Youdao, Inc.

Good day and welcome to the UDAO 2024 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 UDAO. Please go ahead.

Thank you, operator. Please note the discussion today will contain further looking statements related to the future performance of the company. which are intended to qualify for the safe harbor from liability as established by the U.S. Private Securities Litigation Reform Act. Such statements are not guarantees of 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 UDAO's business and financial results is included in certain company filings 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 recalculations of GAAP to non-GAAP financial results, please see the 2024 fourth quarter and full year 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 UW's senior management are Dr. Feng Zhou, our chief executive officer, Mr. Lei Jin, our president, Mr. Peng Su, 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 all numbers are based on RMB, unless otherwise specifically stated. In the fourth quarter, our profitability further improved. Net revenues reached RMB 1.3 billion, a 9.5% decline compared to the same period last year, primarily driven by a decrease in revenues from learning services. Since the summer, we have proactively focused on courses and services with strong demand and maintained a rational approach to customer acquisition. This strategy has enhanced our overall health. Income of operations for the fourth quarter reached RMB 84.2 million, representing an increase of 10.3% year-over-year. Operating cash inflow was RMB 158.2 million, largely stable compared with the same period of last year. For the full year 2024, our key financial indicators demonstrated significant improvements with record profitability and cash flow performance. Net revenues totaled RMB 5.6 billion, up 4.4% year-over-year. Income from operations amounted to RMB 148.8 million. a remarkable turnaround from loss of operations of RMB 466.3 million in 2023, marking a substantial improvement in financial health and achieving our first-ever operating profit from a full-year basis. Operating cash outflow narrowed to RMB 67.9 million, representing an improvement of 84.5% year-over-year. Then let's review the major progresses across our business lines. In the first quarter, net revenues from learning services reached RMB 617.7 million, down by 21.2% year-over-year. By maintaining financial disciplines and focusing on courses like Youdao Lingshi, we enhanced our financial health and long-term competitiveness significantly. Within the learning services segment, net revenues from Digital content services reached RMB $388.8 million in the fourth quarter, which covered the cost and operating expenses, generating meaningful profits. We are committed to fostering long-term growth with top priorities centered on elevating customer satisfaction, optimizing operational vitality, and driving forward-looking innovation initiatives. Yudoling Shi has pioneered a customer acquisition path by focusing on operations on director's IP, leading to over 10% year-over-year growth in gross billings for the fourth quarter. Additionally, our flagship product, which integrates AI tiered learning videos, comprehensive learning counseling, and small-class study experiences, has enhanced customer loyalty, with retention rates surpassing 70% in the fourth quarter. in an improvement of more than 5 percentage points year-over-year. This rise in customer loyalty gives us greater confidence in the future development of Yu Da Ling Shi. In terms of STEAM courses, our franchise programming courses focused on informatics programming and have continuously iterated our products about transitioning from large class to smaller classes. This approach has driven at more than 20% year-over-year increase in gross billings during the fourth quarter, with retention rates exceeding 70%. Next, within the learning services segment, we see strong growth in our AI-driven subscription services. Total sales witnessed an impressive streak of eight conservative quarters with over 50% year-over-year growth. For the fourth year of 2024, AI-driven subscription services generated sales of over RMB 200 million, representing an increase of over 130% year-over-year. Recently, we launched an open source to China's first step-by-step exposition reasoning model, Confucius 01. As a 14 billion parameter lightweight single model, Confucius 01 supports deployments on consumer-grade GPUs and utilizes chain of thought technology to provide detailed problem solving processes. It achieves high accuracy in problem solving with strong logic and reasoning capabilities and offers reasoning in Chinese. Notably, Confucius 01 has officially been open sourced to encourage broader use and innovation of reasoning models in the education sector. Currently, Confucius 01 has been implemented in our AI learning assistant, Mr. PAI Tutor, which received positive feedback with over 100 million cumulative users since the product launched. Udall Desktop Translation has won the Best Online Education App Award at the Microsoft Store 2024 Annual App Awards. Furthermore, we are continuing to develop the HiEcho ecosystem. In the fourth quarter, we partnered with Rokit to deliver an immersive AI-powered English learning experience through AI plus AR technology. Hayako, alongside Yuda Dictionary, was named one of the top nine apps of 2024 by LaTeX. We quickly embraced the recent DeepSeq wave by integrating both Confucius models and DeepSeq R1 across many of our products. Our teams rapidly