Youdao, Inc. Q3 FY2024 earnings call

• The company achieved its first profitable third quarter with income from operations reaching RMB107.3 million, a new quarterly record. On track for full-year operational profitability. - In Learning Services, focused on high-demand services, reduced low ROI customer acquisition, improved customer retention. Youdao Lingshi expanded knowledge video library to nearly 40,000 and question bank to ~100,000. - Online Marketing Services grew due to expansion into new sectors, AI optimization, overseas ad revenue up over 50% y-o-y. - Smart Devices saw revenue growth driven by new product launches like X7 Pro, strong Double 11 performance with dictionary pen securing top sales spots.

For the third quarter, net revenues reached RMB1.57 billion. Learning Services segment: Net revenues were RMB767.9 million, down 19.2% year-over-year. Digital content services (online courses) contributed RMB513.7 million. AI-driven subscription services in Learning Services approached RMB70 million in Q3, representing over 150% year-over-year growth. Online Marketing Services segment: Net revenues were RMB489.4 million, up 45.6% year-over-year. Gross margin was 36.3%, up 4.4 percentage points year-over-year. Smart Devices segment: Net revenues were RMB315.3 million, up 25.2% year-over-year. Gross margin rose to 42.8%, the highest since 2023.

• Expect sustained strong demand for online learning services in the coming years. - AI-driven subscription services in Q4 expected to maintain rapid year-over-year growth. - Online Marketing Services to explore domestic (online entertainment, AI tools, automotive) and international opportunities. - Smart Devices to launch new products in Q4 and beyond, integrating more LLM features.

• Market competition could impact growth. - Macroeconomic factors may affect overseas advertising performance. - Challenges in maintaining high growth rates in certain segments.

Q: Brian Gong asks about strategies and future investment in learning services.

A: Peng Su and Dr. Zhou respond, stating focus on strong demand services, scaling back low ROI customer acquisition, emphasizing Youdao Lingshi as a strategic priority and confident in long-term growth through differentiated products.

Q: Thomas Chong asks about sustainability of smart devices growth.

A: Dr. Zhou responds, citing strategic focus, channel reorganization, successful product launches like X7 Pro, team resilience, and future product pipeline.

Q: Brenda Zhao asks about future growth potential of online marketing.

A: Lei Jin responds, mentioning growth potential in domestic (online entertainment, AI tools, automotive) and international markets, though noting short-term challenges like high base in Q4 last year and e-commerce ad challenges.

Q: Jambua asks about fourth quarter outlook.

A: Wayne Li and Dr. Zhou respond, highlighting continued focus on generative AI integration, confidence in learning services growth, online marketing as cash cow and profit center, and smart devices potential with AI integration and offline LLM translation