Health and sustainable development are more important for long-term success than rapid growth in the short term, said Zhou Feng at the Netease Youdao earnings communication meeting.

Coincidentally, in the latest quarterly reports of Tal Education and New Oriental, 'stability' and 'balance' are also important keywords. Under this guiding thought, Netease Youdao's operating profit for the third quarter reached 0.11 billion yuan, setting a new historical high for quarterly profits. New Oriental and Tal Education also showed double-digit growth.

Compared to the broad layout of previous years, the information released this year shows that educational technology companies have entered a phase of health-oriented development. Looking at Youdao's third quarterly report, there are two significant development trends in this phase: first, focus, moving from scattered to concentrated business, shifting from diversified business to core business dominance. Second, AI+Education has become a mature strategy, entering a stage of large-scale commercialization, which can bring significant benefits to overall performance.

After more than three years of transformation, educational technology companies have moved out of experimental transformations and have begun to focus their businesses, concentrating efforts on AI+Education.

Stability is the priority, and profit capacity has increased sharply.

For the educational companies of the past two years, rapidly recovering growth was the main theme, but since this year, especially in the second half of the year, steady growth has become the core.

The transformation is based on a 'rapid non-lethal failure' mechanism, which encourages frequent failures, treating non-lethal failures as building blocks. In the absence of a clear transformation direction, this model can quickly identify focus directions and find potential businesses. Therefore, it can be seen that in 2022, the keywords spoken by Youdao CEO Zhou Feng were 'long-term sustainable growth' and 'opportunity', while in 2023, they shifted to 'long-term prospects' and 'sustainable development'.

In recent quarters, Youdao has become more pragmatic, seeking a more robust strategy. There is no longer blind expansion, and the focus on the three major business sectors of services, smart devices, and digital marketing has become clearer.

In terms of learning services, Youdao has actively reduced non-essential education service business and focused on its strengths in high school business. In terms of strategy, Youdao pragmatically chooses to leverage its strengths while avoiding weaknesses. Compared to New Oriental and tal education's advantage in offline, Youdao emphasizes strengthening its online presence. During the process of active reduction and focus, Youdao pays more attention to the UE (Unit Operating Profit) model. For high school education services, it focuses on small class teaching, seeking to balance scale and teaching effectiveness.

In terms of smart devices, Youdao emphasizes the "big single product" logic even more. A big single product is a single product that performs outstandingly in the market, has massive sales, and possesses high brand recognition and market influence. For Youdao, this specifically refers to the dictionary pen. In the third quarter, Youdao released a new X7 series of dictionary pens, continuing to strengthen its leading advantage in this niche product.

In online marketing, Youdao clearly understands the strong cash flow characteristics of advertising. For this business, Youdao is obviously more pragmatic, not blindly expanding but instead exploring new growth based on its existing strengths, focusing on marketing towards chinese enterprises going global, domestic KOLs and KOCs marketing, and AI material creation and placement.

"The leading category in the focused area of the company is the core of all competitiveness," said Zhou Feng.

With this core idea guiding it, Youdao's performance shows two significant characteristics: profitability rising sharply and stability being reliably ensured.

Profitability is one of Youdao's brightest indicators in the third quarter. The operating profit for a single quarter reached 0.11 billion yuan, turning a profit year-on-year. This is the first time in Youdao's history that it has achieved profitability in the third quarter, with the quarterly profit amount reaching a new historical high, while achieving positive profit for the first three quarters at once. Based on current trends, if the fourth quarter progresses smoothly, Youdao is very likely to achieve a profit for the entire year.

In this quarter, despite last year's historical high revenue and this year's active reduction of non-essential business, Youdao still achieved positive revenue growth, with third-quarter revenue reaching 1.57 billion yuan, a year-on-year increase of 2.2%, setting a new historical high, showcasing the business's stability and risk resistance capability. Youdao's cash outflow from operating activities was reduced to 85.4 million yuan, a year-on-year reduction of over 70%. On this basis, Youdao received financial support from Netease Group. In the third quarter, Netease provided 0.878 billion yuan of short-term loans and 12.84 million USD of long-term loans, ensuring operational stability.

