Earnings Call Transcript - DAO Q2 2021

Operator, Operator

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.

Jeffrey Wang, Investor Relations Director

Thank you, operator. Please note, the discussion today will contain forward-looking statements related to 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 filings of the company with the 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 2021 second quarter financial results news release issued earlier today. As a reminder, this conference is being recorded. Besides, a webcast replay of this conference call will be available on Youdao's corporate website at ir.youdao.com. Joining us today on the call from Youdao's senior management is Dr. Feng Zhou, our Chief Executive Officer; Mr. Lei Jin, VP of Operations; 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.

Feng Zhou, CEO

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. Q2 was another solid quarter for us. Total net revenues were RMB1.3 billion, representing a 107% increase from the same period in 2020. Revenue from our three segments: learning services, learning products, and online marketing services grew by 112%, 138%, and 60% year-over-year, respectively. Loss from operations for the second quarter of 2021 was RMB544 million. That translates to a margin of loss from operations improvement of 330 basis points from the same period in 2020. As you all know, significant regulatory changes regarding after-school tutoring were introduced recently in China after our fiscal Q2 concluded. Our remarks will be in two parts. I will first talk about the double reduction policy, its impact on us, and our plans. Then, we will go over our Q2 results in more detail. Regarding the double reduction policy, we saw four major points most relevant to us: First, publishing of after-school tutoring advertising is banned on most media platforms; second, access to capital markets is severely limited. For example, after-school tutoring companies are not allowed to pursue IPOs; third, there are tutoring timing limitations. For example, no school subject academic tutoring on weekends or holidays; fourth, academic after-school tutoring companies are required to register as non-profit going forward. We have been exploring strategic and operational changes to our tutoring business and setting new priorities for the whole company since the regulation was published on July 24. First, as always, we are committed to embracing and fully complying with these laws and government policies. We have already made changes to our business, such as stopping academic classes during the summer holidays, and we are actively communicating with regulators on further changes like the non-profit requirements as these have a major impact on our future operations. Therefore, we expect academic tutoring business will be severely limited in the coming quarters. With that said, after-school tutoring is not our sole business. The K-12 after-school tutoring made up about 41.2% of our Q2 total revenue. We believe our other businesses, which contribute over half of our revenue, are not directly impacted by the regulation. We have several high-growth business lines in the non-tutoring part of Youdao. So while we step on the brakes on the tutoring side, we will be driving more growth on the non-tutoring side of our business. Ultimately, we think our deep technology roots and large user base give us the options and diversity much needed in this kind of challenging scenario. Overall, when we add the two sides up, I expect this to be a speed bump in our journey, a headwind for a few quarters. Looking to the future, I see four pillars of growth in our non-tutoring business: Learning services, learning devices, adult education, STEAM courses, and education digitization solutions. We have talked a lot about the learning devices and adult education opportunities in past calls, and our team will keep innovating in these areas. In Q2, both these businesses are doing well. We released Youdao Dictionary Pen Series 3, designed to be more friendly to elementary school and pre-K kids, more affordable, and supports the learning of arithmetic in addition to English and Chinese. As for the third growth area, STEAM courses, it is an area that is made more attractive now that students have more time. We believe we have a competitive advantage in online STEAM courses because we have been operating STEAM courses ever since 2018, and our teams are skilled in concentration, applying technology, and also monetization in this area. In Q2, Youdao Weiqi continued scaling up nicely. Net revenue of Youdao Weiqi increased by 180% quarter-on-quarter. We also launched advanced level small class