SkyWater Technology Q1 2024 Earnings Call Transcript

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Provided by Quartr
May 23, 2024

There are 10 speakers on the call.

Operator

Good day, and welcome to the Jodal 20 24 First Quarter 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.

Speaker 1

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 U. S. Private Securities Litigation Reform Act. Such statements are not guarantees of the future performance and are subject to certain risks and uncertainties, assumptions and

Speaker 2

other factors.

Speaker 1

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 these discussions. A general discussion of the risk factors that could affect Yudao's business and financial results is included in certain company filings with the U. S. Securities and Exchange Commission. The company does not undertake any obligation to update these forward looking information, except as required by law.

Speaker 1

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 4th quarter financial results news release issued earlier today. As a reminder, this conference is being recorded. A webcast replay of this conference call will be available on YuuDao's corporate website at ir. Yudao.com.

Speaker 1

Joining us today on the call from Yuudao's senior management are Doctor. Feng Zhou, our Chief Executive Officer Mr. Lei Jin, our President Mr. Peng Shu, our VP of Strategy and Capital Markets and Mr. Wayne Li, our VP of Finance.

Speaker 1

I will now turn the call over to Doctor. Zhou to review some of our recent highlights strategic directions.

Speaker 3

Thank you, Jeffrey, and thank you all for participating in today's call. Before we begin, I'd like to remind everyone that all numbers are based on renminbi, unless otherwise specifically stated. We had a solid quarter in Q1 2024. Net revenues reached RMB1.4 billion, marking 19.7% year over year growth. Income from operations amounted to RMB29.9 million, a significant turnaround from the RMB195.8 million loss from operations in the same period of last year.

Speaker 3

This marks our first ever profitable first quarter and our first ever consecutive 2 quarters of profitability. In terms of cash flow used in operating activities in the Q1 was RMB RMB391 1,000,000 as Q1 is seasonally low on cost renewals. This represents an improvement of 10.5% year over year. Now, let's review the development across our business lines. Learning services revenue reached RMB718 1,000,000, largely flat compared with the same period last year.

Speaker 3

Within the segment, digital content services maintained strong momentum with net revenues of RMB499.8 million in Q1, marking a 11% year over year growth. Gross margin has consistently exceeded 70% for 3 consecutive quarters. Furthermore, the net revenues generated by digital content services cover the costs and operating expenses and yielded meaningful profits. In terms of product enhancements, we upgraded Yudao Ling Shi in Q1 by introducing a tiered teaching approach tailored to individual needs and capabilities. More recently, we concluded the spring renewals for Yudao Ling Shi students and the retention rates reached a historic high of over 70%, up more than 10 percentage points year over year.

Speaker 3

This retention rate is remarkably high for this age group and competitive with offline services, while offering higher gross margins. Additionally, we launched a new product for Youdao Literature called Virtual Tour of 24 Cities, designed to help students improve their reading and writing abilities. Lastly, leveraging our AI capabilities, we efficiently offered over 30,000 high quality writing refinements in the Q1 through AI writing refinements, 80% more than last quarter. Next in learning services are our AI driven apps and services. On previous calls, we have discussed this extensively our AI initiatives, particularly our large language model projects.

Speaker 3

We believe Youdao is uniquely positioned to bring AI experiences to a lot of users in China and other countries, driving business growth due to our large user base and the long standing experience in algorithm driven products. Adopting a lean approach, we developed our models and multiple applications simultaneously at a fast pace. I'm pleased to share that the total sales of our AI driven subscription services reached approximately RMB50 1,000,000 for the first time in Q1, representing a remarkable year over year increase of over 140%. Actually, this segment has grown year over year by over 50% for 5 consecutive quarters, and we expect the trend to continue. These AI driven subscription services primarily include Yudao Dictionary, Yudao Desktop Translation, High Echo and multiple international apps that provide translation, language learning and other services.

