Youdao Inc (DAO) 2020 Q3 法說會逐字稿

Good day, and welcome to the Youdao 2020 Third Quarter Earnings Conference Call. Today's conference call is being recorded. At this time, I would like to turn the conference over to Regina. Regina, please go ahead.

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 the future performance and are subject to certain risks and uncertainties, assumptions and other factors. Some of those 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 the financial results is included in certain filing of the company with the Securities and Exchange Commission, including our annual report filed on Form 20-F. The company does not undertake any obligation to update this forward 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 definition of non-GAAP financial measures and the reconciliation of GAAP to non-GAAP financial results, please see the 2020 third 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 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. Wei Li, our VP of Finance.

I will now turn the call over to Dr. Zhou to review some of our recent highlights and the strategic direction.

Thank you, Regina, 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.

Online education is more relevant today than ever before, and it is profoundly transforming how people learn. We accelerated our rapid growth momentum in the third quarter and generated total revenue of RMB 896 million. Gross billings from online courses reached RMB 955 million, up 228% year-over-year and 76% quarter-over-quarter, supported by our large-scale marketing and branding campaign during the summer.

Growth in our K-12 segment was particularly strong, reaching a record high. Gross billings from this group were RMB 676 million, up 369% and 120% year-over-year and quarter-over-quarter, respectively. K-12 paid enrollment reached 499,000 up 52% quarter-over-quarter. The K-12 gross billings proportion of Youdao premium courses increased to 77% from 67% in the same period last year. ASP for the K-12 segment was slightly down primarily due to the increased proportion of primary school enrollments, which have relatively lower ASPs than our high-end junior high school courses. Also, 22% of all newly enrolled students gross billings came from organic traffic from -- for Q3, which grew 188% year-over-year.

Gross margins also continued to improve with product improvements and larger scale. Overall gross margin was 45.9% and the gross margin for our learning services was 53.9% up to 20 basis points from Q2. We expect to maintain this growth momentum of our GP margin, mainly due to further improvement of economy of scale.

We continue to strengthen our star-instructor and the teaching assistants team. More than 70% of our current instructors come from Tsinghua University, Peking University or a top 50 university in the world. This year, we hired only about 0.3% of all instructor candidates. We are committed to continue hiring elite instructors and to offer high-quality courses.

Regarding TA teams, we continue to expand our capacity. Total TAs reached 3,368 at the end of Q3 at operation centers around the country.

On the product side, our K-12 math courses made significant progress in Q3. The number of paid enrollments for maths in grades 1 to 12 increased in the third quarter by over 800 year-on-year. For primary school, we added more interactions in classes for key knowledge points. For junior high school, we started to offer regional and textbook-specific courses. For high school, several newly recruited star teachers are available for students to meet diverse demands.

We released a new set of kids' programming courses, including iPhone programming and a custom hardware programming kit in Q3. Student retention of the programming courses exceeded 85%.

Q3 is the main quarter for our summer marketing campaign. The campaign included online performance advertisement, TV sponsorships and ads, and et cetera. We expect this marketing campaign to be the largest for fiscal year 2020. In Q3, brand and performance advertisement spending on courses amounted to RMB 881 million.

Although increased spending led to more short-term losses, it helped drive scale and was down and restrict unit economics requirements. We looked at front-loaded marketing spending in this quarter and a total of expected returns over the next several quarters for each project to make sure it is healthy.

Turning to our adult segment, gross billings increased to RMB 201 million, up 185% year-over-year and 34% quarter-over-quarter. We continue our twofold strategy here. One, we focus on high-value courses such as skill learning and interest [dominated] courses and shift away from low-value courses such as College English.

Second, we leveraged our expertise in content development in this area to launch and quickly iterate new course offerings. Our staple courses continue to do well. For example, Logic English (foreign language) grew over 100% in gross billing year-over-year. The practical English courses released this year, including English Recitation Camp (foreign language) and Oral English Training (foreign language) has ramped quickly, which become the major component of our adults with over 5x growth year-over-year in gross billings.