courses of Weiqi for students that play more competitively. As for our programming courses, the retention rates reached an all-time high of nearly 90% in Q2. STEAM education is a great area, and we will continue to launch more courses in the coming quarters. The last of the four growth areas is education digitization solutions. By that, we mean any product or service delivered in a business-to-business or business-to-government fashion that uses digitization to improve learning and education. The customer could be schools, universities, or enterprises. This is the first time we discussed education digitization solutions on our call. We think it has huge potential. It fits Youdao very well, and now is the right time to do it. According to Huatai Securities, the expected market size for education digitization is over RMB650 billion in 2023. As for Youdao, with our expertise in AI, smart devices design, and manufacturing, as well as a deep understanding of teaching and learning, we believe we are well positioned to seize the opportunities in the rising education digitization market. Right now, we also have an innovative product in this area: Youdao Intelligent Learning Terminal. It is an appliance that automates paper-based homework processing and provides learning diagnosis through AI technology at schools. It works by integrating scanning, printing, and AI diagnosis in a single appliance. Youdao helped Binjiang District in Hangzhou to facilitate education digitization, and our Intelligent Learning Terminal was praised for helping instructors analyze students' learning and knowledge points and improve teaching quality and efficacy. We also continue investing in R&D to build up our learning technology. In Q2, we released the Youdao Intelligent Practice System, our first fully adaptive practice and learning system. It is already in production, using our junior high school math courses, and we plan to integrate it with our learning devices in the future. Going forward, here are our immediate action plans: First, we have been streamlining our workforce for the K-12 after-school tutoring business. We have been following the guidance from the government regarding how we are supposed to operate this segment in the future. Second, for the online courses segment, we will focus on adult courses and STEAM courses that align with the policy direction, as I just talked about; K-12 students have more free time after the double reduction policy. We believe demand for STEAM courses will significantly increase. Regarding adult education, we have seen a strong growing demand for professional certificates and interest-based courses, and we continue to offer competitive products to drive sustainable growth in this area. Thirdly, for learning products, we will continue leveraging our advantages in ed-tech and innovation to further drive growth. We always hope that Youdao's smart learning devices present a great opportunity for growth. We have already achieved scale and profitability in our Dictionary Pen products, and we will continue to launch new products to strengthen our leadership in learning products. Fourthly, for education digitization solutions business, as I introduced just now, there is huge demand, and it is in line with the government's policy direction. We will leverage our advantages to meet the rising demand from public schools, universities, etc. Looking ahead, we are very confident with our plans. We have a strong team, we offer high-quality products, and we have long-term support from our parent company, NetEase. NetEase today announced that it has adopted a share purchase program of up to US$50 million of Youdao's outstanding ADS for a period not to exceed 36 months beginning on September 2, 2021. Under the terms of this program, NetEase may purchase Youdao's ADS in open market transactions on the New York Stock Exchange. The purchase program may be suspended or discontinued at any time. Along with continuing to optimize our business, we are also dedicated to fulfilling our social responsibilities as a corporate citizen. We always strive to help where we can by leveraging our strengths to help communities in need. For instance, facing the recent heavy rainstorm in Henan Province, Youdao joined hands with public welfare institutions to provide post-disaster reconstruction and instructor support for 10 to 15 schools and kindergartens. These activities are expected to support at least 10,000 students in affected areas, and we will continue making ongoing contributions to society in the future. With that overview, I will now turn the call over to Su Peng to review our operational and financial results in Q2. We will then open to questions.

