Youdao, Inc.

Welcome to the YoDAO 2023 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 YoDAO. Please go ahead.

Thank you, operator. Please note the discussion today will contain forward-looking statements related to future company performance. which are intended to qualify for the safe harbor from liability as established by the U.S. Private Security Litigation Reform Act. Such statements are not 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 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 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 reconciliations of GAAP to non-GAAP financial results, please see the 2023 quarter and full year 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 UW Senior Management is Dr. Feng Zhou, our Chief Executive Officer, Mr. Lei Jin, our President, Mr. Peng Su, our VP of Strategy and Capital Market, 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, 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. We had a solid financial performance in Q4, producing an all-time high income from operations and operating cash inflow, Net revenues reached RMB 1.5 billion in Q4, up 1.8% year-over-year. Income from operations reached RMB 76.3 million, increasing 209.2% year-over-year. In terms of cash flow, we achieved an operating cash inflow of RMB 160.6 million, rising by 91% year-over-year. For the full year of 2023, our key financial indicators improved significantly. Net revenues reached RMB 5.4 billion, up 7.5% year-over-year. Loss from operations was RMB 466.3 million, narrowed by 39.8% year-over-year. Operating cash outflow amounted to RMB 438.1 million, improving 17% 0.6% year-over-year. We executed on our strategy of growing our businesses to key growth areas, including digital content services and online marketing services, while at the same time, building product leadership and future growth through AI technology. We continue to drive towards profitability and have already delivered two major versions of our large language models, solid foundations for both 2024 and an AI-driven future. Now, I would like to share more color on our progress in the fourth quarter. First of all, our large language model projects. Last month, we released our second language model for education, so the year two, with major upgrades to conversational abilities, knowledge-based question answering capabilities, and text processing capabilities. Utilizing this new model, we launched High Echo 2 with extensive upgrades to digital human characters, scenarios, conversational abilities, and the all-new teaching mode. We also introduced a major new LLM application, Mr. P, AI Tutor, a conversation and camera-based tutoring app for all K-12 subjects. The AI Tutor extends the application of the real-form language learning to real-time and multi-modality tutoring and covers one of the largest scenarios in K-12 learning. We're thrilled to be the first in China to deliver an all-subject AI Tutor and look forward to serving more and more users with this technology. Additionally, We have open-sourced two technologies, EmotiVoice and QAnything, since Q4, which have so far garnered over 10,000 stars on GitHub, showcasing our technology ability. LLM technology is already driving concrete business growth. For example, our translation subscription fees have grown quickly since we launched LLM features. with over 100% year-over-year growth for three consecutive quarters. Most of the growth comes from the LLM-driven AI box and recently launched LLM translation features. As for the learning services segment, net revenues reached RMB $784 million, largely stable on a year-over-year basis. Momentum from our digital content services is strong. with net revenues of RMB 500, 8.3 million, an increase of 13.4% year-over-year in Q4. The gross profit margin was above 70%. Furthermore, the net operating cash inflow of digital content services reached over RMB 200 million. Additionally, net revenue in Q4 could cover the cost in operating expenses. Departments primarily includes and literature continue to improve their products and services for users. In terms of business updates, I'm glad to share that the retention rate of our consultation service for the plan for strengthening basic academic disciplines was around 75% in Q4. Moreover, since the introduction of AI writing refinement in the third quarter, we have efficiently provided over 25,000 high-quality refinements, garnering widespread praise from our users. For 2023, net revenues from digital content services reached RMB $2 billion, up 11.7% year-over-year, also covering the full-year cost and operating expenses. Regarding STEAM courses, our CSP score prediction system for competitive programming had 200% year-over-year use of growth. The retention rates for advanced level programming courses and GO courses reached approximately 70%. In 2023, 340 students of our programming courses received awards in the CSP competition. Among them, 106 students won the first prize. This achievement highlights the quality of our courses and services. In addition, Youdao Zhongheng was rewarded the second prize in the China New Information Consumption Competition of 2023. As for our online marketing services, in the fourth quarter, the net revenues surged to a historic peak of RMB 474.1 million, an extraordinary year-over-year growth of 96.9%. Online marketing services have recorded over 50% year-over-year revenue growth for five consecutive quarters. This was primarily attributed to our cutting-edge AI technology and enhanced data infrastructure, empowering us to upgrade our RTA technology capabilities, broadening our client base, and expand the range of applications. AI is playing a larger and larger role in our advertisement service. In fact, about 20% of our current advertising materials have already incorporated AI workflow. In addition, net revenues from online marketing services of gaming, entertainment, sports, and O2O industries in Q4 rose by over 200% year-over-year. With regard to the smart devices segment, Net revenues amounted to RMB 222.4 million, declining 45.3% year-over-year. Our efforts to optimize low return of investment sales channels continued to reduce overall channel inventory, impacting the fourth quarter revenue. At the same time, the overall financial health of this segment has improved on a quarter-over-quarter basis. We have finished our sales channel reshuffling. So that is behind us. Product-wise, we recently launched the Youda smart learning path X-training, featuring Mr. P AI tutor powered by our LLM Ziyue. This is the industry's first learning path with an LLM-based all-subject AI tutor. We believe the headwinds of the devices segment are temporary. In fact, on February 21st, we launched UDOT Dictionary PIN A6 Pro with more AI and LLM features. I'm happy to report that A6 Pro sold over 50,000 units in the first week, making it our number one launch with the most units in the first week in our history. As you can see, we are accelerating our product launches. In past years, our new products were mostly launched in the summer. This year, we started the year strong with the H6 Pro and E6. And our work on AI is paying off. Our devices have more attractive features and differentiations than any time before because of AI technology. Exclusive features like AI grammar instruction, AI word instruction, and Mr. AI Tutor are liked by more and more users. and only UDAO products have them. These features are driving high user satisfaction and growth. This is why the new products are selling well. So we remain confident in the future of learning devices. For education digitalization solutions, we reached a major milestone in 2024 of over RMB 100 million contract sales. Additionally, since the launch of Udall Fun Sports, it has been adopted by over 100 schools with a current utilization rate of over 95%. Looking ahead, let's take a high-level view of the business. First, we see that users' demand for digital learning content and services across subjects and across age groups are increasing steadily. since last year after COVID. Yudao is in a good position to capture this opportunity. With our experienced teams and established content, our digital learning content business is already on a multi-quarter growth trajectory. This year, we continue to drive growth by focusing on key strong content areas, mainly including and literature, and developing new content. Another important factor at a high level is our unique strengths in AI technology. We continue to build upon our leadership in educational LRM in 2024. For a technological tidal wave like the LRM, first movers enjoy significant leverage. And its impact on business shows in an accelerating fraction over time. We are a first mover here. and had a quick ramp up in 2023 for our LRM technology and products. We released our own model and multiple industry first products quickly. As we gain more understanding of the technology, this year we believe LRM will contribute more to product leadership of our products, including learning devices, online marketing services, and learning apps. From this high-level view, we believe we are in a good position to lead in building a new generation of AI-powered, high-quality content-based learning and other experiences for people around the country and over the world. Thank you, and now it's Supong to give you an update on our financials.