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Edited Transcript of DAO.N earnings conference call or presentation 21-Nov-19 1:00am GMT

Q3 2019 Youdao Inc Earnings Call

Nov 30, 2019 (Thomson StreetEvents) -- Edited Transcript of Youdao Inc earnings conference call or presentation Thursday, November 21, 2019 at 1:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Feng Zhou

Youdao, Inc. - CEO & Director

* Pei Du

Youdao, Inc. - IR Director

* Peng Su

Youdao, Inc. - VP of Strategies & Capital Markets

* Yongwei Li

Youdao, Inc. - VP of Finance & Senior Financial Controller

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Conference Call Participants

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* Alex Xie

Crédit Suisse AG, Research Division - Analyst

* Mark Li

Citigroup Inc, Research Division - Director

* Sheng Zhong

Morgan Stanley, Research Division - Associate

* Wai Yan Wong

HSBC, Research Division - Head of Internet Research of Asia Pacific & Analyst

* Yue Wu

China International Capital Corporation Limited, Research Division - Analyst

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Presentation

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Operator [1]

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Good day, and welcome to the Youdao 2019 Third Quarter Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Pei Du, Investor Relations Director of Youdao.

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Pei Du, Youdao, Inc. - IR Director [2]

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Thank you, operator. Please note that this conference today will contain forward-looking statements relating to future performance of the company and are intended to qualify for the safe harbor from liabilities as established by the U.S. Private Securities and Litigation Reform Act. Such statements are not guarantees of future performance and are subject to certain risks and uncertainties, assumptions and other factors. Some of these factors are beyond the company's control and could cause actual results to differ materially from those mentioned in today's press release and discussion. A general discussion of the risk factors that affect Youdao's business and financial results is included in certain filings of the company with the Securities and Exchange Commission, including its prospectus and associated amendment on Form 424(b) filed in conjunction with our recent IPO. The company doesn't 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 comparisons purposes only. For a definition of non-GAAP financial measures and a reconciliation of GAAP to non-GAAP financial results, please see the 2019 third quarter financial results news release issued earlier today.

As a reminder, this conference is being recorded. In addition, a webcast replay of this conference call will be available on the Youdao's corporate website at ir.youdao.com.

Joining us today on the call from Youdao senior management is Dr. Feng Zhou, Chief Executive Officer; Mr. Peng Su, our VP of Capital Markets; and Mr. Yongwei Li, our VP of Finance.

I will now turn the call over to Dr. Zhou to review some of our recent highlights and strategic direction.

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Feng Zhou, Youdao, Inc. - CEO & Director [3]

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Thank you, Du Pei, and thank you, everyone, for participating in today's call. Before we begin, I would like to remind everyone that all numbers are based on renminbi.

We're delighted to speak with you today on our very first quarterly conference call following the completion of our IPO at the end of October. So now we're a proud member of the New York Stock Exchange, gaining us a coveted spot among the U.S. capital markets.

The education market in China is growing fast with significant opportunities for growth and changes. We have developed a rich and growing portfolio of online learning products and services to take advantage of such opportunities. Armed with these tools, we strive to pave the way for the future of intelligent learning by offering more intimate yet more efficient online learning experience. We're already on the path, and we continue to grow.

In the third quarter, I'm pleased to report that we accomplished a number of operational and financial achievements. Each of our major business lines in online courses, intelligent learning devices and online marketing services grew in the third quarter, increasing our total net revenue by 98% year-over-year, reaching RMB 346 million. We also more than doubled our gross billings of online courses over our gross profit and deferred revenues as we continue to enhance our products, grow our content offering, scale our business, attract students, improve our conversion rates and expand our marketing services.

I would now like to walk you through some details on our progress with online courses -- online knowledge tools, intelligent learning devices and finally, our online marketing services. First and foremost, let's take a look at our highly scalable online courses.

Gross billings and revenue from online courses both increased significantly in the third quarter from the same period last year with billings reaching RMB 291 million, up by 140% year-over-year, propelled by high-quality products and content. Let's break that down even further by reviewing some of our third quarter activities and metrics within our K-12, early learning STEAM courses and our adult education offerings.