experimented with blending the best of both worlds. DeepSeq R1 delivers robust reasoning and intelligence, while our domain-specific Confucius models are optimized for high traffic scenarios unique to our offerings. This powerful combination already enhances products like Mr. P's AI Tutor, providing users with smarter, more friendly chat experiences, deeper insights into learning materials, and more effective support for challenging problems. Additionally, it enables us to offer faster, more responsive, and cost-efficient service. For online marketing services, net revenue reached RMB $481.7 million in Q4, representing an increase of 1.6% year-over-year. Gross margin increased to 34.2%, up 1.5 percentage points year-over-year. In terms of domestic performance-based advertising, industries such as gaming and AI tools have seen record-breaking revenues. On the international advertising front, we recently established an official partnership with Google. This milestone lays a solid foundation for the future growth of our overseas advertising. Additionally, in the field of overseas KOL, Key Opinion Leader Marketing, we have leveraged our extensive database of global influencers and advanced technologies, such as large language models and image recognition. With these tools, we have developed an evaluation model for KOL video conversion effectiveness. This model comprehensively analyzes trends in influencer videos and their comment sections, allowing us to identify which creator possesses strong virality and widespread reach, therefore driving high conversion rates. By using commercial conversion effectiveness as a key metric, the model assigns ratings to each influencer and uses existing data to predict their conversion potential. Furthermore, we played a pivotal role in the global promotion of the game Marvel Rivals. In the first two weeks after the game's launch, we successfully facilitate the release of nearly 200 pieces of KOR content, resulting in over 80 million impressions across the Internet. Looking ahead, we are optimistic about the long-term prospects of our online marketing services. We are committed to strengthening collaboration with clients in the gaming sector, particularly through enhanced synergy with NetEase Group in both traffic side and demand side. Turning to our Smart Devices segment, Net Revenues reached RMB $240.4 million in Q4, marking an 8.1% year-over-year increase, which significantly improved financial health. Our flagship product, the UDOT Dictionary Pen, performed exceptionally well during the November 11th Shopping Festival, maintaining its position as the top seller in its category on both JD.com and Tmall for five consecutive years. the X7 Pro also earned the top spot in single item sales for dictionary pens on both platforms. These successes contributed to an annual 20% year-over-year increase of revenues for the dictionary pen. In addition, we're thrilled to announce that cumulative sales of our dictionary pen have surpassed 10 million units since its market debut. In terms of product, We recently launched the UDAW Dictionary Pen A7 Pro, featuring an instant scan and translation feature. The product offers top-tier performance at an accessible price point. Earlier this week, we also launched the Space One, a brand new dictionary pen, incorporating the DeepSeq reasoning model, delivering in-depth analytical reasoning capabilities and providing clear guidance for complex problem-solving scenarios. Moving forward, we are committed to continuing to pioneer innovations in smart devices, particularly for dictionary PAN, enhancing personalized educational experiences for our users and strengthening our leadership in this product. In 2024, we executed a focused business strategy that combined rapid generative AI implementation with a steadfast drive towards operational profitability. It was a breakthrough year, during which several of our business units, such as Youda Ads, Youda Lingshi, our dictionary pens, and our AI-powered English learning and translation apps, emerged as clear leaders in their respective segments. Looking ahead, 2025 has started with the explosive popularity of DeepSeek, a trend that is reshaping the Chinese tech industry. As we discussed on this call, we anticipated that open source and reasoning models would revolutionize how people learn and market. And that transformation is now underway. Our response has been swift. Over the past few weeks, we have seamlessly integrated DeepSeq into our apps, courses, app platforms, and hardware devices. Yet, this is just the beginning. We believe that large AI models should serve not merely as additional features, but as autonomous agents that drive outcomes. They should be deeply embedded into our learning and work processes to unlock higher productivity. Accordingly, we are launching our AI native strategy, integrating AI more comprehensively across our business lines by, for example, automating our advertising platforms and introducing AI-driven tutoring for our cost customers. We're excited by the rapid maturing of reasoning models and eager to deliver these innovative projects to our customers this year. Another significant milestone for 2024 was achieving four-year operating profitability for the first time. For 2025, given the current economic conditions and our ongoing progress, we are targeting moderate revenue growth alongside fast-paced improvements in our bottom line. With that, I will turn the call over to Supong to provide you with more detailed insights into our financial performance.

