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.

Thank you, Dr. Zhou, and hello, everyone. Today, I will be presenting some financial highlights from the first quarter and the full year of 2023. We encourage you to read through our press release issued earlier today for further details. As Dr. Zhou mentioned, for the first quarter, total net revenue will RMB $1.5 billion, or U.S. dollar $208.5 million, representing a 1.8% increase from the same period of 2022. Net revenue from our loading services will RMB $784 million, or U.S. dollar $110.4 million. representing a 2.8% decrease from the same period of 2022. Net revenue from our smart devices were RMB $222.4 million, or US dollar $31.3 million, down 45.3% from the same period of 2022, primarily due to our continuous efforts to streamline marketing channel with low return on investments for the intelligence learning products in the first quarter of 2023. Net revenue from our online marketing services were RMB 474.1 million. For US dollar, 66.8 million, representing a 96.9% increase from the same period of 2022. The year-over-year increase in revenue from the online marketing services were mainly attributable to the increased demands for the performance-based advertisements through the third-party internet properties. For the fourth quarter, our total gross profit was RMB 738.8 million. For US dollar, $104.1 million, representing a 4.6% decrease from the first quarter of 2022. Gross margin for learning services was 63.6% for the first quarter of 2023, compared with 64.1% for the same period of 2022. Gross margin for smart devices was 38.3% for the first quarter of 2023, compared with 36.2% for the same period of 2022. Gross margin for online marketing services was 32.7% for the first quarter of 2003, compared with 29.2% for the same period of 2022. For the first quarter, total operating expense were RMB $662.5 million, or US dollar, next 3.3 million, compared with RMB $750 million for the same period of last year. Looking at our expense in more detail, our sales and marketing expense were RMB $441.4 million, compared with RMB 515.9 million in the first quarter of 2022. Research and the development expense were RMB 168.1 million compared with RMB 179.5 million in the first quarter of 2022. Our operating income, income margin was 5.2% in the first quarter of 2023 compared with 1.7% for the same period of last year. For the first quarter of 2023, our net income from continuing operations attributable to ordinary shareholders was RMB $56.5 million, or US $8 million, compared with RMB $12.3 million for the same period of last year. Non-GAAP net income from continuing operations attributable to ordinary shareholders for the first quarter was RMB $69.3 million, or US $9.8 million, compared with RMB $31.1 million for the same period of last year. Basic and diluting net income from continuing operation per ADS attributable to ordinary shareholders for the first quarter of 2023 was RMB 0.47 or US dollar 0.07. Non-GAAP basic and dilute net loss. Net income from continuing operation per ADS attributable to ordinary shareholders for the first quarter was RMB 0.58 or US dollar 0.08. On net cash, provided by the continuing operating activities was RMB $160.6 million, or US dollar $22.6 million for the first quarter. Turning to our full year results, our total revenue for 2023 increased by 7.5% to RMB $5.4 billion, or US dollar $769.1 million. Net revenue for our learning services for 2023 were RMB 3.1 billion, or US dollar, $443.4 million, keeping flat for the 2022. Net revenue from our smart devices for 2023, down by 27.6% year-over-year, to RMB 909.2 billion, or US dollar, $128.1 million. Net revenue from our online marketing services for 2023 were up 98.1% year-over-year, to RMB 1.3 billion, or US dollar, 187.6 million. Total gross profit for 2023 was RMB 2.8 billion, or US dollar, 389.8 million, compared with RMB 2.6 billion in the 2022. Total operating expense for 2023 decreased to the RMB 3.2 billion, or US dollar, 455.5 million, compared with RMB 3.4 billion in the 2022. Net loss from continuing operation attributable to ordinary shareholders for 2023 was RMB $549.9 million, OUS $77.5 million. And the basic and diluted net loss per ADS from continuing operations attributable to ordinary shareholders for 2023 was RMB $4.53, OUS $0.64. Looking at our balance sheet, as of December 31, 2023, our contract liabilities, which mainly consists of the default revenue generated from our lending services, were RMB 1.1 billion, or US dollar, 148.3 million. Compared with RMB 1.1 billion as of December 31, 2022, at the end of the period, our cash, cash equivalent, district cash, time deposit, and short-term investment totaled RMB 527.1 million, or US dollar, 74.2 million. This concludes our prepared remarks. Thank you for your attention. We would now like to open the floor to our questions. Operator, please go ahead.

