Since 2021, the education and training industry has undergone significant differentiation. Nowadays, New Oriental and NetEase Youdao are completely two different species.
On May 23rd, NetEase Youdao released its first quarter financial report. During the reporting period, NetEase Youdao achieved a net income of 1.39 billion yuan, a year-on-year increase of 19.7%, and an operating profit of 30 million yuan, turning losses into profits. For the first time, it achieved positive operating profits for two consecutive quarters.
After the "double reduction" policy, Youdao has focused on the path of technology and has done many high investment and deep barrier businesses. Walking to the edge of profitability means that Youdao has crossed the key threshold.
Key indicator: Health level
The entire financial report, Youdao, released several key information.
Restore growth. This is not the quarter with the fastest growth rate or the highest revenue scale, but it still shows a momentum of growth. The revenue of 1.39 billion yuan set a historic high for the first quarter, exceeding market expectations.
Profit has significantly improved. In the current macro environment, profits are almost politically correct. For example, iQiyi's revenue declined by 5% in the first quarter, but its profit increased by 6%. On the trading day after the financial report was released, its stock price surged by 12%.
Youdao's operating profit in the first quarter of this year was 30 million yuan, with a net profit of 12.4 million yuan, both turning losses into profits year-on-year. This is Youdao's second consecutive quarter of turning losses.
Youdao has been strengthening cost management in recent quarters. This quarter, marketing expenses decreased by 19.4% year-on-year, and research and development expenses decreased by 19.7%. With a 20% reduction in expenses, both double-digit revenue growth and turnaround were achieved. This indicates that Youdao's growth this quarter has gained new drivers.
The driving force comes from the high-frequency word "AI" mentioned in financial reports. Youdao is one of the few educational institutions that has elevated AI to corporate strategy. In just over two years, the "Confucius" model has been released and implemented, HiEcho、 Teacher Xiao P and other products have been launched successively, and Youdao has basically achieved the "soft+hard" two legged walking of large models. With the support of the achievements of the big model, Youdao has established a dual wheel drive model of educational content+generative AI application, which has driven growth beyond expectations.
The profit performance depends on the technology going through the high-intensity investment stage in the early stage. Youdao's gross profit is not low, always around 50%. But in the past two years, the research and marketing investment in large models and related applications has been relatively rigid, which will drag down profits. The expected profitability now indicates that Youdao AI is transitioning from a technology investment period to a result transformation period.
Zhou Feng mentioned a key data point, "We utilized the advantages of AI technology to drive a year-on-year increase of over 140% in the total transaction volume (GMV) of subscribed member services in the first quarter." In fact, The role of AI in Youdao business goes far beyond this, AI also plays a crucial role in the advertising business, with domestic RTA advertising net revenue increasing by over 100% year-on-year. AI has fully intervened in Youdao's business, providing effective drivers for business growth.
This is in line with the basic trend of the current development of the AI industry, and Baidu and Alibaba have also mentioned the role of AI in their financial reports. Compared to comprehensive large-scale models, Youdao's vertical large-scale model business is more focused and its role is more direct.
However, the integration of AI and business has also undergone new changes this quarter.
Business "horse racing", three major strategic focuses
Last year was the first year of the AI big model, and there were clear signs of a race in Youdao's approach. As the application layer of large models accelerates, the trend of strategic focus becomes more apparent.
This is a choice with a higher success rate. In the stage of crossing the river by feeling the stones, there is too much risk of betting all resources on one technical point. After multiple attempts, we can concentrate our efforts to maintain competitiveness while also considering stability.
In the past few years, Youdao's layout has been very extensive. Taking intelligent hardware as an example, Youdao has completed a full stack layout of dictionaries, pens, learning machines, eye protection lights, hearing aids, pocket printers, and translation kings. Enriching SKUs with phased rationality and business adjustment period can effectively support growth. The fact is that Youdao's revenue from 2022 to 2023 has hit a historic high, with a single quarter revenue exceeding 1.5 billion.