Thank you, Dr. Koh. Today, I will be presenting some financial highlights from our post-quarter and the full year of 2024. We encourage you to reach our press release issue earlier today for further details. For the first quarter, total net revenue was RMB $1.3 billion, or US$183.6 million, representing a 9.5% decrease from the same period of 2003. Net revenue from our learning services was RMB $617.7 million, or US$84.6 million, representing a 21.2% decrease from the same period of 2003. The year-over-year decrease was due to our continued strategy focus on more selective customer acquisition approach prioritizing to higher return on investment engagement. We believe, despite the short-term revenue decline, the strategy has been enhanced the overall resilience and operational efficiency of our business. Net revenue from our smart devices were RMB $240.4 million. For US dollar, $32.9 million. 8.1% from the same period of 2003, primarily due to the driven by the continuing increase in sales of use of dictionary pen in 2024. Net revenue from our online marketing services were RMB $481.7 million, U.S. dollar $666 million, representing a modest increase from the same period of 2003. For the first quarter, our total gross profit was RMB $640.8 million, U.S. dollar $87.8 million, representing a 13.3% decrease from the first quarter of 2003. Gross margin for learning services was 60% for the first quarter of 2004, compared with 63.6% for the same period of 2003. Gross margin for smart devices was 43.9% for the first quarter of 2004, compared with 38.3% for the same period of 2003. Gross margin for online marketing services was 34.2% for the first quarter of 2004, compared with 32.7% for the same period of 2023. For the first quarter, we reduced our total operating expense to RMB $556.6 million, or US dollar $76.3 million, compared with RMB $662.5 million for the same period of last year. Looking at our expense in more detail, sales and marketing expense declined to RMB $381.8 million, compared with RMB $441.4 million in the first quarter of 2003. Research and development expense was decreased to RMB $120.7 million, compared with RMB $168.1 million in the first quarter of 2003. Our operating income margin was 6.3% in the first quarter of 2024, compared with 5.2% for the same period of last year. For the first quarter of 2024, our net income attributable to the ordinary shareholders was RMB $83 million, or $11.4 million, compared with RMB $56.5 million for the same period of last year. Non-GAAP net income attributable to the ordinary shareholders for the first quarter was RMB $91.8 million, or $12.6 million, compared with RMB $69.3 million for the same period of last year. Basic and dilute net income per ADS attributable to the ordinary shareholders for the first quarter of 2024 for RMB 0.71 or USD 0.1 and RMB 0.7 or USD 0.1, respectively. Non-GAAP basic and dilute net income per ADS attributable to the ordinary shareholders for the first quarter was RMB 0.78 or USD 0.11 and RMB 0.77 or USD 0.11, respectively. On net cash, provided by operating activity was RMB 158.2 million, or US dollar 21.7 million for the first quarter. Turning to our four-year results, our total revenue for the 2094 increased by 4.4% to RMB 5.6 billion, or US dollar 770.7 million. Net revenue from our loan services for 2094 down by 12.7% year-over-year to RMB 2.7 billion, or U.S. dollar, $376.4 million. Net revenue from our smart devices for 2014 of RMB $903.7 million, U.S. dollar $123.8 million, remaining stable compared to the 2013. Net revenue from our online marketing services for 2014 were up 48.3% year-over-year to RMB $2 billion, or U.S. dollar $270.6 million. Total gross profit for 2014 were RMB 2.7 billion, or US dollar 376.5 million, remaining stable compared to the 2003. Total operating expense for 2004 decreased to the RMB 2.6 billion, or US dollar 356.2 million, compared with RMB 3.2 billion in the 2003. Net income attributable to the ordinary shareholders for 2004 was RMB 82.2 million, or US dollar 11.3 million, and the basic and dilute net income per EDS attributable to the ordinary shareholders for 2014 were RMB 0.7 or USD 0.1. Looking at our balance sheet as of December 31, 2014, our contract liabilities, which mainly consists of the different revenue generated from our lending services, were RMB 961 million or USD 131.7 million. Compared with RMB 1.1 billion as of December 31, 2023, At the end of the period, our cash, cash equivalents and current and non-current restricted cash and short-term investment totaled RMB 662.6 million. For U.S. dollar, 90.8 million. This concludes our prepared remarks. Thank you for your attention. We would now like to open the call to your questions. Operator, please go ahead.

