Youdao, Inc. (NYSE:DAO) Q4 2024 Earnings Call Transcript

Youdao, Inc. (NYSE:DAO) Q4 2024 Earnings Call Transcript February 20, 2025

Youdao, Inc. beats earnings expectations. Reported EPS is $0.09587, expectations were $0.07254.

Operator: Good day, and welcome to the Youdao 2024 Fourth Quarter and Full-Year Earnings Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Mr. Jeffrey Wang, Investor Relations Director of Youdao. Please go ahead.

Jeffrey Wang: Thank you, operator. Please note the discussion today will contain forward-looking statements related to the future performance of the company, which are intended to qualify for the safe harbor from liability as established by the US Private Securities Litigation Reform Act. Such statements are not guarantees of the future performance and are subject to certain risks and uncertainties, assumptions and other factors. Some of these risks are beyond the company’s control and could cause actual results to differ materially from those mentioned in today’s press release and this discussion. A general discussion of the risk factors that could affect Youdao’s business and financial results is included in certain company filings with the US Securities and Exchange Commission.

The company does not undertake any obligation to update this forward-looking information, except as required by law. During today’s call, management will also discuss certain non-GAAP financial measures for comparison purpose only. For the definitions of non-GAAP financial measures and reconciliations of GAAP to non-GAAP financial results, please see the 2024 fourth quarter and full year financial results news release issued earlier today. As a reminder, this conference is being recorded. A webcast replay of this conference call will be also available on Youdao’s corporate website at ir.youdao.com. Joining us today on the call from Youdao’s senior management are Dr. Feng Zhou, our Chief Executive Officer; Mr. Lei Jin, our President; Mr. Peng Su, our VP of Strategy and Capital Markets; and Mr. Wayne Li, our VP of Finance.

I will now turn the call over to Dr. Zhou to review some of our recent highlights and strategic direction.

Feng Zhou: Thank you, Jeffrey, and thank you all for participating in today’s call. Before we begin, I would like to remind everyone that all numbers are based on renminbi unless otherwise specifically stated. In the fourth quarter, our profitability further improved. Net revenues reached RMB1.3 billion, a 9.5% decline compared to the same period last year, primarily driven by a decrease in revenues from learning services. Since the summer we have proactively focused on courses and services with strong demand and maintained a rational approach to customer acquisition. This strategy has enhanced our overall health. Income of operations for the fourth quarter reached RMB84.2 million, representing an increase of 10.3% year over year.

Operating cash inflow was RMB158.2 million, largely stable compared with the same period of last year. For the full-year 2024, our key financial indicators demonstrated significant improvements with record profitability and cash flow performance. Net revenues totaled RMB5.6 billion, up 4.4% year-over-year. Income from operations amounted to RMB148.8 million, a remarkable turnaround from loss of operations of RMB466.3 million in 2023, marking a substantial improvement in financial health and achieving our first ever operating profit from a full-year basis. Operating cash outflow narrowed to RMB67.9 million, representing an improvement of 84.5% year-over-year. Now let’s review the major progresses across our business lines. In the fourth quarter, net revenues from learning services reached RMB617.7 million, down by 21.2% year-over-year.

By maintaining financial disciplines and focusing on courses like your Youdao Lingshi, we enhanced our financial health and long-term competitiveness significantly. Within the learning services segment, net revenues from digital content services reached RMB388.8 million in the fourth quarter, which covered the cost and operating expenses generating meaningful profits. We are committed to fostering long-term growth with top priorities centered on elevating customer satisfaction, optimizing operational vitality and driving forward-looking innovation initiatives. Youdao Lingshi has pioneered a customer acquisition path by focusing on operations on Director’s IP, leading to over 10% year-over-year growth in gross billings for the fourth quarter.