Our intelligent learning devices also grew at an accelerated clip in Q3, with revenues reaching RMB 163 million, up to 89% year-over-year and 89% quarter-over-quarter. We shipped about 250,000 units of our Dictionary Pen 2.0, up 59% from Q2. Over 70% of our Dictionary Pens were purchased by or for a K-12 user.

We continue to integrate software and hardware here to deliver even more seamless experience. For example, you can now scan words or phrases with your Dictionary Pen and read the results on your phone screen, which is even faster than using the using phone -- using the pen alone. In Q4, we are launching a new Dictionary Pen, and we are confident that it will further strengthen our leading position in intelligent learning devices.

Let me say a few more words about how we look at learning devices. During the last 2 years in the market, we have clearly witnessed the introduction of the flourishing set of smart learning devices that parents and kids both love. We believe every kid will eventually own 1 or more of these devices. And these devices will be more and more tightly integrated with online learning services, leading to important cross-selling and other opportunities. At Youdao, with our expertise in AI, learning content, hardware design and brand recognition, we believe we are well positioned to lead this fledgling area.

Overall, our strategy this year is to seize key expansion opportunities. One important principle, we based many decisions on is the principle of value accumulation. We have put a lot of effort into ensuring that along with revenue growth, we also accumulate a large amount of value regarding product innovation ability, customer base expansion, teaching expertise, learning content, learning oriented AI technology, distribution channels and on the ground and et cetera. Accumulating all this value enables us to offer constantly better courses now and long into the future to a huge population of parents willing to pay for high-quality education products.

With that overview, I will now turn the call over to Su Peng to review our financial results. We will then open to questions. Su Peng?

Thank you, Dr. Zhou, and hello, everyone. Today, I will be presenting some of the highlights from our 2020 third quarter. We encourage you to read through our press release issued earlier today for the further details.

We continue to scale our operations in third quarter, achieving considerable year-over-year growth. Our strong technology, curriculum and our supporting intelligent devices and apps are real tools to exponential growth as we pursue additional marketing and branding activities to support our growth.

For the third quarter, total net revenue were RMB 896 million or USD 132 million. This represents an increase of 159% from third quarter of 2019.

Looking at this growth by segment. Net revenue from our learning services and products grew 239.1% year-over-year to RMB 763.5 million or USD 112.4 million. We attribute this growth to a sharp uptick in K-12 paid student enrollments and gross billing per paid student enrollment of Youdao Premium Courses on a year-over-year basis.

Net revenue for online marketing services were RMB 132.6 million or USD 19.5 million, an increase of 9.8% compared with the same period of 2019.

For the third quarter of 2020, our total gross profit greatly improved, reaching RMB 411.6 million or USD 60.6 million, up 361.2% compared with the third quarter of 2019. Gross margin for learning services and products improved to the 48.8% for the third quarter of 2020, up from 27.5% for the third quarter of 2019. The large margin growth was primarily attributable to improved online courses' margins, better economics of scale and further optimization of our business and the faculty commendation structure.

Gross margin for online marketing services was 29.5% for the third quarter of 2020 compared with 22.6% for the third quarter of 2019. The increase was mainly the result of more revenue contributions from brand advertising services, which carry higher margins.

For the third quarter, total operating expense were RMB 1.3 billion or USD 192.3 million compared with RMB 324 million for the same period of the last year.

We continue to invest in our future and the top line expansion in addition to our investment in technology and acquiring talented teachers to support our growing business over the long term. We greatly ramped our sales and marketing efforts, focused on student acquisition and expanding our brand awareness. This was especially important to accelerate during our busy summer campaign. This investment had an immediate positive impact on our growth, which we expect to be long-lasting. In tandem with these investments, we are also structuring our model to become more efficient and recognizing economies of scale.

We will continue to invest in our future growth as appropriate. With that in mind, sales and marketing expense for the third quarter were RMB 1.1 billion compared with RMB 231 million in the third quarter of 2019. Research and development expense for the third quarter were RMB 121 million compared with RMB 74.9 million in the third quarter of 2019.