Our K-12 business expanded rapidly with gross billings increased by 184% year-over-year. Revenue from our K-12 offerings grew by 164% year-over-year, accounting for 50% of our total online course offerings. Our junior high school courses segment growth is also accelerating. Our summer vacation marketing campaign primarily focused on junior high school segment. Our paid student enrollments for this group grew by 495% in Q3 compared with the same period last year.

On top of enhancing service systems and operating procedures, we launched more creative learning features. For example, with our junior high school chemistry and physics courses, we adopted online interactive experience and HTML5 courseware to help students comprehend difficult concepts more easily. Furthermore, the content for our junior high school courses are regularly updated to adapt to regional textbook conditions.

Our high school courses also grew rapidly with paid student enrollments increasing by 57% year-over-year. In Q3, high school mathematics and science courses gradually adopted our multi-tiered course system, in which course materials were organized [by the growth] of learning pace and different levels of difficulty, enabling students to learn more efficiently.

Moreover, during the summer vacation, we finished developing transitional course offerings to help bridge the gap between the junior high school and high school curriculum with a focus on transitional course products, guidance process and tutoring services. This offering is designed to ensure a smoother transition for our students. As a result, 45% of our ninth grade users enrolled in our high school courses in Q3 2019.

Turning to our early learner group. Building out our STEAM offerings has been one of our main areas of focus this year. Our STEAM product includes Youdao Math, Youdao Fun Reading, Youdao kids' English and Youdao kids' coding courses. We have developed the STEAM products for younger age groups by successfully lowering the entrance user age to 4 and above. In the kids' coding courses, we integrated our hardware programming courses based on [Arduino] technology, optimizing the learning and hands-on experience, which allows students to understand logic in computer programming by commanding the objects. Revenue attributable to our kids' coding learners increased by 127% quarter-over-quarter. Our emphasis on content quality led to accelerated growth with revenue contribution from our STEAM segment increased by 172% quarter-over-quarter. In the future, we will launch more STEAM learning content.

Now let's talk about our adult courses. As entrance courses, the CET-4 and CET-6 courses have directed traffic to the rest of our adult learning courses. In Q3, we continued to add interactive features to increase the level of engagement of our practical English courses. Gross billings for our adult practical English courses increased by 59% year-over-year.

With that, I would like to wrap up the online courses part and turn the attention to our intelligent learning devices, which is increasingly gaining popularity. In the third quarter, revenues from our intelligent learning devices increased by 707% year-over-year. We released the second-generation Dictionary Pen in August. Within 2 months of its release, the second-generation Dictionary Pen became the best-selling product on JD.com under the digital dictionary category, with a positive customer review of over 99%. In the meantime, we continue to expand sales channels for our intelligent learning devices.

In addition to our online courses and intelligent learning devices, we also want to discuss our online knowledge tools, which attract our massive user base. In Q3, we introduced a number of enhancements to Youdao Dictionary and Youdao Translation. For our translation app, we released the new features, including document translation, web page translation and full-screen AR translation. With our dictionary app, we strengthened its PDF file processing capabilities and launched a new audio feature to help user practice listening comprehension for IELTS and TOEFL tests. This feature can also help drive traffic to our Youdao Premium Courses.

In overseas markets, U-Dictionary ranks first among education apps in countries such as India, Indonesia, Egypt and Mexico. Its monthly active user reached 16 million by the end of September, an increase of 82% year-over-year. In Q3, we wrote out a feature called magic translate for U-Dictionary providing system-wide interlingual translation for Android phone users. Users frequently use this feature for live text chatting or other online social activities.

In terms of organic traffic conversion, Youdao Dictionary continued to have various user profile labels, enabling us to offer users more personalized course content recommendations. Our dictionary apps also incorporate new promotional banners and content to funnel organic traffic to our online courses. As we continue to optimize these features, we expect to see more students and more efficient conversion to our online courses over time.