Thank you. We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone. If you are using a speakerphone, please pick up your handset before pressing the keys. To redraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster. The first question is from Brian Gong with Citigroup.

Thanks, management, for taking my question. I have a question on our large language model. Yudao is pretty committed to AI, and we also launched our own large language model, Ziyue. Can management share mean monetization channels for Ziyue? Thank you.

Hello, Brian. I'll take this question. Yeah, first there's a consensus in the AI industry that education is one of the most important areas for large language model applications. Sal Maltman talks about it. Bill Gates also talks about education and healthcare are the most important areas. So the overall focus is I think to capture kind of really important use scenarios in education and then monetize that. We basically think about this in two ways, two kinds of LRM projects. One is value-adding projects to our existing businesses. One is completing new things. So for the first category, we have a couple of channels. So obviously one of them, a very important one, is smart devices. I think one trend is quite clear. So LRM features are quickly becoming kind of major selling points for our devices. So for example, AI features like AI grammar instruction, Yu Fa Jin Jia, for explaining sentences, and word instruction, dan se jing jiang, for explaining separate words or phrases. These features have become the most used features and major selling points for Yudai Dictionary PIN since last year. I compare this to use our dictionary, not the dictionary pen, the app, use our dictionary, how we won the dictionary market. So that was done with two features. One is web interpretation, the other is machine translation. So when you have something that really works for a specific learning scenario that users really care about, And also, when only you have that and the other players don't, then it is a very good way to gain more market share and also monetize the technology. Of course, we also have the more recent Mr. P, AI tutor, We think that will also be popular. So this is one way we monetize the technology through smart devices. Of course, we also monetize through app subscriptions. We talked about for our dictionary and translation, AI Box has become a key feature too, driving over 100% growth in subscription year over year for the last three quarters. And it also contributed to our growth of online marketing significantly. So right now, over 20% of our advertising materials, they go through, somewhere in the process, they go through a generative AI workflow. That's already pretty significant. One out of five ad materials are generated from using AI technology or is processed using AI technology. That's the first category, how we apply AI to our existing businesses. The other one, maybe more important for the longer term, is completely new products. Of course, we have High Echo, the English learning app. And also, we will have Mr. PAI Tutor as a standalone product, too. So Mr. PAI Tutor as a standalone product is upcoming. It's a future product. If we look at these apps, these products, I think they cover large use scenarios. For example, the spoken English language learning scenario is a pretty significant business in itself. And in fact, if we look at our peers, The Korean app Speak has, I think, around $20 million US dollar annual revenue already. So I think there's a bright future for AI-powered language learning there. And if you look at Mr. P AI Tutor, it covers an even larger scenario. That is the home tutoring scenario. If the student is learning at home, and doing drills and exercises and have a question, then the AI tutor can answer that question much better than parents or the students herself. So I think it is a profound idea, I would say. It's a profound idea because this is one of the most important scenarios in home education. So if we can have an AI to answer questions for all the subjects that the students learn, and if the AI can answer that question in a really instructional and high-quality fashion, then I think that'll create a lot of value. So in summary, I think The two channels, the two categories are the ones that we are looking at. One has an immediate impact on the business. The other one, longer term, but probably larger in scope. Yeah, so I'm very optimistic about the impact ALM will have on our business going forward. Yeah, thank you.

Got it. Thank you.

The next question is from Kelly Wong with CICC.

Thank you for taking my question. So my question is, as we can see that our learning services revenue in 2023 is kind of flat compared to 2022. So I'm just wondering what is the focus for our learning services segment in 2024? Thank you.