Additionally, our flagship product, which integrates AI, tiered learning videos, comprehensive learning counseling, and small-class study experiences, has enhanced customer loyalty, with retention rates surpassing 70% in the fourth quarter, an improvement of more than five percentage points, year-over-year. This rise in customer loyalty gives us greater confidence in the future development of Youdao Lingshi. In terms of STEAM courses, our franchise programming courses focus on informatics programming and have continuously iterated our product while transitioning from large classes to smaller ones. This approach has driven a more than 20% year-on-year increase in gross billings during the fourth quarter, with retention rates exceeding 70%. Next, within the learning services segment, we see strong growth in our AI-driven subscription services.

Total sales witnessed an impressive streak of eight consecutive quarters with over 50% year-over-year growth. For the full year of 2024, AI-driven subscription services generated sales of over RMB200 million, representing an increase of over 130% year-over-year. Recently, we launched and open-sourced China’s first step-by-step exposition reasoning model, Confucius-o1. As a 14B lightweight single model, Confucius-o1 supports deployment on consumer-grade GPUs and utilizes chain-of-thought technology to provide detailed problem-solving processes. It achieves higher accuracy in problem-solving with strong logic and reasoning capabilities and offers reasoning in Chinese. Notably, Confucius-o1 has officially been open-sourced to encourage broader use and innovation of reasoning models in the education sector.

Currently, Confucius-o1 has been implemented in our AI Learning Assistant, Mr. P AI Tutor which received positive feedback with over 100 million cumulative uses since the product launched. Youdao Desktop Translation has won the Best Online Education App Award at the Microsoft Store 2024 Annual App Awards. Furthermore, we are continuing to develop the Hi Echo ecosystem. In the fourth quarter, we partnered with Rokid to deliver an immersive AI-powered English learning experience through AI plus AR technology. Hi Echo, alongside Youdao Dictionary, was named one of the Top nine Apps of 2024 by LeiTech. We quickly embraced the recent DeepSeek wave by integrating both Confucius models and DeepSeek-R1 across many of our products. Our teams rapidly experimented with blending the best of both worlds: DeepSeek-R1 delivers robust reasoning and intelligence, while our domain-specific Confucius models are optimized for high-traffic scenarios unique to our offerings.

This powerful combination already enhances products like Mr. P AI Tutor, providing users with smarter, friendlier chat experiences, deeper insights into learning materials, and more effective support for challenging problems. Additionally, it enables us to offer faster, more responsive and cost-efficient service. For online marketing services, net revenues reached RMB481.7 million in Q4, representing an increase of 1.6% year-over-year. Gross margin increased to 34.2%, up 1.5 percentage points, year-over-year. In terms of domestic performance-based advertising, industries such as gaming, and AI tools, have seen record-breaking revenues. On the International advertising front, we recently established an official partnership with Google. This milestone lays a solid foundation for the further growth of our overseas advertising.

Additionally, in the field of overseas KOL, Key Opinion Leader marketing, we have leveraged our extensive database of global influencers and advanced technologies, such as large language models and image recognition. With these tools we have developed an evaluation model for KOL video conversion effectiveness. This model comprehensively analyzes trends in influencer videos and their comment sections, allowing us to identify which creator possesses strong virality and widespread reach, therefore driving high conversion rates. By using commercial conversion effectiveness as a key metric, the model assigns ratings to each influencer and uses existing data to predict their conversion potential. Furthermore, we played a pivotal role in the global promotion of the game Marvel Rivals.

In the first two weeks after the game’s launch, we successfully facilitated the release of nearly 200 pieces of KOL content, resulting in over 80 million impressions across the Internet. Looking ahead, we are optimistic about the long-term prospects of our online marketing services. We are committed to strengthening collaboration with clients in the gaming sector, particularly through enhanced synergy with NetEase Group in both traffic side and demand side. Turning to our Smart Devices segment. Net revenues reached RMB 240.4 million in Q4, marking an 8.1% year-over-year increase, with significantly improved financial health. Our flagship product, the Youdao Dictionary Pen, performed exceptionally well during the November 11 shopping festival, maintaining its position as the top seller in its category on both JD.com and Tmall for five consecutive years.