However, Youdao dares to make proactive adjustments, which must be supported by core elements behind it. What is this core element?

AI has fully entered the entire business chain, with significant commercialization results.

2023 is the year of the explosion of AI large models. After Youdao released its first education large model 'Ziyue', Xueersi, Yuanfudao, and Zuoyebang successively launched their large models. Last year, the proportion of AI in educational technology companies significantly increased, and this year, AI has risen to a strategic level.

Youdao stated in its financial report, 'We will continue to implement large models, better empower digital content services, continuously iterate and upgrade the AI subscription service, and in advertising, leverage Youdao's advantages in AI technology, language, and services to continuously expand overseas markets.' From this statement, it can be seen that AI has fully entered Youdao's entire business chain, and Youdao has evidently become an AI technology company.

AI does not directly bring revenue; it is a foundational empowerment that drives upper-level business conversion, progressing step by step to ultimately optimize operations comprehensively.

The first step is the iteration of experience. AI has created a significant differentiation in the experience between applications and hardware, greatly improving the efficiency of online marketing. For learning services, Youdao's Leading Intelligent Learning System can use AI to automatically collect and categorize user errors, adding new questions to enhance the personalized learning experience for users. The AI simultaneous interpretation of Youdao Dictionary, supported by the 'Ziyue' large model, has greatly improved transcription accuracy and naturalness. 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 precision comparable to online NMT. In the field of online marketing, with the support of the AI large model, NetEase Zhixuan integrated AI advertising algorithm models and RTA technology, creating a recommendation model based on target user needs for AI large model applications.

The iteration of experience brings an increase in user numbers. In the third quarter, AI document translation processed a total of 0.1 billion documents. After introducing the AI simultaneous interpretation feature, the first quarter usage of Youdao Dictionary exceeded 4 million times, becoming the most popular paid feature. The 'Speaking Teacher' Hi Echo has become one of the most popular AI products in the country, ranking in the TOP 10 of the next day's retention list. Xiao P Teacher had nearly 20 million users in the third quarter, with a monthly compound growth rate exceeding 100%. The activation volume of the Dictionary Pen X7 series exceeded 0.1 million in the third quarter, and during this year's Singles' Day sales, Youdao Dictionary Pen achieved the highest total sales on both JD.com and Tmall platforms over the entire cycle, marking five consecutive years as the industry leader. Among them, the Youdao Dictionary Pen X7 Pro swept the championship in both JD.com and Tmall for single product sales in the dictionary pen industry, demonstrating overwhelming performance in this category. In terms of online marketing, in the third quarter, Youdao successfully assisted several projects in achieving brand exposure and rising popularity.

The value of ai goes far beyond just the experience; ai empowers various product lines at youdao while reinforcing the interaction and connectivity between them. For example, the addition of "speaking teacher" Hi Echo and teacher Xiao P in the youdao dictionary pen greatly enhances its interactivity. The seamless connection between product functionalities further improves the level of commercialization.

On one hand, the inter-promotion among businesses drives the overall revenue scale growth. In the third quarter, net income from youdao intelligent devices was 0.315 billion yuan, a year-on-year increase of 25.2%. After more than a year of continuous adjustment, it shows strong resilience. The total sales of ai subscription services approached 70 million yuan, with a year-on-year growth of over 150%, marking the seventh consecutive quarter of over 50% year-on-year growth and nearly 10% quarter-on-quarter growth. AI's support again led to online marketing services revenue reaching 0.489 billion yuan, a year-on-year increase of 45.6%, achieving growth for eight consecutive quarters.

On the other hand, the interaction between businesses has opened up profit space. In the third quarter, the gross margin of youdao's digital content services exceeded the level of the segmented market by more than 5 percentage points, generating considerable profit. The gross margin of smart hardware also reached its highest level since 2023.