Peng Su, VP of Strategy and Capital Markets

Thank you, Dr. Zhou, and hello everyone. Today, I will be presenting some operational and financial highlights from our 2021 second quarter. We encourage you to read through our press release issued earlier today for further details. Dr. Zhou introduced the strategic and operational changes to our tutoring business and our new priorities just now. Then I will add more color on the operating side in Q2. First of all, in terms of the adult segment of premium courses, the revenue accounted for 21.5% of the total net revenue in Q2. The Extraordinary Memory course was the biggest one from the gross billing perspective in Q2. In the meantime, an upgraded version of the practical English course has been launched recently; English for All Enjoyment Camp offers immersive teaching from the first-person view, optimizing the education and training model based on the learning characteristics and habits of adults. Furthermore, the upgraded course presents language learning scenarios using AI technology and integrates learning, practice, and test to improve the concentration of students. The Intelligent Assessment System tracks the students' learning conditions to help them customize their learning courses accurately across five major dimensions. In short, enhancing service by AI technology has made education and training easier. As for China University MOOC, which stands for massive open online courses, the leading MOOC platform in China, 137 courses have been certified as national-level premium online courses for vocational education by the Ministry of Education. Looking at our Youdao Dictionary, we added a new function named High Reading in Q2. It is the first learning app that supports real-time assessment of oral English and professional sound monitoring in China, making oral English learning more efficient. Our WOW Community, launched in Q1, grew fast with MAU of more than 10 million in Q2. The monthly active users of our learning apps in Q2 reached more than 113 million. Besides, gross billing from new users contributed by organic traffic increased by 97.3% year-over-year, and gross billing from the total organic traffic accounted for 28.4% of all gross billings in Q2. Now, I will present the financial highlights in Q2. Total gross billing from our online courses reached RMB1.1 billion for the second quarter, up 99.7% year-over-year, and the gross billing from our premium courses rose to RMB1 billion, up 124.1% year-over-year. Gross billings from our K-12 segment accounted for 76.7% of the total gross billing in the second quarter. Paid student enrollments for premium courses were up by 129% year-over-year. Paid student enrollments from our K-12 and adult segments accounted for 86.6% and 13.4% of the paid student enrollments for premium courses, respectively. For the second quarter, total net revenue reached a record RMB1.3 billion, or US$200.3 million. This represents an increase of 107.5% from the second quarter of 2020. Looking at this growth by segment; net revenues from our learning services were RMB921.1 million, or US$142.7 million, up 112.4% from the same period in 2020. We attribute this growth to the increased revenue generated from our online courses, which were further driven by the increase in paid student enrollments for both K-12 and adult courses of Youdao Premium Courses. Net revenues from our learning products were RMB206.3 million, or US$32 million, up 138.8% from the same period in 2020, driven by the substantial increase in Youdao Dictionary Pen sales volume. Net revenues from our online marketing services were RMB166 million, or US$25.7 million, representing a 60.8% increase from the same period in 2020. For the second quarter, our total gross profit reached RMB676.7 million, or US$104.8 million, up 140.4% compared with the second quarter of 2020. Gross margin for learning services increased to 57.9% for the second quarter of 2021, up from 51.7% for the second quarter of 2020. The increase was driven by the improved economies of scale and ongoing optimization of Youdao's faculty compensation structure. Gross margin for learning products increased to 43% for the second quarter from 32.4% for the same period in 2020. The improvement was mainly attributable to the substantial rise in sales volume of Youdao Dictionary Pen Series 3, which carry a higher gross margin than other learning products. Gross margin for online marketing services was 32.7% for the second quarter of 2021, compared with 28.5% for the same period in 2020. The increase was mainly attributable to higher sales of performance-based advertisements through third-party Internet properties, which had an improved gross margin profile over the last year. For the second quarter, the total operating expenses were RMB1.2 billion, or US$189.1 million, compared with RMB564.6 million for the same period last year. With that, for the second quarter, our sales and marketing expenses were RMB973.2 million compared with RMB445.2 million in the second quarter of 2020. Research and development expenses were RMB180 million, compared with RMB91.4 million in the second quarter of 2020. Our operating loss margin was 42.1% in the second quarter of 2021, compared with 45.4% for the same period last year. For the second quarter of 2021, our net loss attributable to ordinary shareholders was RMB524.4 million, or US$81.2 million, compared with RMB257.8 million for the same period last year. Non-GAAP net loss attributable to ordinary shareholders for the second quarter was RMB525 million, or US$77.5 million, compared with RMB250.5 million for the same period last year. Basic and diluted net loss per ADS for the second quarter was RMB4.29, or US$0.66. Non-GAAP basic and diluted net loss per ADS for the second quarter was RMB4.09, or US$0.63. Our net cash used in operating activities for the second quarter was RMB249.1 million, or US$38.6 million. Looking at our balance sheet, as of June 30, 2021, our contract liabilities, which mainly consisted of the deferred revenue for our online courses, were RMB1.4 billion, or US$213.1 million, compared with RMB1.4 billion as of December 31, 2020. At the end of the period, our cash, cash equivalents, restricted cash, time deposits, and short-term investments totaled RMB1.9 billion, or US$294.4 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.

Operator, Operator

Our first question comes from Sheng Zhong of Morgan Stanley. Please go ahead.

Sheng Zhong, Analyst

Thank you for taking my question. My question is, actually, you mentioned that in the current regulatory environment, you will focus more on the non-K-12 space. But my question is: wondering what this means for the K-12 tutoring business? Will you keep it or gradually exit this market? And if you have any operational adjustment plan you can share with us, that would be great. Thank you.

