Youdao - Q2 2023

Transcript

Operator (participant)

Good day, and welcome to the Youdao 2023 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.

Jeffrey Wang (Director of Investor Relations)

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 established by the 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 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 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 2023 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 Senior Management is 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)

Thank you, Jeffrey, and thank you all for participating in today's call. Before we begin, I would like to remind everyone that the financial information and non-GAAP financial information mentioned in this release is presented on a continuing operations basis, and all numbers are based on the RMB, unless otherwise specifically stated. In Q2 2023, our net revenues came in strong and reached CNY 1.2 billion, representing a year-over-year increase of 26.2%. Loss from operations narrowed to CNY 289.1 million, marking a year-over-year improvement of 36.5%. Net cash provided by continuing operating activities stood at CNY 133 million, reflecting growth of 27.6% year over year. We are on a clear path to achieving profitability.

As for our business segment, learning services and online marketing services continue to be our current main driver of growth, both reaching record levels of sales. In the meantime, we're making solid progress in learning services, learning devices, R&D, and we are leading the charge to apply AIGC in education by rapidly releasing applications of generative AI. In the first half of the year, we see an overall positive trend in key financial indicators. Net revenues amounted to RMB 2.4 billion, indicating an increase of 9.9% year-over-year. Loss from operations in the first half reduced to RMB 484.9 million, improving by 16.4% year-over-year. Net cash used in continuing operating activities reached RMB 304 million, marking a 5% year-over-year improvement.

For our learning services segment, Q2 sales of digital content exceeded RMB 800 million, reaching a record high. Customer retention rate across the services was over 60%, leading to over RMB 200 million in operating cash inflow for this area. In addition to our learning content, we launched an AI college admission adviser in Q2 to support students in their college selection process. Users were quick to adopt this tool, leading to over 2 million page views. Online marketing services maintained the rapid growth momentum over the last two quarters. Net revenues reached RMB 303 million in Q2, a historical high, representing an increase of 98.7% year-over-year. Moreover, gross profit margin improved by 4.2% year-over-year.

These achievements were primarily due to advancements in our ad platform, driven by AI algorithms. First, we used proprietary AI technology to effectively identify and track the topics and products, matching the audiences of specific key opinion leaders, with accuracy rates approaching 90%, resulting in more precise ad placement. Secondly, AIGC not only reduced the time for producing ad materials by more than 80%, which better user satisfaction, but also reduce production costs for certain ad materials by over 90%, driving the improvement in gross margin. Positive trends in digital content services and online marketing services in Q2 is expected to continue in the second half. Regarding our STEAM courses, on the policy front, the Ministry of Education announced that starting from June 20th this year, primary and secondary schools will add new programming courses to their curriculum.

This new policy is expected to further expand the demand for programming content and services from families. Youdao recently hosted the seventh Wisdom Cup computer programming contest for primary and secondary school students in Beijing's Haidian District in Q2, which showcased Youdao's influence in the field of programming. In addition, both programming and Go courses performed well with retention in Q2, with the retention rates for the advanced classes approaching 70%. Besides, the student from the Champions class won the Go championship at Jiangsu Mind Sports Games. In terms of the smart devices, total revenues of smart devices were down by 7.4% in Q2 year-over-year. We're still in a transitional period for our devices business, mostly due to sluggish consumer spending in recent months and our stricter sales and marketing budget control.

Both Youdao Dictionary Pen and Youdao Listening Pod performed well during the June 18 Shopping Festival, topping the charts for four consecutive years and two consecutive years respectively on JD.com for both sales volume and number of units sold in this category. In addition, Youdao Listening Pod was updated to support Youdao Learning OS featuring additional apps such as Chinese Children's Encyclopedia, Collins Big Cat Reading, and Youdao AI Listening, further enriching users' experiences. More recently, in August, we released the Youdao Dictionary Pen X6 Pro and the Youdao Listening Pod Pro. We believe in the long-term prospect of learning devices as they are convenient, helpful, and affordable for consumers. We're focusing on two things to drive growth and profitability. One is new products, which we will have more to be released in Q4. Second is optimization to our marketing and sales, which is underway.