Yeah, so I'll take this too. So in 2023, yeah, if you look at data content services, so this is the major contributor of net revenue in our learning services content. So we define digital content services within the learning services sector by any new service that's launched after and according to the policy change. So these primarily include Ling Shi and Yuda Literature and some other smaller courses. not including things like adult courses. So in 2023, net revenues from digital content services reached RMB 2 billion. So it is up 11.7 year over year. And the gross margin was around 70%. So this part of the business met our expectations. So in 2024, we think digital content services will be the focus of our learning services. So let me give you a few points regarding our priorities. So first is consumer needs are quite strong in this area, and we are improving the services to satisfy different user needs. So our Youda Lingshi is already leading in the industry. Our Youda Literature course is also quite popular as we gain more and more users. So one of the key areas is we will provide more personalized services to users. So Lingshi recently introduced a small class course format for students with more advanced learning needs. So this is actually different from the past small class experiences. The new format is offered with mostly pre-recorded video content and our experienced tutors to provide the service. So feedback is very good for this new format. Yudha Literature, Yudha Bowen also launched a new major revision of the course, broadening to more age groups and provide more choices with how much time the user wants to spend on the course. So essentially, as these products establish leadership positions in the industry, we can improve the products to cater to more personalized needs of different different cities, different age groups, and different spending plans. So we think we have good opportunities on this front. Second, there will be new SQs this year. The learning needs of families in China have been changing very quickly in the last two years because of the macro environment, the policy, and trends like AI. So naturally, our teams, we see opportunities of new SKUs. The focus will be on non-curriculum learning of K-12 students. The services aim to provide high-quality learning content and services to broaden the learner's scope and cultivate interests in important STEM and humanitarian areas. and strengthening their lifelong competencies. So for new projects, we take an agile and lean approach. So start small and grow organically. So there are a few of these new projects already going on and going through the incubation process right now. So we will see fruits from these projects in the coming quarters. Thirdly, One important area we put our efforts in is we apply AI to differentiate our products and increase productivity. With our large language model technology, there's a lot in this area we can do, like AI diagnosis, AI tutoring, AI personalized exercises, and on and on. The key thing of applying AI, of course, is to focus on learning results and productivity. So we believe the most fundamental challenge in learning, apart from motivation, yeah, motivation is obviously one area that the human teacher is really, really good at to make the students more motivated, want more to learn. But the other very, very important area is the teaching is a very labor-intensive activity. So we focus on activities that are really important for learning results and also require a lot of labor from teachers. If we can do that, then we can get good results. That is the idea behind the AI writing refinement. For Uda Literature, we already refined 25,000 writings from students in just one quarter. If each one saves half an hour, then that is over 12,000 hours saved for the teachers. That's really significant. a lot of writing skills improvement delivered. So this is a very important win-win, both for the unique value we can add to the course and also increase the productivity from the company's perspective. So we have more projects like this going on, and so I think it will have a more and more important impact on the business this year. Yeah, so that's, yeah, Supong, if you have anything to add.

Yeah, I just add more colors after Dr. Zhou's comments on the data content services. And I believe most people know news about in-province has been confirmed, have confirmed the implementation of the reform in math exam for the college entrance exam in this year. the reform including a reduction in the number of questions, adjustments in the question score, and others innovatively approach in the problem solving. So I think if you see the trend in the past and every single time when the college entrance exam has been updated for the new format of the test, and we expect about the demand for the consulting for how to deal with the new test formats will grow up in the following years. And internally, we have upgraded our digital content services, including the consultings and advice, and teach them how to prepare in the family scenarios for this update, college entrance exam. And in addition, we think that's also the further opportunities for the plan for the strength in basic academic discipline. We are sophisticated in this consultation services, and we think we have built a very strong reputation in domestic top universities and high school. And we think that will be the kind of the driving of the growth of digital hand services in 2024. Thank you.

The next question is from Thomas Chung with Jefferies.