Our operating loss margin was 99.8% in the third quarter of 2020 compared with 67.9% for the same period of last year.

For the third quarter of 2020, our net loss attributable to ordinary shareholders was RMB 877.8 million or USD 129.3 million compared with a loss of RMB 242.2 million for the same period of last year. Non-GAAP net loss attributable to ordinary shareholders for the third quarter was RMB 865.7 million or USD 127.5 million compared with a loss of RMB 238.8 million for the comparable period last year.

Basic and diluted net loss per ADS for the third quarter was RMB 7.73 or USD 1.14. Non-GAAP basic and diluted net loss per ADS for the third quarter was RMB 7.63 or USD 1.12. Our net cash used in operating activities for the third quarter was RMB 593.4 million or USD 87.4 million.

Looking at our balance sheet, as of September 30, 2020, our contract liability which mainly consists of deferred revenue, for our online courses were RMB 1.1 billion or USD 156.9 million, representing an increase of 133.3% from RMB 456.8 million as of December 31, 2019. At the end of the period, our cash, cash equivalent, time deposit and short-term investment totaled RMB 1.1 billion or USD 166.9 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 Instructions) The first question today comes from Brian Gong with Citigroup.

(foreign language) My question is still about the competition. Can management, please, some updates on recent competitive landscape and the outlook. And how does management see student acquisition cost trend to be for first quarter and for next year? And what would be our marketing budget for 4Q and the next year?

Yes, this is Zhou Feng. So first, a couple of points on the competitive landscape. So I think what's obvious is the sector is -- as a whole, is growing quickly, probably quicker than last year. And the sector is investing money, not earning money yet. So I think it's clear we're willing to invest because of 2 things. One is parents are willing to pay for really high-quality education. And so profitability, in the long run, is very much there. And the second is total market size potential is huge. So these 2 factors, they remain true. They are very much true in 2020. And that's why we invested in marketing in the summer, and that's why I think what everyone is thinking about. So we're bullish about the future, yes. So that's one.

And second is I think we see greater concentration in 2020 compared with last year. So in the sense that we only have 5, 6 main players kind of doing K-12 large courses, so with the investment we made in marketing in Q3, we significantly increased our customer base. So with the -- I think with very competitive customer acquisition cost. So this gives us a better reach and more leverage. So yes, I don't want to comment too much on our peers. So that's for us.

Thirdly, I think in terms of in the future, Q4 and how everyone competes and how fierce the competition is, I believe it is important to appreciate the fact that we're still in the early, early days. So early in how we create content and present it, we're early in how we acquire customers. We're early in how we deliver and monetize the content. So we expect a lot of these things to change, a lot of new ways to do these things. So and we are doing performance apps to acquire new customers.

And we are also looking at OMO and other ways and kind of expansion on the ground and that. So it is not a simple math question of putting money on one side and acquiring that many students. So as our approach is to look at this as a dynamic process and innovate and focus on healthy and robust growth. So I'll just say that's very high level.

And regarding marketing, yes, maybe, Su Peng, you can talk a little bit in the details.

Thank you, Doctor, and Brian, for your questions. First of all, the [question] for the marketing expense for the upcoming quarters, there, I think, so first, we don't give any official guidance to the market in line with (inaudible). That's the first.

But yearly, we can share. For Q3, it will be our biggest investment season due to the summer campaign. So on a full year basis, indeed, we significantly enhanced our marketing and investment in the Q3 in this year but we believe it's highly valuable for us to acquire the amount of new students with healthy unit economics. But because it is not a onetime -- for the K2 business, it's not really the onetime track model, for the K-12. Think of the lifetime value of the K-12 students, we expect to -- those users will stay with us for a long time. And we estimate to cover all the sales and marketing margin costs with 1 to 2x for the repurchase for our K-12 products or K-12 users for our product.