Now let's turn to our online marketing services. Despite continued weakness in the overall advertising segment -- sector in China, Youdao continued to focus on education, entertainment, e-commerce and several other verticals. In the third quarter of 2019, revenue from our online marketing services reached RMB 121 million, increasing by 49% compared to the same period of last year.

From a macro perspective, the demand for online education in China is growing rapidly. The market is large and there is a clear change from off-line to online learning. Our robust suite of online learning courses and tools places us in ideal position to capture additional market share and further our leadership position in this field. The combination of our online knowledge tools, online courses and intelligent learning devices supports an integrated online learning experience. It is more personalized and efficient without compromising on quality or the intimacy achieved in off-line setting.

We are passionate about what we are building today, and we will keep building. With our sights set on the long term, we are dedicated to cultivate superior product quality, exceptional content and leading technology. We expect this strategy to drive our future growth and propel value creation for all our stakeholders, our company, our students and our partners as well as the newest members of our constituency, our shareholders.

With that overview, I would like to turn the call over to Su Peng to review our financial performance. We will then open the call up for questions. Peng?

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Peng Su, Youdao, Inc. - VP of Strategies & Capital Markets [4]

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Thank you, Dr. Zhou, and hello, everyone. Today, I will be presenting some financial highlights from our third quarter. We encourage you to read through our press release issued earlier today for further detail.

Our total net revenue for third quarter of 2019 was RMB 345.9 million or USD 48.4 million. This represents a 98.4% increase from RMB 174.4 million in the third quarter of 2018. Our net revenue are comprised of the 2 segments, learning services and products, and our online marketing services. Net revenue from our learning services and products were RMB 225.2 million or USD 31.5 million for the third quarter of 2019. This is up by 141.6% from RMB 93.2 million for the third quarter of 2018. We attribute this growth to the strong growth in the K-12 paid student enrollments and the increase of ASPs.

Net revenue from the online marketing services were RMB 120.8 million or USD 16.9 million, a 48.8% increase from the same period in 2018. The increase was primarily attributable to increased distribution of advertisement through third parties' Internet properties.

Total gross profit for the third quarter of 2019 was RMB 89.2 million or USD 12.5 million compared with RMB 40.6 million for the third quarter of 2018. Gross margin for the learning services and products improved to 27.5% for the third quarter of 2019 from 9.2% for the third quarter of 2018. The large margin growth was primarily attributable to effects of the economies of scale, along with the expansion of the business and the faculty compensation structure optimization.

Gross margin for online marketing services were 22.6% for the third quarter of 2019 compared with 39.5% for the third quarter of 2018. The decrease was mainly the result of more revenue generated from advertisements through the third parties' Internet properties and the international markets, which carry lower gross margin.

We are still in the early phase of cultivating our online education business. Over time, we expect to further grow our paid student enrollments and realize more economies of scale, thereby continuously improving our market profile.

Total operating expense was RMB 324 million or USD 45.3 million compared with RMB 126.2 million for the same period of last year. Our sights are set on increasing the market share, and over the summer, we made a key investment in student acquisition, which is reflected in the growth of our Youdao Premium Courses and overall top line growth. With that in mind, sales and marketing expense was RMB 231 million or 66.8% of net revenues compared with 37.3% of net revenue in the third quarter of 2018.

Research and development expense were RMB 74.9 million, an increase of 42.1% compared with the third quarter of 2018 or 21.6% of total revenues compared with 30.2% in the third quarter of 2018.

Our operating loss target was down to the 67.9% in the third quarter of 2018 -- 2019 from the 49.1% for the same period last year.

Net loss attributable to ordinary shareholders for third quarter of 2019 was RMB 242.2 million or USD 33.9 million. Non-GAAP net loss attributable to ordinary shareholders was RMB 238.8 million or USD 33.4 million.

Basic and diluted net loss per ADS was RMB 2.63 or USD 0.37. Non-GAAP basic and diluted net loss per ADS was RMB 2.6 or USD 0.36. As I mentioned, we see our costs in this period as necessary to meet our long-term objective of sustainable growth. We will continue to prudently manage our costs and strike a balance between top line growth and expense.