Making a big SKU is not only beneficial but also harmful. Both product development and promotion require investment. Therefore, although Youdao's losses have been decreasing, it has never crossed the line of breakeven.
Since the second half of last year, Youdao's strategy has undergone significant changes, shifting from decentralization to focus. Taking hardware as an example, Youdao has started to focus on strong SKUs. The continuous expansion and iteration of dictionary pens are typical representatives. Currently, the new generation of dictionary pens has an entry-level series represented by A6 Pro, an all-around series represented by S6 Pro, a flagship series represented by X6 Pro, and a professional series represented by P6.
Dictionary pens are a strong SKU of Youdao. According to online monitoring data from RUNTO, Youdao focuses on mid to high end products in the dictionary pen market, ranking first in sales and forming a first tier team with Alpha Eggs, occupying more than half of the market share. Since April this year, we have achieved the first place in sales in major e-commerce channels such as JD, Tmall, and Tiktok.
Powerful SKUs focus on certainty and gain a certain market share first. At the current stage, improving the input-output ratio, improving internal resource utilization efficiency, and maintaining high-quality growth are the key.
Intelligent hardware is a microcosm, and with the completion of the trial, Youdao's focus has basically shifted to three major strategies. In the first quarter report, Zhou Feng mentioned that he will focus on digital content services, online marketing services, and subscription membership services.
During the phone conference, Zhou Feng mentioned that due to changes in market demand and other reasons, he has actively shrunk his adult business and focused more resources on digital content services. In the first quarter, digital content services achieved a revenue of 500 million yuan, a year-on-year increase of 11%. In this part of the business, Youdao mainly strengthens the advantages of AI technology and provides users with differentiated and personalized products and services.
At present, the foothold of digital content services includes products such as "Lingshi" and "Bowen". As a strong brand on the track, Lingshi continues to strengthen its advantages and has upgraded its products this quarter, introducing differentiated teaching and personalized instruction to leverage the value of AI in learning outcomes. Bowen has released a new product called "Cloud Tour of 24 Cities", which organizes classrooms using a learning task group teaching model to cultivate the ability to observe, think, and write. Through refined grading, it effectively improves reading and writing abilities.
Subscribing to membership services is a new focus direction for Youdao in the AI era. It is obvious that Youdao is accelerating the commercialization and monetization ability of AI applications, and AI subscription services are one of the main ways that Youdao has found for AI commercialization. According to the financial report, the current business includes dictionary translation Hi Echo、 Teacher Xiao P and other product side. Among them, Hi Echo is currently a software SKU that has been released by Youdao. Quest Mobile has rated it as the representative application of AIGC in the education industry. Hi Echo has recently launched version 3.0, in collaboration with the official IELTS platform, to launch IELTS speaking practice and mock exam modules; We also launched a bilingual teaching model in Chinese and English to cater to the learning habits of Chinese users.
The conversion efficiency of subscription membership mode has always been a problem. Taking Duolingo as an example, its subscription member MAU is 97.5 million, bringing in approximately RMB 954 million in subscription revenue, The ARPU value is 9.9 yuan. You Dao has clearly noticed this issue, and the launch of IELTS oral practice is more targeted, focusing on the exam group and oral practice. It is expected that users will have a higher willingness to pay, which will bring higher income.
Online marketing has been the most eye-catching part of Youdao's growth in recent years. This quarter's net income reached a historic high of 490 million yuan, with a year-on-year growth of over 50% for six quarters, becoming Youdao's second successful growth curve under the AI strategy.
The direction of online marketing is also relatively clear, deepening the application of RTA technology; Increase efforts to expand overseas markets.
This is a combination of technology and market thinking. In the overseas market, Youdao launched its first one-stop overseas marketing platform in China in the first quarter, reaching nearly 10 million KOLs/KOCs worldwide, directly covering over 2 billion users and over 220 countries or regions, helping NetEase Games, GAC Group, BYD, Huawei, Xiaomi TCL、 Hisense, Midea Anker, Shein, Miniso and other companies are going overseas. The application of RTA technology is an important support for expanding the market and improving conversion efficiency. Q1, Youdao Q1, RTA technology has expanded to multiple industries such as cultural entertainment, social networking, automotive, and e-commerce, covering over ten industries in total.
