Youdao, Inc. Q2 FY2024 Earnings Call

Good day and welcome to the Youdao 2024 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 of Youdao. Please go ahead.

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 future performance and are subject to certain risks and uncertainties, assumptions and other factors. Some of these risks are beyond the company’s control and could cause actual results to differ materially from those mentioned in today’s press release and this discussion. A general discussion of the risk factors that could affect Youdao’s business and financial results is included in certain company filings with the U.S. Securities and Exchange Commission. The Company does not undertake any obligation to update this forward-looking information, except as required by law. During today’s call, management will also discuss certain non-GAAP financial measures for comparison purposes only. For the definitions of non-GAAP financial measures, and reconciliations of GAAP to non-GAAP financial results, please see the 2024 second quarter financial results news release issued earlier today. As a reminder, this conference is being recorded. A webcast replay of this conference call will also be available on Youdao’s corporate website at ir.youdao.com. Joining us today on the call from Youdao’s Senior Management are Dr. Feng Zhou, our Chief Executive Officer; Mr. Lei Jin, our President; Mr. Peng Su, our VP of Strategy and Capital Markets; and Mr. Wayne Li, our VP of Finance. I will now turn the call over to Dr. Zhou to review some of our recent highlights and strategic direction.

Thank you, Jeffrey. And thank you all for participating in today’s call. Before we begin, I would like to remind everyone that all numbers are based on Renminbi, unless otherwise specifically stated. In the second quarter of 2024, net revenues reached RMB1.3 billion, growing 9.5% year-over-year. Operating cash inflow reached a record level of RMB250.2 million, an increase of 88.2% year-over-year. Loss from operations was RMB72.6 million, as Q2 is typically seasonally weak in the bottom line, and it narrowed by 74.9% year-over-year. In the first-half of 2024, net revenues reached RMB2.7 billion, marking an increase of 14.5% year-over-year. Loss from operations was RMB42.6 million, narrowing 91.2% year-over-year. Operating cash outflow was reduced to RMB140.8 million, reflecting an improvement of 53.7% year-over-year. The financial performance was in line with our plan. Now, let’s review the major developments across our business lines in the second quarter. Net revenues from learning services were RMB643.8 million, slightly down by 5.5% compared with the same period of last year. Digital content services maintained a healthy growth trajectory, achieving net revenues of RMB403.3 million, up 6.8% year-over-year. Operating cash inflows generated by digital content services exceeded RMB200 million. Youdao Lingshi continued to drive product upgrades and customer satisfaction. Firstly, in Q2 we released over 400 new carefully-calibrated tiered-learning videos for students of different levels. We also significantly upgraded the class-based study experience for better motivation and context. As we discussed before, Lingshi pioneered the approach of personalized pre-recorded video learning. Building upon this vast library of thousands of high-quality videos, we offer a set of important services, including automatic diagnosis of students’ current learning levels, class-based digital learning, personalized quiz generation, and weekend live consultation with our experienced staff members. These are all key to the high effectiveness of our products and we keep improving them every year. Second, in terms of the application of AI and growth initiatives, we upgraded our college admission consultation services to the all-new AI College Admission Advisor in Q2. Using Large Language Models, the AI Advisor effectively discusses and guides students in their college application process, helping them choose universities and majors. Since the new release, the service saw nearly 3 million page views, rising by 30% year-over-year, making it a key asset in attracting new students and parents. Continuous product and service upgrades significantly boosted the retention rate of Youdao Lingshi, reaching over 70% in the second quarter, a record high and an increase of more than 10 percentage points year-over-year. In addition, as for Youdao Literature, we offered nearly 40,000 high-quality AI writing refinements in the second quarter, improving our retention rate by approximately 10 percentage points on a year-over-year basis. Next in learning services segment is our AI-driven subscription services. In the second quarter, our AI-driven subscription services maintained rapid growth, with total sales surpassing RMB60 million, marking a nearly 200% year-over-year increase and over 30% quarter-over-quarter growth. Moreover, this represents the sixth consecutive quarter of over 50% year-over-year growth. Product wise, in June, we launched a major new mobile app, Mr. P AI Tutor, the first all-subject AI tutor in China, and it received positive feedback from users after its initial integration into Youdao Dictionary Pen earlier this year. Second, AI translation in Youdao Desktop Translation now supports languages other than English and Chinese. There is also new support for term databases and multi-modal