Looking at our balance sheet. As of September 30, 2019, our contract liability, which mainly consists of deferred revenue, was RMB 343.6 million or USD 48.1 million, an increase of 93.5% from December 31, 2018. At the end of the period, our cash, cash equivalents, time deposits and short-term investments totaled RMB 160.3 million or USD 22.4 million, and our net cash used in operating activities was RMB 142.1 million or USD 19.9 million.

This concludes our prepared remarks. Thank you for your attention. We would like to open the call for your questions now. Operator, please go ahead.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question will come from Sheng Zhong of Morgan Stanley.

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Sheng Zhong, Morgan Stanley, Research Division - Associate [2]

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I have 2 questions here. One is can you give us some guidance about the next quarter and the next year's outlook on both revenue and margin? And secondly is (inaudible) because we have a lot of good learning tools and we can convert the users on the learning tools, so with the K-12 and adult paying users from internal and external currency. And can you share with us what's the historical trend and then what's your outlook for the future? And do you prepare to increase the percentage from internal -- the conversion rate from internal learning tool?

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Yongwei Li, Youdao, Inc. - VP of Finance & Senior Financial Controller [3]

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Thank you for your question. Similar with NetEase practice, we do not give any quantitative guidance as of this time, although we expect we need to -- we will achieve operating improvements substantial over time with more economies of scale and more operating efficiency. Thank you.

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Peng Su, Youdao, Inc. - VP of Strategies & Capital Markets [4]

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Yes. And for the -- thank you, Sheng. And for your second question about the conversion ratio from our internal and external traffic, yes, you can see our press release since the -- since we launched the last summer campaign in the quarter -- in the third quarter. Our paid student enrollments coming from the external sources has also increased substantially, resulting in a low percentage of our organic traffic in terms of paid students. However, we expect the percentage of paid student coming from our organic traffic back to our average starting in the quarter -- in the first quarters.

We are continuously driving the monetization of our MAUs. For instance in the Q3, we carry out a pilot program on the adult practical English to increase the conversion rate of our own traffic. We have shortened our conversion costs from our dictionary app to our premium courses, achieved over 200% increase in the conversions. So in looking forward content wise, we are attending more audio content for the K-12, China English test to Level 1, Level 6 and graduate entrance English exam preparation in our dictionary app. Similarly, AR mode objects such as animals, plants, cars and the universe will be added to our kids' dictionary. We expect that this additional content to organically link our knowledge tools app with our online courses.

From the product line, we are working on adding more granularly identity tags on our users so that we can offer courses according to their needs. We are also adding more features to let more users study more and know more about our premium courses. We will keep you updated on the program. I hope this answers your question.

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Feng Zhou, Youdao, Inc. - CEO & Director [5]

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This is Zhou Feng. So let me add a few points. So first, the learning tools are a very important part of our business. They contribute the largest user base for us. So we'll keep investing in this area. So for Q3, Youdao Dictionary monthly active user grew by about 12% over last year, so -- and the total monthly active user of all our apps grew by about 13%. So that's reaching 108 million monthly active user. So we'll keep investing in this area then. And we think that's -- this -- the user base will continue to grow.

And on the other hand, so the focus for investing in learning tools will more and more be on K-12, targeting K-12 users. So we keep adding new features to our kids' dictionary product, and we will have more information to report in future calls.

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Operator [6]

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Our next question comes from Mark Li of Citi.

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Mark Li, Citigroup Inc, Research Division - Director [7]

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So I want to ask for -- I think you mentioned about more efficient student acquisition and conversion rate will improve the bottom line in the future. Could you add a bit more color such -- on this front? And how is the color for the summer promotion? And is there any strategy you can share for the upcoming -- such as the winter promotion and going forward?

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Peng Su, Youdao, Inc. - VP of Strategies & Capital Markets [8]

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Yes. Thank you, Mark. This is Su Peng. And in the -- for the -- for our summer, so something -- some information we can share with -- for summer promotion efforts and we can discuss a little about the winter promotion issues. In the quarter 3, at that front, advertisement target in summer and the summer are also in process. We also initiate the campaign for the winter, fall in the mid- to late September. Our 3 -- third quarter's marketing campaign mainly targeted K-12 and the STEAM courses. For the third quarter, we had 237,100 paying student enrollment in our Youdao Premium Courses, including the 92,700 paid student enrollments in our K-12 business.

