On November 14th, educational technology company NetEase Youdao (NYSE: DAO) released its unaudited financial report for the third quarter of 2024.
According to the financial report, NetEase Youdao's net revenue in the third quarter reached 1.57 billion yuan, a year-on-year increase of 2.2%. Among them, the operating profit reached 110 million yuan, achieving profitability for the first time in the third quarter, and the single quarter profit amount reached a historical high. Operating cash outflow narrowed to 85.4 million yuan, a year-on-year decrease of 71%.
NetEase Youdao's performance has rebounded, thanks to the recovery of its intelligent learning hardware business and the continued deepening of commercialization of large models.
NetEase Youdao's net income and net profit in the past five quarters Unit: RMB 1000 Data source: Financial report (the same below) Intelligent hardware business returns to the dictionary pen
During the reporting period, NetEase Youdao's main business was divided into learning services, intelligent learning hardware, and online marketing services.
The net revenue of learning services was 770 million yuan, a year-on-year decrease of 19.2%. Although it increased by nearly 20% month on month, it is still at a historical low.
At present, top education and training companies are increasing their investment in learning services, but Zhou Feng, CEO of NetEase Youdao, admitted at the financial report conference that NetEase Youdao's learning services have encountered some challenges in marketing and customer acquisition this summer. According to Su Peng, Vice President of Strategy and Capital Markets at NetEase Youdao, low return businesses have been reduced this summer.
But by controlling costs and expenses, the overall health of the learning service business has been improved. Among them, the net revenue of digital content services was 510 million yuan, a month on month increase of about 28%. While covering costs and operating expenses, it also contributed considerable operating profits. Obviously, NetEase Youdao's learning service business is undergoing a process of adjustment with the goal of pursuing profits.
Youdao Lingshi, aimed at high school students, is the focus of NetEase Youdao's learning service business. It provides a combination of AI diagnostic planning tests, layered learning videos, and learning consulting services. Su Peng introduced that the renewal rate of Youdao Lingshi has reached 70% and will explore other forms of offline products and services.
This quarter, the intelligent learning hardware business finally bottomed out and rebounded, with revenue of 320 million yuan, a year-on-year increase of 25%, ending six consecutive quarters of negative growth.
The intelligent learning hardware business was once the most representative business of NetEase Youdao, with a single quarter revenue exceeding 400 million yuan, but the revenue in the previous quarter was only 170 million yuan.
Why can the smart hardware business recover? NetEase Youdao introduced at the financial report that this is due to the achievements of strategic focus and channel restructuring.
This year, NetEase Youdao has focused on dictionary pens in smart devices, reducing investment in other SKUs. The net revenue of the dictionary pen series has increased by over 50% year-on-year. The newly launched high-end dictionary pen in the third quarter is equipped with an AI camera and a series of AI functions, including a built-in large model on the end side, which enables the use of large model translation function even in offline situations.
The person in charge of NetEase Youdao introduced at the financial report conference that the performance has continuously declined in the past few quarters, and the hardware team has experienced ups and downs, especially since last year, facing great pressure, which has also led to changes in re planning and execution.
Exploring the Business Model of AI Subscription Services
Last July, NetEase Youdao released the first education model in China. For 16 months, it has been exploring the monetization model of the model, including its implementation in courses, hardware, advertising and other scenarios, as well as software subscription payments.
In the third quarter, the net revenue of NetEase Youdao's online marketing services reached 490 million yuan, a year-on-year increase of 45.6%, continuing to maintain high-speed growth. The gross profit margin increased by 4.4 percentage points year-on-year. The growth of online marketing business benefits from expanding into new fields and utilizing AI to optimize advertising effectiveness.
Zhou Feng believes that there are currently two education big model application directions that are already feasible. Firstly, language learning is an application field that can be well supported by large models. NetEase Youdao's Hi Echo, South Korea's Speak, and the United States' Duolingo are all making many attempts.
The second application is general practice Q&A. The difficulty of general practice Q&A is much greater than language learning, and the basic model is still lacking in the most demanding mathematical aspect among all subjects. Therefore, last year, our team did not confirm its feasibility. However, after a year of continuous polishing of models and products, we have found that users are very welcome to general practice Q&A products based on large models, and their natural user traffic is growing rapidly, with a high success rate in solving user problems, "said Zhou Feng.
In addition to being applied in what scenarios, a key issue for the education big model is the business model. The Big Model "Six Little Tigers" all adopt the To B and To G business models.
Zhou Feng believes that implementing and applying many new technologies through visionary enterprises or government procurement is the starting point, and this is no exception for large models. However, in practice, it is still quite difficult for the To B and To G applications of this round of large models to support the development and even profitability of many companies.
NetEase Youdao is exploring direct consumer oriented software subscription payments. The sales of AI subscription services in the third quarter approached 70 million yuan, an increase of over 150% year-on-year.
Zhou Feng stated that from our observation, the emergence of AIGC has reversed the trend of declining user trial rates for new apps in previous years, and users have started installing new apps again, sparking their curiosity. Moreover, the membership fee model has long been accepted by the younger generation, resulting in not only an increase in retention rates and daily active users, but also a rapid increase in revenue from good products.
Of course, the current education model software subscription payment is still in its infancy and at a relatively low level. To succeed in the monetization model under the siege of free universal big model software, educational big models must continue to break through in meeting specific user needs.