Youdao Reports Second Quarter 2022 Unaudited Financial Results

HANGZHOU, China, Aug. 18, 2022 /PRNewswire/ -- Youdao, Inc. ("Youdao" or the "Company") (NYSE: DAO), a leading technology-focused intelligent learning company in China, today announced its unaudited financial results for the second quarter ended June 30, 2022.

Second Quarter 2022 Financial Highlights^[1]

• Total net revenues were RMB956.2 million (US$142.8 million), representing a 2.4% decrease from the same period in 2021.
  - Net revenues from learning services were RMB563.6 million (US$84.1 million), representing a 7.3% decrease from the same period in 2021.
  - Net revenues from smart devices were RMB239.9 million (US$35.8 million), representing a 16.3% increase from the same period in 2021.
  - Net revenues from online marketing services were RMB152.8 million (US$22.8 million), representing an 8.0% decrease from the same period in 2021.
• Gross margin was 42.8%, compared to 51.0% for the same period in 2021.

"Despite the short-term challenges by the pandemic, our business demonstrated resilience. On one hand, operating cash inflow reached RMB104 million in Q2, mainly due to the strong sales performance of our new services and smart devices. On the other hand, we narrowed our net loss to RMB461 million in Q2, a 12.3% improvement year-over-year," said Dr. Feng Zhou, Chief Executive Officer and a Director of Youdao.

"We recently launched a series of new products, such as Youdao Dictionary Pen X5 and Youdao Smart Learning Pad, as well as new products in STEAM courses and vocational education courses. We have completed the transformation of our business and products in response to regulatory changes last year and entered a new stage of organic growth. Looking ahead, we will stick to upgrading products and services with the support of technology and innovation, navigate the short-term macro challenges, build up and strengthen the long-term franchise. We are on the right track and confident in the second half of this year boosted by the new products and services," Dr. Zhou concluded.

Second Quarter of 2022 Financial Results

Net Revenues 

Net revenues for the second quarter of 2022 were RMB956.2 million (US$142.8 million), representing a 2.4% decrease from RMB979.9 million for the same period of 2021.

Net revenues from learning services were RMB563.6 million (US$84.1 million) for the second quarter of 2022, representing a 7.3% decrease from RMB607.7 million for the same period of 2021. The decrease was mainly attributable to the decline in revenues from adult courses resulting from the decrease in demand due to the resurgence of COVID-19.

Net revenues from smart devices were RMB239.9 million (US$35.8 million) for the second quarter of 2022, representing a 16.3% increase from RMB206.3 million for the same period of 2021, primarily driven by the popularity of the newly launched products since last year.

Net revenues from online marketing services were RMB152.8 million (US$22.8 million) for the second quarter of 2022, representing an 8.0% decrease from RMB166.0 million for the same period of 2021. The decrease was mainly attributable to the curtailed advertising budgets of partial advertising customers.

Gross Profit and Gross Margin

Gross profit for the second quarter of 2022 was RMB409.7 million (US$61.2 million), representing an 18.1% decrease from RMB500.2 million for the same period of 2021. Gross margin decreased to 42.8% for the second quarter of 2022 from 51.0% for the same period of 2021.

Gross margin for learning services decreased to 52.2% for the second quarter of 2022 from 58.8% for the same period of 2021. The decrease was mainly resulted from the decline in economic scales due to the decreased learning revenues in the second quarter of 2022.

Gross margin for smart devices decreased to 30.6% for the second quarter of 2022 from 43.0% for the same period of 2021. The decrease was due to a larger proportion of sales contributed from offline distributors, which have a lower gross margin.

Gross margin for online marketing services was 27.7% for the second quarter of 2022, compared with 32.7% for the same period of 2021. The decrease was mainly attributable to the increased portion in performance-based advertisements through third parties' internet properties, which typically have a lower gross margin profile.

Operating Expenses

Total operating expenses for the second quarter of 2022 were RMB864.9 million (US$129.1 million), compared with RMB755.1 million for the same period of last year.

Sales and marketing expenses for the second quarter of 2022 were RMB596.0 million (US$89.0 million), representing an increase of 7.4% from RMB555.1 million for the same period of 2021. This increase was due to the growth in compensation expenses of the expanded sales and marketing team for learning services and smart devices.