document input. These upgrades pushed AI translation usage to exceed 30 million times in Q2. Third, in collaboration with NetEase Cloud Music, Youdao Dictionary introduced a music sentence feature in the second quarter, helping users learn vocabulary while listening to music. Last but not least, Hi Echo introduced Children Mode, offering tailored topics for children, child-friendly digital avatars, and generating exclusive post-conversation reports to aid children in improving their English speaking skills. We are also delighted to observe that the average usage time of Children Mode is nearly twice that of other modes, highlighting its effectiveness in engaging and retaining users, as well as enhancing their English proficiency. Our online marketing services segment maintained a strong growth trajectory in Q2, with net revenues reaching RMB511.2 million, hitting a record high and representing an increase of 68.4% year-over-year. This marks the seventh consecutive quarter of over 50% year-over-year growth, driven mainly by RTA, Real-Time API, and domestic KOLs’ ongoing robust performances, with RTA revenues more than doubling year-over-year in Q2. Furthermore, as large language models rapidly advance in the market, the demand for promoting these models and their applications among tech companies has surged. Our team seized this opportunity and is helping leading players like ByteDance, Doubao, Zhipu and Baidu ERNIE in this area to grow their products. In Q2, net revenues from AI tools advertisement grew by more than 100% quarter-over-quarter. Additionally, our advertising collaboration with NetEase Group has been advancing smoothly and demonstrating synergy. On one hand, Youdao’s data application significantly enhanced the traffic monetization rate on several NetEase assets by over 100% in Q2. On the other hand, our improved advertising performance has attracted more NetEase product teams to use our service. In the second quarter, the percentage of our total advertising revenue from NetEase as our client increased around 3 percentage points quarter-to-quarter; it is still less than 10% of our total ad revenue, indicating significant future growth potential. Regarding the smart devices segment, the net revenues were RMB166.7 million in Q2, down 25% year-over-year. The decline was in large part due to unfavorable product mix. In Q1, we updated our entry-level dictionary pens, leading to record unit sales in Q2. However, our high-end products were from last year and reached the later part of their life cycle in Q2, so high-end products had relatively lower sales. These factors negatively impacted total device revenues and also the average unit price for Q2. We expect Q2 to be the low point operationally for the device business this year, as we are currently ramping up high-end products for the new school year. In fact, Youdao Dictionary Pen was again the category top seller on JD.com during the June 18th Shopping Festival for the fifth consecutive year. And Q2 unit sales showed a year-over-year increase of over 50%, broadening our brand’s reach. More recently, we launched the new high-end Youdao Dictionary Pen X7. Large Language Model functions like AI translation and Mr. P AI Tutor have already been widely welcomed by users. First-month sales units doubled those of the X6 Pro, the high-end product released last summer. This week we just released our top-of-the-line X7 Pro, with a premium screen and more advanced AI features; it is gaining a lot of interest. Looking at our business as a whole, in the first-half of this year, we executed on our overall strategy of AI plus education and made significant progress in our journey. We focused our resources on three core businesses: digital content services, especially Youdao Lingshi, online marketing services, and AI-driven subscription services. All three areas show good growth, healthy economics, our unique competitiveness, and long future runways. More importantly, they are key assets in our mission of helping every person learn more efficiently. In the meantime, financially we worked hard to drive towards sustainable profitability, which we believe is the foundation for our next phase of growth. I am pleased with the team’s progress and solid execution. Our operational and financial metrics show increased competitiveness of our business. For example, in addition to the numbers I shared at the beginning, the ratio of sales and marketing expenses to net revenues was 35.8% in the first-half of this year, down by approximately 13 percentage points year-over-year, a very good improvement. Looking ahead, barring unexpected market changes, we expect the business to achieve full-year positive operating income in the near future. Youdao’s strength lies in our unique ability to advance AI empowerment across business lines, combining technical strength with operational excellence. The rapid development of our online marketing and AI subscription services proves this and will continue to drive our growth. Our online courses, underpinned by high-quality content, differentiated services, and unique ways of leveraging AI, are another pillar of our future growth. In the long-term, the future of AI plus education looks incredibly bright, and we will strive to lead the charge. With that, I will turn the call over to Su Peng to provide you with more detailed insights into our financial performance. Thank you.

