Youdao - Q1 2024

Transcript

Operator (participant)

Good day, and welcome to the Youdao 2024 First Quarter Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Jeffrey Wang, Investor Relations Director of Youdao. Please go ahead.

Jeffrey Wang (Investor Relations Director)

Thank you, Operator. Please note the discussion today will contain forward-looking statements related to the future performance of the company, which are intended to qualify for the safe harbor from liability, as established by the U.S. Private Securities Litigation Reform Act. Such statements are not guarantees of the future performance and are subject to certain risks and uncertainties, assumptions, and 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 these discussions. 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 purpose only. For the definitions of non-GAAP financial measures and reconciliations of GAAP to non-GAAP financial results, please see the 2024 fourth quarter financial results news release issued earlier today. As a reminder, this conference is being recorded. A webcast replay of this conference call will be available on Youdao's corporate website at ir.youdao.com. Joining us today on the call from Youdao 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.

Feng Zhou (CEO and Director)

Thank you, Jeffrey, and thank you all for participating in today's call. Before we begin, I'd like to remind everyone that all numbers are based on RMB, unless otherwise specifically stated. We had a solid quarter in Q1 2024. Net revenues reached CNY 1.4 billion, marking 19.7% year-over-year growth. Income from operations amounted to CNY 29.9 million, a significant turnaround from the CNY 195.8 million loss from operations in the same period of last year. This marks our first ever profitable first quarter and our first ever consecutive two quarters of profitability. In terms of cash flow used in operating activities in the first quarter, was RMB 391 million.

As Q1 is seasonally low on course renewals, this represents an improvement of 10.5% year-over-year. Now, let's review the developments across our business lines. Learning services revenue reached CNY 718 million, largely flat compared with the same period last year. Within the segment, digital content services maintained strong momentum, with net revenues of CNY 499.8 million in Q1, marking an 11% year-over-year growth. Gross margin has consistently exceeded 70% for three consecutive quarters. Furthermore, the net revenues generated by digital content services covered the costs and operating expenses and yielded meaningful profits. In terms of product enhancements, we upgraded Youdao Lingshi in Q1 by introducing a tiered teaching approach tailored to individual needs and capabilities.

More recently, we concluded the spring reviews for Youdao Lingshi students, and the retention rates reached a historic high of over 70%, up more than 10 percentage points year-over-year. This retention rate is remarkably high for this age group and competitive with offline services, while offering higher growth margins. Additionally, we launched a new product for Youdao Literature, called Virtual Tour of Twenty-Four Cities, Yun You Er Shi Si Cheng, designed to help students improve their reading and writing abilities. Lastly, leveraging our AI capabilities, we efficiently offered over 30,000 high-quality writing refinements in the first quarter through AI writing refinements, 80% more than last quarter. Next in learning services are our AI-driven apps and services. On previous calls, we have discussed this extensively, our AI initiatives, particularly our large language model projects.

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

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

Our online marketing services segment continues to demonstrate remarkable growth, with net revenues reaching a historic high of CNY 492.7 million in the first quarter, marking an impressive 125.9% year-over-year growth. This segment has sustained a robust momentum, achieving over 50% year-over-year growth for six consecutive quarters, driven largely by the strong performance of real-time API, RTA, and the rapid expansion of domestic key opinion leader, KOL, advertising verticals, both of which experienced over 100% year-over-year growth in the first quarter, underscoring the segment's strength and our ability to capitalize on emerging trends. Looking ahead, we see multiple avenues for further growth, including leveraging industry trends like data management platforms, DMP, as well as strengthening our collaboration and synergy with the NetEase Group.

Our partnership with NetEase brings us the benefit of their vast traffic sources and access to more customers within the group. In the first quarter, less than 10% of our ad revenue originates from NetEase, indicating significant future growth potential as we deepen the partnership. At the same time, our AI capabilities will empower the groups to conduct advertising placement more accurately and efficiently across business lines, creating a mutually beneficial synergy that drives growth for both parties. Regarding the smart devices segment, net revenues were CNY 181.2 million in the first quarter, reflecting a 14.8% year-over-year decline. However, it is encouraging to note, that the rate of decline has narrowed by 30 percentage points compared to the previous quarter, indicating a stabilization.