Hi. Thanks, management, for taking my questions. Following the rapid growth for online marketing services in 2023, what are the new growth drivers that we should expect in 2024? Thank you.

Hi. This is Leijun. In 2023, the advertising market is profiting. With the major domestic players like Tencent, ByteDance, and Baidu, they are all growing maybe 20% or 25% in their AD business. The rise of the performance-based ads is a significant driver of this trend. During the development of the AD market, we have integrated AI into our AD business, resulting in much higher growth compared with the average level in the market. We achieved continuous over-cultured growth in every quarter in 2023, and net revenue of RMB 1.3 billion RMB for the whole year, and an increase of nearly 100% growth year-over-year. Besides the AI capabilities, we have a deep understanding of client demand, effective utilization of the data, and our strong focus on AD performance. Those internal capabilities are the key drivers to gather great results. In 2024, we will focus on digital advertising Paying attention to the ADE performance continue to strengthen our advantage just mentioned above and explore the new growth in the following two areas. First is the overseas market. Yudha ADS provides a digital marketing solution for the brand promotion of the Chinese enterprises. Global influencer marketing and overseas ADE placement With our extensive experience and expertise in the translation field, UDAO ADS excels in providing translation services for 108 languages. Moreover, our self-developed AI technology, recommendation algorithms, and neutral network translation enable us to connect with over 1 million high-quality influencers in various industries worldwide. This allows us to directly reach more than 2 billion users in over 75 countries or regions, facilitating the global growth of the Chinese brand. Notably, we have recently become authorized advertising agency for the TikTok, which will further support our expansion in the international market in the future. We explore the potential of the vertical industry, just like online games. We have several advantages in the serving game client, including capabilities in AD material production, deep understanding of gaming, and expertise in content marketing. In the latter half of the last year, we began to collaborate more closely with NetEase Games. Moving forward, we will continue to leverage our robust AI capabilities and aforementioned strengths to provide more comprehensive and tailored service to the client in vertical industries, aiming for a favorable timing to the growth potential of the advertisement business. Thank you.

This is Zoufeng. I'd like to add a point. We got asked a lot recently about why and how we achieve this significant growth in the advertisement business. Let me try to answer the question here. I believe the key to our past and future success in ads is our ability to combine strong business operations and deep advertisement technology. Yodao's ad business is unique. We are not a monetization team of our own traffic, nor a brand advertisement agency. We are a technology-based performance ad platform business. So in addition to our on and operated assets and traffic. We also deliver performance ads for third party traffic. So every page view and every click contributes a tiny bit of revenue. So in this kind of business, efficiency is key to business. That's why our AI and large language model capability is a good fit for this. It is very useful in learning and adapting the app delivery process to maximize the efficiency and value creation. So a lot of app companies on the market, they have a strong business ability, good at sales and acquiring customers, but not necessarily good at technology. On the other hand, a lot of ad tech teams do not really have strong business operations. Through the years of experience our team have, I think we have acquired both skills. Business operations and deep understanding of ad technology. That is why we have seen such growth in the past year. I believe also whether if we can do both skills better, that also will determine whether we can continue to be successful in the future. This is helpful in understanding how we think about the ad business. Yeah, thank you.

The next question is from Bo Zhang with Huatai Securities.

Hello. Good evening, management. This is Kim. Thanks for taking my questions. In 2023, smart device business faced a challenge. In 2024, how to return to growth? Thank you.