Thank you, Dr. Zhou, and hello everyone. Today I will be presenting some financial highlights from the second quarter of 2024. We encourage you to read through our press release issued earlier today for further details. For the second quarter, total net revenues were RMB1.3 billion or US$181.9 million, representing a 9.5% increase from the same period of 2023. Net revenues from our learning services were RMB643.8 million, or US$88.6 million, representing a 5.5% decrease from the same period of 2023. Net revenues from our smart devices were RMB166.7 million, or US$22.9 million, down 25% from the same period of 2023, which was mainly attributable to the decreased unit price due to the change of product mix. Net revenues from our online marketing services were RMB511.2 million, or US$70.3 million, representing a 68.4% increase from the same period of 2023. The increase was primarily due to increased sales of performance-based advertisements through third parties’ internet properties, which was driven by our continued investments in cutting-edge AI technology. For the second quarter, our total gross profit was RMB636.8 million, or US$87.6 million, representing a 12.3% increase from the second quarter of 2023. Gross margin for learning services was 60% for the second quarter of 2024, compared with 57.4% for the same period of 2023. Gross margin for smart devices was 30.3% for the second quarter of 2024, compared with 35.8% for the same period of 2023. Gross margin for online marketing services was 39.1% for the second quarter of 2024, compared with 31.9% for the same period of 2023. For the second quarter, we reduced our total operating expenses to RMB709.3 million, or US$97.6 million, compared with RMB856.3 million for the same period of last year. Looking at our expenses in more detail: Sales and marketing expenses declined to RMB515.7 million, compared with RMB587.7 million in the second quarter of 2023. Research and development expenses were decreased to RMB153 million, compared with RMB205.1 million in the second quarter of 2023. Our operating loss margin also significantly narrowed to 5.5% in the second quarter of 2024, compared with 24% for the same period of last year. For the second quarter of 2024, we narrowed our net loss attributable to ordinary shareholders to RMB99.5 million, or US$13.7 million, compared with RMB299.2 million for the same period of last year. Non-GAAP net loss attributable to ordinary shareholders for the second quarter was RMB96 million, or US$13.2 million, compared with RMB283.6 million for the same period of last year. Basic and diluted net loss per ADS attributable to ordinary shareholders for the second quarter of 2024 was RMB0.85, or US$0.12. Non-GAAP basic and diluted net loss per ADS attributable to ordinary shareholders for the second quarter was RMB0.82, or US$0.11. Our net cash provided by operating activities was RMB250.2 million, or US$34.4 million, for the second quarter. Looking at our balance sheet, as of June 30, 2024, our contract liabilities, which mainly consist of deferred revenue generated from our learning services, were RMB1 billion, or US$142.9 million, compared with RMB1.1 billion as of December 31, 2023. At the end of the period, our cash, cash equivalents, current and non-current restricted cash, time deposits, and short-term investments totaled RMB568.5 million, or US$78.2 million. This concludes our prepared remarks. Thank you for your attention. We would now like to open the call to your questions. Operator, please go ahead.

Thank you. We will now begin the question-and-answer session. Our first question today will come from Brian Gong of Citi. Please go ahead.

Thanks, management, for picking that question. I have a question regarding our strategy in the education sector. So as we observed, competitors are ramping up their investment in the education sector. Given the intensified competition, what is our strategy? Thank you.

