Youdao, Inc.

Good day, and welcome to the Yodal 2024 First Quarter 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 Yodal. 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 sleep fiber from 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 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 is included in certain company findings 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 purpose only. For the definitions of non-GAAP financial measures and recommendations of GAAP to non-GAAP financial results, please see the 2024 Fourth Quarter 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 UDOT's corporate website at ir.udot.com. Joining us today on the call from UDOT Senior Management Dr. Feng Zhou, our Chief Executive Officer, Mr. Lei Jin, our President, Mr. Peng Shu, 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'd like to remind everyone All numbers are based on revenue, unless otherwise specifically stated. We had a solid quarter in Q1, 2024. Net revenues reached RMB 1.4 billion, marking 19.7% year-over-year growth. Income from operations amounted to RMB 29.9 million, a significant turnaround from the RMB 195.8 million lost from operations in the same period of last year. This marks our first-ever profitable first quarter and our first-ever consecutive two quarters of profitability. In terms of cash flow used in operating activities in the first quarter was RMB $391 million. As Q1 is seasonally low on course renewals, this represents an improvement of 10.5% year-over-year. Now let's review the development across our business lines. Learning services revenue reached RMB 718 million, largely flat compared with the same period last year. Within the segment, digital content services maintained strong momentum with net revenues of RMB 499.8 million in Q1, marking a 11% year-over-year growth. Gross margin has consistently exceeded 70% for three consecutive quarters. Furthermore, the net revenues generated by digital content services cover the costs and operating expenses and yielded meaningful profits. In terms of product enhancements, we upgraded Yougao Lingshi in Q1 by introducing a tiered teaching approach tailored to individual needs and capabilities. More recently, we concluded the spring renewals for Yudaling Shi students and the retention rate reached a historic high of over 70%, up more than 10 percentage points year-over-year. This retention rate is remarkably high for this age group and competitive with offline services while offering higher growth margins. Additionally, We launched a new product for Youda Literature called Virtual Tour of 24 Cities, Yun You 24 Cheng, designed to help students improve their reading and writing abilities. Lastly, leveraging our AI capabilities, we efficiently offered over 30,000 high-quality writing refinements in the first quarter through AI writing refinements, 80% more than last quarter. Next in Learning Services are our AI-driven apps and services. On previous calls, we have discussed extensively our AI initiatives, particularly our large language model projects. We believe Yodog is uniquely positioned to bring AI experiences to a lot of users in China and other countries, driving business growth due to our large user base and the long-standing experience in algorithm-driven products. Adopting a lean approach, we develop our models and multiple applications simultaneously at a fast pace. I'm pleased to share that the total sales of our AI-driven subscription services reached approximately RMB 50 million for the first time in Q1, representing a remarkable year-over-year increase of over 140%. This segment has grown year-over-year by over 50% for five consecutive quarters, and we expect the trend to continue. These AI-driven subscription services primarily include your DAW dictionary, your DAW desktop translation, High Echo, and multiple international apps that provide translation, language learning, and other services. While we are still in the early days, the future looks incredibly promising. We firmly believe that consumer-facing products are the largest growth opportunity for AI at present, and the combination of large language models and subscriptions are a very natural route for growing AI products. For instance, leveraging our proprietary large language model Ziyue, we have increased the accuracy of Chinese-English translation in approximately 98% driving more subscriptions. Additionally, we recently launched an upgraded version of High Echo in collaboration with the IELTS organization, introducing modules for IELTS speaking practice, simulated exams, and a bilingual teaching mode to better cater to Chinese users' learning needs. Furthermore, Quest Mobile recognized High Echo as a pioneer application in the education industry for AI-generated content. Our online marketing services segment continues to demonstrate remarkable growth, with net revenues reaching a historic high of RMB $492.7 million in the first quarter, marking an impressive 125.9% year-over-year growth. This segment has sustained robust momentum, achieving over 50% year-over-year growth for six consecutive quarters. driven largely by the strong performance of real-time API, RTA, and the rapid expansion of domestic key opinion leader, KOL, advertising verticals, both of which experienced over 100% year-over-year growth in the first quarter, underscoring the segment's strength and our ability to capitalize on emerging trends. Looking ahead, we see multiple avenues for further growth. including leveraging industry trends like data management platforms, DMP, as well as strengthening our collaboration and synergy with the NetEase group. Our partnership with NetEase brings us the benefit of their vast traffic sources and access to more customers within the group. In the first quarter, less than 10% of our app revenue originates from NetEase, indicating significant future growth potential as we deepen the partnership. At the same time, our AI capabilities will empower the groups to conduct advertising placement more accurately and efficiently across business lines, creating a mutually beneficial synergy that drives growth for both parties. Regarding the smart devices segment, net revenues were RMB $81.2 million in the first quarter, reflecting a 14.8% yearly decline. However, It is encouraging to note that the rate of decline has narrowed by 30 percentage points compared to the previous quarter, indicating a stabilization. On the product front, we recently released Yudao dictionary pen S6 Pro, which quickly became the top-selling dictionary pen in terms of sales volume on JD.com after its launch. While we continue to face headwinds in this segment, we remain confident in the medium to long-term outlook for our learning devices, underpinned by our commitment to product innovation and our deep understanding of the education technology market. As usual, let me share with you some thoughts about our overall strategy. As our recent financials indicate, our business is nearing the achievement of sustainable profitability. A key strategic question for us is, How do we cross the sustainable profitability threshold and build long-term growth in this highly competitive education technology sector? Our strategy is to maintain financial discipline and focus on a few key businesses with high growth and strong competitive advantages. Currently, we have identified the three areas where we are concentrating more energy and resources. Our focus is on digital content services, in particular, Youdao Lingshi for high school students. Over the past few years, Lingshi has emerged as the leading player in its segment. We believe there is a healthy multi-language trajectory for Lingshi in front of us. Secondly, we are focusing on online marketing services, which is approaching RMB 500 million in quarterly revenues. We see two main growth drivers working in our favor, the trend of tech-driven advertisement product innovations, including wide applications of RTA, DMP, and particularly generative AI in the industry, as well as untapped customer acquisition opportunities as we achieve larger scale and product leadership. Thirdly, our focus is on AI-driven subscription services, currently generating around RMB 50 million in quarterly total sales. Although relatively small at present, this segment is growing at a high speed with over 100% year-over-year growth this quarter. It is a key conduit through which our investments in AI will pay off. I'm pleased to share that we will be launching Mr. P AI Tutor, the first all-subject AI Tutor in China as a free mobile app in June. We encourage you to try it out and provide us with feedback once it's available. In conclusion, we are later focused on driving robust growth by offering premium online learning services and spearheading AI innovations for consumers while concurrently maintaining financial discipline. The future holds immense promise for AI-driven learning, advertisement, and consumer services. With that, I will turn the call over to Sukong to provide you with more detailed insights into our financial performance. Thank you.