So we achieved a great outcome through the summer marketing campaign. And as Doctor mentioned, the payroll -- paced enrollments increased over 400% during the Q3. And if you discover the growth of subjects, our math products increased over 8x year-over-year in terms of the paid enrollment. So we are dedicated on the continued -- our fast healthy growth, we think. And we will not hesitate to keep investing in our top line expansion for those projects with healthy unit economics.

And on the other hand, we believe because our pretty unique product mix, And we do not rely on the sales and marketing to expand our business, we can also, regarding our apps and like Doctor has mentioned for our intelligent devices, we shipped about over 250,000 units for our Dictionary Pen version 2.0. In those users, over 70% of our Dictionary users were purchased by the or for our K-12 users. And I think that we can [direct] -- in the future, we will deploy -- discover more synergy between our intelligent devices and our online services.

So I think for the last question about the acquisition costs, I think -- I just mentioned about as well the summer campaign season really was the -- was this higher user acquisition costs due to the increasing customer demand and also -- then the costs went down after a summer season.

But during the semesters, the student and parent typically will wait until the winter season or the coastal winter season to cruise after school tutoring products. And we're also, I think, actively trying to use the multi-customer acquisition channels to attract users like for our marketing, e-commerce platform and the social network. I think the new paid enrollment marketing via the [grow] marketing will grow about several times compared with the same period of last year. So we will keep close monitoring about the customer acquisition cost to keep a healthy growth for our total business, for our whole business. So I hope that answered your question. Thank you, Brian.

Next question comes from Sheng Zhong with Morgan Stanley.

I have a couple of small questions. The first one is a follow-up about the internal MAU customer conversion. So you have a quick MAU growth and also you have smart devices shipment to students. So do we have -- can you share the number how much percent of your enrollment is from your internal traffic? And do you have any expectation on this number going forward?

And secondly is you have a very strong gross margin improvement in past few quarters, especially the premium online courses. So what's your view about the normalized gross profit margin for your online courses?

And sorry, for last one is a quick one. Maybe it's too early, but can you share some color on your retention rate from this fourth semester to winter courses?

Thanks, Zhong Sheng. So regarding converting MAUs from our organic traffic to paying users, so I can give you 1 data point is 22% of all our billings in Q3 come from internal traffic. So that's 188% growth over the last -- same period last year.

So in terms of long term, yes, you can do the math here. So if you compute that number, the enrollment number as a percentage of MAU, which is over 100 million. So it's still very low. It's lower than 1%. So there's still a lot of room for growth. Recurring -- so the end-state long-term potential, I think the short answer is we believe a couple of percentage points is doable.

To explain why, so first, remember we do have big price gaps. So on one side, it's a free product, the Dictionary. On the other side, it's the course of several thousand, again. So there's -- it is non-trivial to do the conversion.

So on the other hand, we are -- we have been quite -- become quite experienced at this. So we do have the advantage that our dictionary users are quite loyal. They come back a lot. And we have many opportunities to touch them. So we use ways like free trials, of course, then we did the introduction of customization features, ready users tell us who they are, things like that. And they have been quite useful in increasing the conversion. So sort of data, our data we have, including the trajectory, shows that a couple of percentage points is credible work-up number in the future. So we are always experimenting with ways to offer users more relevant courses and other services. So it could be higher, yes.

And you also mentioned the learning devices. Yes, we believe it's also a very good source of organic conversion. So a lot of these devices are purchased by our K-12 students. So -- and there are -- over 25 -- 250,000 of dictionary pens sold in Q3. So it's already a sizable number. So we will look at this properly in the future.

And the second question regarding gross margin, kind of in the long run. I think the short answer is, right now, we are at around 50%. We think 60%, 70% is completely doable. And -- but it's -- there's a lot of factors playing into that, so we will see.

And last question is regarding retention. We're still early. But we did start signing up current students for winter and spring courses in late October. It is an ongoing process that extends into Q1 2021. So -- but what I can share with you is preliminary data shows that, in general, we've been able to significantly increase both the number of new students and improve the retention rate at the same time over the same period last year. So we feel good about the final results at the end of the retention period in January. I hope that answer your question.

