Youdao (DAO) 31 Aug 212021 Q2 Earnings call transcript

Good day and welcome to the Youdao 2021 Second 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 for Youdao. Please go ahead.

operator. you, Thank by discussion future the to contain statements as forward-looking for Please of today the to established liability from performance safe intended U.S. company, related the note, harbor will the which qualify are Private Securities Act. Litigation Reform the guarantees to and and are assumptions and factors. risks performance of statements are future Such uncertainties, other not subject certain

financial filings these not update and and undertake A with those business Exchange of general and results the Securities results law. to obligation to actual forward-looking these Youdao's could is and information, cause release risk the included certain risks the does Some of press any of materially discussion are except mentioned from in Commission. factors control this as affect company The today's beyond discussion. by company the company's required could in differ that

certain During financial also non-GAAP measures for today's will call, purpose only. management discuss comparison

and results, quarter GAAP news the financial of today. to definitions second XXXX reconciliations the financial measures non-GAAP financial issued see earlier non-GAAP of release For results please

conference reminder, will call webcast a of replay Youdao's a recorded. Besides, is conference As available website at this on corporate ir.youdao.com. be being this

on today Dr. Zhou, Lei from Finance. Dr. will Markets; Capital to Zhou Chief Li, VP recent Youdao's the senior Wayne our Feng Su, Mr. Operations; highlights now management of of strategic over our Jin, direction. I of Executive is Officer; Mr. and to of call and Strategy call our VP turn Peng us VP Joining review our some and the Mr.

and participating you, in thank Jeffrey, today's for all Thank you call.

loss segments: another revenues margin XXX% period and million. points services, same RMBX.X from Loss based numbers remind to grew of XXX us. billion, of translates representing was to X Revenue Total from operations basis I and online in same respectively. RMBXXX XXXX marketing learning on net by Before everyone from were would like That second from XXXX. year-over-year, products, for we renminbi. the the operations XXXX. services, our of improvement was QX XXX% XX% quarter XXX%, for all from are solid the quarter in increase learning period a that begin,

As fiscal China regulatory concluded. significant after-school recently our after know, you tutoring changes in QX introduced were all regarding

be results will we first talk on in will us detail. parts. policy, double our go Then, X its remarks more reduction Our over the I and QX our about plans. will impact

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not allowed tutoring to IPOs; pursue limitations. For are timing example, third, ASTs

school forward. are subject or For example, fourth, as ASTs holidays; no academic nonprofit register to going weekends tutoring on required academic

XX. been We to for our priorities July strategic regulation exploring have was whole the operational published new business on since and company the changes tutoring and setting

these we embrace always, are First, with as comply and and committed government fully laws policies. to

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add driving business. more base large non-AST roots growth us think So the we gives and journey, up, side while a few we this the in needed user be we I speed options in this much to expect and side, step a diversity X quarters. our Overall, for the of technology a our on our of sides the headwind when AST on we be Ultimately, kind scenario. bump brakes deep on will challenging

pillars service STEAM growth courses our see -- of non-AST in adult Looking digitization business. education, Learning devices, to the learning and I solutions. future, X education

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also small We class play Weiqi students more of advanced for that courses competitively. level launched

time RMBXXX or improve high As for Securities, billion think By a will in education the an we expected is in rates could fashion on time is fashion and mean in and retention of market over is education growth X it. It education XXXX. first to launch schools, coming continue to for more quarters. that, all-time solutions now delivered fits that discussed or business-to-business to to Youdao digitization programming QX. This great courses, or STEAM we digitization business-to-government XX% our has the digitization Huatai huge We well service any area, education learning The do size the the be uses call. we customer potential. areas education. very nearly our it is According reached of courses The product enterprises. the last digitization solutions. in is right universities a and

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homework automates and integrating diagnosis schools. appliance. printing a is paper-based in Youdao single AI appliance Intelligent scanning, by learning Learning diagnosis at processing Terminal. works and technology It AI It that provides an through

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here now. immediate right plans our are forward, action Going

First, we for streamlining K-XX our have force been work AST business.

segment following regarding the in guidance been the to have the government supposed future. we are We operate from this how