Then let's discuss our progress with AI. As a leading education technology provider in China, we have always been proud of our capabilities in technological innovations. We believe large language models and AIGC presented a great innovation and growth opportunity for us. In July, we announced our proprietary large language model, language model, Ziyue, optimized for education application, and have successfully deployed it to six applications starting from the second quarter. We believe we are among the fastest in adopting LLM and making the most solid business progress in this area in China. I'm happy to report that one of Ziyue's applications, the AI Box feature in Youdao Translation, has already driven nearly 100% year-over-year growth of translation subscription, and over 200% year-over-year growth of subscription fees. AI Box provides very convenient in-application AI features like sentence refinement, grammar correction, writing suggestions, and summarization.

In July, we also launched the first digital human language coach in China named Echo. Echo teaches spoken English one-on-one, and thanks to large language model technology, she understands the learner very well, is fun to talk to, and provides high-quality feedback and really helps the learner improve their language acquisition. Echo made its debut at the World Artificial Intelligence Conference in Shanghai, receiving great enthusiasm from the audience and media. Two weeks later - two weeks ago, Echo became generally available in Youdao Dictionary Pen X6 Pro. The reviews so far are great, and we expect Echo to, and more AIGC launches, to drive our business growth in the coming months. Looking ahead, we believe education could be among the top verticals for large language models.

This technology provides great potential for personalization of the learning experience, effective guidance throughout the learning process, and integration of knowledge across subjects. That summarizes our business operations in Q2. At a high level, our strategy this year is twofold. First, we prioritize driving healthy growth by offering high-quality digital content services. Secondly, we dedicate efforts to accelerate the integration of generative AI into our products and services. In Q2, our teams made both significant progress in both areas. The user demand for high-quality learning products and services remain consistently high. Leveraging our strength in content creation, user understanding, and technological capabilities, we're committed to continuously delivering exceptional products that address the needs of our users. Finally, I would like to share Youdao and the NetEase Group have both approved a proposed amendment to the aforementioned-...

$300 million revolving loan facility to extend the maturity date of the facility, including loans already drawn from it, until March 31, 2027. In addition, we announced that the board of directors have approved an amendment to the foregoing program to increase the total authorized repurchase amount by an additional $20 million. This demonstrates the long-term support from NetEase and the confidence from your business management. Thank you. Now it's Peng Su to give you an update on our financials.

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 second quarter of 2023. Then I encourage you to read through our press release issued earlier today for further details. For the second quarter, total net revenue RMB 1.2 billion, or $166.4 million, representing a 26.2% increase from the same period in 2022. Net revenue from our learning services were RMB 680.9 million, or $93.9 million, representing a 20.8% increase from the same period in 2022. Primarily driven by the strong sales performance of digital content services compared with the same period of 2022.

Net revenue from our smart devices were RMB 222.2 million, or $30.6 million, down 7.4% from the same period in 2022, primarily due to the decreased demand for the intelligent learning products in the second quarter of 2023. Net revenue from our online marketing services were RMB 303.6 million, or $41.9 million, representing a 98.7% increase from the same period in 2022. The increase was mainly attributable to the increased demand for the performance-based advertisement through the third party's internet properties. For the second quarter, our total gross profit was RMB 567.2 million, or $78.2 million, representing a 38.4% increase from the second quarter of 2022.

Gross margin for learning services was 57.4% for the second quarter of 2023, compared with 52.2% for the same period in 2022. Gross margin for smart devices was 35.8% for the second quarter of 2023, compared with 30.6% for the same period in 2022. Gross margin for online marketing service was 31.9% for the second quarter of the 2023, compared with 27.7% for the same period in 2022. For the second quarter, total operating expense were RMB 856.3 million, or $118.1 million, compared with RMB 864.9 million for the same period of last year.

With that, for the second quarter, our sales and marketing expense were CNY 587.7 million, compared with CNY 596 million in the second quarter of 2022. Research and development expense were CNY 205.1 million, compared with CNY 208.4 million in the second quarter of 2022. Our operating margin was 24% in the second quarter of 2023, compared with 47.6% for the same period of last year. For the second quarter of 2023, our net loss from continuing operation attributable to ordinary shareholders was CNY 299.2 million, or $41.3 million, compared with CNY 453.9 million for the same period of last year.

