On November 16th, educational technology company NetEase Youdao (NYSE: DAO) released its unaudited financial report for the third quarter of 2023. According to the financial report, NetEase Youdao's net income in the third quarter reached 1.54 billion yuan, a historic high, with a year-on-year increase of 9.7%.
Since the third quarter, benefiting from the continuous upgrade of AI technology to the product system, NetEase Youdao has achieved significant improvements in sales and user reputation across multiple businesses, and has driven improvements in multiple financial indicators.
The financial report shows that NetEase Youdao's gross profit margin rose to 55.9% in the third quarter, reaching a new high in the past two years. The operating loss was 57.7 million yuan, a year-on-year decrease of 73.7%, and the net loss attributable to shareholders was 103 million yuan, a year-on-year decrease of 44%.
In July of this year, NetEase Youdao released the first education model in China, "Ziyue", and launched six application results. Recently, 'Confucius' became one of the first batch of educational models to be registered. The Confucius Education Model and its application products are officially open to the public.
AI continues to drive the development of our learning services, intelligent hardware, and online marketing services, improving product quality and user satisfaction. In the early stages of the implementation of the 'Ziyue' education model, it has also received positive feedback from users, "said Zhou Feng, CEO of NetEase Youdao.
Accelerate the implementation of large models to drive diversified business growth
With the support of AI technology, NetEase Youdao has received positive feedback from the market for multiple businesses.
The virtual human oral private education Hi Echo was launched on the mobile app in October this year, and the number of users has exceeded 100000, all of which are obtained through natural channels. In addition, the upgrade of AIBox and the launch of AI writing function have driven a year-on-year increase of over 160% in Q3 membership fees for Youdao Dictionary and Youdao Translation.
Hi Echo is a virtual human oral private education based on the Ziyue Big Model independently developed by Youdao, virtual human driving technology developed by NetEase, and Youdao TTS technology.
The biggest challenge of learning a foreign language comes from the lack of an environment in which learners can immerse themselves and gradually master language skills. The concept of Hi Echo is that through big models, we can create this language environment in a high-quality and efficient manner, "said Zhou Feng, CEO of NetEase Youdao, at the financial report meeting on the evening of November 16th
Zhou Feng introduced that the distribution channels of the product will be expanded, and the next major version is planned to be released by the end of this year, and is currently progressing according to the plan.
Users have always hoped for more freedom and fun, while also seeking higher quality conversations and richer content. Our upgraded version will bring more surprises to users, "he said.
In terms of learning services, NetEase Youdao launched the AI video question pushing function in the third quarter. After students watch the knowledge point explanation video, the system will push corresponding questions to test the learning effect. During the reporting period, students completed over 7.6 million questions.
In addition, NetEase Youdao has also launched a creative guidance service, which utilizes AI correction technology to shorten the time for precise approval and modification by 50%.
Stable growth and profitability of learning services business
NetEase Youdao's main business is divided into learning services, intelligent hardware, and online marketing services.
In the third quarter, the net income of learning services was 951 million yuan, a year-on-year increase of 7%, maintaining a steady growth trend.
Among them, the sales revenue of digital content services exceeded 400 million yuan, and the gross profit margin reached a historic high. At present, the net income of learning services can already cover costs and operating expenses.
NetEase Youdao provides different types and brands of learning services, including humanities and aesthetic education literacy courses such as "Youdao Bowen", chess courses such as "Youdao Zongheng", and youth programming.
It is reported that in the third quarter, the sales of programming courses increased by over 30% year-on-year, especially with the upgrade of the self-developed CSP scoring system, which led to a year-on-year increase of over 100% in the number of visitors to the scoring system on the day of the competition.
Zhou Feng introduced, "The current learning service environment is different from the past three years, and students have more flexible learning time. Our digital service content is transitioning from traditional courses to new forms. We are deploying big model technology as soon as possible and have seen positive feedback from students
In the coming quarters, we can provide students with more interactive and diverse courses, "said Zhou Feng.
In the third quarter, NetEase Youdao's learning service business had a gross profit margin of 67.8% and achieved profitability.
Zhou Feng introduced that in recent years, more attention has been paid to the health status of the business rather than its scale. Despite still facing fierce competition from peers and the challenge of uncertainty in the business environment of learning services. But there is a great opportunity to continue reducing costs and improving efficiency through artificial intelligence technology.
It is understood that NetEase Youdao's online marketing service has achieved strong growth for four consecutive quarters, with a year-on-year growth rate of over 50%. Its net income reached 340 million yuan, a historic high, with a year-on-year increase of 113.5%.
The growth is mainly attributed to the advantages of AI technology and the accumulation of industry data, which has enabled NetEase Youdao to achieve precise crowd targeting and real-time traffic screening, thereby promoting the improvement of conversion efficiency, user satisfaction, and net income.
It is reported that the demand for advertisers in the fields of entertainment and games has increased significantly, playing an important role in the growth of this business. The net advertising revenue of the cultural and entertainment industry in the third quarter increased by over 150% year-on-year. In addition, summer is an important promotion season for such advertisers, which has also boosted NetEase Youdao's performance.
Fluctuation in financial condition of intelligent hardware
As an advantageous business of NetEase Youdao, intelligent hardware continues to perform unexpectedly. In the third quarter, NetEase Youdao's intelligent hardware business net revenue was 252 million yuan, a year-on-year decrease of 29.3%. This is the third consecutive quarter of negative year-on-year growth for the business, but it shows a slight growth trend compared to the previous quarter.
This is vastly different from the market side performance.
In August of this year, NetEase Youdao released its new dictionary pen X6 Pro, becoming the first intelligent hardware product equipped with the "Confucius" education model. It launched functions such as grammar intensive speaking and virtual human oral coaching, and also introduced the classic teaching aid brand "5-year college entrance examination 3-year simulation" for the first time on the content side. In the third quarter, users of the X6 Pro dictionary pen used it more than 50% more frequently than S6.
Zhou Feng explained at the financial report that in the third quarter, the sales of intelligent hardware (Sell Out) actually increased by more than 10% year-on-year. The sales amount tracks the amount of intelligent hardware ultimately sold to users through various channels.
The growth in terminal sales, but the negative growth in factory sales, is due to NetEase Youdao being in a period of adjustment in sales channels, reducing some low return on investment sales channels, thereby reducing channel inventory and causing financial fluctuations.
Zhou Feng stated that the selling amount is a key sales indicator that the company pays attention to internally, and the most important indicator that the company pays attention to is user stickiness. Through user feedback and user stickiness indicators, it is known that users really like these big language model features.
Zhou Feng introduced that he will continue to rely on the ability of large language models to enhance the autonomous interaction between students and intelligent hardware, making the product experience closer to the real classroom. It is expected that multiple SKUs will be launched before the end of this year.