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have this Regarding strong we continue and a professional adult in we to growing competitive sustainable certificate for demand to growth interest-based drive products area. seen education, offer courses, and

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schools, universities We will leverage demand advantages our -- et from and cetera. meet the rising to for public public

are Looking confident we ahead, our with very plans.

market not a that parent NetEase. purchase any it our where also have The team, our program, strive we suspended may long-term purchase program has continuing are beginning as strong on September business, today announced up US$XX New exceed to the months communities ADS Exchange. XX to a offer purchase the for to help Along of discontinued a we can, Stock with optimizing We leveraging transactions in York so may social help open high-quality in XXXX. have responsibilities products, dedicated Youdao's citizen. adopted As strengths our a terms we from always support ADS of we time. NetEase at to corporate we need. program outstanding X, on Under NetEase fulfilling our million be of company, to this and share or Youdao's period

the results XX These financial With to QX. schools to hefty for hands turn will the For areas, at instructor in instance, affected contributions review joined the Province, overview, public in expected students facing to activities provide recent support society to and XX,XXX over and that continue post-disaster support rain in kindergartens. to Peng making to Youdao Su storm future. Henan operational XX and institutions I least our will and now welfare are ongoing reconstruction call we with in

Su Peng? We will then to open questions.

side and I Dr. Zhou release Then business just in more financial Zhou, and Thank strategic hello operating our Today, and now. earlier encourage presenting some new read to introduced press Dr. color highlights today details. and further QX. the our our issued the you change for tutoring operational We on second our XXXX you, to quarter. from operational I priority will everyone. add through be will

billing Feifán launched version Camp English perspective revenue the one the in in person de course QX. an Enjoyment Extraordinary recently; teaching immersive of terms the in course from the on scenario the gross has In optimized all, it's dimensions. based the The short, for been for of courses, learning conditions the integrate the improve upgraded net help concentration from of from by service upgraded the training account of biggest technology Furthermore, of Assessment English learning, characteristics meantime, premium X total the and test to the offers enhancing presents The view, and to the education habits revenue learning All segment has customize them adult XX.X% practical First tracks and [ph] accurately course Memory, the first easier. was of adult. learning students. jìyì, major the course language AI students' using made Intelligent education practice of model AI In System and learning training the the and the by technology learning their QX.

certified online by University course, courses platform also for for MOOC University premium online XXX been courses the in and the has Education. courses national means vocational MOOC, online level China As Ministry major massive China the education platform for of open students. as Chinese leading

Youdao a learning named first is real-time the supports English professional QX. at efficient. more in High Dictionary, Reading added English and oral of the that we assessment app China, new function monitoring It oral in our making learning Looking sound

total MAU [ph] organic by contributed our of users student paid in the XXX% year-over-year, billion the increased of XX.X% active online K-XX by more XX premium our our Paid of than for the for with XX.X% in enrollments than As Community, billing the the and our reached we million. student billion, WOW total for from it second organic be apps to and QX, courses K-XX users from XXX.X% billing courses and The accounted million and quarter. learning WOW enrollments launched Then, student XX.X% QX. up grew billings courses Total XX.X% respectively. gross QX. the QX new monthly courses, gross segments QX. of in Besides, quarter, from more adult of Trend year-over-year, fast up rose XXX our in RMBX accounted gross gross year-over-year. traffic Paid the for XX.X% accounted in highlights from up all premium XX.X% year-over-year. traffic billing from reached I for presenting RMBX.X premium for billing gross segment Gross for were billings billing gross from financial second enrollments by will in

revenue quarter net a an US$XXX.X or billion, RMBX.X the reached total of of quarter, XXXX. second the represents increase second million. record from This For XXX.X%

from our XXX.X% million, our a same XXXX, Looking from paid in our US$XXX.X both by revenues period services in from up XXXX. online enrollments revenues Youdao RMBXXX.X learning the segment; increase Pen of period RMBXXX this marketing or which in growth increase were same were Net were the for to further volume. or Net courses at learning Courses. XXX.X% from sales US$XX.X Dictionary products XX.X% up driven by same from the were and million, XXXX. by representing Premium net million, our the increase substantial We online revenue K-XX attribute increased million, Youdao US$XX this adult from RMBXXX.X in period services million, from student revenues million, generated or growth the in the driven courses,