Thank you, Brian. This is Peng. I will handle the question first. Before answering the question, I will give a very quick background regarding the education scenario in China. The number of candidates registered for the college entrance exam has increased from roughly 10 million in 2019 to over 30 million this year. It's likely to keep increasing in the next decades as well. The exam is getting more competitive. The overall college entrance exam scoreline has been shown to have an upward trend. Taking Tianjin as an example, it has increased by more than 70 points compared to 2019. Thus, we believe the demand for college entrance exam preparations will continue to rise. In terms of strategy, we see moderately intensified competition for pre-college learning services this year, which is understandable given the current market conditions. I believe we have the necessary means to continue to invest and remain a leading player in this dynamic market. First, we will continue to drive customer satisfaction and retention. We have already passed industry-leading satisfaction and retention rates. During the first half of this year, our retention rates reached a historical high in Q2, exceeding 70% and representing a year-over-year increase of over 10%. I think that metric is a testament to users' recognition of our products and services. Secondly, we will continue to produce outstanding learning results. As we've helped students achieve good results and gain admission to their desired universities, most students tend to return to us. If you look at our results from last year and this year, we’ve nearly doubled the number of students gaining admission to top schools. This is important for building our market reputation. This is achievable because of our 10-year format of classes, the AI-driven content, and our comprehensive service model, which are innovative, creative, and proven methodologies for college entrance exam preparation. Third, we are applying more AI technology in our business, such as the AI Quiz recommendations and the AI-based college admissions advice services. In Q2, our AI College application advisors generated nearly 60,000 application forms, roughly a 30% increase year-over-year. We believe this positioning will make us a market leader this year. We are confident in the advantages AI can provide in the market. Lastly, we will keep innovating and investing in the market, strengthening our market channels and branding development, providing a better integrated experience for users through online and offline coordination. This year, we have enhanced localized live broadcasts and services across different cities. We will leverage our teaching strengths and operational experience to improve online customer acquisition, competitiveness, and reduce customer acquisition costs. In summary, we are confident about the future development of our Youdao education business and service. In the long run, high-quality products will always be the answer for a competitive market.

Yes, thank you.

Yes, let me add a point. The most important thing is the product. Ultimately, it’s about understanding customers and satisfying their needs. Our teams excel at this because Feng Zhou and his predecessors have been long-running members of Youdao. We've been doing this for 80 years already. Throughout this process, we’ve innovated several times. The current AI plus pre-recorded video plus comprehensive service model was introduced in 2021. It was a big change, but it makes a lot of sense. Students preparing for college entrance exams typically lack free time, making traditional live course formats an inadequate fit. Thus, the team was actually preparing for this change for a year at that time, and the market conditions in 2021 prompted the team to make the leap, leading to our substantial growth since then. This proves the innovation capability of our teams, and I expect the Lingshi team to keep innovating and remain passionate about their work. This is the culture at NetEase and Youdao, which allows us to create high-quality content.

Thank you.

The next question will come from Peng Zhao of CICC. Please go ahead.

Good evening, Dr. Zhou, Feng Zhou. Thanks for taking my questions. Your online marketing business saw very strong revenue growth in the first half of the year. Could you please tell what's the outlook of this business for the second half of the year? Thank you.

Hi, this is Lei Jin. For the second half of the year, our outlook for online marketing services remains positive. We have seen net revenue growth significantly from around RMB200 million per quarter to over RMB500 million in Q2 of this year. This marks seven consecutive quarters of year-over-year net revenue growth exceeding 50%, alongside continuous improvement in profitability. We expect this year-over-year revenue growth to continue through the second half. Several key factors are driving this sustainable growth. First, our robust data accumulation, advanced AI algorithms, and profound understanding of customer demand form the cornerstones of our long-term competitiveness. As we continuously collect and feed data into our Data Management Platform (DMP), we achieve more accurate predictions, better decision-making, and more refined online marketing services tailored to user needs. Second, our expansion into overseas advertising has been a significant growth driver. We offer clients comprehensive and personalized international advertising services, including brand communication, global KOL marketing, overseas AD placement, and live streaming commerce. Leveraging our deep understanding of client needs, we have accelerated the development of international advertising infrastructure. By the end of Q2, our international carrier database has exceeded 7 million, a year-over-year increase of over 200%. This resulted in Q2 net revenue from international performance-based advertising approaching RMB100 million, with a growth rate around 30 percentage points higher than in Q1. In the second half, we will capitalize on the growing demand from Chinese companies seeking to expand internationally. First, sustainable development of international advertising efforts. Third, our collaboration with NetEase Group has been mutually beneficial. In Q2, Youdao’s data adaptation significantly improved the monetization rate by over 100% of NetEase Group’s traffic. In return, NetEase Group provides us with more controllable and predictable traffic resources. Moving forward, we will continue upgrading our algorithms and the DMP platform to enhance our AI-driven data capabilities, improve advertising efficiency, and boost revenue. While we remain mindful of the increasing risk from traffic competition, we are committed to leveraging opportunities to assist Chinese companies in their global expansion. Simultaneously, leveraging our strengths in customer relations, AI, and data, we are gradually establishing our exclusive advertising network. This will support the sustainable development of our advertising business. Thank you.

