Healthy and sustainable development is more important for long-term success than rapid growth in the short term, "Zhou Feng said at the NetEase Youdao financial report communication meeting.
Coincidentally, in the latest quarterly financial reports of TAL Education and New Oriental, "stability" and "balance" are also important keywords. Under this guiding ideology, NetEase Youdao achieved a third quarter operating profit of 110 million yuan, with a single quarter profit amount reaching a historic high. New Oriental and TAL Education have also shown double-digit growth.
Compared to the extensive layout in previous years, based on the information released this year, educational technology companies have entered a period of health oriented development. Based on the third quarter report of Youdao, there are two significant development trends in this stage: firstly, focus, business from scattered to clustered, and from diversified business to core business dominance. Secondly, AI+education has become a mature strategy, entering the stage of large-scale commercialization, and can bring significant gains to overall performance.
After more than three years of transformation, educational technology companies have stepped out of their attempts at transformation and shifted their focus to business, concentrating on AI+education.
Stable performance leads to a sharp increase in profitability
In the past two years, rapid recovery of growth was the main proposition for education companies, but since the beginning of this year, especially in the second half of the year, steady growth has been the core.
The transformation is based on the mechanism of "quick non fatal failure", which requires frequent failures and takes non fatal failures as a high brick. In situations where the direction of transformation is not yet clear, this model can quickly identify the direction of development and find potential businesses. Therefore, it can be seen that in 2022, the key words spoken by Youdao CEO Zhou Feng are "long-term sustainable growth" and "opportunities", while in 2023, they are "long-term prospects" and "sustainable development".
In recent quarters, Youdao has become more pragmatic and seeking more robust strategies. No longer blindly expanding, the focus of the three major business segments of learning services, smart devices, and digital marketing is clearer.
In terms of learning services, Youdao has proactively shrunk its non essential education service business and focused on its advantageous high school business. In terms of playing style, Youdao emphasizes practical choices to highlight strengths and avoid weaknesses. Compared to the offline advantages of New Oriental and TAL Education, Youdao focuses on making efforts online. In the process of actively reducing and focusing, Youdao pays more attention to the UE (Unit Operating Profit) model, and for high school education services, emphasizes the use of small class teaching, seeking to achieve a balance between scale and teaching effectiveness.
In terms of smart devices, Youdao places greater emphasis on the logic of "single item". The so-called bulk product refers to a single product that has outstanding performance, huge sales volume, high brand awareness, and market influence in the market. Specifically, on Youdao, it is a dictionary pen. In the third quarter, Youdao released a new dictionary pen X7 series, continuously strengthening its leading advantage in this niche product.
In terms of online marketing, Youdao clearly understands the strong cash flow characteristics of advertising. For this business, Youdao is obviously more pragmatic, not blindly expanding, but exploring new increments based on existing advantages, focusing on going global for Chinese enterprises, domestic KOL and KOC marketing, AI material production and advertising, etc.
The leading category in the company's field of focus is the core of all competitiveness, "said Zhou Feng.
Under the guidance of such core ideas, Youdao's performance presents two significant characteristics: a sharp increase in profitability and reliable guarantee of stability.
Profitability is one of the most impressive indicators for Youdao in the third quarter. The operating profit for a single quarter reached 110 million yuan, turning losses into profits year-on-year. This is the first time in Youdao's history that it has achieved profitability in the third quarter, with a single quarter profit amount reaching a historical high while achieving positive profits in the first three quarters. According to current trends, if the fourth quarter progresses smoothly, Youdao has a good chance of achieving full year profitability.
In this quarter, despite achieving a historic high in revenue in the same period last year and actively reducing non essential business this year, Youdao still achieved positive revenue growth. Its revenue in the third quarter reached 1.57 billion yuan, a year-on-year increase of 2.2%, setting a new historical high and demonstrating the robustness and risk resistance of its business. The cash outflow from Youdao's operating activities decreased to 85.4 million yuan, a year-on-year decrease of over 70%. On this basis, Youdao received financial support from NetEase Group. In the third quarter, NetEase provided RMB 878 million in short-term loans and USD 128.4 million in long-term loans, ensuring the stability of its operations.