Product quality is our core values. Our winter season strategy is to strengthen our top-ranking courses and add complementary courses from other disciplines and subject matters. We plan to introduce the enhanced smart pen experience and more AI-driven function as well. We have a prepared marketing budget but remain -- we remain flexible and will deploy advertisements upon assessing the market conditions.

In fourth quarter, we will allocate our advertisement budgets to our winter courses and acquire through investment in preparation courses, under the premise that, that product quality is ensured, that we are paying close attention to our unit economics, including monetize operating metrics such as the course retention rates, cross-subject purchase and the users' referral rates. Thank you, Mark.

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Feng Zhou, Youdao, Inc. - CEO & Director [9]

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Yes. This is Zhou Feng. Yes, let me add 2 points. First is, so high growth in the junior high school segment is, I would think, the most important outcome of the summer campaign and also actually for the first 3 quarters of this year. So this is a key area of investment for us. So high -- junior high school is growing very rapidly, and high school is also growing quickly, but junior high school is faster. And if you look at the business, junior high school users tend to stick with the service for longer. They renew for a longer time, so we think it is the right choice to focus on junior high school for this year.

And the second point is remember that significant portion of our traffic comes from our own assets, so this gives us lower customer acquisition cost and this also gives us better flexibility in terms of reacting to kind of market dynamics of acquiring users. And when we combine that with external marketing expense, we can expand our business efficiently. I hope that answers your question.

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Operator [10]

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Our next question comes from Alex Xie of Crédit Suisse.

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Alex Xie, Crédit Suisse AG, Research Division - Analyst [11]

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So my first question is about our intelligent devices segment. Would you please share more details about our latest development and particularly about our new generation of Dictionary Pen? And my second question is about our mix of paid course enrollments in terms of high school, junior high and primary school in Q3. Management, I think, shared very encouraging progress in both high school and junior high. What will be our strategy for primary school in the future?

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Feng Zhou, Youdao, Inc. - CEO & Director [12]

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Yes. First, regarding the hardware, you're right that -- so we think this is a very, very promising area. So we think smart learning hardware is a great business. So if you look at it, Chinese parents, they want to invest in their kids' education and they can do it in several ways. They can buy courses for their kids and also they can buy books by content for their kids. And the other way -- another way is for them to buy learning hardware for their kids. So we have all the expertise to do it. We have the understanding of users. We have the design expertise. We have content, and we also have AI technology. And also, we -- finally, we have the user base to sell these devices to.

So we actually started this business more than 2 years ago with the Pocket Translator. So in 2017, it's a popular product for us. And this year, in 2019, the Dictionary Pen, the second-generation Dictionary Pen is a winner at a larger scale than that, than the Pocket Translator. Now that we have very good products in our hands, the immediate task is to further expand the sales channels. So we're looking to expand these channels and sell more of these devices, and it's promising. So that's the first point.

Another point is when these hardware devices are sold at larger scale, this also allows us to sell more of our services, including courses on top of these devices. So that's a virtuous circle. You sell more hardware devices, you get revenue profit. And you can also sell services on top of that. So this is a very interesting space, and we will keep working on it.

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Peng Su, Youdao, Inc. - VP of Strategies & Capital Markets [13]

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Yes. Thank you, Alex, and for your second question -- this is Su Peng. And for the extracurricular or the simple courses, primary school segment is the current offer. This includes our Youdao Math, Youdao Reading, Youdao Speaking, Youdao Fun Reading, and the kids' coding program. Early STEAM online learning holds a lot of potential with the help of a lot of interactive multimedia courseware. For instance kids' coding courses, which we launched in December 2018, quickly become a rising star. In third quarter, we add hardware content so that students can make and control the real object by writing codes. This makes the coding more intuitive and fun for the kids.