Our next question today will come from Thomas Chong of Jefferies. Please go ahead.

Hi, good evening. Thanks management for taking my question. May I ask about AI-driven subscription services? We're actually seeing subscription services continue to expand. What is the commercialization aspect for Mr. P AI Tutor? Thank you.

Hi Thomas. Yes, this is Feng. The key aspect here is the user scenario. At Youdao, we focus a lot on user scenarios. Mr. P serves the home learning scenario, which we believe is one of the top consumer learning scenarios for students. Therefore, it is significant and currently not well served by existing products. We think Mr. P perfectly fits this scenario. Regarding the product and our learnings for commercialization, I have several points to share. The first is that initial feedback for the app is very positive. The recent release of Mr. P marks what we call a broad release for us. In its first month on the market, users engaged with Mr. P AI Tutor nearly 2 million times, making it the second most used feature of the X7 dictionary pen right after word lookup and translation, which is the basic function of the device. It has already surpassed previous favorite features like Wayne and Xinjiang, indicating its popularity. The second point I want to emphasize is that Mr. P is quite a unique and leading product in the market concerning functionality. It is the first all subject, covering nine in total, K-12 AI learning companion app, delivering high-quality results. Some of our peer companies focus on one or two subjects, while others’ products do not yet deliver high-quality results. Our engineering and research team has developed a key set of technologies that enable Mr. P and are working diligently to improve it. Clearly, we are still in the early stages, but we expect the experience to enhance over time. We believe this technology holds immense promise; we envision every family in China with students needing this AI companion, whether in app form or integrated into other devices, not just in China but potentially in other countries as well. The third point pertains to monetization and commercialization; we believe subscription fees represent a highly scalable way of commercializing generative AI technology. Additionally, we are also exploring other avenues, such as smart devices, B2B licensing, and opportunities in international markets. I prefer not to delve into specific concrete plans, but we do have existing products that provide an idea of our direction. For example, Hi Echo is already a substantial contributor to our overall AI subscription sales, which we previously shared reached over RMB60 million in Q2, growing nearly 200% year-over-year. Growth for Hi Echo is attributed to factors like continuous product improvements, positive word-of-mouth, and user referrals. We anticipate Mr. P will follow a similar trajectory. We have also undertaken various projects for Hi Echo on the B2B front, positioning it as an official partner of British Council’s IELTS test. Our longstanding history of effective collaboration with international companies and institutions is another strength. Hi Echo was also recently featured on the Apple App Store homepage, underscoring its quality and popularity. Overall, we find that AI apps are gaining traction among users, and numerous ideas exist within our team for their commercialization. We envision this year and the next as an advantageous time window to grow and monetize these AI applications. Yes, we will concentrate our efforts in this area. Thank you.

Thank you.

Our next question today will come from Howard Ton of Macquarie. Please go ahead.

Hi, good evening and thank you for taking my question. My question regards the non-academic tutoring market. I would like to know more about your company's progress in STEAM courses and whether you will accelerate investments in the future?