The X7 Pro also earned the top spot in single-item sales for dictionary pens on both platforms. These successes contributed to an annual 20% year-over-year increase of revenues for the dictionary pen. In addition, we are thrilled to announce that cumulative sales of our dictionary pen have surpassed 10 million units since its market debut. In terms of product, we recently launched the Youdao Dictionary Pen A7 Pro, featuring an instant scan and translation feature. The product offers top-tier performance at an accessible price point. Earlier this week, we also launched the SpaceOne, a brand-new dictionary pen, incorporating the DeepSeek reasoning model, delivering in-depth analytical reasoning capabilities and providing clearer guidance for complex problem-solving scenarios.

Moving forward, we are committed to continuing to pioneer innovations in smart devices, particularly for dictionary pen, enhancing personalized educational experiences for our users and strengthening our leadership in this product. In 2024, we executed a focused business strategy that combined rapid generative AI implementation with a steadfast drive towards operational profitability. It was a breakthrough year, during which several of our business units such as Youdao Ads, Youdao Lingshi, our dictionary pens, and our AI-powered English learning and translation apps emerged as clear leaders in their respective segments. Looking ahead, 2025 has started with the explosive popularity of DeepSeek, a trend that is reshaping the Chinese tech industry.

As we discussed on this call, we anticipated that open-source and reasoning models would revolutionize how people learn and market, and that transformation is now underway. Our response has been swift over the past few weeks. We have seamlessly integrated DeepSeek into our apps, courses, ad platforms and hardware devices. Yet, this is just the beginning. We believe that large AI models should serve not merely as additional features, but as autonomous agents that drive outcomes. They should be deeply embedded into our learning and work processes to unlock higher productivity. Accordingly, we are launching our AI Native strategy integrating AI more comprehensively across our business lines by, for example, automating our advertising platforms and introducing AI-driven tutoring for our course customers.

We’re excited by the rapid maturing of reasoning models and eager to deliver these innovative projects to our customers this year. Another significant milestone from 2024 was achieving full-year operating profitability for the first time. For 2025, given the current economic conditions and our ongoing progress, we are targeting moderate revenue growth alongside fast-paced improvements in our bottom line. With that, I will turn the call over to Su Peng to provide you with more detailed insights into our financial performance.

Peng Su: Thank you, Dr. Zhou, and hello everyone. Today I will be presenting some financial highlights from our fourth quarter and full year of 2024. We encourage you to read through our press release issued earlier today for further details. For the fourth quarter, total net revenues were RMB1.3 billion, or US$183.6 million, representing a 9.5% decrease from the same period of 2023. Net revenues from our learning services were RMB617.7 million, or US$84.6 million, representing a 21.2% decrease from the same period of 2023. The year-over-year decrease was due to our continued strategic focus on a more selective customer acquisition approach, prioritizing higher return on investment engagements. We believe despite the short-term revenue decline, this strategy has enhanced the overall resilience and operational efficiency of our business.

Net revenues from our smart devices were RMB240.4 million, or US$32.9 million, up 8.1% from the same period of 2023, primarily driven by the continued increase in sales of Youdao Dictionary Pen in 2024. Net revenues from our online marketing services were RMB481.7 million, or US$66 million, representing a modest increase from the same period of 2023. For the fourth quarter, our total gross profit was RMB640.8 million, or US$87.8 million, representing a 13.3% decrease from the fourth quarter of 2023. Gross margin for learning services was 60% for the fourth quarter of 2024, compared with 63.6% for the same period of 2023. Gross margin for smart devices was 43.9% for the fourth quarter of 2024, compared with 38.3% for the same period of 2023.

Gross margin for online marketing services was 34.2% for the fourth quarter of 2024, compared with 32.7% for the same period of 2023. For the fourth quarter, we reduced our total operating expenses to RMB556.6 million, or US$76.3 million, compared with RMB662.5 million for the same period of last year. Looking at our expenses in more detail: Sales and marketing expenses declined to RMB381.8 million, compared with RMB441.4 million in the fourth quarter of 2023. Research and development expenses were decreased to RMB120.7 million, compared with RMB168.1 million in the fourth quarter of 2023. Our operating income margin was 6.3% in the fourth quarter of 2024, compared with 5.2% for the same period of last year. For the fourth quarter of 2024, our net income attributable to ordinary shareholders was RMB83 million, or US$11.4 million, compared with RMB56.5 million for the same period of last year.