Feng Zhou, CEO

Thank you, Sheng Zhong. Currently, we are following government guidance at a working level. For instance, we have discontinued summer courses and removed any courses scheduled on weekends. Looking ahead, we anticipate more changes like this and will offer our K-12 services differently, in line with government directives. We note that national and local policies on after-school tutoring are quite consistent, and we expect measures from these policies to be executed in the coming months, though some timings remain unclear. The government's schedule could change, but we will adhere to their instructions. It is still early for us to present a clear adjustment plan. We believe these new measures will significantly affect our K-12 tutoring business, with impacts emerging over the next few quarters. From a broader perspective, we see these policies as promoting the long-term development of education in China. They are intended to give children more free time, encourage extracurricular interests, and allocate more resources to schools. We fully support these changes, as they align with our initial intention in the educational sector. There is a saying in Chinese that emphasizes the roles of teachers in imparting values, skills, and clarity, which resonates with our mission to achieve these goals. Technology plays a vital role in how we fulfill this mission, ultimately aiming to empower children for brighter futures, which is why we welcome these policies. Regarding the non-K-12 space, we observe that the government is encouraging digital transformation across various sectors, including education. Digitization boosts productivity and is driving change in many areas. The government’s commitment to this, especially in education, is evident. For example, in July, six ministries collaboratively issued guidelines promoting the integration of digital technology in education. We believe that education technology in China is advancing. While online after-school tutoring is part of this sector, education technology encompasses much more. As previously mentioned, we will concentrate on four areas for growth: learning devices, STEAM courses, adult education, and education digitization solutions. These focus areas align with the government's vision and reflect strategies we have been developing for some time, representing significant growth opportunities for us.

Sheng Zhong, Analyst

Thank you very much.

Operator, Operator

The next question comes from Brian Gong of Citi. Please go ahead.

Brian Gong, Analyst

Yes, thanks management for taking my question. My question is about the competition in learning devices, adult education, and STEAM education. Do you think the competition in those areas will become more intensified since after the new regulation? Other tutoring names are also looking to come into this area to find new growth drivers. Yes, that's my question. Thank you.

Peng Su, VP of Strategy and Capital Markets

Thank you, Brian. This is Su Peng. Yes, the first point is we always believe that intelligent learning devices will provide huge opportunities for ed-tech companies. In China, there are nearly 200 million K-12 students, as well as an even larger number of adult learners aspiring to improve their learning effectiveness. Parents right now are ready to invest in education. However, with growing demand, it's likely that many other companies have already entered the segment. What we think about these intelligent learning products is that there are significant technical barriers throughout the entire process, including development, production, and sales, where we believe Youdao has improved substantially over time and achieved exceptional results. If you go back two years ago, we released our Dictionary Pen Series 2 in August 2019. With these resources, we established good market reputation and recognition, and we feel we have made impressive strides in the minds of parents. So we are confident we are the leading provider in this sector. The second point is regarding adult education products. If you look at the numbers, net revenue from our adult education business is up over 100% year-over-year in Q2. We are successfully managing two different SKUs, or product lines in our pipeline: First is what we call practical English, a language learning product. Second is called the Extraordinary Memory, which helps people train their memory capabilities. These are entirely different products, each delivering core value to our users. We believe we can effectively operate both product lines simultaneously with our adult education team. Additionally, as we mentioned, we have launched several new functions in the first half of this year, including the new High Reading program. Thus, we expect to learn more about user behavior through these two different functions and refine our offerings based on their activities within our apps. We are optimistic about maintaining a leading position in this area of adult education. As Dr. Zhou mentioned, we also found another promising opportunity in B2B and B2G services. They not only exhibit high demand but also align with policy directions. We call this our digitalization education business. It is poised to enhance education in classrooms, improve educational system management, and create innovative delivery modes. Our innovative Intelligent Learning Terminal boosts digitization for primary and high school education across China, adopting intelligent educational solutions to facilitate self-studying and personalized teaching, which we believe will enhance efficacy and reduce the burden on both teachers and students. I hope that answers your question. Thank you, Brian.

Feng Zhou, CEO

Brian, this is Feng Zhou. Yes, let me add a few words. The question about competition in these new areas is quite reasonable. We will indeed see a lot of competition, and we are already observing companies launching new products and services. The way we perceive it is that we regard ourselves as a product-focused company. We think there are product-focused companies and service-focused companies in education, and both models are viable. However, when it comes to hardware, particularly devices, the focus is undoubtedly product; this gives us a competitive edge. We have been in this sector for several years and have assembled strong product teams. When it comes to STEAM education, we believe we are stronger in online delivery. This is why we consistently focus on the online segment of tutoring education. For STEAM courses, we will also keep our focus online, which differs from academic courses in that STEAM courses tend to be more appealing to students as they are extracurricular. We believe we possess ample experience and a strong track record in creating captivating STEAM courses like Weiqi, or the game of Go. We are confident we can develop more successful learning modules of this sort. I hope this response is helpful. Thank you.

Brian Gong, Analyst

Yes, thank you very much. That's very helpful.

Operator, Operator

The next question comes from Alex Xie of Credit Suisse. Please go ahead.

