© Reuters. Minutes of NetEase Youdao (DAO.US) Q1 Earnings Conference Call: Learning and Advertising Business Continues Strong and New Smart Hardware Products Launched in Q3
Zhitong Finance APP has learned that NetEase Youdao’s latest financial report shows that the overall net income of Q1 in 2023 will reach 1.16 billion yuan, of which the income from learning services, smart hardware and online marketing will be 730 million yuan, 210 million yuan, and 220 million yuan respectively. During the reporting period, NetEase Youdao marketing service platform completed the upgrade. Benefiting from the help of AI, the ability of precision marketing has been significantly improved, and the online marketing business has achieved a year-on-year growth of 79.7% in the first quarter of this year. In the subsequent performance conference call, the management was full of confidence in the development of the whole year, mainly based on the good momentum of the three main businesses: the demand for learning services is strong; the advertising growth cycle will continue; smart hardware has rebounded since March, and New smart hardware will be released in the second and third quarters.
The minutes of the earnings call are as follows:
Strong growth in learning and advertising business; new smart hardware launches in the second half of the year
Q：The management is full of confidence in the company’s development in 2023. What are the main reasons?
A: On the whole, the first quarter was a bit challenging for us, because our main business learning services and smart hardware were affected by the epidemic. However, the decline in these two businesses was partially offset by the strong performance of advertising performance . Learning services and smart hardware recovered quickly in the second half of the first quarter, so we think the negative impact in the first quarter is just a one-off.
Our confidence in 2023 comes from the following aspects:
First, for learning services, we see strong demand and we have a strong and growing product lineup. As we mentioned earlier, sales of learning services (excluding adult courses) increased by more than 40%. The growth was due to strong user demand and the launch of our new digital content services. For example, Youdao Bowen, High School Services and Youdao Ledu are all growing, and we also have new learning services this year. Therefore, we are confident in the growth of learning services.
Second, for smart hardware, we’ve also seen a good recovery. In March, the number of dictionary pen activations increased by 20% year-on-year. We plan to release new smart hardware in the second and third quarters.
Third, advertising has grown for two consecutive quarters. Advertisements grew 58% year-over-year in the fourth quarter of last year. In the first quarter, the growth rate was even higher, reaching nearly 80%. In our view, we are in an advertising growth cycle. The algorithmic upgrades we made to the platform in the fourth quarter proved to be very effective, which allowed us to attract more customers and more budgets. Under the current macro environment, merchants are more inclined to effect advertising to accelerate recovery. Therefore, we expect the advertising growth cycle to continue.
That’s why we’re confident about the full year 2023.
Driving innovation in generative AI for educational learning
Q：Please tell us about our progress in the field of AI？
A: Generative artificial intelligence is a revolutionary technology, and we intend to develop this technology into our competitive advantage. The impact of generative artificial intelligence on education and learning is enormous, and we are committed to driving innovation in this area.
To this end, we officially announced “Ziyue”, a large language model in the field of education, which aims to achieve the goal of personalized learning and tutoring through the development and application of large language models. AI teachers can deeply understand the content and quickly grasp the learning styles and needs of students. Providing an efficient teaching experience is the ultimate goal of educational technology, and products with generative artificial intelligence will be in high demand in the market.
We have made rapid progress. We understand that rapid iteration is critical when developing revolutionary new technologies. We have released several new products and features based on generative artificial intelligence. As we mentioned before, the AI-Box function in Youdao translation, the speaking function in Youdao dictionary pen, and the AI voice review based on generative artificial intelligence in our Go course. In less than a month since the launch of AI-Box, it has been used nearly 1 million times, which is a good momentum.
I also want to add that Youdao has been applying AI technology to the education field for 6 years and has performed well in the past, and now this process will accelerate. This started with the release of Youdao neural machine translation technology in 2017. In 2018, we applied Transformers to the field of translation. In 2019, we embedded Transformers into the dictionary pen. In 2020, we deployed a high-quality speech recognition engine based on Transformers. In 2022, we transplanted the engine into the dictionary pen P5 terminal. So we think we already have a first-mover advantage in this space.
Because we are already investing heavily in AI technology, especially in transformers technology, we don’t expect to need to increase the overall R&D expenses to deploy generative artificial intelligence. In doing so, we will leverage our existing investments, redeploy and optimize our R&D resources.
In conclusion, I would like to reiterate that we remain committed to complying with laws and regulations related to artificial intelligence to ensure that our technologies are developed and utilized in an ethical and responsible manner.
The smart hardware business rebounded, and the number of dictionary pen activations in March increased by more than 20% year-on-year
Q：What is the main reason for the decline in the net revenue of smart hardware in the first quarter?
A: As we mentioned before, the main reason for the 16% decline in smart hardware revenue in the first quarter was the epidemic. In January and early February, consumer demand was weak, and some offline channels were not open for business. However, at the beginning of the spring semester, demand quickly recovered and the channel began to function normally. Therefore, in March, new activations of dictionary pens increased by more than 20% year-on-year, and the business rebounded.
Both consumer demand and channels have met our expectations since March. Our teams are working hard to drive product innovation and drive growth. Our newly launched Kaikoushuo and Baidu Wangpan have received very positive feedback. Because of the focus on generative artificial intelligence, users are eager to use features like Speak. And Baidu Netdisk has been one of the most popular features because many users are already using it to store learning materials.
The ecosystem is growing nicely. If you look at the growth of the overall dictionary pen user base, in the first quarter, monthly active users (MAU) of active dictionary pen users grew almost 40% year-over-year. This means more customers bought the device, actively enjoyed the product and were satisfied with the experience. This is great and will lead to more business opportunities for us.
Compared with other consumer electronics products, educational smart hardware has shown resilience in the current macroeconomic environment. Our new smart hardware will be released in Q3. We look forward to new products that will bring a better experience to our users.
In terms of sales channels, we expanded our coverage by exploring the possibility of live channel. We have cooperated with Li Jiaqi to hold nearly 20 live events with the theme of Youdao Dictionary Pen. This kind of cooperation not only helps to promote our sales, but also enhances the influence of our brand.
So we expect the growth of smart hardware revenue to gradually recover. We have confidence in the long-term development of smart hardware.
Three factors drive the advertising business to grow by 80% in the first quarter, and the positive momentum continues
Q：In the first quarter, our online marketing services net revenue grew 80% year-over-year. What are the main drivers of this growth?
A: As for advertising, customer value comes first. We have been working hard to create value for our customers. The 80% year-over-year increase in revenue in the first quarter shows that we are on the right track.
There are three main reasons for this:
First, macroeconomic recovery drives demand, especially for fast-moving consumer goods. This has led to growth in performance-based advertising revenue.
Secondly, because the upgraded advertising system launched in the fourth quarter of last year provided customers with more timely and accurate conversion data. Customers have given positive feedback on the higher precision marketing capabilities brought about by AI technology.
Third, the upgrade of our AI algorithm has significantly improved our ability to more precisely match advertisers with users. Our audience is mainly college graduates and young professionals. With the help of our advertising team, our client has recently had very successful marketing to audiences in industries such as FMCG, cosmetics and food. With the power of AI, we can make more accurate predictions and recommendations to better match our users and customers.
The positive momentum in online marketing services is expected to continue.