quarter increase higher advertisement an properties, sales XX.X% XXXX. of over margin was million, increase gross substantial for structure. margin services volume in profile in XXXX. products. the of For margin the the increased for margin increased to from rise for The improved Gross learning Youdao's compared second gross third-party reached driven higher from improved with with was second of our for period by the and gross the the XX.X% in up XX% quarter, XX.X% of XXXX, through the for quarter was margin the The improvement compensation XXX.X% of same X, million, performance-based Gross XX.X% total mainly the profit the Dictionary XXXX, to second or for to online mainly services RMBXXX.X second for optimization Pen which economics second was of attributable learning second attributable quarter Youdao year. a to faculty period Internet The of which other up marketing products ongoing scale compared quarter US$XXX.X XX.X% carry for XXXX. of learning Series than for the XXXX. same last had Gross sales quarter

second RMBXX.X RMBXXX.X quarter, were million and total Research our in billion, quarter sales of expenses the million with year. XXXX. RMBXXX.X second that, in the the the million second expenses marketing were XXXX. RMBXXX For last RMBX.X second million, expenses same for development With US$XXX.X the with of with quarter the were the million million, in and or period for operating compared compared RMBXXX.X quarter, compared

XX.X% XXXX, same XX.X% Our quarter operating with loss compared in the of second was last margin year. the period for of

or the shareholders US$XX.X with compared ordinary our net same for second Non-GAAP the period of million second attributable million, million, quarter was ordinary was RMBXXX net For RMBXXX.X loss shareholders XXXX, the of RMBXXX.X last same year. for attributable for loss to to the quarter diluted million, year. Basic US$XX.X per last and was the loss was or RMBX.XX, loss net quarter US$X.XX. ADS or ADS RMBX.XX, basic per million, the and diluted quarter Non-GAAP RMBXXX.X million second US$X.XX. for with second compared period or for net

for the was used RMBXXX.X or cash million, net activities US$XX.X in Our million. operating second quarter

for of the Looking sheet, our as US$XXX.X of contract billion, end balance June XXXX. liabilities, XXXX, RMBX.X now your to equivalent, please cash the billion investments million, December RMBX.X attention. your compared deferred for at concludes restricted Thank to deposits We time with open were RMBX.X period, XX, and our revenue the ahead. cash, consisted cash, our This of US$XXX.X courses, or would our short-term mainly At million. XX, as of our online totaled or go like billion prepared Operator, remarks. call which you the questions.

question [Operator from Stanley. Instructions] comes Sheng And Zhong our first Morgan of

you that plan on exit you actually, any wondering environment, adjustment But this share my My is, question if gradually is, question for this will more And it K-XX in business? that current have be keep means focus great. or with operation you space. what Will tutoring you you non-K-XX can regulatory us, market? mentioned the will

we now, government following working Zhong. Thanks, from Yes, right Sheng level. are at a guidance

scheduled like that. weekends removed we on stopped courses. and example, any courses We for So summer things

we we -- we So actually service process, thing policy, the that offer different. like be content. for policy that way more changes And guidance Beijing they the K-XX government. the consistent follow AST, will from forward, regarding will the And see is this. policies basically we see quite in local are in will other One and their we national our going

But these in policies, some in expect be implemented, So implemented measures our expect some months. implemented the to is, the thinking executed, we we coming already are not current yet. them are

still process. we're So, the in

government moved will current some -- we instructions. schedules the timing not And view. but around, schedules the this And -- of the be government's is follow yet. could our so is the So clear basically,

the K-XX perspective. more a we still me tell coming Again, cost we it's from about for plan us. bit earlier these to opportunity take talk to so expect Yes, from and business, And macro think said, existing the impacts we very measures in our a to a come will let more where adjustment do on clear have as impact I quarters. this are significant