Research and development expenses for the second quarter of 2022 were RMB208.4 million (US$31.1 million), representing an increase of 42.9% from RMB145.8 million for the same period of 2021. The increase was primarily due to higher payroll-related expenses associated with a larger number of development and technology professionals in smart devices and education digitalization solutions.

General and administrative expenses for the second quarter of 2022 were RMB60.5 million (US$9.0 million), representing an increase of 11.6% from RMB54.2 million for the same period of 2021. The increase was mainly attributable to the increased provision for the credit losses allowance on the receivables, which was RMB6.9 million in the second quarter of 2022, compared to RMB3.4 million for the same period of 2021.

Loss from Operations

Loss from operations for the second quarter of 2022 was RMB455.2 million (US$68.0 million), compared with RMB254.9 million for the same period in 2021. The margin of loss from operations was 47.6%, compared with 26.0% for the same period of last year.

Net Loss from Continuing Operations Attributable to Youdao's Ordinary Shareholders

Net loss from continuing operations attributable to Youdao's ordinary shareholders for the second quarter of 2022 was RMB453.9 million (US$67.8 million), compared with RMB234.9 million for the same period of last year. Non-GAAP net loss from continuing operations attributable to Youdao's ordinary shareholders for the second quarter of 2022 was RMB435.8 million (US$65.1 million), compared with RMB215.0 million for the same period of last year.

Basic and diluted net loss per American depositary shares ("ADSs") of the Company from continuing operations attributable to ordinary shareholders for the second quarter of 2022 was RMB3.67 (US$0.55), compared with RMB1.92 for the same period of 2021. Non-GAAP basic and diluted net loss from continuing operations per ADS attributable to ordinary shareholders was RMB3.52 (US$0.53), compared with RMB1.76 for the same period of 2021.

Balance Sheet

As of June 30, 2022, Youdao's cash, cash equivalents, restricted cash, time deposits and short-term investments totaled RMB1.3 billion (US$188.1 million), compared with RMB1.6 billion as of December 31, 2021. For the second quarter of 2022, net cash provided by continuing operating activities was RMB104.2 million (US$15.6 million), capital expenditures totaled RMB46.7 million (US$7.0 million), and depreciation and amortization expenses amounted to RMB10.7 million (US$1.6 million). Youdao's ability to continue as a going concern is dependent on management's ability to implement an effective business plan in future periods in light of the changing regulatory environment, generate operating cash flows and continue to be able to obtain outside sources of financing as necessary for Youdao's future development. As of the date of this release, Youdao has received various financial support from the NetEase Group, including, among others, RMB878.0 million short-term loans and US$70.0 million long-term loans with maturity dated March 31, 2024 drawn down under the US$300.0 million revolving loan facility. In support of Youdao's future business, NetEase Group has agreed to provide financial support for Youdao's continuing operations.

As of June 30, 2022, the Company's contract liabilities, which mainly consisted of deferred revenues generated from Youdao's learning services, were RMB1.1 billion (US$168.1 million), compared with RMB1.1 billion as of December 31, 2021.

Conference Call

Youdao's management team will host a teleconference call with simultaneous webcast at 6:00 a.m. Eastern Time on Thursday, August 18, 2022 (Beijing/Hong Kong Time: 6:00 p.m., Thursday, August 18, 2022). Youdao's management will be on the call to discuss the financial results and answer questions.

Dial-in details for the earnings conference call are as follows:

A live and archived webcast of the conference call will be available on the Company's investor relations website at http://ir.youdao.com.

A replay of the conference call will be accessible by phone one hour after the conclusion of the live call at the following numbers, until August 25, 2022:

About Youdao, Inc. 

Youdao, Inc. (NYSE: DAO) is a leading technology-focused intelligent learning company in China dedicated to developing and using technologies to provide learning content, applications and solutions to users of all ages. Building on the popularity of its online knowledge tools such as Youdao Dictionary and Youdao Translation, Youdao now offers smart devices, STEAM courses, adult and vocational courses, and education digitalization solutions. In addition, Youdao has developed a variety of interactive learning apps. Youdao was founded in 2006 as part of NetEase, Inc. (NASDAQ: NTES; HKEX: 9999), a leading internet technology company in China.