Non-GAAP net income attributable to ordinary shareholders for the fourth quarter was RMB91.8 million, or US$12.6 million, compared with RMB69.3 million for the same period of last year. Basic and diluted net income per ADS attributable to ordinary shareholders for the fourth quarter of 2024 were RMB0.71, or US$0.1 and RMB0.70, or US$0.1, respectively. Non-GAAP basic and diluted net income per ADS attributable to ordinary shareholders for the fourth quarter was RMB0.78, or US$0.11 and RMB0.77, or US$0.11, respectively. Our net cash provided by operating activities was RMB158.2 million, or US$21.7 million, for the fourth quarter. Turning to our full-year results, our total revenues for 2024 increased by 4.4% to RMB5.6 billion, or US$770.7 million.

Net revenues from our learning services for 2024 down by 12.7% year-over-year to RMB2.7 billion, or US$376.4 million. Net revenues from our smart devices for 2024 were RMB903.7 million, or US$123.8 million, remaining stable compared to 2023. Net revenues from our online marketing services for 2024 were up 48.3% year-over-year to RMB2 billion, or US$270.6 million. Total gross profit for 2024 were RMB2.7 billion or $376.5 million remaining stable compared to the 2023. Total operating expense for 2024 decreased to RMB2.6 billion or $356.2 million compared with RMB3.2 billion in 2023. Net income attributable to ordinary shareholders for 2024 was RMB82.2 million or $11.3 million. And basic and diluted net income per ADS attributable to ordinary shareholders for 2024 were RMB0.7 or $0.1. Looking at our balance sheet.

As of the December 31st, 2024, our contract liabilities, which mainly consists of deferred revenue generated from our Learning Services, were RMB961 million or $131.7 million compared with RMB1.1 billion as of December 31st, 2023. At the end of the period our cash, cash equivalents and current and non-current restricted cash and short-term investments totaled RMB662.6 million or $90.8 million. This concludes our prepared remarks. Thank you for your attention. We would now like to open the call to your questions. Operator please go ahead.

Q&A Session

Operator: Thank you. We will now begin the question-and-answer session. [Operator Instructions] The first question we have is from Brian Gong of Citi. Please go ahead.

Brian Gong: Thanks management for taking my question and congrats on decent profitability achieved for this quarter. Just a very quick question. Can management elaborate on the outlook for this year 2025 like for different business lines and our overall strategies? Thank you.

Feng Zhou: Thank you, Brian. So, our company is focused on two key areas. One is AI-driven education technology. The other is AI-driven online marketing technologies. So, I’ll talk about our strategy in 2025 along these two lines and we see significant opportunities in both areas. So, one our strategy is to enhance our offering by leveraging cutting-edge AI improving our content quality, gaining deeper insights into customer needs, and we try to establish leadership positions in each of our key product segments. So, as we discussed earlier, reasoning models have become very important for the education segment and also marketing segment. So, we anticipated rapid advancement in this area. And the actual pace actually exceeded our expectations.

Today not only do we have models that are really good at reasoning at solving problems, but also they are very affordable. So, I think if you look at history so breakthroughs in infrastructure technology has often lead to explosive growth in applications. So, we believe this year 2025 and likely next year will be very important pivotal for the widespread developing of large language model applications in education and advertising. So, that’s where we will be focusing on the product and tech side. And on the financial side, 2024 was a milestone year for us as we achieved profitability. And looking ahead to 2025, we plan to maintain a drive towards a modest revenue growth while keeping profitability a key focus for us, particularly in today’s challenging economic environment.