Non-GAAP net loss from continuing operations attributable to ordinary shareholders for the second, for the second quarter was RMB 283.6 million or $39.1 million, compared with RMB 435.8 million for the same period of last year. Basic and diluted net loss from continuing operations per ADS attributable to ordinary shareholders for second quarter of 2023 was RMB 2.45 or $0.34. Non-GAAP basic and diluted net loss from continuing operations per ADS attributable to all ordinary shareholders for the second quarter was RMB 2.32 or $0.32. Our net cash provided by the continuing operating activities was RMB 133 million, or $18.3 million for the same quarter.

Looking at our balance sheet, as of June 30, 2023, our contract liability, which mainly consists of the deferred revenue generated from our learning services, were RMB 1.2 billion, or $167.3 million, compared with RMB 1.1 billion as of December 31, 2022. At the end of the period, our cash, cash equivalents, restricted cash, time deposit and short-term investment, total RMB 680 million, or $93.8 million. This concludes our prepared remarks. Thank you for your attention. We will now open the call to your questions. Operator, please go ahead.

Operator (participant)

Thank you. We will now begin the question and answer session. To ask a question, you may press star, then one on your touchtone 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 for a moment to assemble our roster. Our first question today will come from Brian Gong with Citi. Please go ahead.

Brian Gong (Analyst)

... Good evening, management. Thanks for taking my questions. I have a very quick one on our plans on AIGC technology. What AI applications will be launched in the second half of this year? And what impact will they have on our business in your view? Thank you.

Feng Zhou (CEO)

Hi, Brian. Yeah, this is Feng Zhou. Yeah, we announced our proprietary large language model, Ziyue for education, in July. We are looking to leverage this breakthrough technology to drive both short-term and future growth. So we have plans for both the coming months and also for the longer term. So in the short term, we've already launched six applications of Ziyue, including our digital human language coach named Echo, AI Box 2.0, and AI translation, etcetera. So the first line of work for us is to deploy these applications to more of our services, apps, and devices and start to drive business growth with these new capabilities.

So in fact, it is already driving growth as early as in Q2. For example, AI Box 1.0 already drove nearly 100% year-over-year growth of translation subscriptions, and over 200% year-over-year growth of subscription fees in Q2, as we just discussed in prepared talks. We've also launched Echo, our digital human language coach and English grammar instruction feature, in the latest Youdao Dictionary Pen X6 Pro, launched earlier this month. Echo is the first large language model-based digital human language coach in China. So this is a groundbreaking product. It is liked a lot by our customers from our feedback.

Our AI grammar instruction feature is also the first of its kind in learning devices. Our users tell us that they really like these two new features because they are really helpful and engaging. We will continue to upgrade these features over the coming months and we plan to launch and monetize them on other platforms, for example, on phones. So Echo and other features will be on phones too. One of the strengths of AIGC products from our observation is that consumers are willing to pay for them because they are they are really useful and helpful. Yeah, this has been shown to be true by the tremendous growth of products like Midjourney and ChatGPT itself.

So we do not need to go to the free to use model to kind of indirectly monetize these products. Instead, they could be monetized directly from day one. This shortens the investment cycle of these products. Regarding entirely new applications, I am also happy to share that we plan to launch more LLM-based applications in Q4 this year. There are other aspects of the English language learning that AIGC can really help with, not only grammar, and there are other subjects that we should provide AIGC products for. Now, our teams are more familiar with how these language models work and have accumulated substantial experience in their applications. So we are able to quickly iterate and build more applications.

So more applications will come in Q4 this year. So in short, we are off to a good start with this career project. So we entered the market early, and it is already driving growth, and it has a great long-term potential. So looking further ahead, a generative AI represents a transformative opportunity for the education technology sector, as well as a lot of other industries, as we all know. So it has the potential to allow much more personalized learning and to increase the productivity of the overall education process. So we are also starting early in LLM with the aim to drive long-term future growth.

For that, for that purpose, the basic LLM technology is important, and we believe what's more important is the application scenarios. We are looking at a lot of the different scenarios in education, and because we are early into the game, our teams have more experience, so we believe we can maintain the early lead that we already have enjoying in this area. So overall, we are bullish about combining large language models in education, and we will keep innovating in this area. Yeah. Thank you.

Brian Gong (Analyst)

Thank you. That's very helpful.