Speaker 3

While we are still in the early days, the future looks incredibly promising. We firmly believe that consumer facing products are the largest growth opportunity for AI at present and the combination of large language models and subscriptions are very natural routes for growing AI products. For instance, leveraging our proprietary large language model, we have increased the accuracy of Chinese English translation approximately 98%, driving more subscriptions. Additionally, we recently launched an upgraded version of Hi Echo in collaboration with the IELTS organization, introducing modules for IELTS speaking practice, simulated exams and a bilingual teaching mode to better cater to Chinese users' learning needs. Furthermore, Crest Mobile recognized HiEcho as a pioneer application in the education industry for AI generated content.

Speaker 3

Our online marketing services segment continues to demonstrate remarkable growth, with net revenues reaching a historic high of RMB492.7 million in the Q1, marking an impressive 125.9 percent year over year growth. This segment has sustained robust momentum, achieving over 50% year over year growth for 6 consecutive quarters, driven largely by the strong performance of real time API, RTA and the rapid expansion of domestic key opinion leader, KOL advertising verticals, both of which experienced over 100% year over year growth in the Q1, underscoring the segment's strength and our ability to capitalize on emerging trends. Looking ahead, we see multiple avenues for further growth, including leveraging industry trends like data management platforms, DNP, as well as strengthening our collaboration and synergy with the NetEase Group. Our partnership with NetEase brings us the benefit of their vast traffic sources and access to more customers within the group. In the Q1, less than 10% of our app revenue originates from NetEase, indicating significant future growth potential as we deepen the partnership.

Speaker 3

At the same time, our AI capabilities will empower the group to conduct advertising placements more accurately and efficiently across business lines, creating a mutually beneficial synergy that drives growth for both parties. Regarding the smart devices segment, net revenues were RMB181.2 million in the Q1, reflecting a 14.8% year over year decline. However, it is encouraging to note that the rate of decline has narrowed by 30 percentage points compared to the previous quarter, indicating a stabilization. On the product front, we recently released the Eudah Dictionary Pen S6 Pro, which quickly became the top selling dictionary pen in terms of sales volume on jd.com after its launch. While we continue to face headwinds in this segment, we remain confident in the medium to long term outlook for our learning devices, underpinned by our commitment to product innovation and our deep understanding of the education technology market.

Speaker 3

As usual, let me share with you some thoughts about our overall strategy. As our recent financials indicate, our business is nearing the achievement of sustainable profitability. A key strategic question for us is, how do we cross the sustainable profitability threshold and build long term growth in this highly competitive education technology sector? Our strategy is to maintain financial discipline and focus on a few key businesses with high growth and strong competitive advantages. Currently, we have identified the 3 areas where we are concentrating more energy and resources.

Speaker 3

First, our focus is on digital content services, in particular, for high school students. Over the past few years, Lingxi has emerged as the leading player in its segment. We believe there is a healthy multiline growth trajectory falling through in front of us. Secondly, we are focusing on online marketing services, which is approaching RMB 1,000,000 in quarterly revenues. We see 2 main growth drivers working in our favor, the trend of tech driven advertisement product innovations, including wide applications of RTA, DMP and particularly generative AI in the industry, as well as untapped customer acquisition opportunities as we achieve larger scale and product leadership.

Speaker 3

Thirdly, our focus is on AI driven subscription services, currently generating around RMB50 1,000,000 in quarterly total sales. Although relatively small at present, this segment is growing at a high speed with over 100% year over year growth this quarter. It is a key conduit through which our investments in AI will pay off. I'm pleased to share that we will be launching Mr. P AI tutor, the first all subject AI tutor in China as a free mobile app in June.

Speaker 3

We encourage you to try it out and provide us with feedback once it's available. In conclusion, we are laser focused on driving robust growth by offering premium online services, online learning services and spearheading AI innovations for consumers, while concurrently maintaining financial discipline. The future holds immense promise for AI driven learning, advertisement and consumer services. With that, I will turn the call over to Sookong to provide you with more detailed insights into our financial performance. Thank you.