On the product front, we recently released the Youdao Dictionary Pen S6 Pro, which quickly became the top-selling dictionary pen in terms of sales volume on JD.com after its launch. While we continue to face headwinds in this segment, we remain confident in the medium to long-term outlook for our learning devices, underpinned by our commitment to product innovation and our deep understanding of the education technology market. As usual, let me share with you some thoughts about our overall strategy. As our recent financials indicate, our business is nearing the achievement of sustainable profitability. A key strategic question for us is: How do we cross the sustainable profitability threshold and build long-term growth in this highly competitive education technology sector? Our strategy is to maintain financial discipline and focus on a few key businesses with high growth and strong competitive advantages.

Currently, we have identified the three areas where we are concentrating more energy and resources. First, our focus is on digital content services, in particular, Youdao Lingshi, for high school students. Over the past few years, Lingshi has emerged as the leading player in its segment. We believe there is a healthy multi-line growth trajectory for Lingshi in front of us. Secondly, we are focusing on online marketing services, which is approaching RMB 500 million in quarterly revenues. We see two main growth drivers working in our favor: the trend of tech-driven advertisement product innovations, including wide applications of RTA, DMP, and particularly generative AI in the industry, as well as untapped customer acquisition opportunities as we achieve larger scale and product leadership. Thirdly, our focus is on AI-driven subscription services, currently generating around RMB 50 million in quarterly total sales.

Although relatively small at present, this segment is growing at a high speed, with over 100% year-over-year growth this quarter. It is a key conduit through which our investment in AI will pay off. I'm pleased to share that we will be launching Mr. P AI Tutor, the first all-subject AI tutor in China, as a free mobile app in June. We encourage you to try it out and provide us with feedback once it's available. In conclusion, we are laser-focused on driving robust growth by offering premium online services, online learning services, and spearheading AI innovations for consumers, while concurrently maintaining financial discipline. The future holds immense promise for AI-driven learning, advertisement, and consumer services. With that, I will turn the call over to Peng Su to provide you with more detailed insights into our financial performance. Thank you.

Peng Su (VP of Strategy and Capital Markets)

Thank you, Dr. Zhou, and hello, everyone. Today I will be presenting some financial highlights from the first quarter of 2024. We encourage you to read through our press release issued earlier today for further details. For the first quarter, total net revenue were RMB 1.4 billion, or $192.8 million, representing a 19.7% increase from the same period of 2023. Net revenue from our learning services were RMB 780 million, or $99.4 million, representing a 2% decrease from the same period of 2023. Net revenue from our smart devices were RMB 181.2 million, or $25.1 million, down 14.8% from the same period of 2023, primarily due to the decreased demand for the learning products in the first quarter of 2024.

Net revenue from our online marketing services were RMB 492.7 million or $68.2 million, representing a 125.9% increase from the same period of 2023. The year-over-year increase in revenue from the online marketing services was primarily due to the increase in sales of the performance-based advertisements through the third party's internet properties, which was driven by our continuing investments in the cutting-edge AI technology. For the first quarter, our total gross profit was RMB 681.5 million, or $94.4 million, representing a 13.2% increase from the third quarter of 2023. Gross margin for learning services was 63.1% for the first quarter of 2024, compared with 62% for the same period of 2023. Gross margin for smart devices was 32.6% for the first quarter of 2024, compared with 39.6% for the same period of 2023.

Gross margin for online marketing services was 34.3% for the first quarter of 2024, compared with the 29.1% for the same period of 2023. For the first quarter, total operating expense were RMB 651.6 million, or $90.2 million, compared with RMB 797.6 million for the same period of last year. With that, for the first quarter, our sales and marketing expense were RMB 455.4 million, compared with RMB 565.2 million in the first quarter of 2023. Research and the development expense were RMB 136.7 million, compared with RMB 182.8 million for the first quarter of 2023. Our operating income margin was 2.1% in the first quarter of 2024, compared with operating loss margin of the 16.8% for the same period of last year.