Operator (participant)

Our next question today will come from Tammy Wang of CICC. Please go ahead.

Natalie Wu (Analyst)

... Good evening, management. This is Tammy Wong from CICC. Thank you for taking my questions. So in terms of the smart devices, since we have released the Youdao Dictionary Pen X6 Pro and Listening Pod Pro earlier this month, so would you mind provide an update on the user feedback for these new smart devices? And also, as we saw a slight decline in revenue in the smart devices sector this quarter, does management still maintain a confidence in the long-term prospects of this business? Would you mind give us more color on this? Thank you.

Feng Zhou (CEO)

Yeah. Thank you. Yeah, this is Feng Zhou again. As you mentioned, we launched the dictionary pen X6 Pro and with our Listening Pod Pro earlier this month. Let me provide a quick update. For the X6 Pro dictionary pen, this is our flagship product, and the most popular features were the 100-day ultra long standby time, English grammar instruction, digital human language coach, and test and analysis from the popular Five-Three Series (5年高考3年模拟). So these are the four most popular features we got from user feedback. The users like these features very, very much.

So, what's exciting for us is that the AIGC language coach is actually among the most popular features. It's the number 3 feature, so it's one of the most popular features. So, we're happy to share that for the first 20 days of August, driven by the popularity of X6 Pro and S6, new dictionary pen activations were up by more than 20% year-over-year. So that's for the new dictionary pen product. As for the Listening Pod Pro, the most popular features from user feedback is the AI player and AI dialogue. These two features are the most popular.

As for kind of new product sales activation, so we've observed that year-over-year increase in new activations of our Listening Pod line. So this year is higher in activation than the same period last year. That's also for the first 20 days in August. And as I discussed in prepared remarks, we will have new devices to be released in Q4. So we are looking forward to bringing more new products to our customers in Q4 this year. That's a quick update on new products. Now let's discuss our thinking regarding the current market environment. Recently, the consumer electronics industry exhibited overall weakness due to mostly the macro cycle.

The demand for smart learning devices, although relatively resilient compared to other categories, was also affected to some extent. We are continually monitoring the market's condition and optimizing our operation. Right, right now, for Q2 and Q3, we are focusing on user satisfaction and profitability. Two things, user satisfaction and profitability. In Q2, we moved out of some low return on investment sales channels and reduced our costs. So this contributed to the slightly lower year-over-year device levels. We believe this is a right approach in this market, given our overall objective of sustainable growth and moving towards company-wide profitability. We're also actively adjusting the price points we cover. For example, the new S6 dictionary pen is priced at CNY 499, a relatively low price one.

The product has very good experience and also very good profitability for us. So this is one example of us kind of covering, adjusting our price points we cover. So the S6 is very popular right now, along with the very popular flagship X6 Pro. So that's a quick summary of our current operating tactics regarding smart devices. So we're focusing on user satisfaction with our best products and also driving profitability of the business, not absolute scale growth. And we are doing all this by actively managing our R&D process and also, very importantly, sales and marketing costs with discipline.

Now, looking ahead to the long term, I believe learning devices do have a relatively low penetration rate, representing a significant opportunity for growth. The market size growth observed in the overall market over the last few years indicates that this upward trend is there. Yeah, according to a research report released by the Internet Society of China in July this year, the market size of learning devices is projected to increase from CNY 24.9 billion in 2019 to an estimated CNY 43.1 billion in 2023. Yeah. So Youdao is poised to be a leading brand in this space with our expansive user base, strong product design capabilities, and also commitment to advanced technologies like the large language models.

So we believe the slowdown is temporary, and we are optimistic about the long-term opportunity. Yeah, I hope that answers your question.

Peng Su (VP of Strategy and Capital Markets)

Yes, and this is Peng Su. I just only one point, I'll add it after Dr. Zhou comments, and we think the X6 Pro is totally different or innovative, the most innovative dictionary pen compared with all the dictionary pen released in past years. It's because it used to be the hardware for students to learn the English more efficiently. And right now, we think we not only just enhance the features of the dictionary check, the dictionary functions, and at the same time, we also added about the service content, like the Echo, the interactive, the language training program, as well as the grammar instructing program.