Speaker 4

Thank you, Doctor. Zhou, and hello, everyone. Today, I will be the For the Q4, total net revenue were RMB1.4 billion or US492.8 million dollars representing a 19.7 percent increase from the same period of 2023. Net revenue from our learning services were RMB718 1,000,000 or US99.4 million dollars representing a 2% decrease from the same period of 2023. Net revenue from our smart devices were RMB181.2 million or US25.1 million dollars down 14.8% from the same period of 2023, primarily due to the decreased demand for the learning products in the Q1 of 2024.

Speaker 4

Net revenue from our online marketing services were RMB492.7 million or US68.2 million dollars representing a 125 0.9% increase from the same period of 2023. The year over year increase in revenue from the online marketing services was primarily to the increase in sales of the performance based advertisements through the 3rd party's Internet properties, which was driven by our continued investments in the cutting edge AI technology. For the Q4, our total gross profit was RMB681.5 million or US94.4 million dollars representing a 13.2% increase from the Q3 of 2023. Gross margin for learning services was 63.1% for the Q1 of 2024, compared with 62% for the same period of 2023. Gross margin for smart devices was 32.6% for the Q1 of 2024, compared with 39.6% for the same period of 2023.

Speaker 4

Gross margin for online marketing services was 34.3% for the Q1 of 2024, compared with 29.1% for the same period of 2023. For the Q1, total operating expense were RMB651.6 million or US90.2 million dollars compared with RMB797.6 million for the same period of last year. With that, for the Q1, our sales and marketing expense were RMB455.4 million, compared with RMB RMB565.2 million in the Q1 of 2023. Research and the development expense were RMB146.7 million, compared with RMB182.8 million for the Q1 of 2023. Our operating income margin was 2.1% in the Q1 of 2024 compared with operating loss margin of the 16.8% for the same period of last year.

Speaker 4

For the Q1 of 2024, our net income attributable to ordinary shareholders was RMB12.4 million or US1.7 million dollars compared with net loss attributable to the ordinary shareholders of the US204.4 million dollars for the same period of last year. Non GAAP net income attributable to the ordinary shareholders for the Q1 was RMB20.3 million, US2.8 million dollars compared with non GAAP net loss attributable to the ordinary shareholders of the RMB193.9 million for the same period of last year. Basic and diluted net income per ADS attributable to the ordinary shareholders for the Q1 2024 were RMB0.11 or US0.02 dollars and RMB0.1 or US0.01 dollars Non GAAP basic and diluted net income per ADS attributable to ordinary shareholders for the Q1 was RMB0.17 or US0.02 dollars Our net cash used in operating activity was RMB391 1,000,000 or US54.1 million dollars for the Q1. Looking at our balance sheet, as of March 31, 2024, our contract liability, which mainly consists of the deferred revenue generated from our online learning services, were RMB769.1 million or US206.5 million dollars compared with RMB1.1 billion as of December 31, 2023. At the end of the period, our cash, cash equivalents, restricted cash, term deposit and short term investment totaled RMB326 1,000,000 or US45.2 million dollars This concludes our prepared remarks.

Speaker 4

Thank you for your attention. We would now like to open the call for your questions. Operator, please go ahead.

Operator

We will now begin the question and answer session. Our first question comes from the line of Brian Kong with Citigroup. Please go ahead.

Speaker 5

Yes. Thanks management for taking my question and congratulations on decent results. My question is regarding digital content service, which has demonstrated rapid growth over the past several quarters. So management share, what are the primary factors growing future growth again? Thank you.

Speaker 4

Thank you, Brian. This is Sue Pang. We think the first is about digital content services, particularly Yodalix are the most in demand and financial robust parts with our learning services. In the last year, last year, net revenue from digital content services are for the it's around RMB2 1,000,000,000 for the RMB2 1,000,000,000, up about 11% year over year. Additionally, digital kind of services generated profit in the last in the full year, last year.