Alex Xie, Analyst

Hi, management. Thank you for taking my questions. My first question is about your customer acquisition strategy and customer acquisition costs. I think you will shift your focus to the non-K-12 segments. How should we think about them in the future? My second question is about the profitability of your non-K-12 business lines. Could you please share your ideas about what kind of margins your non-K-12 business could achieve under your business plan? Thank you.

Peng Su, VP of Strategy and Capital Markets

Alex, this is Su Peng. I will take your first question. Regarding customer acquisition strategy for the non-K-12 after-school tutoring business, we will definitely leverage existing user traffic and put more emphasis on conversions supported by our organic traffic to enhance the conversion rate and expand our user base as well. Concerning the WOW Community launched in Youdao Dictionary in Q1, it grew rapidly with MAUs exceeding 10 million in Q2, reflecting our ability to boost organic traffic within our Dictionary apps. For the adult business, it's crucial to create high-quality content and products before pouring money into acquiring customers through marketing. As a result, we strive to deliver high-quality processes and products to our clients first. Before public release, we undergo several rounds of internal tests to refine the content, ensuring we deliver top-quality offerings to our clients. This strategy will guide us moving forward in adult education. For STEAM products, we are also developing a variety of new content in our pipeline, aiming to create more cross-selling scenarios for children over six years old. Currently, we are successfully operating products like Weiqi and kids programming courses. We anticipate releasing additional STEAM courses for older kids at the start of the fall semester. I hope this answers your question. Regarding profitability, we emphasize maintaining a healthy business model and unit economics as the foundation for our business operations. If you look at the various sectors, you will note our learning devices have exemplified significant year-over-year improvement in gross profit margins, showcasing substantial upticks compared to last year. Additionally, you can observe improvements across almost all our operating metrics since going public. We expect the same trends to continue, fostering a bright future and presenting sizable opportunities for all segments of our businesses.

Alex Xie, Analyst

Got it. Thank you very much.

Operator, Operator

The next question comes from Thomas Shen of Nomura. Please go ahead.

Thomas Shen, Analyst

Thank you, management, for taking my questions. I have one question about how we should forecast the impact from the recent regulations for after-school tutoring? Any insights regarding the top line or margins would be very helpful. Thank you.

Lei Jin, VP of Operations

Hi Thomas, this is Lei Jin. Firstly, Youdao is committed to fully complying with the Beijing after-school tutoring measures and similar regulations from other local governments. Youdao needs to implement the central government's requirements. In line with Beijing's after-school tutoring measures, we have ceased offering extended AST classes on weekends, national holidays, and during the current summer break period in Beijing. Such measures are expected to materially impact our existing K-12 academic tutoring business. In the first quarter of this year, revenue from K-12 AST classes accounted for less than 50% of our total revenue. Youdao is an intelligent learning company, not solely focused on tutoring. Although we face challenges from the double reduction policy, this does not change our long-term vision, and we are genuinely optimistic about the long-term development. In the medium term, we think this impact could last for about 12 months as we navigate through the transition. The entire K-12 AST represents about 41% of our Q2 total revenue. Additionally, computer education for grades 1-9 constitutes about 24% of our Q2 total revenue. At the same time, we manage a diversified business with significant operations that remain unaffected by these regulations. Our non-AST business is already substantial at over 50% of our revenue and is growing at approximately 100%. Therefore, we believe we are in a favorable position. We will carefully and prudently manage this process moving forward, as our management team is focused on long-term strategy and is confident in navigating these challenges, placing us in a better market position. Additionally, NetEase is supporting us for the long haul.

Thomas Shen, Analyst

Thank you. That was helpful.

Operator, Operator

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

Thomas Chong, Analyst

Hi, good evening. Thanks management for taking my questions. May I ask about the outlook in terms of operating expenses like R&D, sales and marketing, and administrative expenses in the coming quarters? Specifically for the sales and marketing side, can we expect it will materially slow down in the upcoming quarters? Also, any insights into expected headcount by the end of this year would be appreciated. Thank you.

