Youdao Reports Third Quarter 2019 Unaudited Financial Results

HANGZHOU, China, Nov. 21, 2019 /PRNewswire/ -- Youdao, Inc. ("Youdao" or the "Company") (NYSE: DAO), a leading intelligent learning company in China, today announced its unaudited financial results for the third quarter ended September 30, 2019.

Third Quarter 2019 Financial Highlights

• Total net revenues were RMB345.9 million (US$48.4 million), a 98.4% increase from the same period in 2018.
  - Net revenues from learning services and products were RMB225.2 million (US$31.5 million), a 141.6% increase from the same period in 2018.
  - Net revenues from online marketing services were RMB120.8 million (US$16.9 million), a 48.8% increase from the same period in 2018.
• Gross billings from online courses[1] increased 139.8% year-over-year to RMB290.9 million (US$40.7 million) and the gross billings of Youdao Premium Courses[2] increased 104.6% year-over-year to RMB214.6 million (US$30.0 million).
• Gross margin was 25.8%, compared with 23.3% for the same period in 2018.
• Deferred revenue from online courses was RMB296.7 million (US$41.5 million), compared with RMB129.1 million as of December 31, 2018.

Key Operating and Financial Data

"In the third quarter, we achieved strong financial and operational growth across our business, driven by our highly scalable online courses, increased intelligent learning devices sales, and strong performance from our online marketing services," said Dr. Feng Zhou, Chief Executive Officer and Director of Youdao. "Our strategic focus remains on improving product quality, strengthening our top-performing courses, expanding our subject offerings, and supplementing our course growth with our content development system. Our Youdao Premium Courses had 237,100 paid enrollments in the third quarter, up 37.6% year-over-year and gross billings reached RMB214.6 million. Paid enrollments from our core K-12 programs were particularly robust, increasing by 179.2% year-over-year with gross billings of RMB146.7 million.  The growing popularity of our new, early learning STEAM courses is also promising, both in its own regard and as a feeder program for seamless integration into our K-12 courses. We also saw exceptional growth from our intelligent learning products, which we consider to be an indispensable part of students' learning experience. As an increasing component to our growth strategy, we released Youdao Cloud Pen in June and the 2^nd generation Youdao Dictionary Pen in August. Both received excellent reviews and rankings."

"We will continue investing in intelligent learning technology to encourage more interaction and engagement. By leveraging the insights we obtain from students' learning process via our intelligent technology, we can offer even more tailored learning experiences. We will also continue investing in student acquisition to grow our active student population. At the same time, we will work to leverage our massive organic traffic. Over time, more efficient student acquisition and conversion rates will positively impact our bottom line. Our goal for now will be to continue to increase our gross billings, paid student enrollments, and revenues.

"Our strategic initiatives are designed to support our growth over the long-term. By offering premium content, knowledge tools and technology, we are confident we can improve users' online learning experience, providing a personalized experience that combines the benefits of online and offline education to increase learning productivity and efficiency. The completion of our IPO in October gives us even more responsibilities, not only to our growing tribe of students, but to our partners, employees and investors," Dr. Zhou concluded.

Third Quarter 2019 Financial Results

Net Revenues

Net revenues for the third quarter of 2019 were RMB345.9 million (US$48.4 million), a 98.4% increase from RMB174.4 million for the third quarter of 2018.

Net revenues from learning services and products were RMB225.2 million (US$31.5 million) for the third quarter of 2019, a 141.6% increase from RMB93.2 million for the third quarter of 2018. The increase was primarily attributable to strong growth in K-12 paid student enrollments and increased gross billings per paid student. The number of K-12 paid student enrollments increased 179.2% year-over-year to 92,700 students in the third quarter of 2019. The gross billings per paid student enrollments of Youdao Premium Courses increased 48.6% year-over-year to RMB905 for the third quarter of 2019. In addition, revenues from Youdao's intelligent learning devices increased 706.7% year-over-year, primarily due to a significant increase in sales volume of Youdao Dictionary Pen and Youdao Pocket Translator as such products continued to gain popularity among users due to their premium product quality.