Speaker 4

In the Q1 of this year, net revenue from digital content services reached close to the RMB500 1,000,000, reflecting around 11% year over year growth as well. And we do not at the same time, we do not only keep the revenue growth at same level, but significantly improve the profitability at the same time. We expect we can just expand out the profitability of the digital and services quickly in this year. I think the factors which has driven the growth of the digital kind of services. Definitely, first is because we see the very strong demand from the market.

Speaker 4

That's the I think that's the part of the that's we see the signals from the market regarding our services. And secondly, it's about definitely we provide a pretty unique values to our customer, from our products. And we think about our two examples with our AI capabilities, we can offer the users academic diagnostics, personal learning test plans and recommended access following the video content consumptions. And also the AI based college admissions advisers, we call the AI provided comprehensive services such as college application assistance, course selection advice, as well as the college admissions policy guidance. We think that's the pretty unique value we provide to our customer for this product.

Speaker 4

I think in the remaining 3 quarters of this year, we will continue to focus the profitability of each product. For the key products and services such as Bingzhou, we will allocate more resources and efforts striving for the faster growth in this year. And secondly, we find a significant potential for the offline service as well. Through these initiatives, we aim to reach a broader range of students and provide a more high quality consulting services. While our data learning is primarily delivered online, we believe that is the integration of online and offline services.

Speaker 4

We think that we offer better services to all the students and customers as well. With that, we are pretty confident about the profitability of our digital services as we expect to see a rapid improvement in the full year of 2024. In addition, Xudalixin, our core products expect to remain a rapid growth in the forecast in the foreseeable futures. Thank you.

Speaker 3

Yes, Brian, this is Zhoukeng. Yes, I just want to add one point. So as Sookong just said, we are working on offline services for Lingxi as of right now. So some we already have about 10 cities in service right now. Yes, so this is an important initiative for the team.

Speaker 3

So, we think about online and offline a lot. So, I want to just want to add a little bit of thinking about this. So, we think online courses are really great. So, fundamentally, they are more efficient. And if we look at Lingxi, a lot of the cost content is actually delivered with pre recorded video.

Speaker 3

And this is a very good thing for the business because the users really like this format. It allows more freedom in how they schedule their time. And it's good for the business because of high efficient nature of prerecorded videos and AI content. However, we also recognize that to reach these students, potential students and also to provide consultation for students, a lot of students and parents, they prefer offline face to face kind of service. So we think the future is online is will be really great and we will kind of complement that with offline and combining the 2 will actually bring a lot of values to the users and also kind of opening new avenues of growth for the business.

Speaker 3

Thank you.

Speaker 6

Thank you.

Operator

Our next question comes from the line of Kenny Wang, CICC. Please go ahead.

Speaker 7

Thanks for taking my questions. So I have one question about our online market. I think our online marketing services have been experiencing a rapid growth for 6 consecutive quarters. So how could we achieve a sustainable growth in the future? Thank you.

Speaker 6

Hi, this is Leijin. As we discussed during the call last quarter, Yudao's AD business is performance based AD platform. We aggregate the traffic from the both within Youdao and outside of Youdao to serve the customers' marketing needs. And our competitive stance lies in the unique combination of the technology skills and the customer services and operation skills. In the Q1 of this year, our advertising business achieved net revenue of nearly RMB500 1,000,000 and a gross margin of 34.3%.

Speaker 6

Both of these are record highs. Additionally, this segment generates meaningful profit. Looking ahead, there are 3 key factors to drive the sustainable growth in the future. The first, continued technological empowerment. In the Q4, we expanded real time API RTA to cover it to include the industries such as entertainment, social media and automotive and e commerce, covering over 10 secondtors now.

Speaker 6

The proportion of RCA AD revenue has increased to around 30% in Q1. The implementation of RTA data strategy has improved conversion efficiency by over 50% for some time. Looking ahead, RTA revenue is excited to further increase By continuously optimizing AI algorithm and data analysis, we can better meet the diverse needs of our clients and improve advertising effectiveness. In addition, our data management platform, CMP, is a centralized application repository designed for collecting, storing and processing user data from multiple sources. This enable advertisers to gain a deep understanding of their target audience behaviors and the preference.