China's So for the think first, long-term are policies designed development education. the I of

and So resources these more business schools. do will these fully all free is more let the let be very and long we consistent designed for compliant, more the Yes. term. as our original changes, These embrace reform. time, interests into kids extracurricular to education Therefore, intention develop put them have actually are policies with

actually Chinese preaches So there's those a Teachers doubts. saying who dispels and [indiscernible]. skills are values, teaches

futures. these doubts. empower skills I purpose we teaches And think the children it's and right final things, fitting Because one preaches a to to purpose to technology is do dispel the brighter is get do to our yes. And use kids, values, now, the it that.

policies. So the this why is we embraced fully

Second, that actually productivity government economy, and many and of it, embracing are and governments in digital really regarding a increases the transforms It transformation the including will fields fields. non-K-XX, driving education. education. is Digitization force. we a also that, the stop see not lot including the powerful in doing And understands

example, for to X opinion digital building, in mainly deployments promote new jointly on infrastructure technology in released So more guiding education, the ministries July, of education.

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that right what work of on. what So hard many that's focusing hope teams clear your our are question. is at also Yes, that I And answers now. -- for us

of comes Gong Citi. The from Brian next question

about is adult question learning and competition the education. STEAM My devices, education on

intensified AST also So area Yes, There new some growth drivers. find new you think are other looking become are after do to new of question. competition the names? also will areas my -- them those regulation, since more come policy, that's this into to the of

ed ready This XXX is for the students backlog the Also Su devices Peng. huge And as that well -- now are in Brian. nearly you, improve the first always demand, will even invest we segment. entered to there's companies. Thank believe about the probably intelligent the K-XX learning opportunities Yes, provide Yes, of million efficacy. growing we China, education. parents is, many more as already aspire their other companies have in right indeed, learners to with learning tech

what including we process, technical for Youdao has for improvement However, about to the achieved these think there really think the and substantial learning sales, time barrier intelligent are the area development, production products, results. made the long exceptional and we entire where in the that some

X If the you we parents resource, mind. released With years go August about in and made barriers, back to we we pushed think in and -- message -- our XXXX. established Dictionary impressive parents' Series to a good market X and Pen this we had reputation the have ago recognition,

leading think one At we be So -- are leading device we are -- in in are learning we leading the the one. definitely the the we we sector. least, will

in to -- are these are face thinking we the really So about sectors. we confident competition about

different education up year-over-year also, we the SKU about our about The is our see QX. business the the or product. product are Yes, you if education in about the or over numbers, XXX% content the successfully adult X net adult operating And revenue pipeline. in thing second from is

call First product. language learning practical a English we is It's product. what English,

help people capabilities. kind the Memory. called to to of is Second memory That's their train Extraordinary

different value different they are core different users. -- with to that our -- entirely So X products

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new as High a mentioned, year, about this Reading we program. of in first So functions will several the launched we new half have translate

learn through behavior these so can more through and -- we our about program, that their think know a in more we activity users' functions, can lot through we demand the can we of we their different apps. X So expect -- know

just can more provide their we So demand. for product

about organic So it we always because this traffic have had for we think us.

will we this in So -- we about -- we that's this think sector. about at leading will -- Yes, for adult present. definitely that's think we a education think have what position

education services addition, doctor It's In it's very education management found business. another It's mode delivery. -- It's in not we digitalization it mentioned, business. policy but also new innovative has also only XB of as classroom, we called and consistent directions. good but a think the call the XB to consider it's we system, with in demand, opportunity -- huge improve the enhance providing education opportunity of

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Zhou. Brian. Feng is This Yes,

Let me add words. few a

So is new yes question areas. so these the in competition about --

will Of new lot with and course, already products competition, see see already. coming we up services companies we and a of

it a So ourselves we about think view product company. we that the as way is

think And have companies but lead for things education some obviously and different so we in and I -- service-focused because product. to So for different that's some products, we hardware you the things, actually competitiveness. will think good, this is of product-focused it's -- and companies models and doing this for the for product devices, are hold both ways

teams. for we doing we've couple have have we very of because teams advantage we -- strong been a for strong think it So very devices, years, and here absolutely product

these And selling stronger and online. we also refining think for are products. STEAM, [indiscernible] we defining So