Net revenues from online marketing services were RMB120.8 million (US$16.9 million), a 48.8% increase from RMB81.2 million for the same period in 2018. The year-over-year increase in online marketing services revenues was attributable to the increased distribution of advertisement through third parties' internet properties.

Gross Profit and Gross Margin

Gross profit for the third quarter of 2019 was RMB89.2 million (US$12.5 million), compared with RMB40.6 million for the third quarter of 2018. Gross margin for the third quarter of 2019 was 25.8%, compared with 23.3% for the third quarter of 2018.

Gross margin for learning services and products increased to 27.5% for the third quarter of 2019 from 9.2% for the third quarter of 2018, primarily attributable to our success in achieving effects of economies of scale, along with the expansion of the business and faculty compensation structure optimization.

Gross margin for online marketing services was 22.6% for the third quarter of 2019, compared with 39.5% for the third quarter of last year. The decrease was mainly attributable to more revenue generated from increased distribution of advertisement through third parties' internet properties and international markets, which carry lower gross margin.

Operating Expenses

Total operating expenses for the third quarter of 2019 were RMB 324.0 million (US$45.3 million), compared with RMB126.2 million for the same period of last year. 

Sales and marketing expenses for the third quarter of 2019 were RMB231.0 million (US$32.3 million), compared with RMB65.0 million for the third quarter of 2018. The increase was primarily due to increased expenses associated with student acquisition, branding enhancement and sales and marketing staff compensation.

Research and development expenses for the third quarter of 2019 were RMB74.9 million (US$10.5 million), an increase of 42.1% compared with RMB52.7 million for the same period last year. The increase was primarily due to increased payroll-related expenses associated with an increased number of course-development and technology professionals.  

General and administrative expenses for the third quarter of 2019 increased to RMB18.1 million (US$2.5 million) from RMB8.5 million for the same period of last year. The increase was mainly attributable to increases in the number of Youdao's general and administrative staff and their increased compensation levels.

Loss from Operations

Loss from operations for the third quarter of 2019 was RMB234.7 million (US$ 32.8 million), compared with RMB85.7 million for the same period in 2018. The margin of loss from operations was 67.9%, down from 49.1% for the same period of last year.

Net Loss Attributable to Youdao's Ordinary Shareholders

Net loss attributable to Youdao's ordinary shareholders for the third quarter of 2019 was RMB 242.2 million (US$33.9 million), compared with RMB77.0 million for the same period of last year. Non-GAAP net loss attributable to Youdao's ordinary shareholders for the third quarter of 2019 was RMB238.8 million (US$33.4 million), compared with RMB75.0 million for the same period of last year.

Basic and diluted net loss per American Depositary Share ("ADS") attributable to ordinary shareholders for the third quarter of 2019 was RMB2.63 (US$0.37), compared with RMB0.84 for the third quarter of 2018. Non-GAAP basic and diluted net loss per ADS was RMB2.60 (US$0.36), compared with RMB0.82 for the third quarter of 2018.

Balance Sheet

As of September 30, 2019, Youdao's cash, cash equivalents, time deposits and short-term investments totaled RMB160.3 million (US$22.4 million), compared with RMB435.4 million as of December 31, 2018. The decrease mainly resulted from continued investment in daily operations, including student acquisition and brand enhancement. For the third quarter of 2019, net cash used in operating activities was RMB142.1 million (US$19.9 million), capital expenditures totaled RMB4.4 million, and depreciation and amortization expenses amounted to RMB2.8 million.

As of September 30, 2019, the Company's contract liabilities, which mainly consists of  deferred revenues, was RMB343.6 million (US$48.1 million), an increase of 93.5% from RMB177.5 million as of December 31, 2018.