However, if Youdao dares to make proactive adjustments, there must be core elements to support it, which is also the key to improving stability and profitability. What is this core element?
AI has fully entered the entire business chain, with significant commercialization achievements
2023 is the year of the explosion of AI big models. After Youdao released its first education big model "Ziyue", Xueersi, Yuanfudao, and Homework Help successively launched big models. Last year, the proportion of AI in educational technology companies has significantly increased, and this year, AI has risen to the strategic level.
In its financial report, Youdao stated that it will continue to implement large-scale models to better empower digital content services, continuously iterate and upgrade AI subscription services, and utilize its advantages in AI technology, language, and services in advertising to continuously expand overseas markets. From Youdao's words, it can be seen that AI has fully entered Youdao's entire business chain, and Youdao has become an AI technology company.
AI does not directly generate revenue, it is a link that empowers the lower level to drive upper level business transformation, progresses layer by layer, and ultimately optimizes operations comprehensively.
The first step is the iteration of the experience. AI has significantly differentiated the experience between applications and hardware, resulting in a noticeable improvement in the efficiency of online marketing. For learning services, Youdao Lingshi Intelligent Learning System can use AI to automatically collect and classify user errors, add new questions, and enhance users' personalized learning experience. The AI simultaneous interpretation of Youdao Dictionary, supported by the "Confucius" model, greatly improves the accuracy and naturalness of translation. For smart hardware, in the third quarter, the dictionary pen X7 Pro became the "first learning hardware to achieve offline AI large model translation", with accuracy comparable to online NMT. In the field of online marketing, with the support of AI big models, NetEase Smart Selection has integrated AI advertising algorithm models and RTA technology to create a recommendation model based on target user needs for the application of AI big models.
Experience iteration leads to an increase in user base. In the third quarter, AI document translation processed a total of 100 million documents. After introducing AI simultaneous interpretation function, Youdao Dictionary's usage exceeded 4 million times in the first quarter, becoming the most popular paid feature. Hi Echo, the "speech teacher," has become one of the most popular AI products in China, ranking among the top 10 on the retention list the next day. Teacher Xiao P's usage in the third quarter approached 20 million, with a monthly compound growth rate exceeding 100%. The activation volume of the X7 series of dictionary pens exceeded 100000 in the third quarter. During this year's Singles' Day, Youdao Dictionary Pen won the first place in full cycle sales on two major platforms, JD.com and Tmall, achieving five consecutive years of ranking first in the industry. Among them, the Youdao Dictionary Pen X7 Pro has won the championship in single product sales in the dictionary pen industry on JD.com and Tmall. In terms of the dictionary pen, it can be said to have a crushing performance. In terms of online marketing, in the third quarter, Youdao successfully assisted multiple projects in achieving brand exposure and increasing popularity.
The value of AI goes far beyond experience. While AI empowers various product lines of Youdao, it also strengthens the interaction and connectivity between product lines. For example, adding "Speaking Teacher" Hi Echo and "Little P Teacher" to the Youdao Dictionary Pen greatly enhances the interactivity of the dictionary pen. The integration of product functions has further improved the level of commercialization.
On the one hand, businesses mutually promote each other and drive the overall growth of revenue scale. In the third quarter, Youdao Intelligent Devices had a net revenue of 315 million yuan, a year-on-year increase of 25.2%. After more than a year of continuous adjustments, it has demonstrated strong resilience. The total sales revenue of AI subscription services is close to 70 million yuan, with a year-on-year growth of over 150%. It is the seventh consecutive quarter with a year-on-year growth of over 50% and a month on month growth of nearly 10%. The assistance of AI has enabled online marketing service revenue to reach RMB 489 million, a year-on-year increase of 45.6%, achieving growth for eight consecutive quarters.
On the other hand, the linkage between businesses has opened up profit margins. In the third quarter, the gross profit margin of Youdao Digital Content Services exceeded the segmented market level by more than 5 percentage points, generating considerable profits. The gross profit margin of smart hardware has also reached its highest level since 2023.