For the first quarter of 2024, our net income attributable to ordinary shareholders was RMB 12.4 million, or $1.7 million, compared with net loss attributable to the ordinary shareholders of RMB 204.4 million for the same period of last year. Non-GAAP net income attributable to the ordinary shareholders for the first quarter was RMB 20.3 million, or $2.8 million, compared with non-GAAP net loss attributable to the ordinary shareholders of RMB 193.9 million for the same period of last year. Basic and diluted net, net income per ADS attributable to the ordinary shareholders for the first quarter 2024, were CNY 0.11, or $0.02, and CNY 0.1, or $0.01. Non-GAAP basic and diluted net income per ADS attributable to ordinary shareholders for the first quarter was CNY 0.17, or $0.02.

Our net cash used in operating activity was CNY 391 million, or $54.1 million for the first quarter. Looking at our balance sheet, as of March 31, 2024, our contract liability, which mainly consists of the deferred revenue generated from our online learning services, was RMB 769.1 million, or $106.5 million, compared with RMB 1.1 billion as of December 31, 2023. At the end of the period, our cash, cash equivalents, restricted cash, term deposits, and short-term investments total RMB 326 million, or $45.2 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.

Operator (participant)

We will now begin the question and answer session. To ask a question, you may press star, then one on your touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster... Our first question comes from the line of Brian Gong with Citigroup. Please go ahead.

Brian Gong (Internet and Media Research)

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

Peng Su (VP of Strategy and Capital Markets)

Thank you, Brian. This is Peng Su. We think this, firstly, it's about the digital content services, particularly, are the most in demand and financially robust parts with our learning services. In the last year, our net revenue from digital content services of are for the it's around two billion RMB, up about 11% year-over-year. Additionally, digital content services generated profit in the last for the full year last year. In the first quarter of this year, net revenue from digital content services reached close to CNY 500 million, reflecting about around the 11% year-over-year growth as well.

We do not, at the same time, we do not only keep the revenue growth at the same level, but significantly improve the profitabilities at the same time. We expect we can just expand on the profitabilities of the digital content services very quickly in this year. I think the factors which has driven the growth of the digital content services, definitely first is because we see the very strong demand from the market. That's the. I think that's the part from the. That's what we see the signals from the market regarding our services. And secondly, it's about definitely we provided pretty unique values from our products to our customers.

We think about this. For examples, with our AI capabilities, we can offer the users academic diagnostics, personal learning plan, test plans, and recommended access following the video content consumptions. And also, the AI-based college admissions advisors. We call the AI college admission adviser, provided comprehensive services such as college application assistance, course selection advice, as well as the college admissions policy guidance. We think that's a pretty unique value we provide to our customer for these products. I think in the remaining three quarters of this year, we will continue to focus the profitability of each product. For the key products and services, such as Lingshi, we will allocate more resources and efforts striving for the faster growth in this year. And secondly, we find a significant potentials for the offline service as well.

Through these initiatives, we aim to reach a broader range of students and provide more high quality consulting services. Well, our digital content learnings is primarily delivered online. We believe that is the integration of online and offline services. We think that will be offer better services to all the students and customers as well. With that, we are pretty confident, pretty confident about the profitability of our digital content services, as expect to see a rapid improvement in the full year of 2024. In addition, with Lingshi, our core products is expected to remain a rapid growth in the forecast, in the foreseeable futures. Thank you.

Feng Zhou (CEO and Director)

Yeah, Brian, this is Feng Zhou. Yeah, I just wanna add one point. So, as Peng Su just said, we are working on offline services for Lingshi, yeah, as of right now. Yeah, so we already have about 10 cities in service right now. Yeah, so this is an important initiative for the team. So we think about online and offline a lot, so I just wanna add a little bit of thinking about this. So, so we think online courses are really great. So, fundamentally, they are more efficient. So, if we look at Lingshi, a lot of the course content is actually delivered with pre-recorded video.

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

Brian Gong (Internet and Media Research)

Thank you.

Operator (participant)

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

Kenny Wang (Director)

Good evening, management. Thanks for taking my question. So I have one question about our online marketing services. It seems, our online marketing services have been experiencing a rapid growth for six consecutive quarters. So, how could we achieve sustainable growth in the future? Thank you.