Yongwei Li, VP of Finance

Hi Thomas, thank you for your question. This is Wayne. As Dr. Zhou mentioned, we are slowing down in the AST side. Simultaneously, we are driving more growth on the non-AST side of our businesses, such as smart devices and education digitization solutions. Therefore, it's challenging to provide a clear direction for changes in our operating expenses at a financial level. Youdao is an ed-tech company, and we feature multiple businesses. K-12 AST does not comprise our sole revenue stream. The revenues from our non-K-12 segments accounted for about 60% in the second quarter, and these areas will not receive direct negative impacts from the double reduction policy. I would like to share two points concerning operating expenses related to our K-12 AST sector, which represent a segment of our financial outlook. First, following government policy, the publishing of AST advertising on most media platforms is banned. Thus, we have ceased AST advertising for K-12, which has led to a sharp decrease in our marketing expenses. Second, we intend to downsize the K-12 AST business scale. As previously mentioned, given the limited tutoring timetable, our sales personnel and the number of tutoring classes will be reduced accordingly. As for R&D investment, we are an AI technology-oriented company and will continue our commitment to investing significantly in our other core business areas. Therefore, it's possible that R&D expenses will continue to increase. Lastly, I want to emphasize that diversification remains one of our strengths. We will proactively capitalize on growth opportunities, but the foremost condition will be our complete compliance with laws and government directives.

Thomas Chong, Analyst

Thank you.

Operator, Operator

The next question comes from Liping Zhao of CICC. Please go ahead.

Liping Zhao, Analyst

Good evening, management. Thanks for taking my questions. I have two questions here. First, this recent policy encourages students to study at home or at school. Will this stimulate the demand for our educational smart devices? Any plans for the new product launches of our smart devices? Secondly, related to the share purchase program, we noticed that NetEase announced a share purchase program of US$50 million of Youdao's ADR. Could management elaborate a little bit more on the reason behind it? Thank you.

Feng Zhou, CEO

Yes, thanks. Regarding your first question about learning devices and the launch of new products in this area—I can share exciting news. Tomorrow, we will launch a new version of the Dictionary Pen in collaboration with People's Education Press, which has been overseeing that development. So tomorrow, September 1, we are releasing this new Dictionary Pen; it includes features that work directly with students' textbooks. This has been one of the most sought-after features by parents and students, and we have finally ironed out all the details for the launch. We are very optimistic about this product. Moreover, in a few days, we will introduce another product related to language learning, specifically focusing on a different aspect of language acquisition. As September marks the start of the academic year, it is a crucial period for any learning-related products. Therefore, with these two new products alongside our existing well-performing Dictionary Pen products, we believe we have an excellent product lineup for this school year. Thank you.

Operator, Operator

The next question comes from Candis Chan of Daiwa. Please go ahead.

Feng Zhou, CEO

Sorry, operator. I think we have the second question, right? Yes, regarding the share purchase program from NetEase. I introduced in my prepared remarks that NetEase today announced the share purchase program approved for up to US$50 million of Youdao's shares. It will start two days from now and last a maximum of three years, with NetEase planning to purchase Youdao's shares on the open market. I believe this share purchase program demonstrates profound support for Youdao's business and our long-term development. As you know, NetEase has supported us on multiple occasions before, such as providing credit lines a couple of quarters back. This again signifies their backing. This is crucial in the current market landscape. Moreover, NetEase certainly hopes Youdao will achieve strong performance in the capital markets over time, contributing to the motivations behind the share purchase program. We will keep you updated on these developments if more information becomes available. Thank you.

Operator, Operator

The next question comes from Candis Chan of Daiwa. Please go ahead.

Candis Chan, Analyst

Hi, management. Thank you for taking my questions. I just want to quickly follow up on your comments about the downsizing of the K-12 business. Can you quantify the restructuring costs for this K-12 AST business? How would that impact your cash flow position?

Peng Su, VP of Strategy and Capital Markets

Candis, thank you for your question. Concerning K-12 restructuring costs, we believe each player will incur additional expenses, such as compensation for dismissed staff, cancellation costs for rental offices, and potential impairment losses for prepaid materials. Different players might face varying situations. As Dr. Zhou mentioned, Youdao already has a solid foundation for its non-K-12 business, and in the future, we expect to drive more growth in this non-tutoring space. Part of the K-12 talent will transition to the non-K-12 business areas, such as STEAM classes and adult education. They will continue to create value for us. Compared to other tutoring companies, we have comparatively low additional costs on the compensation side and will provide more opportunities for our talent. Secondly, as an online company, we face fewer fixed costs, such as rental fees during restructuring. Lastly, we believe the restructuring costs will be closely linked to the final policy regarding non-profit organizations for K-12. Currently, we are actively communicating with the regulators regarding the detailed policy for non-profit organization designations, but that policy is still underway, so we will ensure full compliance with government regulations and await the final policy. I hope that answered your question.

Candis Chan, Analyst

Yes. Thank you very much.

Operator, 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.

Jeffrey Wang, Investor Relations Director

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 TPG Investor Relations in China or the U.S. Have a great day.

Operator, Operator

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