Thank you. This is Peng. I will handle the questions. In the second quarter, we made some progress in our non-academic courses, although our language screening and logic thinking courses are still in their early stages. However, in terms of gross billings, both have seen year-over-year growth exceeding 100%. Our English communication and other skills-based training have always been a strength for us. Empowered by AI, we can now provide users with comprehensive service support before, during, and after classes. Moreover, we have established strong faculty and high-quality content to deliver excellent in-class services. With the rapid development of our AI-driven subscription services, we can also assist users in personalization and post-class scenarios related to their listening and speaking capabilities. For instance, as mentioned in previous quarters, the AI compatibility allows users to engage in oral communication anytime and anywhere, generating personalized analysis reports to address speech and grammar issues. The logic thinking courses are in high demand, reflecting parental hopes that such classes will continuously improve their children's thinking abilities. Our products meet parents' needs. Additionally, when students face problems after class, as Dr. Zhou noted, Mr. P AI Tutors can help answer questions and guide them to think critically rather than just providing answers. We consider this a significant innovation that families desire in education. Looking ahead, we will continue to prioritize high-quality development in the non-academic segment. If we identify clear opportunities, we plan to consider increasing investments in non-academic courses.

I believe it's vital to select courses for non-academic programs carefully to ensure success. Given the broad range of potential topics in this space, it’s crucial to choose wisely. Parents may show initial interest in many topics, but in the long run, they select the courses that genuinely benefit their children. Only those courses that prove valuable will gain long-term popularity. Therefore, our approach at Youdao requires careful consideration in the selection of non-academic courses. For example, we believe that literature skills are crucial for children's development; mastering language nuances benefits individuals throughout their lives. That particular course has demonstrated success over the years. We will continue to refine our offerings. Another significant focus is developing computing skills, widely recognized as essential for future careers. Our competitive program, Youdao Little Tooling, has successfully operated for six years and recently produced our first national NOI gold medalist. Thus, whenever we initiate a non-academic course, we ensure careful selection to guarantee long-term success.

Our next question today will come from Bo Zhang of Huatai Securities. Please go ahead.

Hello, can you hear me?

Your line is live. Yes, thank you.

Thank you, management, for taking my question. Congratulations on the strong performance this quarter. I have a question regarding Smart Life. We saw revenue from smart devices is still decreasing. Could you share some details on your entire document plan for the second half of the year and average offers? Thank you.

For the last few quarters, we've reorganized our sales channels as we communicated previously. We also focused our products on our core fixed categories. This year, we've released four Dictionary Pens: from the mid-tier X6 Pro to flagship models X7 and X7 Pro. Users have informed us that they genuinely appreciate these new products. The Youdao Dictionary Pens have been the category's top seller on JD.com during the June 18th Shopping Festival for five consecutive years, showcasing user preference for our brand. The X7 in its debut month generated twice the revenue of last year's flagship X6 Pro, as I mentioned in the prepared remarks. This positive news indicates that our strategy to focus on core products and channel efficiency is on point. We now need to maintain our focus on key products, primarily Dictionary Pens, while enhancing our sales capabilities and optimizing channels. Additionally, the device business's financial performance has shown improvement following this refocusing strategy, laying a solid foundation for growth. Furthermore, regarding high-end products, we consider them our strengths. Our initial large language model applications were integrated into high-end products. In July, we launched the Dictionary Pen X7, and last week we introduced the X7 Pro, both featuring large language model functionalities, including Mr. P AI Tutor and AI translation, which have garnered significant interest. First-month sales of these products have doubled compared to previous models, which is encouraging as our products are the only ones on the market to offer such features. Concerning price points, last year, we expanded into the mid-range market with the launch of the SNA series, aiming to serve a broader audience and diversify user needs. In Q2, we noted that Dictionary Pen unit sales grew over 50% year-over-year. Moreover, net revenue from Dictionary Pens increased nearly 10% year-over-year. This data indicates that maintaining a balanced pricing strategy has been effective; our cheapest product, the X6 Pro, is still priced RMB50 or RMB100 higher than competing models. We believe that this balance allows us both unit and revenue growth, which is promising. Regarding gross margin ratios, the Smart Devices division recorded a slightly low gross margin ratio of 30% in Q2, primarily driven by product mix issues. There was a higher proportion of mid-tier products compared to high-end ones. However, as we ramp up the production of higher-end products in Q3 and Q4, we still target a gross margin ratio of 40% as before. Our competitive advantage lies in our distinctive AI features and improved hardware, which includes advanced AI cameras and screens—both firsts in our market. Additionally, we have enhanced our supply chain over the past year, resulting in reduced supply costs. Overall, we expect Q2 to be the operational low point for our hardware division, and we anticipate better performance moving forward.