Lei Jin (President)

Hi, this is Lei Jin. As we discussed during the call last quarter, Youdao's AD business is a performance-based AD platform. We aggregate the traffic from both within Youdao and outside of Youdao to serve the customers' marketing needs. Our competitive stance lies in the unique combination of the technology skills and the customer services and the operation skills. In the first quarter of this year, our advertising business achieved a net revenue of nearly RMB 500 million and a gross margin of 34.3%. Both of these are record high. Additionally, this segment generates meaningful profits. Looking ahead, there are three key factors to drive the sustainable growth in the future. The first, continued technological empowerment.

In the first quarter, we expanded the real-time API, RTA, to coverage to include the industries such as entertainment, social media, and automotive, and e-commerce. Covering over 10 sectors now, the proportion of RTA ad revenue has increased to around 30% in Q1. The implementation of RTA data strategy has improved conversion efficiency by over 50% for some clients. Looking ahead, RTA revenue is expected to further increase. By continuously optimizing AI algorithm and data analysis, we can better meet the diverse needs of our clients and improve the advertising effectiveness. In addition, our data management platform, DMP, is a centralized application repository designed for collecting, storing, and processing user data from multiple sources. This enables advertisers to gain a deep understanding of their target audience, behaviors, and preferences.

Our DMP enhances this by integrating user tags and audience package management functionalities. This further guides targeted advertising deployment and optimization, thereby improving advertising efficiency and effectiveness. And the second, the further expansion of customer acquisition opportunities. The proportion of the advertising traffic from NetEase and the revenue from the NetEase group was relatively small, indicating significant growth potential in the future. Moving forward, we will better utilize the traffic resources within the NetEase group. Compared to the purely external traffic, the traffic from NetEase is relatively more predictable and controllable. Furthermore, by strengthening our collaboration with the NetEase group, we will gain deeper insight into the needs of the gaming industry users, which will help us expand our client base in the gaming sector. The third, overseas marketing expansion.

In terms of global key opinion leader, KOL marketing, we have access to over 5 million global internet celebrities, including more than 1,000 exclusive ones. We can provide the clients with a personalized KOL marketing solution, including KOL selection, marketing strategy development, video content planning, as well as monitoring and optimization of KOL content performance. Our leading AI technology further empower global KOL marketing efforts. To support the rapid international expansion of Chinese enterprises, Youdao Ads launched China's first desktop overseas marketing platform in Q1. Youdao Ads have already assisted several Chinese companies overseas, including just like NetEase Games, BYD, Anker, and Shein in their global expansion efforts. Currently, the global KOL marketing business is still in the early stages, presenting substantial growth potential in the future. Thank you.

Operator (participant)

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

Thomas Chong (Managing Director)

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

Feng Zhou (CEO and Director)

... We apply AI and large language model heavily in multiple business lines, including advertising courses and subscriptions in apps. So, AI subscriptions cover the last category. As we discussed in pre-prepared remarks, AI subscription sales have been growing rapidly, up 140% this quarter year-over-year. Yeah, reaching about 50 million RMB. So to break it down a little bit for you, here are the major products that contributes to that. Yeah, first is Youdao Dictionary and Youdao Desktop Translation. So dictionary is our flagship mobile app, and desktop translation is our most popular app for PCs and Macs.

According to QuestMobile, they have over 100 million combined monthly active users and are the top translation apps in China. So last year, we introduced the AI translation feature, powered by our large language model to web users. In Q1, we significantly improved the translation quality, reaching 98% accuracy rate for English to Chinese, Chinese to English translation, and then rolled it out to all users of Youdao Dictionary, free of charge. So for more demanding scenarios, paid subscription users enjoy more usage quotas. So the user feedback has been overwhelmingly positive, yeah, leading to a lot of new subscriptions.

