming clear that this technology has fundamentally revolutionized access to many formerly highly valuable but cost-prohibitive services for learners, schools, and families. We're already witnessing accelerated changes in this domain. We're very excited about opportunities presented by large language models. I'm delighted to share that UDAH is playing a leading role in the rapid advancement of LLMs and their applications in education. Recently, we achieved a notable milestone with the receipt of relevant filings for our proprietary LLM, Ziyue, this month. This underscores the acknowledgment of our technological capabilities by regulatory authorities. On the product front, we introduced the world's first digital human language coach, named Hi-Echo. It was launched on Yuda Dictionary Pen X6 Pro in August and made its way to mobile app stores in October. I'm happy to share that High Echo has already accumulated more than 100,000 registered users. A quick update. Additionally, we continue to enhance AI Box in UDAO translation and introduce the AI writing alongside other features, driving over 160% year-over-year growth in translation subscription fees in Q3. Moreover, I am thrilled to share that we will host an event in Beijing next month to introduce more MLM products and features. Next, I will quickly outline key business developments in Q3. As for the learning services, revenue comes in at RMB 950.8 million, representing a 7% year-over-year growth. We continue to focus on user satisfaction and healthy growth in line with our goal to achieve profitability. Sales of digital content services exceeded RMB 400 million in Q3 with gross margin ratio exceeding 70% that hit the record high. During Q3, we released an AI quiz recommendation feature which presents personalized quiz questions after students watch instructional videos to help improve learning and assess results. students finished over 7.6 million quiz questions in Q3. Additionally, we launched AI writing refinement in Q3, effectively reducing the time required for detailed assessment and refinement of student writings by 50%. Regarding our STEAM courses, the gross billions of programming courses grew by over 30% year-over-year in Q3. Our programming and informatics courses have high user satisfaction, mainly due to our one-stop services that provide comprehensive learning, competition preparation, and post-competition score estimations. Furthermore, we once again collaborated with the Chinese Weiqi Association to successfully hold the second National Children's Weiqi Open Championship. Turning to online marketing services, We continue to see strong growth momentum in Q3. Net revenues of online marketing services reached a historic high of RMB 336.1 million, marking a 113.5% year-over-year increase and four quarters of over 50% growth. We continue to deploy enhancements to both AI and matching technology and more industry-specific data. The continued growth of the business also provided our technical teams access to more data to do more precise audience targeting and real-time traffic filtering. These upgrades have, in turn, improved conversion rates, customer satisfaction, and our revenue. As for the smart devices segment, net revenues were RMB 251.9 million in Q3, down by 29.3% year over year. The decline was mainly due to our continued efforts to reduce low return of investment sales channels, leading to a reduction in overall channel inventory that impacted Q3 revenue. Our channel optimization efforts will continue in Q4. We expect a continued short-term negative impact in this segment before the optimization is likely to conclude by the end of the year. I would like to stress that these channel optimizations improve the business's long-term growth and profitability potential. On the product front, users embrace our new products, including the UDAO Dictionary Pen X6 Pro and UDAO Listening Pod Pro, leading to a year-over-year increase of over 10% in smart devices' sellout R&B amount. U.Dictionary Pen X6 Pro, our flagship with LLM features, exhibited over 50% higher usage frequency than U.Dictionary Pen X6 in Q3, reflecting the popularity of its new features among customers. Our other efforts are also progressing well. For educational digitalization solutions, we successfully secured a project bid in Jiangsu and other regions in the third quarter. Education digitization is a big focus for the overall public education sector, and we aim to build this line as a growth segment steadily. Looking ahead, we are committed to delivering top quality education content, products, and services to our customers. Moreover, our leading proprietary large language model unlocks various opportunities for many novel applications, which is crucial in revolutionizing learning on a wider scale. We are very excited about the opportunities and cannot wait to serve our customers with more innovative products. Thank you. And now it's Pengsu to give you an update on our financials.