Youdao : Fourth Quarter 2022 Earnings Conference Call (Earning Release)

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Youdao Reports Fourth Quarter and Fiscal Year 2022 Unaudited Financial Results

Hangzhou, China - February 23, 2023 - Youdao, Inc. ("Youdao" or the "Company") (NYSE: DAO), a leading technology-focused intelligent learning company in China, today announced its unaudited financial results for the fourth quarter and fiscal year ended December 31, 2022.

Fourth Quarter 2022 Financial Highlights1

• Total net revenues were RMB1.5 billion (US$210.8 million), representing a 38.6% increase from the same period in 2021.
  o Net revenues from learning services were RMB806.3 million (US$116.9 million), representing a 39.2% increase from the same period in 2021.
  o Net revenues from smart devices were RMB407.0 million (US$59.0 million), representing a 28.1% increase from the same period in 2021.
  o Net revenues from online marketing services were RMB240.8 million (US$34.9 million), representing a 58.6% increase from the same period in 2021.
• Gross margin was 53.3%, compared with 42.5% for the same period in 2021.

Fiscal Year 2022 Financial Highlights

• Total net revenues were RMB5.0 billion (US$726.8 million), representing a 24.8% increase from 2021. o Net revenues from learning services were RMB3.1 billion (US$447.2 million), representing a 26.3%
  increase from 2021.
  o Net revenues from smart devices were RMB1.3 billion (US$182.2 million), representing a 28.2% increase from 2021.

• As previously disclosed, in compliance with applicable regulatory requirements, the Company had ceased to offer the after-school

tutoring services on academic subjects in China's compulsory education system (the "Academic AST Business") at the end of December 2021. The Academic AST Business met the criteria of discontinued operations. Retrospective adjustments to the historical statement of operations have also been made to provide a consistent basis of comparison for the financial results of the continuing operations. The financial information and non-GAAP financial information included in this press release are presented on a continuing operations basis, unless otherwise specifically stated.

1. Net revenues from online marketing services were RMB672.4 million (US$97.5 million),

representing a 13.2% increase from 2021.

• Gross margin was 51.6%, compared with 49.5% for 2021.

"Our ongoing investment in AI technology facilitated our ability to consistently introduce and broaden our digital content services and smart device offerings throughout 2022. In both the third and fourth quarters, the net revenues from our digital content services covered its costs and operating expenses, showing the improved health of our business. Our new smart devices launched in the second half of 2022, including upgraded dictionary pens and smart learning pads, were highly recognized by customers, which led to strong sales growth during the November 11 Shopping Festival. As a result of the solid performance of our new services and smart devices, we achieved record-high net revenues and our first-ever income from operations in the fourth quarter. Our improved financial and operating indicators demonstrate that we have the right strategy in place to support our growth trajectory," said Dr. Feng Zhou, Chief Executive Officer and Director of Youdao.

"Years of experience have taught us that the full value of AI cannot be realized on its own. To effectively support users, technologies must be integrated with sound business scenarios. Looking ahead, we will continue to prioritize our users. By leveraging our advanced technology and innovation, we will continue to introduce additional high-quality educational products and services to meet users' diverse and personalized demands." Dr. Zhou concluded.

Fourth Quarter 2022 Financial Results

Net Revenues

Net revenues for the fourth quarter of 2022 were RMB1.5 billion (US$210.8 million), representing a 38.6% increase from RMB1.0 billion for the same period of 2021.

Net revenues from learning services were RMB806.3 million (US$116.9 million) for the fourth quarter of 2022, representing a 39.2% increase from RMB579.3 million for the same period of 2021. The year-over- year growth was primarily driven by the strong sales performance from the new services initiated after the implementation of the "Double Reduction" Policy.

Net revenues from smart devices were RMB407.0 million (US$59.0 million) for the fourth quarter of 2022, representing a 28.1% increase from RMB317.7 million for the same period of 2021, primarily driven by the popularity of Youdao's newly launched products, such as the Youdao Dictionary Pen X5.

Net revenues from online marketing services were RMB240.8 million (US$34.9 million) for the fourth quarter of 2022, representing a 58.6% increase from RMB151.8 million for the same period of 2021. The year-over-year increase in revenues from online marketing services was mainly attributable to the increase in performance-based advertisements through third parties' internet properties.

Gross Profit and Gross Margin

Gross profit for the fourth quarter of 2022 was RMB774.7 million (US$112.3 million), representing a 74.0% increase from RMB445.3 million for the same period of 2021. Gross margin increased to 53.3% for the fourth quarter of 2022 from 42.5% for the same period of 2021.

Gross margin for learning services increased to 64.1% for the fourth quarter of 2022 from 51.4% for the same period of 2021, primarily attributable to the significant increase in revenues, improved economics of scale and ongoing optimization of Youdao's faculty compensation structure.