Thank you.

Our next question today will come from CITIC. Please go ahead with your question.

Good evening, management. Thank you for taking my question. My question concerns profitability. Will we achieve profitability this year? If so, will we be able to sustain profitability in the future? Thank you.

Thank you for your question. This is Wayne. I will take your question. We are fully committed to improving our overall health and achieving positive operating income this year. Over the past year, we have successfully reduced operating losses compared to the previous year, especially in the first half of this year, where operating losses were reduced by more than 90% year-over-year to approximately RMB40 million. Historical data indicates that we typically see higher operating income in the second half of the year compared to the first half, giving us confidence in achieving positive operating income for the full year of 2024, despite intense competition and various uncertainties. We believe this profitability will be sustainable in future years due to the following reasons. Firstly, we see strong profitability in three core areas: digital content services, online marketing services, and AI-driven subscription services, which are our strategic focuses. By allocating more resources to these areas, we have achieved profitability, and we intend to continue doing so. Our online marketing services, powered by RTA technology and data capabilities, have seen over 50% year-over-year net revenue growth for seven consecutive quarters, thus driving profitability. Leveraging AI technology and quality content, our digital content services have improved learning efficiency and effectiveness for our users. Youdao Lingshi is a leading product, fundamentally driving revenue and profit growth. Secondly, we have improved financial performance in our non-core businesses. For non-core sectors such as smart devices and non-digital content services, we implemented stricter health requirements, focusing on higher ROI metrics and labor efficiency. This led to a temporary decline in overall business scale but significantly improved health and reduced losses. Thirdly, we are enhancing operational efficiency through AI technology and content innovation. To achieve profitability, we are committed to improving marketing efficiency through innovation and user experience enhancement via premium learning content. We are exploring various innovations, such as diversified marketing channels and employing advanced AI technology to optimize marketing efficiency and mitigate challenges like rising acquisition costs due to intense competition. By innovating premium content, such as transitioning from traditional live-stream online classes to content embedded with AI technology (like adaptive Question Bank), we address user concerns such as time constraints while providing personalized learning experiences. This premium content has resulted in strong user engagement, with retention rates surpassing 70% in Q2. To summarize, our strategic focus and innovative approaches have improved our operating margins, instilling confidence in sustaining profitability in the future. Thank you.

Our next question today will come from Crystal Li of China Merchant Securities. Please go ahead.

Hi, thanks management for taking my question. Congratulations on the strong results. I just want to know how we should interpret the recent opinions on promoting high-quality development of service consumption, particularly regarding education and training consumption?

Thank you. Yes, we have noted that earlier this month, state counselors issued opinions promoting the high-quality development of service consumption, emphasizing the importance of meeting diverse and personalized learning needs of the general public and urging social training institutions to enhance service quality in response to public demand. First, to clarify, Youdao has consistently embraced policy guidelines and operated within the scope permitted by these policies. Currently, it's still early in this process, and we still lack further details regarding the scope and categories of the policy. First, we will await further clarification on details related to the policies from the public. What we can say now is that Youdao’s strategy is to continue investing in the education sector with AI features. If you look at the dynamics of our products, we have always been innovative and creative, capable of developing new product formats that align with policy expectations. We will continue to update existing products and introduce new services in accordance with current and upcoming policy guidelines. This approach will be consistent as we aim to deliver positive results in response to policy directives. We can discuss more details once we receive additional information regarding specific policies in the future. Thank you.

Thank you.

At this time, we will conclude the question-and-answer session. I'd like to turn the conference back over to management for any closing remarks.

Thank you again for joining us today. If you have any further questions, please feel free to contact us at Youdao directly or reach out to Piacente Financial Communications in China or the U.S. Have a great day.

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