For more information, please visit: http://ir.youdao.com.

Non-GAAP Measures

Youdao considers and uses non-GAAP financial measures, such as non-GAAP net income/(loss) from continuing operations attributable to the Company's ordinary shareholders and non-GAAP basic and diluted income/(loss) from continuing operations per ADS, as supplemental metrics in reviewing and assessing its operating performance and formulating its business plan. The presentation of non-GAAP financial measures is not intended to be considered in isolation or as a substitute for the financial information prepared and presented in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP").

Youdao defines non-GAAP net income/(loss) from continuing operations attributable to the Company's ordinary shareholders as net income/(loss) from continuing operations attributable to the Company's ordinary shareholders excluding share-based compensation expenses and impairment of long-term investment. Non-GAAP net income/(loss) from continuing operations attributable to the Company's shareholders enables Youdao's management to assess its operating results without considering the impact of these items, which are non-cash charges in nature. Youdao believes that these non-GAAP financial measures provide useful information to investors in understanding and evaluating the Company's current operating performance and prospects in the same manner as management does, if they so choose.

Non-GAAP financial measures are not defined under U.S. GAAP and are not presented in accordance with U.S. GAAP. Non-GAAP financial measures have limitations as analytical tools, which possibly do not reflect all items of expense that affect our operations. In addition, the non-GAAP financial measures Youdao uses may differ from the non-GAAP measures uses by other companies, including peer companies, and therefore their comparability may be limited.

The presentation of these non-GAAP financial measures is not intended to be considered in isolation from or as a substitute for the financial information prepared and presented in accordance with GAAP. For more information on these non-GAAP financial measures, please see the table captioned "Unaudited Reconciliation of GAAP and non-GAAP Results" set forth at the end of this release.

The accompanying tables have more details on the reconciliations between our GAAP financial measures that are most directly comparable to non-GAAP financial measures. Youdao encourages you to review its financial information in its entirety and not rely on a single financial measure. 

Exchange Rate Information

This announcement contains translations of certain RMB amounts into U.S. dollars ("US$") at specified rates solely for the convenience of the reader. Unless otherwise stated, all translations from RMB to US$ were made at the rate of RMB6.6981 to US$1.00, the exchange rate on June 30, 2022 set forth in the H.10 statistical release of the Federal Reserve Board. The Company makes no representation that the RMB or US$ amounts referred could be converted into US$ or RMB, as the case may be, at any particular rate or at all.

Safe Harbor Statement

This press release contains forward-looking statements. These statements are made under the "safe harbor" provisions of the U.S. Private Securities Litigation Reform Act of 1995. Statements that are not historical facts, including statements about the Company's beliefs and expectations, are forward-looking statements. Forward-looking statements involve inherent risks and uncertainties, and a number of factors could cause actual results to differ materially from those contained in any forward-looking statement. In some cases, forward-looking statements can be identified by words or phrases such as "may," "will," "expect," "anticipate," "target," "aim," "estimate," "intend," "plan," "believe," "potential," "continue," "is/are likely to" or other similar expressions. The Company may also make written or oral forward-looking statements in its reports filed with, or furnished to, the U.S. Securities and Exchange Commission, in its annual reports to shareholders, in press releases and other written materials and in oral statements made by its officers, directors or employees to third parties. Statements that are not historical facts, including statements about the Company's beliefs and expectations, are forward-looking statements. Forward-looking statements involve inherent risks and uncertainties. Further information regarding such risks, uncertainties or factors is included in the Company's filings with the SEC. All information provided in this press release is as of the date of this press release, and the Company does not undertake any duty to update such information, except as required under applicable law.

For investor and media inquiries, please contact:

In China:
Jeffrey Wang
Youdao, Inc.
Tel: +86-10-8255-8163 ext. 89980
E-mail: IR@rd.netease.com

The Piacente Group, Inc.
Emilie Wu
Tel: +86-21-6039-8363
E-mail: youdao@thepiacentegroup.com

In the United States:
The Piacente Group, Inc. 
Brandi Piacente
Tel: +1-212-481-2050
E-mail: youdao@thepiacentegroup.com

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