So we will remain financially disciplined balancing growth and profitability. So, looking at the separate businesses. So for Learning Services, we remain focused on high-demand products like Youdao Lingshi. So as we talked about, we think this is the right strategy. This is good for our financial health and this is also good for long-term growth. And we — for this year for courses, AI is going to be more important for us compared to past years, because the technology is finally — we believe it’s ready. It’s in place to introduce features like AI tutoring as a core element of our course offerings. So that’s a major project we are working on right now. So combined with our high-quality video learning content and expert service teams, so we believe AI tutoring will provide an enhanced — much enhanced learning experiences for our customers.

Additionally, we are also working on other AI features like AI-driven college admissions adviser. So we believe that will be important too. We’re also expanding our AI subscription services, which we offer as affordable and interactive learning experiences. So we recently upgraded Hi Echo. So with a much better conversation experience much lower conversation latency. So, that’s an example of what we will do down the line. So we will enhance a lot of our services and release new subscription services this year. And as regard to Smart Devices, we see continued opportunities in 2025. Our focus remains on maintaining market leadership with the dictionary pen category. And also at the same time, we’d like to introduce new category products. So we have a very good product pipeline for 2025.

So just two days ago, we launched our first high-end product of this year the Youdao SpaceOne pen. So this device represents our vision for what a next-generation AI tutoring learning device should look like. So it’s a very different product as our dictionary pens. So it is a very good example of how we continue to differentiate through this kind of innovation, so especially in terms of enhanced personalized learning experiences for home learners. So finally, but also very importantly, in online marketing services, the key trend continued to be — we see to be two-fold. One important trend is the shift of the multi-trillion yuan ad industry towards performance-based advertising. And the second trend is the growing application of AI of large language models in advertising.

So we are still a relatively small player in this space but we see significant growth opportunities in 2025 by leveraging these trends. So we plan to deepen our strategic collaboration with NetEase to integrate more traffic ecosystems and advertiser resources. The partnership, which began last year 2024, currently represents less than 10% of our ad revenue and we expect this to grow considerably in 2025. So in parallel, we will also continue to expand globally with a focus on key opinion leader, marketing and performance-based advertising. So moreover, we are actively exploring AI and LLM-driven projects that will enhance platform capabilities for our ad clients. So our goal is to replicate the step growth we achieved in Q4 last year Q4 2023.

While this kind of step growth is challenging to attain, we are committed to find them and pursue them. So, at the same time we continue to optimize and expand our business on a day-to-day basis. So we think that will ensure more stable and sustainable growth. So as our AI technology matures we will accumulate more customers develop more experienced teams contributing to our ad business growth. Yes that’s all from me.

Wayne Li: Thank you Dr. Zhou. And this is Wayne. I’d like to add more color from the financial perspective. There was remarkable financial progress in 2024 and we will continue to monitor the key financial metrics to track our progress in 2025, particularly in profitability and cash flow improvement aspect. First from the profitability front as mentioned by Dr. Zhou 2024 marks the first year to achieve the scalable profit. The net income attributable to Youdao’s ordinary shareholders for 2024 was over RMB 80 million compared with the loss of around RMB 550 million in 2023. The significant improvement in our bottom line, primarily stepped from our focus on strategic projects and the streamline of loss-making operating units. We believe AI and LLM-driven technology as mentioned by Dr. Zhou such as AI tutoring will enhance our advantages of our business.

It will further drive the improvement in financial performance in 2025. Looking ahead to 2025 with AI technology become more mature and cost effective, we will further leverage this advancement and implement new cost optimization measures to enhance business profitability. Second from a cash flow perspective, we have dramatically improved our net cash outflow from a substantial improvement from RMB 440 million net outflow in 2023 to around RMB 70 million in 2024. Such improvements step from both enhanced profitability and rapid growth of our AI subscription business. In 2025, we will continue our efforts in revenue expansion and cost control aiming to achieve historical breakeven in annual operating cash flow for further improvement. Regarding revenue growth as mentioned by Dr. Zhou, we anticipate continued moderate growth considering today’s challenging economic environment, while keeping profitability a key focus.