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be So more yes SKUs. create And we that's think able hope -- really to we so successful -- helpful. I will of these

The next Xie comes from of Suisse. Alex question Crédit

question first customer your and is acquisition acquisition strategy My about costs. customer

will future? second focused share them business in to about achieve you ideas question my of plan? the us Would about think segments. business should what And I you is the being the some kind How about think margins your your non-K-XX with could of shift non-K-XX your your non-K-XX lines. please we of profitability in your business

this the first, adult. by to user importance Alex, strategy committed Su And I traffic first customer attach take implement need adopted the Peng. the of go for and we will the will I and similar and and traffic existing I tutoring by and is the business, it's measures adult to users, rate requirements I organic question, to before and definitely first and non-K-XX too. leverage central the more think opinions. government's to conversion for with for governments, the if measures education, the after-school our acquisition question the the contribute Beijing to and complying expand to be other tutoring It's our about of all, local fully boost after-school STEAM conversions

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you're to all, the the have I high-quality to create for and first customer of think products on adult the think, spending business, you I acquisitions. content marketing dollar of before sort So,

high-quality the will the at cross-selling more successful we in years provide we product model definitely, process cross-sell will the And like them content business. have to about before scenario fall And and least scenario we we like new the is will -- be release And kids for old question most the the existing about our to make other -- content try think just unit just to kids courses different business to and like to semesters. internally, second hope for think programming. -- up take now, public, for customers. will in -- adult just the over And years through be kids our -- so, create create I will can are the we for we several -- will and again we healthy we customer our high-quality refine question. about first. We hope the Yes, internal we old. X about to We rounds And strategy it's right will pipeline expect our try we provide X it operate then, available for do between Weiqi taps for the STEAM also -- we always content, all again our us for the the to your high-quality the always strategies operating a products, acquisition. that the a we always customer. think economics, auto create we content that care customer We will healthy to several online answer the education. profitability. sure emphasize, to and build always we about we And STEAM for over will and think we the we ongoing and content a be

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so see you different and to that learning great our devices go the And if examples. will the be sectors, you'll

business all and tremendous about gross metrics the margins always just we uptick when bright last single compared in about we keep -- year-over-year for very And our have the in the business; since keep it. almost gross the And profitable we improve moving just our this trending, -- about it's margins will of forward every businesses metrics. think see and year-over-year, about and will we We great operating for the expect our develop public future in That a a helpful our question be improve track on be that we and year a have That's potentially in segment your -- see keep that also think -- became be that hope with I We we can company. our you X. improved so operating will the in the opportunity it, us that and to we year profit our keep long run. learning will will devices.

comes Shen from Thomas Nomura. next The of question

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Thomas, this Lei Jin.

measures local to complying is AST and with Beijing governments. the Youdao by fully similar other given committed Firstly, the measures

impact implement of In the national holidays period the than business. In measures compliance year, breaking from on quarter to AST with this the in requirements stopped current weekend, are expected needs existing accounted Beijing classes to on AST our Such academic K-XX the K-XX extended revenue. have revenue offering the AST of and XX% first we less central a Youdao for school material total classes Beijing. the our cost high measures, opinion. of government

Youdao company, is learning an company. a intelligent not just totalitarian

up QX exclude segments other XX% whole K-XX long-term At months our process. a the the medium the truly maybe by a about few AST and not run computer significant reduction we our QX revenue. I makes think optimistic business total And regulation. XX of grade [indiscernible] not revenue. we make the to are will we diversified we So that of time, as will X-X, education, subject up XX% long-term external impacted with development. term, about same total reversion, This for is transition. are The does about double change quarters In this

over non-AST our growing XX% is about already business Our big of XXX%. revenue at quite and

think we are good shape. in So we a

process carefully We and will the manage prudently.

better have a to navigate the and are position and has long-term in challenges management team the market. vision commitment, and we a Youdao confident

is the in addition, us In long NetEase supporting run.