Thank you. We will now begin the question and answer session. To ask a question, you may press star and then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star and then two. The first question we have is from Brian Gong of City. Please go ahead.

Thanks, management, for taking my question, and congrats on decent profitability achieved for this quarter. Just a very quick question. Can management elaborate on the outlook for this year, 2025, like for different business lines and our overall strategies? Thank you.

Thank you, Brian. So our company is focused on two key areas. One is AI-driven education technology. The other is AI-driven online marketing technologies. So I'll talk about our strategy in 2025 along these two lines. And we see significant opportunities in both areas. So one, our strategy is to enhance our offering by leveraging cutting-edge AI, improving our content quality, gaining deeper insights into customer needs, and we try to establish leadership positions in each of our key product segments. So as we discussed earlier, reasoning models have become very important for the education segment and also marketing segments. segment. So we anticipated rapid advancement in this area. And the actual case actually exceeded our expectations. Today not only do we have models that are really good at reasoning, at solving problems, but also they are very affordable. So I think if you look at history, So breakthroughs in infrastructure technologies have often lead to explosive growth in applications. So we believe this year, 2025, and likely next year, will be very important, pivotal for the widespread developing of large language model applications in education and advertising. So that's where we will be focusing on the product and tech side. On the financial side, 2024 was a milestone year for us as we achieved profitability. And looking ahead to 2025, so we plan to maintain a drive towards a modest revenue growth while keeping profitability a key focus for us So particularly in today's challenging economic environment. So we will remain financially disciplined, balancing growth and profitability. So looking at the separate businesses. So for learning services, we remain focused on high demand products like Youda Lingshi. So as we talked about, we think this is the right strategy. This is good for the for our financial health, and this is also good for long-term growth. And for this year, for courses, AI is going to be more important for us compared to past years. Because the technology is finally, we believe it's ready. It's in place to introduce features like AI tutoring as a core element of our course offerings. So that's a major project we're working on right now. So combined with our high quality video learning content and the expert service teams. So we believe AI tutoring will provide an enhanced, much enhanced learning experiences for our customers. Additionally, we're also working on other AI features like AI driven college admission advisor. So we believe that'll be important too. We're also expanding our AI subscription services. which we offer is affordable and interactive learning experiences. So we recently upgraded higher code, so with much better conversation experience, much lower conversation latency. So that's an example of what we will do down the line. So we will enhance a lot of our services and release new subscription services this year. And as regard to smart devices, we see continued opportunities in 2025. Our focus remain on maintaining market leadership with the dictionary pen category. And also, at the same time, we'd like to introduce new category products. So we have a very good product pipeline for 2025. So just two days ago, we launched our first high-end product of this year, the Youdao Space One pen. So this device represents our vision for what a next generation AI tutoring learning device should look like. So it's a very different product as our dictionary pens. So it is a very good example of how we continue to differentiate through this kind of innovation. So especially in terms of enhanced personalized learning experiences for home learners. So finally, but also very importantly, in online marketing services, the key trend that continues to be, we see to be twofold. One important trend is the shift of the multi-trillion yuan ad industry towards performance-based advertising. The second trend is the growing application of AI of large language models in advertising. So we are still a relatively small player in this space, but we see significant growth opportunities in 2025 by leveraging these trends. So we plan to deepen our strategic collaboration with NetEase to integrate more traffic ecosystems and advertiser resources. The partnership which began last year, 2024, currently represents less than 10% of our ad revenue, and we expect this to grow considerably in 2025. So in parallel, we also continue to expand globally with a focus on key opinion leader marketing and performance-based advertising. So moreover, we are actively exploring AI and LLM driven projects that will enhance platform capabilities for our app clients. So our goal is to replicate the step growth we achieved in Q4 last year, Q4 2023. While this kind of step growth is challenging to attain, we are committed to find them and pursue them. So at the same time, we continue to optimize and expand our business on a day-to-day basis. So we think that will ensure more stable and sustainable growth. So as our AI technology matures, we will accumulate more customers, develop more experienced teams, contributing to our ad business growth. Yeah, that's all from me.