The next question comes from Alex Xie with Credit Suisse.

Congratulations on the quarter's growth. And for -- my question will be about the competitive landscape. So several of the players in this market made the comment that the top 4 players in K-12 last Q3, their advantages. And again, the non-top 4 will become bigger and bigger. And we also see several players raised their funding in September and then recently. So what will be the positioning of Youdao in this market? And how do you think about competitive -- advantages in this kind of competitive environment?

Yes. So yes, this is, again, about the competitive landscape. So what I would say is, yes, in general, we are not operating around market share, yes. So we think our competitive strength is threefold. Yes. So we focus on high-quality content, product innovations and great technology, 3 things. Quality, innovation and technology. So we don't intend to do all the courses and all the grades. Right now, if you look at our offerings, we -- the focus is clearly, for K-12 is on junior high and high school, senior high school -- junior and senior high school.

And -- so if you look at our track record, so the 3 things really, we think, that really help us. Focus on quality, enabled us to deliver best seller courses like Logic English, (foreign language) and our junior high school Chinese course (foreign language).

Innovation led us to projects like the Dictionary Pen where we created entirely new product categories that people really love and it's growing superfast. And technology innovation like automatic essay grading, which we talked a little bit about in the past. And they are now being integrated into our services during the summer. We believe these 3 things are vital to our success. And that's the first point I want to make.

Then looking at the operations side, in Q3, we added a lot of students. So we did that because we think the products are ready. They offer a great value and retention potential for our users -- for the users. So that's why we did it during the summer. And for us, it obviously increased economy of scale and the impact of our products among the users. So we are quickly expanding in our scale, which we expect to continue to do.

And lastly we're really happy about our product pipeline. So that's pretty important. So for K-12, for kind of preschool courses, and also for adult courses, we have nice projects, really strong projects in R&D. So when these products are ready, we will release and promote them and I believe this is how we grow the business instead of just spending dollars on sales and marketing.

Got it. I have a follow-up on this question. Resources, several medium players raised funding recently. What do you think will be the condition for Youdao to release funding? Or what will be the condition that you won't consider releasing funding?

Yes, we're happy with our current cash position. And so one thing you want to look at is if you look at our operating cash flow for the first 3 quarters, so it's actually -- yes, it's actually a healthy, healthy process for us. So that's one.

And second is yes, obviously we have ways to raise funding if we need. So we will, of course, keep that in mind. And lastly, yes, the -- our controlling shareholder, NetEase, have always been very supportive of Youdao's business, and they believe fully in the vision, so they will always have our back.

Next question comes from Liping Zhao with CICC. So.

(foreign language) I have 2 questions here. First, we noticed strong growth of our learning devices. And why is that? And what will be Dao's future strategy on that business? And what's the TAM market and the overall market share we will have in a stable future?

And second question is related to the GP margin. Without that, we have a quite good improvement on the GP margin. Can the management share, for K-12 courses, the average number of students per quarter, and in addition, the average number of students served per teacher?

Thank you, Brenda, this is Su Peng. We think, for the intelligent devices, that's -- like the Doctor mentioned, I think it is a new sector developed by the Youdao team. And you see the numbers have shifted further -- - it will depend in Q3. I think it's -- grow very fast in the numbers. Which -- we are pretty confident about the numbers growing in the next few quarters, and we will -- and we also -- we think we expect to build up more hardware pipeline -- internal pipeline in the future. We think that's combined -- will combine with -- will be part of the online education in the future and I think that's combined with intelligent devices or combined with services. So we think the market's potential is tremendous. It's -- we believe and we think we will spend more time and resources to develop more intelligent devices in the future.

Yes. We'll have a new version on December 1. Yes. So we really like the new version. We think we -- there's a lot of innovation there, yes.

And I think the other thing about these devices is that it's not just a hardware device. It's actually device plus content. So a lot of our thinking went into it by putting really unique content and technology in it. So it has good margins and it's really sticky.