While we face significant challenges from competitors and business uncertainty we remain confident in delivering better business and financial performance in 2025.

Operator: The next question we have is from Brenda Zhao of CICC. Please go ahead.

Brenda Zhao: Good evening, Zhou and Su. Thanks for taking my question. Congrats on the improvement in your progress in your AI products both in education and in ad sector. So my question is about the online marketing business because we saw that the Q4 growth of this business is kind of like flattish. What kind of opportunities will arise for this business in 2025? Are we going to expand our — because previously we are mainly in the domestic market are we going to expand in the overseas market? And what’s our strategy? Thank you.

Lei Jin: This is Jin Lei. Thank you for your questions. In 2025 Youdao’s advertising strategy will focus on three interconnected growth drivers. The first we are intensifying our collaboration with NetEase Group through both technological integration and ecosystem expansion. By developing Youdao’s proprietary data analytics and AI algorithm across NetEase platforms they are driving measurable improvement in advertising efficiency building on our successful partnership with NetEase Cloud Music news and mailbox mail services. We are now identifying new high-potential traffic channels with the ecosystem to create additional advertiser touch points. Notably, our ad services for NetEase Group achieved over 200% year-over-year revenue growth in 2024, yet they still account for less than 10% of our total ad revenue, demonstrating substantial untapped potential.

Second, as you mentioned, our global expansion is gaining strong momentum. Last year marked two strategic breakthroughs becoming one Tier 1 TikTok partner helped us surpass RMB 100 million in international ad revenue with over 100% year-over-year growth, while our recent Google partnership certification established a sustainable foundation for cross-border growth. This alliance strategically position us to capture the emerging opportunities in global digital marketing through 2025 and beyond. Finally, we are revolutionizing our advertising tech stack through AI innovation, following the successful integration of our advertising LLM with DeepSeek’s capabilities. We are now developing an AI advertising optimizer. This solution automates campaign strategy generation aligned with marketing objectives enable dynamic budget optimization and execute real-time speed adjustment significantly enhance both position and operational efficiency in ad delivery.

Brenda Zhao: Thank you.

Operator: The next question we have is from Thomas Chong of Jefferies. Please go ahead.

Thomas Chong: Hi. Good evening. Thanks, management for taking my question. My question is about the priority for Learning Services this year. Thank you.

Peng Su: Thank you, Thomas. This is Su Peng. I will handle the question first. And I think the last year, we initiated the structured adjustments in our Learning Services product portfolios. We intensified the focus on the courses with robust demand especially in the Youdao Lingshi. We are phasing out non-essentials programs at the same time. This restructuring remains ongoing I think and it’s projected to conclude in the second half of this year. Upon completion, revenue from the Learning Services is expected to stabilize in the latter half of this year. I think Youdao Lingshi will serve as the strategic priority for Learning Services in this year 2025. We commit to the advance following the key initiatives to deliver the more personalized and efficient learning experience for our customers.

And at the same time, we expect the revenue and the gross billings of the Lingshi will keep growing in 2025 as well. But first, we think we will leverage the advanced capability of the DeepSeek the large language models. We will comprehensively upgrade the AI services within the Youdao Lingshi intelligent learning system. Post upgrade of the enhancement will include — the first is for more precisely, the identification of knowledge gaps, optimize the learning class design, enhanced clarify in QA and explanations, a more comprehensive college application planning solutions. Secondly, we are implementing the data-driven updates to the instructional videos beyond routine updates aligned with the curriculum revisions. Our primary update criteria will be derived from the students’ exercise accuracy rates within the intelligent learning system.

When the error rates exceeds the threshold, our dedicated adviser will proactively engage the students to collect feedback on the specific video content, expediate the consolidated feedback to the content managers and our R&D teams facilitate media video update and system redevelopments. And we think that will be the things we did in the 2025 on the Learning Services and we feel confident about the business and the content and we expect to keep delivering the high-quality products and services to our students. Thank you, Thomas. I hope that answers your questions.