Speaker 6

Our D and P enhanced this by integrating user tags and audience package management functionalities. This future guide targets advertising, deployment and optimization, thereby improving advertising efficiency and the effectiveness. And then the second, the further expansion of customer acquisition opportunities. The proportion of the advertising traffic from net and the revenue from the NetEase Group was relatively small, indicating significant growth potential in the future. Moving forward, we will better utilize the traffic resources within the NetEase Group.

Speaker 6

Compared to the purely external traffic, the traffic from the NetEase is relatively more predictable and controllable. Furthermore, by our collaboration with NetEase Group, we will gain deeper insight into the needs of the gaming industry users, which will help us expand our client base in the gaming sector. The 3rd, overseas marketing expansion. In terms of global key opinion leader, KOL Marketing, we have access to over 5,000,000 global Internet celebrities, including more than 1,000 exclusive ones. We can provide the clients with personalized KOL marketing solutions, including QL selection, marketing strategy development, video content planning, as well as monitoring and optimization of KOL content performance.

Speaker 6

Our leading AI technology further empower global KOL marketing efforts to support the rapid international expansion of Chinese enterprises. Youdao ADS launched China's 1st 5 stop overseas marketing platform in Q1. Youdao ADS have already assessed several Chinese companies, including just like NetEase Games, BRD, Anchor and Xi in their global expansion efforts. Currently, the global KOL marketing business will still in the early stages, presenting substantial growth potential in the future. Thank you.

Operator

The next question comes from the line of Thomas Chong with Jefferies. Please go ahead.

Speaker 4

Hi, good evening. Thanks management for taking my question. My question is about what are the main products for our AI driven subscription services? Thank you.

Speaker 3

We applied AI and large language model heavily in multiple business lines, including advertising courses and subscriptions in apps. So AI subscriptions cover the last category. As we discussed in prepared remarks, AI subscription sales have been growing rapidly, up 140% this quarter year over year, reaching about RMB50 1,000,000. So to break it down a little bit for you, here are the major products that contributes to that. Yes, first is Yudao Dictionary and Yudao Desktop Translation.

Speaker 3

So, dictionary is our flagship mobile app and desktop translation is our most popular app for PCs and Macs. According to Cresta Mobile, they have over 100,000,000 combined monthly active users and are the top translation apps in China. So last year, we introduced the AI translation feature, powered by our large language model to last year to web users. In Q1, we significantly improved the translation quality, reaching 98% accuracy rate for English to Chinese, Chinese to English translation and they wrote it out to all users of Yudao Dictionary free of charge. So for more demanding scenarios, so paid subscription users enjoy more usage quotas.

Speaker 3

So the user feedback has been overwhelmingly positive, leading to a lot of new subscriptions. Currently, these two apps are the largest contributors to our subscription sales, and we expect some potential growth as our large language model gain more capabilities and expand into new usage scenarios. 2nd, there's a high echo. Yes, it is the world's 1st digital human language coach introduced last year. We recently launched a module tailored for IELTS Preparation, IELTS, in collaboration with the British Council.

Speaker 3

This module available through a separate subscription assists users to better prepare for the IELTS exam through personalized exercises, customized feedback and simulated mock exams. So we expect the new offering to further boost the sales of Hayako. So for international users, so it is the first time we share that we have several apps that's popular. IRecord is the perfect app for those looking to capture high quality voice recordings and transcribe them with high accuracy through automatic speech recognition. Currently, iRecord ranks at the top 2 places in the voice recording apps category in North America.

Speaker 3

Lectimate is an innovative app designed to help overseas college students comprehend lectures more effectively by using the power of voice recognition and large language model technologies. It is the number 2 in its category in North America. So finally, there's Mr. P AI tutor. As discussed in our prepared remarks, we will be launching the app version of Mr.