AI has systematically organized youdao's business lines from the bottom up. This explains why youdao can withstand the fluctuations brought about by proactive adjustments and create new profit highs.

Of course, it is not just youdao that has elevated ai to a strategic height; in the latest quarterly report, tal education has also stated, "ai learning devices are one of the fastest-growing business lines." Hence, in the education technology sector, ai represents the future and dominates the future competitive landscape.

Technology, health, and the future of a larger market.

Combining the youdao financial report and current trends in the industry, the most natural implementation of ai in education is through smart hardware plus application ecology. As ai is still in the development stage, there is still enormous space for growth in this market, and competing in this market requires both product strength and operational capability.

Educational smart hardware and its supporting applications have already become the most promising market after consumer electronics. Previously, the technology iteration speed of educational hardware was not fast, but this was due to the technology level not yet meeting the demands. As AI transitions from quantitative to qualitative changes, the application in educational scenarios has reached the forefront.

On one hand, consumer electronics have long been in a mature market stage, with smartphones and tablets covering most scenarios, leaving little room for development. On the other hand, education is a strong and essential market, and its previous penetration rate was not high, allowing for growth potential. Research institution Luotu Technology estimates that total channel sales for 2024 are expected to reach 5.88 million units, a year-on-year growth of 24.6%.

Industry participants have clearly noticed this incremental market. Besides Youdao, iflytek co.,ltd., baidu, Yuanfudao, Zuoyebang, and Xueersi have all entered the scene. This year, advertisements for educational hardware have notably increased in public spaces such as buildings and elevators, with a large influx of players into the market. In conjunction with the development trajectory of consumer electronics, this situation is a result of demand dictating supply.

The current development stage of the educational hardware and applications market can be roughly compared to the smartphone market around 2010. In the early stages of development, it is essential to create products like those of apple and Xiaomi, streamline the supply chain, and sort out distribution channels, rather than rushing to manufacture new products like HTC or WP.

Those that can truly survive through the waves will definitely be institutions that have no shortcomings in products, channels, and supply chains.

Youdao has evidently noticed this. Zhou Feng stated, "We will continue to focus on our dictionary pen, which is our leading product in the market." From an analytical strategy perspective, having a major product allows Youdao to concentrate its resources, applying over ten years of accumulated foundation to its flagship product, enhancing its market competitiveness. Expanding from absolute moat products to other categories is a more solid approach. According to a results-oriented approach, Youdao's strategy is successful. The major products demonstrated strong resilience in development, weathering the previous adjustment period and entering a phase of rapid growth.

On this basis, in the third quarter, Youdao thoroughly reorganized its overall channel layout, achieving a more balanced proportion among major e-commerce platforms and strengthening the construction of offline specialty stores. The inventory was further optimized, effectively completing the historical task of clearing old stocks. The major product strategy further improved inventory turnover efficiency and significantly reduced storage costs. This series of adjustments ensures that Youdao is well-prepared for the competition ahead.

Youdao adopts a slim-down strategy for learning services, avoiding large-scale investments in online marketing businesses, which aligns with the logic of focusing on major products for smart devices. Healthiness has already become the primary choice. This is also a choice influenced by the overall environment. Currently, the capital markets are more profit-oriented and sustainable management-oriented, making long-term sustainability more crucial than reckless expansion. Therefore, whether it is Youdao, new oriental, or tal education, all place great emphasis on the healthiness of their business.

The competition in education technology empowered by ai is destined to be a long-term battle, making the ability to operate sustainably crucial at this stage.

As education technology companies increasingly emphasize stable growth and profitability, it indicates that the transformation exploration period has become history, and excessive investment no longer aligns with actual development. Continuing to explore the practical application of ai technology, focusing on profitable business operations, and reducing non-essential, non-dominant business lines are now the main characteristics of education technology companies both currently and in the medium to long term.