The trend of strategic focus is obvious, but it has not solved the core problem, What can AI bring to the business?
Scene acceleration conversion and efficiency leap
This quarter, many listed companies are talking about how AI can help their operations. But how to reflect it? Different types of business in different enterprises vary greatly, and specific case studies are needed for specific analysis.
The AI technology of Youdao cannot do without another keyword "scene". Zhou Feng emphasized that pure AI technology cannot create enough value, only technology combined with business scenarios can truly solve the problem of implementation.
AI has facilitated the deep integration of multiple business scenarios, such as the integration of the Confucius 2.0 model with the Hi Echo 2.0 version, and the AI tutoring app for general practice Q&A, which has led to the growth of subscription membership services; Integrating with learning service scenarios has facilitated the improvement of learning outcomes; The integration with advertising business has facilitated conversion efficiency. At the same time, the integration of technology and software applications with hardware such as Youdao Dictionary Pen P6 and Youdao AI Learning Machine X20 has improved the experience of hardware products.
The comprehensive integration of AIGC and scenarios, after improving the overall effect at the product level, is further transmitted to the efficiency level.
Breaking down the business, it can be seen that the gross profit margin of Youdao's digital content services has reached 73%, exceeding 70% for three consecutive quarters. The logic is also very clear, The assistance of AI in personalized teaching and other aspects has improved the efficiency of word-of-mouth conversion. Taking "Bowen" products as an example, in the first quarter, Bowen supported efficient and high-quality correction of over 30000 essays, an increase of 80% compared to the previous quarter, driving a 10% increase in conversion rate. While AI helps platforms increase revenue, it also extends the service capabilities of employees, covering more users and improving human efficiency in a more reasonable way.
In terms of online marketing business, AI can analyze a large amount of user data, help enterprises build accurate user profiles, and achieve personalized marketing. AIGC is creating advertising content materials AI live streaming continues to play a role in KOL marketing and data analysis, thereby unleashing one-stop service capabilities in advertising promotion effectiveness and user feedback. Assist brand owners in reducing human communication costs, improving promotion efficiency, and achieving efficient conversion of advertising value, thereby achieving sustained growth.
In the first quarter, RTA's net advertising revenue increased by over 100% month on month, driving a conversion efficiency increase of over 50% for some customers. The four small dragons of e-commerce going global, and new energy vehicle companies going global... At present, Chinese enterprises are comprehensively expanding overseas, and Youdao is the first to achieve refined management, improve conversion efficiency, and will inevitably benefit from the benefits brought by industry growth.
There are two key potential points among them. On the one hand, in the first quarter, the growth of Youdao's advertising business was almost entirely achieved by its own technological strength. The proportion of advertising traffic and revenue from NetEase Group is very small. In the future, NetEase will inevitably provide more traffic resources, and compared to pure external traffic, the controllability of this part of traffic is relatively higher. There will be more definite growth prospects in the future.
On the other hand, NetEase's resources also help Youdao improve customer puzzles. By strengthening collaboration with the group, Youdao has the opportunity to further enhance its understanding of user needs in the gaming industry, thereby expanding to other customers in the gaming industry and achieving faster growth.
Zhou Feng stated at the financial report meeting that we will continue to utilize our capabilities in AI and understanding of education to explore the application scenarios of the "Confucius" model in education, advertising, and other fields. Accelerate the implementation of products and applications, and strive to better assist users in improving learning and work efficiency.
From a dynamic perspective, the continuous investment and iteration of Youdao's AI technology will correspondingly enhance the impact on scenarios and efficiency. At the same time, the strategy gradually established its direction of development after the business race, AI is more targeted. The positive cycle effect is basically established, and the prospect of Youdao's transformation to technology AI is becoming increasingly clear.