Youdao, Inc. (DAO) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Youdao Summer Business Update Conference Call. [Operator Instructions] And just please be advised that today's conference is being recorded. At this time, I will now hand the conference over to Pei Du, Investor Relations Director of Youdao. Thank you, and please go ahead.

Thank you, presenter. Thanks, everyone, for joining us for the first summer campaign update conference call. Joining us today from Youdao's senior management team is our VP of Operations, Lei Jin; VP of Strategy and Capital Markets, Peng Su; and our VP of Finance, Wayne Li. Before we proceed, please note that this call may contain forward-looking statements made pursuant to the safe harbor provisions for the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on management’s current expectations and observations that involve risks and uncertainties, and other factors that are not under the company’s control which may cause actual results, performance or achievements of the company maybe materially different from the results, performance or expectations implied by these forward-looking statements. All forward-looking statements are expressly qualified in their entirety by the cautionary statements, risk factors, and details of the company’s filings with the SEC. The company does not assume any obligation to revise or update any forward-looking statements as a result of new information, future events, changes in market conditions, or otherwise, except as required by law. With that, I'm pleased to return over the call to Peng Su.

Hello, everyone. We currently do plan to hold this routinely at the end of each summer season. We realize this comes on the heels of our Q2 call; however, as you may know, summer is a popular season for Chinese students to enroll in after-school tutoring courses for the coming academic year. With that in mind, we believe it will be helpful to provide you with an update at the end of the summer break to discuss our summer initiatives and performance with more transparency. As discussed during the Q2 earnings call, we saw attractive marketing window this summer, boosted by the increasing penetration of the online education in China. While this has tapered off some in second quarter, we are still seeing the strong momentum and heightened interest in online education during the summer. With our effective investment in sales and marketing, content and faculty, the paid student enrollment for the K-12 courses of the Youdao Premium Courses amounted to over 456,000 in the 2-months period of July and August 2020, representing over 500% increase compared to the corresponding period of 2019. As we continue to drive our paid student enrollments, we have also been substantially strengthening our core capability and competitive edge. Let me walk you through a few of our key summer initiatives and their results: First, we have been focused on building our Class-A course subjects and training our new faculty members, with a view to further expanding our course offering and enhancing our teaching quality. Second, we have received very positive feedback from students and their parents for the interactive features we used to enhance the content of the certain courses. We are making further investments in developing our star-instructor interactive course formats and tools, which we believe will improve our students' user experience, learning efficiency and learning results. Third, to prepare for the rapid growth of student enrollments, we have recently hired a number of new tutors, increasing our total number of tutors to 2,699 as of the June 30, 2020, more than 3x of the total numbers as of the end of March. With continuous investments in our faculty, our students will benefit from a more customized and interactive learning experience across multiple course subjects. In order to achieve the rapid and sustainable growth in the long term, we have significantly increased our sales and marketing budget for the summer season and into the third quarter of the 2020 as planned, which increase was generally in line with the substantial increase in paid student enrollments of the K-12 courses of Youdao Premium Courses for the summer of 2020. While such investments may widen net loss for this ongoing quarter, we expect to benefit from these measures and achieve sustainable and healthy growth in the long run. With that overview, we would now like to open the call to your questions. Operator, please go ahead.

[Operator Instructions] Your first question comes from the line of Brian Gong from Citi.

Congratulations on the solid enrollment growth. I just have one question. Can management elaborate more on the marketing cost during the summer session and the outlook in the second half?

Thank you, Brian. And as we discussed, we have significantly stepped up our investment in sales and marketing in this attractive summer window as planned, which were largely in line with the rapid growth of our paid student enrollments in this period. In light of the significant marketing opportunities, we will continue to invest for the rest of this year to drive long-term growth. As we are still in the interim of the third quarter, we believe it is prudent not to provide an estimate of the total amount of the sales and marketing expense for this ongoing quarter and beyond, which are subject to various factors and market conditions. We expect such an effort will help us to get more benefit in the K-12 sector and achieve sustainable growth in the long term. I hope that answered your question. Thank you, Brian.

Your next question comes from the line of Alex Xie from Crédit Suisse.

I think the enrollment growth of 500% is indeed emphatic. However, I think since last quarter, I also noticed that your reported K-12 enrollments seem to be a bit inflated by the cost leads. That's the reason why we see 30% ASP drop in the last quarter. So would you please share the update of your gross -- K-12 gross billings? Is this as high as 500% growth?

This is Lei Jin. Yes, the K-12, the price in August slightly increased compared to the same period of the last year. However, such impact of price are very -- marked primarily in doing high school and high school courses. We currently cannot estimate the impact of the cost mix with our total gross billing for the third and fourth quarters for this year. As planned, we will continue to focus on drive paid student enrollments and optimize price mix to drive healthy growth of the gross billing. Thank you, Alex.