Recent Developments

Initial Public Offering ("IPO")

On October 29, 2019, the Company completed its IPO on the New York Stock Exchange. In its IPO, the Company sold a total of 5,600,000 ADSs, each representing one of our Class A ordinary shares, par value US$0.0001 per share. In addition, the Company issued Class A ordinary shares for a total consideration of US$125 million in connection with concurrent private placements to certain investment funds managed by Orbis Investment Management Limited, based on the IPO price of US$17.00 per ADS. The Company received total net proceeds of approximately US$213 million after deducting underwriter commissions and relevant offering expenses.

NetEase Share Purchase Program for Youdao's ADSs

Youdao's controlling shareholder, NetEase, Inc. ("NetEase"), today announced that it has adopted a share purchase program of up to US$20.0 million of Youdao's outstanding ADSs in accordance with SEC Rule 10b-18 for a period not to exceed 12 months beginning on November 25, 2019.  Under the terms of this program, NetEase may purchase Youdao ADSs in open-market transactions on the New York Stock Exchange.  Such purchases may be effected pursuant to a plan in conformity with SEC Rule 10b5-1.  The purchase program may be suspended or discontinued by NetEase at any time.

Conference Call

Youdao's management team will host a teleconference call with simultaneous webcast at 8:00 p.m. Eastern Time on Wednesday, November 20, 2019 (Beijing/Hong Kong Time: 9:00 a.m., Thursday, November 21, 2019). Youdao's management will be on the call to discuss the quarterly 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 November 27, 2019:

About Youdao, Inc. 

Youdao, Inc. (NYSE: DAO) is a leading 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, Youdao Cloudnote and Youdao Translation, Youdao now offers online courses covering a wide spectrum of age groups, subject matters, learning goals and areas of interest. In addition, Youdao has developed a variety of interactive learning apps and smart learning devices. Youdao was founded in 2006 as part of NetEase, Inc. (NASDAQ: NTES), 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 gross billings and non-GAAP net income/(loss) attributable to the Company's ordinary shareholders and non-GAAP basic and diluted earnings/(loss) 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 gross billings for a specific period as the total amount of consideration for online courses sold on Youdao Premium Courses, NetEase Cloud Classroom and China University MOOC, net of the total amount of refunds, in such period. The management uses gross billings as a performance measurement because the Company generally bills students for the entire course tuition at the time of sale of the courses and recognizes revenue proportionally over an average of the learning periods of different online courses. Youdao defines non-GAAP net income/(loss) attributable to the Company's ordinary shareholders as net income/(loss) attributable to the Company's ordinary shareholders excluding share-based compensation expenses. Non-GAAP net income/(loss) attributable to the Company's shareholders enables Youdao's management to assess its operating results without considering the impact of share-based compensation expenses, which are non-cash charges. 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 does not reflect all items of expense that affect our operations. Share-based compensation expenses have been and may continue to be incurred in our business and are not reflected in the presentation of non-GAAP net income/(loss) attributable to the Company's ordinary shareholders. 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 non-GAAP and 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 RMB7.1477 to US$1.00, the exchange rate on September 30, 2019 set forth in the H.10 statistical release of the Federal Reserve Board. The Company makes no representation that the RMB or US$ 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:
Pei Du
Youdao, Inc.
Tel: +86-10-8255-8907
E-mail: ir.youdao@service.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

[1] Gross billings is a non-GAAP financial measure. Gross billings for a specific period refers to the total amount of consideration for Youdao's online courses sold on Youdao Premium Courses, NetEase Cloud Classroom and China University MOOC, net of the total amount of refunds, in such period. See "Non-GAAP Measures" and "Unaudited Reconciliation of GAAP and non-GAAP Results" at the end of this press release.

[2] Youdao Premium Courses are Youdao's flagship online learning offerings primarily focused on K-12 students, covering a wide spectrum of subject matters, learning goals and areas of interest.

View original content:http://www.prnewswire.com/news-releases/youdao-reports-third-quarter-2019-unaudited-financial-results-300962497.html