Speaker 3

P AI tutor in June. Compared with the end of last year, we have further optimized our language model for K-twelve, achieving improved accuracy in problem solving. Accuracy of problem solving has increased by 3% and our serving cost has decreased by over 50%. So these 6 apps are our main offerings for AI subscription services. Subscription is a very natural monetization approach for AI and large language models.

Speaker 3

So currently, subscriptions are experiencing rapid growth and we have a pipeline of new features and new products under development. So for this year, we can already see a clear growth trajectory. Yes, hope that answers your questions.

Speaker 4

Thank you.

Operator

The next question comes from the line of Bo Zhang, Huatai Securities. Please go ahead.

Speaker 8

Good evening, management. Thanks for taking my question. This is Jang Luo from Huatai. My question is the net revenue from smart device continue to decline on a year over year basis. How do you view the future development of this segment?

Speaker 8

Thank you.

Speaker 3

Thank you. Yes, we shared in our last call that we concluded the optimization of our sales channels of learning devices at the end of last year. So we exited some low return of investment sales channels. While this significantly improved the bottom line of the hardware segment, It also led to year over year decline of sales. As we build new sales channels and release new products this year, we are in the process of driving the recovery of the business.

Speaker 3

In Q1, we expanded into new healthier offline and online sales channels and released 3 new products, the A6 Pro Dictionary Pen, the E6 listening part and X20 learning path. The result is that the year over year decline decreased to 14.8%, over 30 percentage points less than Q4. The A6 Pro quickly became the top selling dictionary pen on Douyin and JD dotcom. More recently, after Q1, we launched the S6 Pro, which again surpassed the A6 Pro and became the number one dictionary pin. ASIC Pro and S6 Pro are affordable and mid priced dictionary pens at RMB349 and RMB599.

Speaker 3

The ASIC Pro is actually our most affordable dictionary pen at launch. However, it is more expensive than its peers in the market, which are priced at RMB299 or even RMB200. So we made a conscious choice here. We made the choice to build high quality products even at affordable prices. So we do not intend to engage in race to the bottom by each other with lower and lower prices.

Speaker 3

So, the result is that customers responded positively. And the A6 Pro and A6 Pro, as we just discussed, swiftly became the number one seller after their releases. So this is I believe this is excellent news. Now the A6 Pro is covering a price range that we were not serving before, expanding our customer base. And S6 Pro is our top selling mid priced product.

Speaker 3

In the summer, we have some very innovative new products in the pipeline for the new school year. I'm optimistic about their outlook as there are several factors that are working in our favor. One is our established product leadership positions in categories like different listening products. 2nd is our ability to apply AI and the large language models to these devices. So parents tell us that they are very interested in these features, which have become increasingly mature and helpful.

Speaker 3

3rd, our sales and marketing channels are now more established and more efficient than before. So the device team obviously has a lot of work ahead of them and we are eager to launch these new products. So, yes, stay tuned for more updates.

Speaker 8

Thank you.

Operator

The next question comes from the line of Yekun Zhang, Citix. Please go ahead.

Speaker 3

Good evening, management. Thank you for taking my question. My question is about the outlook. Could management share some insights into the outlook of 2022? Thank you.

Speaker 4

Thank you. This is Sookong. And I think for the outlook for this year, for the full year 2024, as Doctor. Huang discussed in the prepared speech, definitely we'll dedicate on to digital content services, online marketing services and AI driven subscription services. Firstly, for the digital content services, definitely it's our top priority priorities for our business development.

Speaker 4

We will develop and ensure and seizing the increased demand by continuously improve our products with our AI capabilities and AI capabilities and expanding our presence in the offline market. As Doctor. Wu mentioned, we have the confidence in the further improvement in profit from the 2nd kind of services in this year. And secondly, as for the online marketing services, we think that it has made a significant strides since last year. We are focused on the long term growth of our advertising business by different our RTA technology and generate AI applications.