Gross margin for smart devices increased to 46.2% for the fourth quarter of 2022 from 30.8% for the same period of 2021. The improvement was mainly attributable to the popularity of Youdao's newly launched Youdao Dictionary Pen X5, which carries a higher gross margin than other products.

Gross margin for online marketing services was 29.2% for the fourth quarter of 2022, compared with 32.6% for the same period of 2021. The decrease was mainly attributable to the increase in performance-based advertisements through third parties' internet properties, which typically have a lower gross margin profile.

Operating Expenses

Total operating expenses for the fourth quarter of 2022 were RMB750.0 million (US$108.7 million), compared with RMB693.6 million for the same period of last year.

Sales and marketing expenses for the fourth quarter of 2022 were RMB515.9 million (US$74.8 million), representing an increase of 22.7% from RMB420.4 million for the same period of 2021. This increase was mainly driven by increasing sales and marketing efforts associated with Youdao's learning services and smart devices.

Research and development expenses for the fourth quarter of 2022 were RMB179.5 million (US$26.0 million), representing an increase of 5.4% from RMB170.2 million for the same period of 2021. The increase was primarily due to higher payroll-related expenses associated with a larger number of development and technology professionals in smart devices.

General and administrative expenses for the fourth quarter of 2022 were RMB54.6 million (US$7.9 million), representing an increase of 18.4% from RMB46.1 million for the same period of 2021. The increase was mainly attributable to an increase in employee related expenses in the fourth quarter of 2022.

Impairment of intangible assets from business combination for the fourth quarter of 2021 reflected the impairment of the intangible assets related to a subsidiary acquired due to the adverse development of its business and change of the regulatory environment.

(Loss)/Income from Operations

As a result of the foregoing, income from operations for the fourth quarter of 2022 was RMB24.7 million (US$3.6 million), compared with loss from operations of RMB248.3 million for the same period in 2021. The margin of income from operations was 1.7%, compared with margin of loss from operations of 23.7% for the same period of last year.

Net (Loss)/Income from Continuing Operations Attributable to Youdao's Ordinary Shareholders

Net income from continuing operations attributable to Youdao's ordinary shareholders for the fourth quarter of 2022 was RMB12.3 million (US$1.8 million), compared with net loss from continuing operations attributable to Youdao's ordinary shareholders of RMB215.9 million for the same period of last year. Non- GAAP net income from continuing operations attributable to Youdao's ordinary shareholders for the fourth quarter of 2022 was RMB31.1 million (US$4.5 million), compared with Non-GAAP net loss from continuing operations attributable to Youdao's ordinary shareholders of RMB168.2 million for the same period of last year.

Basic and diluted net income from continuing operations per American depositary share ("ADS") attributable to ordinary shareholders for the fourth quarter of 2022 was RMB0.10 (US$0.01), compared with basic and diluted net loss from continuing operations per ADS attributable to ordinary shareholders of RMB1.75 for the same period of 2021. Non-GAAP basic and diluted net income from continuing operations per ADS attributable to ordinary shareholders was RMB0.25 (US$0.04), compared with Non-GAAP basic and diluted net loss from continuing operations per ADS attributable to ordinary shareholders of RMB1.37 for the same period of 2021.

Balance Sheet

As of December 31, 2022, Youdao's cash, cash equivalents, restricted cash, time deposits and short-term investments totaled RMB1.0 billion (US$147.4 million), compared with RMB1.6 billion as of December 31,

2021. For the fourth quarter of 2022, net cash provided by continuing operating activities was RMB84.1 million (US$12.2 million), capital expenditures totaled RMB3.8 million (US$0.5 million), and depreciation and amortization expenses amounted to RMB11.7 million (US$1.7 million). Youdao's ability to continue as a going concern is dependent on management's ability to implement an effective business plan in future periods in light of the changing regulatory environment, generate operating cash flows and continue to be able to obtain outside sources of financing as necessary for Youdao's future development. As of the date of this release, Youdao has received various financial support from the NetEase Group, including, among others, RMB878.0 million short-term loans and US$80.0 million long-term loans with maturity dated March 31, 2024 drawn down under the US$300.0 million revolving loan facility.

As of December 31, 2022, the Company's contract liabilities, which mainly consisted of deferred revenues generated from Youdao's learning services, were RMB1.1 billion (US$154.7 million), compared with RMB1.1 billion as of December 31, 2021.

Fiscal Year 2022 Financial Results

Net Revenues

Net revenues for 2022 were RMB5.0 billion (US$726.8 million), representing a 24.8% increase from RMB4.0 billion for 2021.

