(Image source: Visual China)

Beginning in 2021, the education and training industry has been significantly divided. Today, New Oriental and NetEase are completely two “species”.

On May 23, NetEase Youdao released its first quarter earnings report. During the reporting period, NetEase Youdao achieved net revenue of 1.39 billion yuan, a year-on-year increase of 19.7%, and operating profit of 0.3 billion yuan, turning a loss into a profit. For the first time, it achieved positive operating profit for two consecutive quarters.

After the “double reduction,” Youdao focused on the path of technology and did many businesses with large investments and deep barriers. Getting to the edge of profit meant that Youdao crossed a critical threshold.

Key Metrics: Health

The entire financial report revealed several key information.

Resume growth. It wasn't the fastest growing quarter, nor was it the quarter with the highest revenue scale, but it still showed momentum of growth. Revenue of 1.39 billion dollars set a record high for the first quarter and exceeded market expectations.

Profits have improved markedly. In the current macro environment, profits are almost “politically correct.” For example, iQiyi's revenue fell 5% in the first quarter, but profit increased 6%, and the stock price surged 12% on the trading day after the earnings report was released.

In the first quarter of this year, Youdao had an operating profit of 30 million yuan and net profit of 12.4 million yuan, all of which turned losses into profits over the same period last year. This is the second consecutive quarter where you have reversed losses.

In recent quarters, Dao has been strengthening cost management. This quarter, marketing expenses decreased 19.4% year over year, and R&D expenses decreased 19.7% year over year. With expenses reduced by 20%, both a double-digit increase in revenue was achieved, and losses were reversed. This shows that Youdao's growth this quarter has had a new driving force.

The driving force comes from the high-frequency term “AI” mentioned in financial reports. Youdao is one of the few educational institutions that elevate AI to corporate strategy. Over a period of more than two years, the “Ziyue” model was released and applied. Products such as HiEcho and Little P were launched one after another. Youdao has basically achieved the “soft+hard” approach of the big model. Supported by the results of the big model, Youdao established a two-wheel drive model for educational content+generative AI applications, thus driving growth beyond expectations.

Profit performance depends on technology passing through the early stage of intense investment. Yudao's gross profit is not low; it is around 50% all year round. However, the R&D and marketing investment for major models and related applications in the last two years has been quite rigid, which will drag down profits. Profitability now indicates that AI is transitioning from a period of technology investment to a period of transformation of results.

Zhou Feng mentioned a key data, “We used the advantages of AI technology to drive a year-on-year increase of more than 140% in total product transactions (GMV) for subscription services in the first quarter.” In fact, the role of AI in leading businesses is far more than that. AI also plays a key role in the advertising business, and the net revenue of domestic RTA advertising increased by more than 100% over the same period last year. AI is already fully involved in leading businesses, bringing effective drivers for business growth.

This is in line with the current basic trends in the development of the AI industry. Baidu and Ali also mentioned the role of AI in their financial reports. Compared to the comprehensive big model, the big vertical model business is more focused and has a more direct effect.

However, there were new changes in the combination of AI and business this quarter.

Business “horse racing”, focusing on three strategies

Last year was the first year of the big AI model, and there are clear signs of “horse racing” with good practices. As the application layer of large models accelerates, the trend of strategic focus is more obvious.

This is a choice with a higher success rate. At the stage of crossing the river, betting all resources on one technical point is too risky. After trying many parties, they can concentrate their efforts to maintain competitiveness while taking into account robustness.

Youdao has had a very broad layout in the past few years. Take smart hardware as an example. In the past few years, Youdao has completed a full-stack layout of dictionary pens, learning machines, eye protection lamps, hearing aids, pocket printers, and translation king. The rationality of rich SKUs is phased and the business adjustment period can effectively support growth. In fact, the same is true. Youdao's revenue from 2022 to 2023 hit record highs one after another, with revenue exceeding 1.5 billion dollars in a single quarter.