Speaker 4

In addition, we will definitely strengthen our partnership with the NetEase Group in traffic, advertisement placements and as well as the other areas. Our investment in the AI is, as you know, maybe as you knew, we have already invested in AI for a long time. And we expect we can just generate more results from the AI subscription AI driven subscription services in this year. We think we will keep we will continue to iterate about and develop new products, advancing the process of AI monetization as well. Total sales of the AVI subscription services are expected to be main record growth momentum throughout the for the full of this year.

Speaker 4

And finally, I think we have shared more color from the financial perspectives. We have been making great endeavors to achieve the full year possibilities in the near future, we expect. Since the last year, we have been diligently focusing on controlling the operating costs and expense, while improving the operation efficiency. This effort has already yield significant results as evidenced by our achieve the profitability for the 2 consecutive quarters for the first time. And moving forward, we will maintain our cost and expense management will striving the increased revenue at the same time.

Speaker 4

I think that's our outlook for the full year of 2024. Thank you.

Operator

The last question for today comes from the line of Linda Huang, Macquarie. Please go ahead.

Speaker 9

Hi, management. This is Macquarie, Linda. So thank you very much for this opportunity. I want to ask about operating expenses because I noticed that we have the decent decline for the marketing and as well as the R and D. So I just wanted to know about that for the rest of the year.

Speaker 9

How is the trend for these 2, the OpEx item? And how should we think about this, the expense to the revenue ratio? Thank you very much.

Speaker 2

Thank you for your question. This is Wen. I will take your question. Marketing efficiency is a crucial metric and a key indicator of our profitability. We are dedicated to improving the efficiency of online customer acquisition.

Speaker 2

We continuously explore various innovations to optimize marketing efficiency, which includes but not limited to diversified marketing channels, to leverage our most advanced AI technology and to continuously enrich content to improve product experience, thereby migrating the challenges such as writing acquisition costs due to the intense competition. I will add more color on these three areas mentioned above. 1st, the expectation of user acquisition channel. Take learning service as an example. Online education companies have inherent advantages in channel innovation compared to offline education institutions.

Speaker 2

Online education allows us to reach customer beyond geographic boundaries and absolutely capture traffic on high traffic platforms. In contrast, customer acquisition for offline education institutions influenced by physical location constraints, limited to their source of acquisition. In recent years, acquisition channel have become increasingly diversified, including PLL, key opinion leader, live streaming and integrated online versus offline environment. Such innovations enable us to reach a broader and more relevant audience, thereby reducing acquisition costs or improving conversion rates. 2nd, leverage AI capability into our products.

Speaker 2

The application of AI technology can reduce the cost of material preparations and enhance product experience, thereby attracting user and increased conversion rates. For instance, we employed an AISC refinement function to enhance user experience during trial lessons by providing timely feedback on assets, thus improving the conversion efficiency of this lesson. We believe that our advanced AI technology and the large language models can help us to build a stronger product ecosystem, further enhancing marketing efficiency. 3rd, enhancing user experience through innovation of premium content. Each competitor pays a lot of attention and try to get an excellent conversion rate through certain forms of advertising.

Speaker 2

Innovative premium content is the key to get good results by satisfying the needs of customer. Let me give you another example. Yourdali Shi, one of our most important learning services, has transitioned from traditional live streaming online classes to innovative pre recorded content just mentioned by Doctor. Zou, embedded with AI technology such as adaptive question bank, which resolved the concerns on the inflexible time schedule and offer the personalized user experience. This transformation has proved successful in meeting user needs and enriching their user experience, gathering widespread claims.

Speaker 2

Back to your question. In 20222023, the sales and the marketing expense account for approximately 46 percent 42% of our total revenue, respectively. And in the Q1 of 2020 4, the further decrease to 33%. So we are very confident in maintaining this optimization trend in the long run. Thank you.

Operator

And that concludes the question and answer session. I would like to turn the conference back over to management for any additional or closing comments.

Speaker 1

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 Pearson Financial Communications in China or the U. S. Have a great day.

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