Yes, thank you. Thank you, Dr. Tso. And this is Wayne. I'd like to add more color from the financial perspective. There was remarkable financial progress in 2024, and we will continue to monitor the key financial metrics to track our progress in 2025, particularly in probability and cash flow improvement aspects. First, from the probability front, as mentioned by Dr. Zhou, 2024 marks the first year to achieve the scalable profits. Net income attributable to your thousand ordinary shareholders for 2024 was over $80 million compared with the loss of around $550 million in 2023. The significant improvement in our bottom line primarily depth from our focus on strategy project and the streamline of loss-making operating units. We believe AI and LIM-driven technology, as mentioned by Dr. So, such as AI tutoring, will enhance our advantages of our business. It will further drive the improvement in financial performance in 2025. Looking ahead to 2025 with AI technology become more mature and cost-effective. We will further leverage this development and implement new cost optimization measures to enhance business profitability. Second, from the cash flow perspective, we have to massively improve our net cash outflow from substantial improvements from 440 million RMB net outflow in 2023 around 70 million RMB in 2024. Such improvements step from both enhanced profitability and rapid growth of our AI subscriptions. In 2025, we will continue our efforts in revenue expansion and cost control, aiming to achieve historical break-even in annual operating cash flow for further improvements. Regarding revenue growth, As mentioned by Dr. Zhou, we anticipate continued moderate growth considering today's challenging economic environment while keeping profitability a key focus. While we face significant challenges from competitors and business uncertainty, we remain confident in delivering better business and financial performance in 2025. Thanks.

The next question we have is from Brenda Zhao of CICC. Please go ahead.

Good evening, Zhou Zong and Su Zong. Thanks for taking my question and congrats on the improvement in your progress in your AI products both in education and in ad sector. So my question is about the online marketing business because we saw that the Q4 growth of this business is kind of like flattish. What kind of opportunities will arise for this business in 2025? Are we going to expand our, because previously we are mainly in the domestic market, are we going to expand in the overseas market and what's our strategy? Thank you.

Hi, this is Jonas. Thank you for your question. In 2025, UDA's advertising strategy will focus on three interconnected growth drivers. The first, we are intensifying our collaboration with the NetEase Group through both technological integration and ecosystem expansion. By developing UDA's proprietary data analytics and AI algorithms, across NetEase platforms. They are driving a measurable improvement in advertising efficiency, building on our successful partnership with NetEase, cloud music, news, and mailbox mail services. We are now identifying new high-potential traffic channels with the ecosystem to create additional advertiser platforms. Notably, our AD services for IT's group achieved over 200% year-over-year revenue growth in 2024, yet they still account for less than 10% of our total AD revenue, demonstrating substantial update potential. Second, as I mentioned, our global expansion is gaining strong momentum. Last year marked two strategic breakthroughs. becoming a tier-one TikTok partner helped us surpass RMB 100 million in international AD revenue. This is over 100% year-over-year growth. Well, our recent Google partnership certification established a sustainable foundation for cross-border growth. This alliance strategically presents us to capture the emerging opportunities in global digital marketing through 2025 and beyond. Finally, we are revolutionizing our advertising tech stack through AI innovation, following the successful integration of our advertising LRM with deep six capabilities. We are now developing An AI advertising optimizer, this solution automates campaign strategy generation aligned with marketing objectives, enable dynamic budget optimization, and execute real-time bid adjustment. Significantly enhance both provision and operation efficiency in AD delivery. OK. Thank you.

Thank you.

The next question we have is from Thomas Chong of Jefferies. Please go ahead.

Hi, good evening. Thanks, management, for taking my question. My question is about the priority for learning services this year. Thank you.

Thank you, Thomas. This is Supong. I will handle the question first. And I think the last year, we initiated a structured adjustment in our learning services product portfolios. We intensified the focus on the courses with robust demands, especially in the Yu Dao Ling Shi, while facing out non-essential programs at some times. This restructuring remains ongoing, I think, and it's projected to conclude in the second half of this year. Upon completion, revenue from the learning services is back to the civilized in the latter half of this year. I think Yu Dao Ling Shi will serve as the strategic priority for learning services in this year, 2025. We commit to the advance following the key initials to deliver the more personalized and efficient learning experience for our customers. And at the same time, we expect the revenue, whatever the Course readings of the LingXu will keep growing in the 2025 scale. The first we think we will leverage is the advanced capability of the DeepSeq, the large library models. We will comprehensively upgrade the AI services within the Yu Dao LingXu intelligent learning system. Post-upgrade enhancement will include the first is for the more precisely identification of knowledge gaps, optimize the learning class design, enhanced clarifying in QA and explanations, and more comprehensive college application planning solutions. Secondly, we are implementing the data-driven updates to the instructional videos beyond routine updates aligned with the curriculum revisions. Our primary update criteria will derive from the students' exercise accuracy rates within the intelligent learning system. When the average exceeds the threshold, our dedicated advisor will proactively engage the students to collect feedbacks on specific video content, expedite the consolidated feedbacks to content managers and RD teams, facilitate immediate video updates and system redevelopments. And we think that will be the things we did in the 20.5 on the loan services. And we feel confident about the business and the content. And we expect to deliver the high quality product and services to our students. Thank you, Thomas. I hope that answers your questions.