Expanding SKUs is not only good or bad; product development and promotion require investment. Therefore, although losses have been declining, Yudao has never crossed the break-even line.

Beginning in the second half of last year, YouDao's strategy changed markedly, from fragmentation to focus. Taking hardware as an example, Youdao is starting to focus on strong SKUs. The continuous expansion and iteration of dictionary pens is typical. Currently, the new generation of dictionary pens has the entry-level series represented by the A6 Pro, the all-round series represented by the S6 Pro, the flagship series represented by the X6 Pro, and the professional edition series represented by the P6.

Dictionary pens are strong SKUs. According to online monitoring data from RUNTO Technology (RUNTO), Youdao focuses on high-end products in the dictionary pen market, ranked first in sales, and formed the first tier with Alpha Egg, accounting for more than half of the dictionary pen's share. Since April of this year, it has achieved top sales in major e-commerce channels such as JD, Tmall, and Douyin.

Strong SKUs focus on certainty and gain a definite market share first. At this stage, it is the key to improving the input-output ratio, improving the efficiency of internal resource utilization, and maintaining high-quality growth.

Smart hardware is a microcosm. With the completion of testing the waters, Dao's driving direction has basically focused on the three major strategies. In a quarterly report, Zhou Feng mentioned that it will focus on digital content services, online marketing services, and subscription membership services.

During the call, Zhou Feng mentioned that due to changes in market demand and other reasons, the adult business was actively reduced and more resources were concentrated on digital content services. In the first quarter, digital content services achieved revenue of 500 million yuan, an increase of 11% over the previous year. In this part of the business, Yudao mainly strengthens the advantages of AI technology to provide users with differentiated and personalized products and services.

Currently, the foothold of digital content services includes products such as “Linkshi” and “Blog News.” As a strong brand on the racetrack, Lingshi continues to strengthen its advantages. Product upgrades were carried out this quarter, introducing hierarchical teaching and teaching according to ability to give full play to the value of AI in learning results. Blog Wen, on the other hand, released a new product, “Cloud Tour 24 Cities,” which organizes classrooms using the learning task group teaching model to cultivate the ability to “think, read, and write”, and then effectively improve reading and writing skills through refined correction.

Subscription membership services are a new focus direction in the AI era. Obviously, Youdao is accelerating the commercial monetization capabilities of AI applications, and AI subscription services are one of the main ways Youdao AI commercialization has found. According to financial reports, the current business includes product terminals such as dictionary translation, Hi Echo, and Mr. Xiao P. Among them, Hi Echo is a software SKU that has already been launched by Dao. Quest Mobile rated it as AIGC's representative app for the education industry. Hi Echo recently launched version 3.0, collaborating with IELTS to launch IELTS speaking practice and mock exam modules; it also launched a bilingual Chinese-English teaching model for the study habits of Chinese users.

The conversion efficiency of the subscription membership model has always been an issue. Taking many neighboring countries as an example, their MAU of subscription members is 97.5 million, bringing in subscription revenue of about RMB 954 million, and an ARPU value of 9.9 yuan. Some people have clearly noticed this problem. The introduction of IELTS speaking exercises is clearly more targeted, focusing on test groups and speaking practice. It is expected that users will be more willing to pay and bring in more revenue.

Online marketing is one of the most impressive segments of growth in recent years. Net revenue for the quarter was 490 million yuan, a record high. It has already increased by more than 50% year-on-year in six quarters, making it the second growth curve that Youdao has successfully run under the AI strategy.

The direction of online marketing is also quite clear, deepening the application of RTA technology; increasing overseas market expansion efforts.

This is the idea of combining technology and the market. In overseas markets, Youdao launched the first domestic one-stop overseas marketing platform in the first quarter, reaching nearly 10 million KOL/KOC worldwide, directly covering more than 2 billion users, covering more than 220 countries or regions, helping companies such as NetEase Gaming, GAC Group, BYD, Huawei, Xiaomi, TCL, Hisense, Midea, Anker, Shein, and Miniso to go overseas. The application of RTA technology is an important support for expanding the market and improving transformation effects. In the first quarter, and in the first quarter, RTA technology expanded to various industries such as culture and entertainment, social networking, automobiles, and e-commerce, covering more than ten industries.