Currently, these two apps are the largest contributors to our subscription sales, and we expect substantial growth, as our large language model gain more capabilities and expand into new usage scenarios. Second, there's HiEcho. Yeah, it is the world's first digital human, digital human language coach, introduced last year. We recently launched a module tailored for IELTS preparation, IELTS, in collaboration with the British Council. This module, available through a separate, subscription, assists users to better prepare for the IELTS exam, through personalized exercises, customized feedback, and, simulated mock exams. So we expect the new offering to further boost, the sales of HiEcho. So, for international users, so it is, the first time we share that, we have several apps that's popular.

iRecord is the perfect app for those looking to capture high-quality voice recordings and transcribe them with high accuracy through automatic speech recognition. Currently, iRecord ranks at the top 2 places in the voice recording apps category in North America. LectMate is an innovative app designed to help overseas college students comprehend lectures more effectively by using the power of voice recognition and large language model technologies. It is the number 2 in its category in North America. So finally, there's Mr. P AI Tutor. As discussed in our prepared remarks, we will be launching the app version of Mr. P AI Tutor in June.

Compared with the end of last year, we have further optimized our language model for K through 12, achieving improved accuracy in problem solving. Accuracy of problem solving has increased by 3%, and our app serving cost has decreased by over 50%. So, these six apps are our main offerings for AI subscription services. Subscription is a very natural monetization approach for AI and large language models. So, currently, subscriptions are experiencing rapid growth, and we have a pipeline of new features and new products under development. So, for this year, we can already see a clear growth trajectory. Yeah, hope that answers your questions.

Kenny Wang (Director)

Thank you.

Operator (participant)

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

Bo Zhang (Equity Analyst)

Good evening, management. Thanks for taking my question. This is Bo Zhan from Huatai. My question is, the net revenue from smart devices continued to decline on a year-over-year basis. How do you view the future development of this segment? Thank you.

Feng Zhou (CEO and Director)

Thank you. Yeah, we shared in our last call that we concluded that the optimization of our sales channels of learning devices at the end of last year. So we exited some low return of investment sales channels. While this has significantly improved the bottom line of the hardware segment, it also led to year-over-year decline of sales. As we build new sales channels and release new products this year, we are in the process of driving the recovery of the business. In Q1, we expanded into new, healthier offline and online sales channels and released 3 new products.

... the A6 Pro dictionary pen, the E6 listening pod, and the X20 learning pad. The result is that the year-over-year decline decreased to 14.8%, over 30 percentage points less than Q4. The A6 Pro quickly became the top-selling dictionary pen on Douyin and JD.com. More recently, after Q1, we launched the S6 Pro, which again surpassed the A6 Pro and became the number one dictionary pen. A6 Pro and S6 Pro are affordable and mid-priced dictionary pens at CNY 349 and CNY 599. The A6 Pro is actually our most affordable dictionary pen at launch. However, it is more expensive than its peers in the market, which are priced at 299 or even CNY 200.

So we made a conscious choice here. We made the choice to build high quality products even at affordable prices. So we do not intend to engage in a race to the bottom by undercutting each other with lower and lower prices. So the result is that customers responded positively, and the A6 Pro and S6 Pro, as we just discussed, swiftly became the number one seller after their releases. So this is, I believe, excellent news. Now the A6 Pro is covering a price range that we were not serving before, expanding our customer base. And the S6 Pro is our top-selling mid-priced product. In the summer we have some very innovative new products in the pipeline for the new school year.

I'm optimistic about their outlook as there are several factors that are working in our favor. One is our established product leadership positions in categories like dictionary pen, listening products. Second is our ability to apply AI and the large language models to these devices. So parents tell us that they are very interested in these features, which have become increasingly mature and helpful. Third, our sales and marketing channels are now more established and more efficient than before. So the device team obviously has a lot of work ahead of them, and we are eager to launch these new products. So, yeah, stay tuned for more updates.

Bo Zhang (Equity Analyst)

Thank you.

Operator (participant)

The next question comes from the line of Youjun Zhang, CITIC. Please go ahead.

Youjun Zhang (Executive Director and Chairman)

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

Peng Su (VP of Strategy and Capital Markets)

Thank you. This is Peng Su. And I think for the outlook for this year, for the full year 2024, as Dr. Wang discussed in the prepared speech, definitely we'll dedicate on the digital content services, online marketing services, and AI-driven subscription services. Firstly, for the digital content services, definitely is our top priority for our business development. We will develop and ensure and seizing the increased demands, but continuously improve our products with our AI capabilities. And AI capabilities and expanding our presence in the offline market. As Dr. Wang mentioned, we have the confidence in the further improvement in profits from digital content services in this year. And secondly, as for the online marketing services, we think that it has made a significant strides since last year.