Net revenues from learning services were RMB3.1 billion (US$447.2 million) for 2022, representing a 26.3% increase from RMB2.4 billion for 2021. The increase was primarily driven by the strong sales performance from the new services initiated after the implementation of the "Double Reduction" Policy.

Net revenues from smart devices were RMB1.3 billion (US$182.2 million) for 2022, representing a 28.2% increase from RMB980.4 million for 2021. The increase was primarily driven by the popularity of Youdao's newly launched products, such as the Youdao Dictionary Pen X5.

Net revenues from online marketing services were RMB672.4 million (US$97.5 million) for 2022, representing a 13.2% increase from RMB593.9 million for 2021. The increase was attributable to the increase in the sales of performance-based advertisements through third parties' internet properties.

Gross Profit and Gross Margin

Gross profit for 2022 was RMB2.6 billion (US$375.0 million), compared with RMB2.0 billion for 2021. Gross margin for 2022 was 51.6%, compared with 49.5% for 2021.

Gross margin for learning services increased to 62.0% for 2022 from 59.8% for 2021, primarily attributable to the significant increase in revenues, improved economics of scale and ongoing optimization of Youdao's faculty compensation structure.

Gross margin for smart devices increased to 39.1% for 2022 from 36.9% for 2021, primarily attributable to the substantial rise in sales volume of Youdao Dictionary Pen X5, which carries a higher gross margin than other products.

Gross margin for online marketing services was 27.4% for 2022, keeping flat with 28.1% for 2021.

Operating Expenses

Total operating expenses for 2022 were RMB3.4 billion (US$487.3 million), representing an increase of 14.6%, compared with RMB2.9 billion for 2021.

Sales and marketing expenses for 2022 were RMB2.3 billion (US$337.5 million), representing an increase of 12.1%, compared with RMB2.1 billion for 2021. This increase was mainly driven by increasing sales and marketing efforts associated with Youdao's learning services and smart devices.

Research and development expenses for 2022 were RMB803.8 million (US$116.5 million), representing an increase of 32.3%, compared with RMB607.4 million for 2021. The increase was primarily due to higher payroll-related expenses associated with a larger number of development and technology professionals in smart devices and education digitalization solutions.

General and administrative expenses for 2022 were RMB229.2 million (US$33.2 million), representing an increase of 20.4%, compared with RMB190.3 million for 2021. The increase was mainly attributable to an increase in employee related expenses in 2022.

Impairment of intangible assets from business combination for 2021 reflected the impairment of the intangible assets related to a subsidiary acquired due to the adverse development of its business and change of the regulatory environment.

Loss from Operations

Loss from operations for 2022 was RMB774.7 million (US$112.3 million), compared with RMB943.2 million for 2021. The margin of loss from operations was 15.5%, compared with 23.5% for 2021.

Net Loss from Continuing Operations Attributable to Youdao's Ordinary Shareholders

Net loss from continuing operations attributable to Youdao's ordinary shareholders for 2022 was RMB720.9 million (US$104.5 million), compared with RMB895.4 million for 2021. Non-GAAP net loss from continuing operations attributable to Youdao's ordinary shareholders for 2022 was RMB639.9 million (US$92.8 million), compared with RMB788.3 million for 2021.

Basic and diluted net loss from continuing operations per ADS attributable to ordinary shareholders for 2022 was RMB5.83 (US$0.84), compared with RMB7.36 for 2021. Non-GAAP basic and diluted net loss from continuing operations per ADS attributable to ordinary shareholders was RMB5.18 (US$0.75), compared with RMB6.48 for 2021.

Operating Cash Flow from Continuing Operations

For 2022, net cash used in continuing operating activities was RMB531.4 million (US$77.0 million), capital expenditures totaled RMB69.8 million (US$10.1 million), and depreciation and amortization expenses amounted to RMB42.2 million (US$6.1 million).

Share Repurchase Program

On November 17, 2022, the Company announced that its board of directors had authorized the Company to adopt a share repurchase program in accordance with applicable laws and regulations for up to US$20 million of its Class A ordinary shares (including in the form of ADSs) during a period of up to 36 months. As of the date of this release, the Company accumulatively repurchased an aggregate of approximately 1.8 million ADSs for approximately US$10.0 million from the open market under the share repurchase program.

Conference Call

Youdao's management team will host a teleconference call with simultaneous webcast at 5:00 a.m. Eastern Time on Thursday, February 23, 2023 (Beijing/Hong Kong Time: 6:00 p.m., Thursday, February 23, 2023). Youdao's management will be on the call to discuss the financial results and answer questions.

Dial-in details for the earnings conference call are as follows:

United States (toll free):	[phone]
International:	[phone]
Mainland China (toll free):	400-120-1203
Hong Kong (toll free):	800-905-945