Operator: The next question we have is from Bo Zhang of Huatai Securities. Please go ahead.

Bo Zhang: Thanks for taking my question. This is Zhang Bo from Huatai. My question is after the integration of Youdao large language model, Confucius with DeepSeek, what positive impact can we expect on the business operation? Thanks.

Feng Zhou: Yes. Thank you, Zhang Bo for the question. Yes, I will take it. So I think there are three points. So first, building on DeepSeek, particularly DeepSeek R1, the reasoning models, it opens up a lot of exciting opportunities for us. So, we’re one of the first teams in the education and advertising area to integrate DeepSeek into our including Mr. P AI Tutor Youdao Dictionary, Youdao Dictionary Pen Chinese — China University MOOC and Youdao Smart Cloud. So we’re doing it first. However what’s more powerful is enhancing these models with domain-specific, business-specific knowledge. So one, key technology that you can enhance the base model, the base DeepSeek model is to augment it with a retrieval augmented generation, RAG technology.

So this integrates the model with knowledge bases and vector databases to combine general capabilities with domain-specific expertise. So, our team has significant experience with RAG and our QAnything framework. It is actually one of China’s leading RAG platform. So that’s a good example. So we’ve also developed popular RAG applications in education such as our AI college application assistant last year. So, now with DeepSeek, we will strengthen these RAG applications making them more effective. So from a competitive standpoint, the deeper integration of strong models into applications is I think it’s quite similar to developing apps for mobile platforms like iPhone and Android. So, those teams with better app building experiences, I think right now, we will have an edge here.

So these teams will develop AI applications better, just as we have been able to develop mobile applications very well. So that’s one. So second point is — so agents are a newer, very promising application model of large language models. So, instead of just answering single questions, so agents solve multistep tasks. So AI agents have already seen success in areas like programming and I expect education and advertising to be the next major area where agents will be very successful. So Jin Lei just talked about AI ad optimizing optimizers. Yes, these are agent applications that we are already exploring and we already see very good early results for these AI agents. So there are a lot of very highly frequent scenarios, where we see that a strong model combined with agent technology can automate tasks with a very high success rate, such as tutoring on specific topics, such as optimizing advertising assets and performing ad attribution analysis Gwango Qwen [ph].

Third, we are enhancing general purpose large-scale models with smaller more domain-specific vertical models. So this is different from RAG. So, essentially, RAG is you combine a model with knowledge base. So vertical model is you develop new smaller and more specialized models. This actually has been our strategy since 2023 and it’s proving to be highly effective. So for instance, we recently open-sourced the Confucius-o1-14B reasoning model I talked about. So this one is optimized to run on a consumer-grade GPU like the 30-90 or 40-90. So it actually outperforms the skilled version of DeepSeek R1 of the same size of the same 14B size in mass tasks. So basically we developed a model for mass tasks that’s more effective than DeepSeek of the same size.

So I think that’s very exciting. So — and what’s also exciting is that Confucius-o1 was developed in — by our teams in just a month just under a month. So that showcases how rapid open-source models development has empowered our team and others in the industry to create competitive vertical models. So alongside Confucius-o1 we’ve actually also developed a Confucius translation model with just 10% of the parameters of larger-sized general models. And also — and we also have Confucius edge model with fewer than one billion parameters that delivers offline translation quality better than many online NMT translation models. So as we continue to understand and anticipate usage scenario in the coming quarters, we will quickly upgrade these models and develop new vertical models.

So keeping R&D and compute cost efficient while delivering valuable results to our users and business yes. So I hope that answers your question. Thank you.

Bo Zhang: Thanks. Helpful. Thank you.

Operator: Thank you. This concludes our question-and-answer session. And I would like to turn the conference back over to management for any closing remarks.

Jeffrey Wang: Thank you once again for joining us today. If you have any further questions please feel free to contact us at Youdao directly or reach out to Piacente Financial Communications in China or the US. Have a nice day.

Operator: The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.