We are focused on the long-term growth of our advertising business by deepen our RTA technology and generate AI applications. In addition, we will definitely strengthen our partnership with the NetEase Group in traffic, advertisement placements, and as well as the other areas. Our investment in the AI is, as you know, we have already invested in the AI for a long time, and we expect we can just generate more results from the AI subscription, AI-driven subscription services in this year. We think we will continue to iterate about and develop new products, advancing the process of AI monetization as well. Total sales of the AI subscription services are expected to be rapid growth momentum throughout this year.

Finally, I think we will share the more color from the financial perspectives. We have been making great endeavors to achieve the full year profitability in the near future, we expect. Since the last year, we have been diligently focusing on the controlling the operating costs and expense, while improving the operation efficiency. This effort has already yielded significant results, as evidenced by our achieve the profitability for the two consecutive quarters for the first time. Moving forward, we will maintain our costs as an expense management. We are striving to increase the revenue at the same time. I think that's our outlook for the full year of 2024. Thank you.

Operator (participant)

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

Linda Huang (Head of Asia Consumer Research)

Hi, management. This is Macquarie, Linda. So thank you very much for this opportunity. I want to ask about operating expenses, because I noticed that we have the decent decline for the sales and marketing and as well as the R&D. So I just want to know about that for the rest of the year, how is the trend for these two, the OpEx item? And how should we think about this, the expense to the revenue ratio? Thank you very much.

Wayne Li (VP of Finance)

Thank you for your question. This is Wayne. I will take your question. Marketing efficiency is a crucial metric and a key indicator of our profitability. We are dedicated to improving the efficiency of online customer acquisition. We continuously explore various innovations to optimize marketing efficiency, which include, but not limited to diversify marketing channels, to leverage our most advanced AI technology, and to continuously enrich content to improve product experience. Thereby mitigating the challenges such as rising acquisition costs due to the intense competition. I will add more color on these three areas mentioned above. First, diversification of user acquisition channel. Take learning service as example. Online education companies have inherent advantages in channel innovation compared to offline education institutions. Online education allows us to reach customer beyond geographical boundaries and accurately capture traffic on high traffic platforms.

In contrast, customer acquisition for offline education institutions in China is often influenced by physical location constraints, limiting their source of acquisition. In recent years, acquisition channels have become increasingly diversified, including KOL, key opinion leader, live streaming, and integrated online versus offline environment. Such innovations enable us to reach a broader and more relevant audience, thereby reducing acquisition costs or improving conversion rates. Second, leverage AI capability into our products. The application of AI technology can reduce the cost of material preparations and enhance product experience, thereby attracting user and increase conversion rates. For instance, we employ an ASR refinement function to enhance user experience during trial lessons by providing timely feedback on essay, thus improving the conversion efficiency of this lesson.

We believe that our advanced AI technology and the language models can help us to build a stronger product ecosystem, further enhancing marketing efficiency. Third, enhancing user experience through innovation of premium content. Each competitor pays a lot of attention and try to get an excellent conversion rate through certain forms of advertising. Innovative premium content is the key to get good results by satisfying the needs of customers. Let me give you another example. Youdao Lingshi, one of our most important learning services, has transitioned from traditional live streaming online classes to innovative prerecorded content, just mentioned by Dr. Zhou, embedded with AI technology such as adaptive question bank, which resolve the concerns on the inflexible time schedule and offer the personalized user experience.

This transformation has proved successful in meeting user needs and enriching the user experience, generating widespread claims. Back to your question, in 2020 and 2022 and 2023, the sales and marketing expense accounts for approximately 46% and 42% of our total revenue, respectively. In the first quarter of 2024, they further decreased to 33%. So we are very confident in maintaining this optimization trend in the long run. Thank you.

Operator (participant)

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 The Piacente Group in China or the U.S. Have a great day!