of comes question from Jefferies. Thomas next Chong The

about in the slowing color expenses it end of we the I and in expect count, down of year? expect terms outlook the G&A next the should and ask the any head R&D, In about of the on marketing next couple sales quarters? marketing May quarters? about what And this count head in we will sales side, of materially should by particular, operating the and like couple the

Wayne. for you your thank is Thomas, This question.

businesses the are Therefore, the we we brakes driving think level. the not clear change operating Zhou, of Dr. education easy direction expense the more solutions. have on devices, AST for I non-AST smart same side. growth whole the on at to by financial side, the is mentioned are as At stepping the time, it on just such a As digitalization our

of As this tech just the multiple an have which business. And about not second Youdao sole operating quarter AST K-XX outlook. for ed no willing points XX%, our is mentioned, year K-XX revenues which was to for impact our we direct of the double there non-K-XX I'm is reduction the policy. is company, businesses share part expenses channel -- negative financial represents our and AST, businesses. X on from

is on such K-XX AST publishing the and First, to marketing in policy, for spend. for which platform stopped we [indiscernible] government as media the most branding decrease activity in advertising advertising according causes, resulted AST We banned. expenses a our sharp

we will K-XX scale. AST Second, downsize the business

tutoring classes the accordingly. time, tutoring head reduced As the salesperson will and count, the be we on K-XX mentioned, considering the limited

are For the R&D an will technology lot business. invest we think company, in to AI continue our other a I investment, we

R&D. will continuing for it increase be chance a to there's So

Finally, to emphasize, -- is I'd the advantages. of like diversification our one our

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question next from of The Zhao comes CICC. Liping

questions two have I here.

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Yes.

new the recent devices, first you question regarding time. plans asked any for about in learning about we area. Yes, products actually very products do have new So this so

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Daiwa. question Chan The next from Candis comes of

operator. Sorry,

we think share for regarding question program -- question, I purchase share second -- the right? this So have the repurchase NetEase. from

that in NetEase announced program share Youdao's starts remarks from lasting of days it So million X now, approved a to purchase shares. at for prepared X I that US$XX there's introduced And my up years. most today

it's so the -- will market. Youdao's shares purchase NetEase on So open

one hand, demonstrates NetEase So I our think the Youdao's it And for -- strong long-term purchase announced support share development. for program. the the business on

NetEase So, multiple so as us supported all know, on occasions. you has

again providing couple back. line example, For of support. And us the shows quarters with a their credit this

this other a long has -- And performance run. NetEase in hope Youdao market hope think that's NetEase the I scenario. important very the in the as would -- hand, think I market certainly capital on good in

you future. more for and we if share the in the will that's program, more we we provide updates -- purchase I with So have think when

The from question will Daiwa. Chan of come next Candis now

about K-XX position? to up business. how costs I K-XX the your just downsizing impact want your of follow on restructuring business? just that would cash AST quickly the comments the quantify flow And for this you Can

question. thank Candis, your for you

K-XX for staff, costs dismissed compensation prepaid cancelation incur as cost additional for costs, office for player loss certain materials. costs impairment believe For such each restructuring will we the rental and office

players think might face However, I different situations. different

to They valuation Dr. STEAM business. business. expect education. Part side in Zhou, classes mentioned be join will non-K-XX our to K-XX the driving the and for continue talents just future, the non-K-XX growth of of on already more As Youdao a we basis has non-AST for good And us. create as adult business, by such will

Let's and compensation say, compared with other tutoring on companies, offer talent. we opportunity side, more have will cost our we to relatively low the additional

Second, be company, to fixed the restructuring. costs as fewer rental as fee considered an such there online during are

of underway. restructuring the the closely organization the on and regulators policy is K-XX. Currently, -- policy organization, still is believe to we we communicating Finally, policy non-for-profit detailed final for linked actively for the cost with are the but non-for-profit

is we policy. So wait government it with to compliant will policy, the still for for final your questions. need and Wish we the fully helpful

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

again Thank for you once us today. joining

you TPG us feel please great any at directly If a U.S. the out Have have China free or in Investor reach or questions, to further contact Youdao to Relations day.

you presentation, for you disconnect. today's may The Thank attending conference and now now is concluded.