Another example is our Youdao Math, a series of interactive courses totaling 5 hours were created and used to help kids coming out kindergarten to accommodate to primary school courses. We also add more in-house courseware so that kids can learn with contact by touching the real object.

Moreover, we also provide -- prepare free books for parents to help them to guide their kids. The effort paid off. Our revenue of the Youdao kids' coding and the Math course increased 126.5% and 417.7%, respectively, in the third quarter over second quarter. We are seeing the excellent promise with the revenue from the same courses growing by 172% quarter-over-quarter in the third quarter. Year-over-year, it's not available as we start off to offer them last year. I hope this answers your question.

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Operator [14]

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Our next question comes from Natalie Wu of CICC.

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Yue Wu, China International Capital Corporation Limited, Research Division - Analyst [15]

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I have 2 questions here. Firstly, can you give us some color on the CC for a typical [order of] semester book price K-12 enrollments acquired from summer promotion, taking into all consideration of [broadband] acquisition costs and conversion rate? And how do you assess related LTV? It would be great if management can help us work through the math. And also, what's the outlook for the longer-term margin profile for our online K-12 business and adult courses separately? That's my first question.

And secondly, lately, actually we see some existing large players planning to tap into the staff teacher field for a certain business. So just wondering, should we be concerned about the related impact? And will that create some short-term turbulences?

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Peng Su, Youdao, Inc. - VP of Strategies & Capital Markets [16]

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Well, thank you, Natalie. So for the first question, yes, for the customer acquisition costs, I think, well, because we can now -- by now, we think we can now deliver very clear numbers about customer acquisition costs. It is really affected by a lot of factors such as the seasonalities, target student segment and so on. Internally, we also measure the customer acquisition costs in conjunction with other operational data such as the retention rate, cross-subject enrollment and the user's referral. We believe our acquisition efficiency keep improving, and we are confident in the ability to make continuous programs in the future.

And we -- I think I would like to remind everyone that we have over 1 billion -- over 100 million MAU for our online tools segment such as the Youdao Dictionary and the Youdao Translation and which can be related -- relatively easy to convert to online education users. In the meantime, our external acquisition efficiency is pretty competitive. Our organic traffic, combined with our acquisition efficiency, give us the flexibility in different competitive dynamics.

We emphasize the cost effectiveness and the sustainable growth, and that we closely monitor our unit economics. We believe, in the short term, we plan to continue to invest more in sales and marketing to strategically acquire more paid student enrollments and gain more market share. With our premium products and content, our students have high retention. That's why we treat [mattered] and sustainable customer more as investment than as cost.

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Yongwei Li, Youdao, Inc. - VP of Finance & Senior Financial Controller [17]

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In terms of margin expansion, we can benefit from the good performance on top line for our online courses in third quarter this year. The revenue from the online content service was over RMB 108 million achieved over 100 -- year-over-year increase, resulting in 27% gross margin versus 7.6 percentage for the same period of last year. We believe more margin improvement over time with more economies of scale and improved operating efficiency. Wish my answer addressed your margin question.

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Feng Zhou, Youdao, Inc. - CEO & Director [18]

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Yes. Natalie, so the second question is regarding competition from larger companies. Is that right?

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Yue Wu, China International Capital Corporation Limited, Research Division - Analyst [19]

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Yes.

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Feng Zhou, Youdao, Inc. - CEO & Director [20]

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Yes. Yes, so we take all our competitors very seriously. So if you tell me which companies those are, and I will really look very carefully at their products. So that's one. So we think the online education is not a winner-take-all business. So that's basically fundamentally the way we look at competition in this space. It is a content and technology-powered business. So there is no very obvious network effect in this market. So basically, we think there could be a number of leading players in this area, not 1, not 2 but a number of them. So we will shoot for either one of the leading ones, if not the first one, the largest one.

So another way to look at it is, also, when more companies come to this area, so it raises awareness for users. This is also how we look at the summer campaigns. We think it's a good thing. It raises customers' awareness of these products and raises penetration of these products over the summer very quickly. So that's a good thing for the whole industry.