I've discussed the recent progress on devices in the prepared remarks. So let me provide some more details on the most recent product launch and some thoughts on future directions. The ASICs Pro dictionary pen, the launch exceeded our expectations, as we talked about, with over 50,000 units sold in the first week. In terms of the product itself, the ASICs Pro pen has the best screen and the best content within the price range. and supports high-quality offline translation and AI features like grammar instruction and word instruction. Moreover, our supply chain team did a really good job of delivering very good quality and good value for a relatively affordable price. Also, live video selling on Douyin contributed to the launch momentum. That's kind of a rough breakdown of the A6 Pro launch. It is worth pointing out that although the A6 Pro is more affordable for consumers than our higher end products, it actually has a similar gross margin ratio for us compared to our higher priced products. So we are not sacrificing margin for selling more units. We are able to maintain a competitive gross margin ratio for this product because of our strong in-house design abilities and also our close collaboration with our IC supplier with our other supply chain partners. The other product, the listening pod E6, also met our expectations. it is the number one selling product in its category right now. So this is a good start for the devices team this year, and I expect the team to keep delivering good launches in the coming months. Going forward, we have more device launches in Q1 and Q2 planned. If you look at our products last year and before, We have been mostly focused on higher priced products compared to our peers. The plan going forward is to cover both higher and a little bit lower price points, both with leading products in their category. We're able to do this because it is finally possible to deliver premium quality and experience for for these slightly lower-priced products because of the experience of our team accumulated over time, over the years, and the maturity of the supply chains. So now, we believe, is the right time to reach more users with this product combination. For future premium products, let me say a few words. I believe AI and hardware features, unique hardware features, provide a lot of opportunity for creating value for users, for more premium products. For example, yeah, running large language models on the device itself is very attractive because now that ARM features are like grammar instruction become popular with our users. Naturally, users want to run them on device. As it is more convenient, response time is better. So one of the most asked questions we got for the dictionary pen is actually whether it supports offline translation. Yeah, of course, all our dictionary pens supports offline translation. But that reflects thinking of the user that a key deciding factor in their purchase is whether it can support these offline operations. So on-device AI and ALM are very interesting. So we think we will have more to share when we have them. So lastly, the sales channel reorganization is done. So we've transitioned to a more online-focused, more agile sales and supply structure. The recent launch is kind of a first testament to the team's ability. The live video sales, the KOL recommendations brought significant momentum to the launch. The team still has a lot of work ahead of them. They need to build out more sales, new sales and marketing channels, and also optimize to get good ROIs from the sales channels. So nonetheless, the launch is a very good start. So I hope that answers your question. Thank you.

The next question is from Ikun Zhang with Citix.

Hello, Manjimeng. Thank you for taking that question. Well, I have only one question. With the improved cash flow observed in 2023, could the management provide an outlook for the cash flow in 2024? Thank you.

Thank you for your question. This is Wayne. I will take your question. Operating cash flow is always treated as a key healthy indicator for our company, and we are Please note a remarkable improvement in our operating cash flow of 2023 compared with prior periods. The operating cash outflow in 2023 was narrowed by near 20% year-over-year. Notably, in the fourth quarter, the operating cash inflow reached a record of around RMB 161 million, rising by net 1% year-over-year. This indicates that the business is progressing towards a healthy direction. On a segment basis, both the learning services and online marketing services help achieve the positive operating cash inflow, which makes us more confident in the further improved operating cash flow in 2024. We expect to maintain such good momentum for our operating cash flow in 2024. Firstly, we will continue to enhance our ability to generate cash inflow through leveraging AI technology and optimizing business operations. In addition, as to the smart devices segment, improvements in product performance and sales channel management are expected to boost the cash generation credibility from this segment. It is also worth noting that the cash flow exhibits quarterly but vary with a stronger seasonality in the second and the fourth quarter, preliminary due to user acquisition and the retention activity in the learning services segment during this period. Furthermore, from a long-term perspective, NetEase has been providing financial support to us. For instance, three years of revolving low facility amounting to $300 million as disclosed in our annual release with maturity dated March 31, 2027. We should facilitate the development of business, especially in the area of our long-term investment in core technologies and resources. In sum, we are very confident in our cash flow for 2024. Thanks.

And that concludes the question and answer session. I would like to turn the conference back over to the management for any additional or closing comments.

Thank you once again for joining us today. If you have any further questions, please feel free to contact us as you are directly or reach out to Pearson Financial Communications in China or the U.S. Have a great day.

Ladies and gentlemen, thank you for joining the conference. It's now over. You may disconnect your telephones. Thank you.