Thank you.

The next question we have is from Bojan of, Huatai Securities. Please go ahead.

Thanks for taking my question. This is Zhang Bo from Huatai. My question is, after the integration of Yodov's last language model produces with Dixit, what positive impact can they expect on the business operation?

Thanks. Yeah, thank you, Zhang Bo, for the question. Yeah, I'll take it. So I think there are three points. So first, building on DeepSeq, particularly DeepSeq R1, the reasoning models, it opens up a lot of exciting opportunities for us. So we're one of the first teams in the education and advertising area to integrate DeepSeq into our projects. including Mr. PAI Tutor, Yodai Dictionary, Yodai Dictionary Pen, China University MOOC, and Yodai Smart Cloud. So we're doing it first. However, what's more powerful is enhancing these models with domain-specific, business-specific knowledge. So one, key technology that you can enhance the base model, the base DeepSeq model is to augment it with retrieval augmented generation, RAC technology. So this integrates the model with knowledge bases and vector databases to combine general capabilities with domain specific expertise. So our team has significant experience with RAC and our Q-anything framework. It is actually one of China's leading RAC platform. So that's a good example. So we've also developed popular RAC applications in education, such as our AI college application assistant last year. So now with DeepSeq, strengthen these RAG applications and making them more effective. So from a competitive standpoint, the deeper integration of strong models into applications is I think it's quite similar to developing apps for mobile platforms like iPhone and Android. So those teams with better app building experiences i think right now we'll have a an edge here so these teams will develop ai applications better just as we have been able to develop mobile applications very well so that's one so second point is uh so agents are a newer very promising application model of large language models. So instead of just answering single questions, so agents solve multi-step tasks. So AI agents have already seen success in areas like programming, and I expect education and advertising to be the next major area where agents will be very successful. So Jinlei just talked about AI ad optimizers. Yeah, these are agent applications that we are already exploring and we already see very good early results for these AI agents. So there are a lot of very highly frequent scenarios where we see that A strong model combined with agent technology can automate tasks with a very high success rate, such as tutoring on specific topics, such as optimizing advertising assets and performing ad attribution analysis. Third, we are enhancing general-purpose large-scale models with smaller, more domain-specific vertical models. So this is different from RAG. So essentially, RAG is you combine a model with knowledge base. So vertical model is you develop new, smaller, and more specialized models. This actually has been our strategy since 2023, and it's proving to be highly effective. So for instance, we recently open sourced the Confucius 01 14B reasoning model I talked about. So this one is optimized to run on a consumer-grade GPU like the 3090 or 4090. So it actually outperforms the distilled version of DeepSeq R1 of the same size, of the same 14B size in math tasks. So So basically we developed a model for mass tasks that's more effective than DeepSeq of the same size. So I think that's very exciting. And what's also exciting is that Confucius 01 was developed by our teams in just a month, just under a month. So that showcases how rapid open source models development has empowered our team and others in the industry to create competitive vertical models. So alongside Confucius 01, we've actually also developed a Confucius translation model with just 10% of the parameters of larger size general models. And we also have Confucius Edge model with fewer than 1 billion parameters that delivers offline translation quality better than many online NMT translation models. So as we continue to understand and anticipate usage scenarios in the coming quarters, we will quickly upgrade these models and develop new vertical models. So keeping R&D and compute cost efficient while delivering valuable results to our users and business. So I hope that answers the question. Thank you.

Thank you.

This concludes our question and answer session. And I would like to turn the conference back over to management for any closing remarks.

Thank you once again for joining us today. If you have any further questions, please feel free to contact us at UDAO directly or reach out to Pearson Financial Communications in China or the US. Have a nice day.

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