The trend of strategic focus is obvious, but it hasn't solved the core problem. What can AI actually bring to the business?

Accelerated scene transformation and efficiency leapfrog

This quarter, many listed companies are talking about AI helping their operations. However, how to reflect it, the business types of different enterprises are very different, and specific case analysis is needed.

Good AI technology is inseparable from another keyword “scene.” Zhou Feng stressed that simple AI technology cannot create sufficient value; only technology combined with business scenarios can truly solve implementation.

AI has contributed to the deep integration of multiple business scenarios. For example, the Ziyue 2.0 model has integrated with applications such as Hi Echo 2.0 and the AI tutor Xiao P who answers questions, which has contributed to the growth of subscription membership services; integration with learning service scenarios has contributed to improved learning effectiveness; and integration with advertising business has contributed to transformation efficiency. At the same time, technology and software applications are also integrated with hardware such as YouDao Dictionary Pen P6 and Youdao AI Learning Machine X20, enhancing the experience of hardware products.

The full integration of AIGC and the scene is further transferred to the efficiency layer after the product layer has fully improved the effect.

As can be seen from the dismantling business, the gross margin of Youdao's digital content service has reached 73%, which has exceeded 70% for three consecutive quarters. The logic is also very clear. AI boosts at levels such as teaching according to ability, improving the efficiency of word-of-mouth conversion. Take the “Bowen” product as an example. In the first quarter, Bowen supported more than 30,000 efficient and high-quality proofreading essays, which increased 80% month-on-month, driving the conversion rate to increase by 10% month-on-month. While AI helps the platform increase revenue, it also extends the service capabilities of employees, covers more users, and improves human efficiency in a more reasonable manner.

In terms of online marketing business, AI can analyze large amounts of user data to help enterprises construct accurate user profiles and achieve personalized marketing. AIGC, on the other hand, continues to play a role in creating advertising content materials, AI live streaming, and KOL marketing and data analysis, thereby unlocking one-stop service capabilities in terms of information such as advertising promotion effects and user feedback. Help brands reduce labor communication costs, improve promotion efficiency, and achieve efficient transformation of advertising value, thereby achieving continuous growth.

In the first quarter, RTA's net advertising revenue increased by more than 100% month-on-month, driving some customers to increase their conversion efficiency by more than 50%. E-commerce is going overseas, and new energy vehicle companies are going overseas... At this stage, Chinese companies are fully overseas. They are taking the lead in achieving refined management and improving transformation effects, and will also inevitably benefit from the benefits brought about by the growth of the industry.

There are also two key potential points in this. On the one hand, in the first quarter, almost all of the growth in the advertising business was achieved by our own technical strength. The NetEase Group accounts for a very small share of ad traffic and revenue. In the future, NetEase will inevitably give more traffic resources. Compared with pure external traffic, this portion of traffic is relatively more controllable. There will be more definite growth prospects in the future.

On the other hand, NetEase's resources also help improve customer puzzles. By strengthening collaboration with the Group, there is an opportunity to further enhance understanding of the needs of users in the game industry, thereby expanding other customers in the game industry and achieving faster growth.

Zhou Feng said at the earnings conference that we will continue to use our AI capabilities and understanding of education to explore application scenarios of the “Ziyue” model in education, advertising, and other fields. Accelerate the implementation of products and applications, and strive to better help users improve learning and work efficiency.

Looking at it from a dynamic perspective, smart AI technology continues to be invested and iterated, and its effects on scenarios and efficiency will increase accordingly. At the same time, the strategy gradually established a driving direction after going through business horse racing, and AI was more targeted. The effects of a positive cycle have basically been established, and the prospects for transformation to technological AI are becoming more and more clear.