Youdao, Inc. Q4 FY2024 earnings call

Management Statement and Operational Highlights

• Learning Services: Focused on high-demand products like Youdao Lingshi, with AI tutoring as a core element of course offerings. Expanding AI subscription services, and upgraded Hi Echo for better conversation experience. Launched AI college application assistant and other AI features.
• Online Marketing Services: Strengthening collaboration with gaming clients, especially NetEase Group. Global expansion with Google partnership and KOL marketing, using evaluation model for KOL video conversion effectiveness. Promoted game Marvel Rivals successfully.
• Smart Devices: Maintaining market leadership in the dictionary pen category, introducing new category products. Launched Youdao SpaceOne with DeepSeek reasoning model for enhanced personalized learning experiences.
• AI Initiatives: Open-sourced Confucius-o1 reasoning model. Integrated DeepSeek into products like Mr. P AI Tutor and Youdao Dictionary. Developed RAG applications and AI agents for ad optimization, such as AI ad optimizers.

Segment Performance

• Learning Services: In Q4, net revenues were RMB617.7 million, a 21.2% year-over-year decline. Digital content services within this segment reached RMB388.8 million in Q4, covering costs and generating profits. Youdao Lingshi saw over 10% year-over-year growth in gross billings in Q4, with retention rates surpassing 70%. STEAM courses franchise programming had over 20% year-on-year growth in gross billings in Q4. AI-driven subscription services had eight consecutive quarters of over 50% year-over-year growth, and full-year 2024 sales were over RMB200 million (+130% year-over-year). Full-year 2024 net revenues from learning services were RMB2.7 billion, a 12.7% year-over-year decline.
• Online Marketing Services: Q4 net revenues were RMB481.7 million, a 1.6% year-over-year increase. Gross margin was 34.2%, up 1.5 percentage points year-over-year. Collaborated with Google for overseas growth and leveraged KOL marketing with an evaluation model for video conversion effectiveness. Promoted game Marvel Rivals, with nearly 200 pieces of KOL content released in the first two weeks post-launch, generating over 80 million impressions.
• Smart Devices: Q4 net revenues were RMB240.4 million, an 8.1% year-over-year increase. The Youdao Dictionary Pen had a 20% year-over-year revenue increase, with cumulative sales surpassing 10 million units. Launched Youdao Dictionary Pen A7 Pro and SpaceOne, with SpaceOne incorporating the DeepSeek reasoning model.

Guidance

• 2025 focus on modest revenue growth while maintaining profitability. Leveraging AI in education and marketing. For Learning Services, enhancing Youdao Lingshi with AI tutoring and expanding AI subscription services. For Smart Devices, introducing new category products. For Online Marketing Services, deepening collaboration with NetEase and expanding globally, including leveraging AI in advertising with optimizer development.

Risks

• Factors beyond the company's control affecting business and financial results, as mentioned in certain company filings with the US Securities and Exchange Commission, including risks related to market conditions, competition, and technological advancements.

Question and Answer

Q: Brian Gong of Citi asks about the outlook for 2025 for different business lines.

A: Feng Zhou responds on AI-driven education and marketing, balanced growth and profitability, strategies for Learning Services (focus on Youdao Lingshi, AI tutoring as core, expanding AI subscription), Smart Devices (maintain market leadership, introduce new products), and Online Marketing Services (deepen collaboration with NetEase, expand globally).

Q: Brenda Zhao of CICC asks about online marketing business opportunities in 2025, including overseas expansion.

A: Lei Jin talks about intensifying collaboration with NetEase Group, global expansion with Google partnership and KOL marketing, and developing AI ad optimizers as agent applications.

Q: Thomas Chong of Jefferies asks about the priority for Learning Services in 2025.

A: Peng Su states that Youdao Lingshi is the strategic priority, leveraging DeepSeek for AI services, upgrading instructional videos based on student feedback, and expecting revenue and gross billings growth.

Q: Bo Zhang of Huatai Securities asks about the positive impact of integrating Youdao's large language model Confucius with DeepSeek.

A: Feng Zhou explains three points: enhancing RAG applications with DeepSeek, developing AI agents for multistep tasks (like AI ad optimizers), and enhancing general-purpose models with domain-specific vertical models, citing Confucius-o1 and RAG framework QAnything.