That will be the most useful function features for the students when they learn the language. So we believe after the added advanced services, they can create more interactive between the users and our hardware, that we can help us to know more about their demands in the long run. So we think that will be the totally different product compared with the past one. So we are still confident about X2 Pro growth in the midterm and long run. And like Dr. Zhou mentioned, we expect within our future products, we can enable more features of the transformative large language models into our hardwares. Thank you.

Feng Zhou (CEO)

Yeah, more, more exciting products are coming, yeah, later, Q4. Yeah.

Natalie Wu (Analyst)

Okay, got it. Thank you. That's very clear, and we look forward to them.

Operator (participant)

Our next question is from Thomas Chong of Jefferies. Please go ahead.

Thomas Chong (Managing Director, Head of China Internet)

Hi, good evening. Thanks, management, for taking my questions. My question is regarding the online marketing side. What were the driving factors behind the rapid growth in revenue from online marketing services over the past three quarters? Furthermore, what are the key direction for the latter half of this year? Thank you.

Lei Jin (President)

Hi, this is Lei Jin. The online marketing service has already have robust growth for the three quarters in a row, with a surge of nearly 100% for Q2. The Q2 is the first quarter which online marketing revenue exceeded RMB 300 million. Internally, there are many, mainly two factors that drive the growth. Firstly, the advancement of AI technology has improved matching accuracy on our ad platform a lot. KOL can successfully reach the users across the various major platforms. Our in-house AI technology allow us to accurately identify the relevant things associated with the KOL achieving accurate rate of nearly 90%. This enable us to deliver highly precise advertising and help our clients reach their target audience faster and more accurate.

Secondly, we upgrade the data analytics abilities of our AD platform. With more and more convincing data, we can enhance and optimize the traffic and advertisement materials with our effectiveness, and the result is improved advertising performance. Externally, despite the sluggish consumer environment, there is still a strong consumption willingness among the young people aged between 18 and 35 in gaming, cosmetics, and fast-moving consumer goods. Our AD clients would like to capitalize the purchasing intent of young people. As for Youdao, a lot of young people are using our products, and we have a deep understanding of them. In the second half year, we will focus on two key directions for the AD. Firstly, we will focus on overseas AD marketing.

This is a strong demand. We have an advantage of in terms of resources, language capabilities, and experience in this field. With our in-house AI technology recommendation algorithm and neural network translation, we can connect with over 1 million influencer celebrity worldwide. We are actively reaching more than 2 billion users in over 55 countries or regions. Those are assisting Chinese brand to overseas expansion. Secondly, we will further enhance our data capabilities. Since the upgrade of our ad platform in Q4 last year, we have seen the huge benefit of the real-time and accurate data in helping our user decision making and boosting the ad revenue. By the end of this year, we will try to further enhance our ad platform to give our clients better marketing performance. Thank you!

Operator (participant)

...Our next question today will come from Candice Chan of Daiwa. Please go ahead.

Candice Chan (Analyst)

Great. Thank you for taking my question. I have a question regarding this learning services. Can management talk about our coming focus for the learning services in the second half this year, both on the K to twelve and also the education, sorry, the adult segment? Thank you.

Feng Zhou (CEO)

Hi, this is Feng Zhou. Digital content services are the largest part of our learning services business segment. As we mentioned in the prepared remarks, digital content services are actually a bright spot. Its sales reached RMB 800 million in Q2. It's the first time, it's a record high. Retention is also at a high level of around 60%. Within the digital content category, in Q2, we launched the AI University Application Advisor to support students in their college selection process. So this is, we think going forward, this is going to be important because it allows us to touch many users.

So in this since its launch, it's already gained over 2 million page views, as we mentioned in prepared remarks. Yeah, so if you look at the data content service over the last 5 quarters, you know, so it's actually been growing very healthily over the course over the last 5 quarters. As our learners keep adopting this new form of interactive online learning. Yeah, so it's different from online learning before. So it's a new form with video materials, with personalized practices and also AI feedback. So it's great for us to see that users, more and more users adopt this new form, and the business is growing very quickly.

Yeah, so we're happy to see that. So we expect the digital learning content and learning services as a whole to continue to perform well in the second half. So we will enhance online learning further by investing in educational R&D to create high quality content, and also improve our personalized assessment and feedback system, which is a strong feature of our systems. Furthermore, our collaboration with Shaanxi History Museum for immersive learning on Youdao Literature, that project was a great success. So we have more IP collaboration planned for this year, offering users more opportunity to learn about Chinese culture through immersive experiences.