AI has sorted out the business lines of Youdao from bottom to top. This also explains why Youdao can withstand the fluctuations brought by proactive adjustments and create new profit highs.
Of course, Youdao did not elevate AI to a strategic level alone. In its latest quarterly financial report, TAL Education also bluntly stated, "Artificial intelligence learning devices are one of the fastest-growing business lines." From this perspective, in the field of educational technology, AI represents the future and dominates the competitive landscape of the future.
Technology, Health, and the Future of a Larger Market
Based on Youdao's financial report and current industry trends, the most natural landing of AI and education is the combination of intelligent hardware and application ecology. Due to the fact that AI is still in the development stage, there is still huge room for growth in this market. To compete in this market, product and business capabilities are needed to support it.
Educational intelligent hardware and its supporting applications have become the most promising market for the development of electronic consumer goods. Previously, the technological iteration speed of educational hardware was not fast, but this was due to the fact that the technical level had not yet reached the required level. With the transformation of AI from quantitative to qualitative, the application of educational scenarios has reached the forefront.
On the one hand, consumer electronics has been in the stock market stage for a long time, with most scenarios covered by mobile phones and tablets, and the development space is already very limited. On the other hand, education is a strong and essential market, and its previous penetration rate was not high, with room for growth. According to the research institution Luotu Technology, it is expected that the full year omni channel sales in 2024 will reach 5.88 million units, a year-on-year increase of 24.6%.
Industry participants have clearly noticed this incremental market. In addition to Youdao, iFlytek, Baidu, Yuanfudao, Homework Help, and Xueersi have all ventured into it. Since the beginning of this year, there has been a significant increase in advertisements for educational hardware in public places such as buildings and elevators, and a large number of players have entered the market. Based on the development trajectory of consumer electronics, this is a situation where demand determines supply and is inevitably formed.
The current development stage of the education hardware and application market can be roughly compared to the smartphone market around 2010. In the early stages of development, what is needed is to create products, connect supply chains, and streamline channels like Apple and Xiaomi, rather than rushing to create new products like HTC, WP, and other manufacturers.
The institutions that can truly survive in the waves of sand must have comprehensive and flawless products, channels, and supply chains.
Youdao clearly noticed this. Zhou Feng said, "We will continue to focus on our dictionary pens, which are our leading products in the market." From an analysis strategy perspective, the large order product enables Youdao's resources to be concentrated, applying more than ten years of foundation to flagship products and enhancing the product's market competitiveness. Expanding from absolute moat products to other categories is a more solid approach. A result oriented and effective strategy is successful. The large product has demonstrated strong development resilience, passed the previous adjustment period, and entered the fast lane of development.
On this basis, in the third quarter, Youdao comprehensively sorted out the overall channel layout, with a more balanced proportion of major e-commerce platforms and strengthened the construction of offline exclusive stores. At the same time, the inventory has been further optimized, and the historical legacy task of clearing inventory has been basically completed. The single item strategy has further improved inventory turnover efficiency and greatly reduced warehousing costs. This series of adjustments can ensure a light and agile approach, providing flexibility for future competition.
Youdao adopts a slimming strategy for learning services and avoids large-scale investment in online marketing business, which is consistent with the logic of focusing on large products with smart devices. Health has become the primary choice. This is also a choice of the overall environment. Currently, the capital market is more profit oriented and sustainable operation oriented. Compared to expanding without considering costs, it is more important to have long-term sustainable operation capabilities. Therefore, whether it is Youdao, New Oriental, or TAL Education, they all attach great importance to the health of their business.
The competition in educational technology empowered by AI is destined to be a long-term competition, therefore, sustainable business capabilities are crucial at this stage.
As educational technology companies increasingly emphasize steady growth and profitability, it means that the period of transformation exploration has become history, and excessive investment is no longer in line with development reality. Continuing to explore the landing of AI technology scenarios, focusing on profitable businesses, and compressing non essential and non dominant business lines have become the main characteristics of current and medium - to long-term education technology companies.