And the focus for us will remain for product leadership and also healthiness in the unit economics. So we will be focusing on the customer acquisition costs, lifetime values of our products. And also, because we've been doing kind of technology-enabled learning products for over 10 years and we've been doing courses for close to 5 years now, so we think the knowhow we've accumulated in this area will allow us to compete effectively in this area. So it's -- we're still very -- we're very bullish about the market. Yes.

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Operator [21]

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(Operator Instructions) And our next question will come from Binnie Wong of HSBC.

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Wai Yan Wong, HSBC, Research Division - Head of Internet Research of Asia Pacific & Analyst [22]

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Two questions here. One is that in terms of like if you look at the conversions, right, of users, I think management keeps on emphasizing that the content and technologies are key differentiation. So can you just give a little bit more color, besides the hardware device we're aware of, anything that in terms of content and technology down the road we think that we will continue to differentiate and try to gain market share here?

And then second question is a follow-up question on previous questions as to the lifetime value of users. So if you look at what are now -- in terms of how many -- like number of courses, right, users would have to sign up in order to basically cover the spending maybe in terms of the marketing user acquisition costs, like on a per user basis, right? If you look at marketing acquisition cost per user and then looking at how much we -- revenue we gained, so this is a follow-up on the earlier question.

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Feng Zhou, Youdao, Inc. - CEO & Director [23]

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Sorry, the first question about conversion from the learning tools or conversion from hardware products, I didn't get that.

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Wai Yan Wong, HSBC, Research Division - Head of Internet Research of Asia Pacific & Analyst [24]

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Sorry. Yes, sorry, it's the conversions of the learning tools. Just how content and technology strategy would work well to differentiate from the market and to gain market share. So just a long-term strategy question.

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Feng Zhou, Youdao, Inc. - CEO & Director [25]

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Sure, yes. So we've been doing the user conversion from learning tools to online courses for a couple of years now. So the team has a lot of experience here. And also, so we do it in many different ways. One of the common way is for users -- if you go to our dictionary app, you will see listings of our free trial courses on the front page of the dictionary app. So we've built a effective channel in converting these users.

In Q3, one thing we added, in particular, is that we enriched the user labeling system of our dictionary. So if a user comes to install the dictionary the first time, we will ask them, so are you a student, which grade are you on. And for this quarter, we added more fun grade labels to these questions, so we get more detailed data. And the results have been very encouraging. It's -- it increases the enrollments of these free trials and also increases the conversion rate for those users. Yes. So I hope that answers your question.

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Peng Su, Youdao, Inc. - VP of Strategies & Capital Markets [26]

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And Binnie, this is...

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Wai Yan Wong, HSBC, Research Division - Head of Internet Research of Asia Pacific & Analyst [27]

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Yes. Certainly, it did.

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Peng Su, Youdao, Inc. - VP of Strategies & Capital Markets [28]

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Yes. For your second question, yes, definitely, you mentioned about the LTV historically. You have mentioned also -- asked about how the LTV can cover the customer acquisition costs through the marketing. And that's what we just -- that's just mentioned by Dr. Zhou in previous question, where we focus on the healthy growth. And so definitely, we do think that we are ready for the marketing and -- at any time to acquire the customer or the student through the [summer] marketing campaigns. But definitely, we will remain flexible and observe the market dynamics. And it remains -- that's because -- to follow your last questions, we do have the external and internal traffic to cover for our [use]. And also we are familiar -- education is really a product and content-driven business instead of marketing.

So we are -- we truly believe we'll be able to build up the high-quality content and build up a high-quality product. That will be the long-term value to us as well as for our customers. That's where we'll be dedicating -- that's why we've been dedicated in the (inaudible) the content and focus on technology combined with our technology services to provide more premium services for our customers. Yes, I hope that answers your questions.

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Operator [29]

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

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Pei Du, Youdao, Inc. - IR Director [30]

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Thank you, once again, for joining us today. If you have any further questions, please feel free to contact us at Youdao directly or by reaching out to TPG Investor Relations in China or the U.S. Have a good day.

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Operator [31]

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The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.