So the second category of learning services is STEAM courses, including mainly Go courses and kids programming. So Youdao became a GESP certification service center. GESP is a graded examination of software programming of the China Computer Federation in the first half of the year. In addition, as an exclusive online education partner, Youdao hosted the seventh Wisdom Cup, as we talked about. So, in the second half of the year, we will continue to focus on our strength in the STEAM area, which is two leading online course systems for students enthusiastic about Go and also competitive programming, respectively.

We already upgraded our programming courses for the summer, and we'll move on to upgrade our fall and winter courses in the second half. Another project we have ongoing for STEAM customers is we also plan to offer more offline activities and events for our customers. We've had offline events like Go game events and competitive programming events for years. They are particularly popular this summer because parents and students are eager to go out and participate in community activities and events.

So given our huge online learning audience and also our experience in organizing offline STEAM events, we are working to provide more STEAM events opportunities to our learners and families in the second half of the year and to drive engagement and growth. Lastly, in terms of adult courses, we made positive progress in Q2. Despite macro challenges, we launched digitized product for math preparation for postgraduate entrance exam, which provide knowledge teaching, step-by-step guidance, and personalized practice. So this product has been very well received by users with a next day retention rate of over 50%.

So in the second half of the year, we will continue to focus on postgraduate entrance exam courses in the adult category because of strong demand. It is projected that college graduates and postgraduates exam participate will exceed 4 million and 5 million, respectively, in 2024. Both historical highs. We will strive to further explore and expand our digitalized product with a specific focus on enhancing our English preparation for postgraduate entrance exams. Yeah, that's our plans for learning services. I hope that answers your question. Thank you.

Jeffrey Wang (Director of Investor Relations)

Great, thank you very much.

Operator (participant)

Your next question will come from Duan Li of Huatai Securities. Please go ahead.

Duan Li (Analyst)

Good evening, management. I'm Duan Li from Huatai Securities. Thanks for taking my question. Just a quick one. Will ongoing investment in AI result in the significant increase in R&D expenses in the second half of this year?

Wayne Li (VP of Finance)

This is Wayne. Thank you for your question. I will take your question. In terms of R&D investment, we are prudent on it, and we believe our AI investment is continual and more focused on education scenarios, not widespread for all scenarios. As just mentioned by Dr. Zhou, our recent AI investment mainly focused on six applications, such as large language model-based translation in English grammar instruction, and the AI essay instruction. Just remind you that this is not our first time we invested in AI area. Youdao is planning in implementing AI technology, and such technologies have been widely applied in our learning services and smart devices. At the same time, we have received the benefits from adopting more effective development methods, which enhance our R&D efficiency.

For example, in the first half of this year, although we deployed our proprietary large language model in certain education scenarios, we still experienced around 6% year-over-year decline in R&D expenses when compared to the same period last year, which mainly contributed from our efficiency improvements with more comprehensive experience, experiences in AI investment, and saving costs through applying AIGC technology. The introduction of AIGC has resulted in a notable enhancement in work efficiency. For instance, the incremental of implementation of AIGC has led to a 50% increase in the efficiency of producing art content for our courses, teaching materials. We anticipate that such improvements will be continued in the future. Both cost saving in AI investments and the application of AIGC technology enable us to accumulate potential technological capabilities and the knowledges for further advancement.

By the end of this year, we plan to launch more AI application efforts. We will continuously balance our investment in large language models and applications. We believe our team will gain more experience on it, and we'll develop a clear understanding on investment yield with greater effectiveness. We expect the effectiveness of the application side will continue to improve. Going forward, we are continuously on the clear path to achieving profitability, and we will continue to optimize the structure of our R&D investment. For example, eliminating R&D expenditure on those unclear prospective projects, so that we can allocate the savings to our preferred AI projects. Above all, we will enhance investment in AI, but we do not expect a significant year-over-year increase in overall R&D expense in the second half year, which it is helpful. Thank you.

Duan Li (Analyst)

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.

Feng Zhou (CEO)

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 US. Have a great day.

Operator (participant)

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