Yes, I think that's -- I hope that answered your question about your intelligent devices. And the second is for the marketing issues. And yes, as we mentioned, we improved a lot about our GP margin in this quarter compared with the same period last year. We think that's also leveraged from our economies of scale as well as restructuring our compensation structures for our business and faculties in this quarter.

And for your questions about average classes, I think that's not really -- I think the number of the students for 1 class is, I think, because we are offering more star teachers in this quarter as well. So I think the average number has increased a little and -- but think about scale, we have just increased. A lot of the new teachers and students had some time. And for the tutors, from the teaching assistants side, I think -- I remember, it's also around 200. But if you use the total enrollment divided by our total tutors, that will be different because we have to pre-hire all the tutors before we offer the services to our students. So that will be -- that, in some part, our tutors will be in training process in this quarter. So I think in -- from the operating efficiency for this quarter, we have improved a lot compared with the last -- same period last year. So we are fully confident about to increase our GP margin tremendously -- gradually in the next few quarters. I hope that answered your question.

Next question comes from Binnie Wong with HSBC.

I have a question regarding on the competitive landscape. How do you see that get evolved into 2021, especially when like (foreign language), a lot of these private players have been raising a lot of capital. It seems that they're also spending a lot of, like, very low pricing, right, to just try to drive the user acquisition. So I'm not so sure if, like, into 2020, do you think we will also be stepping up in terms of the marketing expense to just drive a faster growth or maybe you think any strategies that we can use more?

And then the second thing is a follow-up from the last question is, in terms of any, like, cross-selling ratio, right, from the Youdao app, I mean, the Dictionary app to cross sell into the premium courses. And then we saw the premium cost growth actually accelerated to 300% Y-on-Y, right, from a 200% growth last quarter. What are some of the key reasons that structurally we should be aware of and that can last into the next quarter? (foreign language)

Binnie, this is Wei. I'd like to [take] your questions. As just mentioned by Dr. Zhou, for the competition landscape, I think, as I mentioned (inaudible) quickly. And there's a combination that is more concentrated. Just you mentioned, we believe the company have more cash deals, definitely has the company in a better position than facing the competition. We are comfortable with our current cash level. We have some positive cash flow in the first 2 quarters, and we have financial support from our parent company, NetEase, just mentioned.

And in the long run, we do not expect huge cash expectation incurred for 2025 year. However, at the same time, you may notice our learning service and the product business expand very quickly. So -- which improved our business and app.

In terms of the competition in user acquisitions, I think the market (inaudible) seem to seek higher (inaudible) current stage due to the good market window. And most (inaudible) also are trying get different user acquisition channels, which were more cost-benefit balance. The market size potential is very huge and businesses is more concentrated as just mentioned. So our unit economic is healthy. I think we will continue to take advantage of marketing to get opportunity to grow our business, yes.

(foreign language) please. Yes.

Okay. What's your follow up question?

(foreign language)

Yes. I think for Q3, it's -- so we kind of significantly raised our sales and marketing level. And as we talked about, we think Q3 is the largest of 2020, right? So obviously, for next year; the next year, Q3, the summer is also a good opportunity to acquire users. So I think we're still early in total kind of scale. So we're still small. So we will, basically, as Wei talked about, so unit economics is really key for our decision. So I believe in Q1, Q2, we talked about -- so we have prepared the money. We have prepared the budget. But we will really pull the trigger only when we see good UE for us. So that reflects our ways of thinking. So we're still small. Obviously, if UE is good, we will grow.

And to kind of repeat, we talked about this many times. So the way we look at UE is that the marketing spending is upfront, it's front loaded. And then we will basically look at the current quarter projected return from these investments next 2, maybe 3 quarters, and then we will do a determination, yes. So if we see good numbers then -- and we see good opportunities to invest and then we will do it. Yes, so that's the way we think about it. But the market dynamic, of course. But we think, probably next year, we'll also have good opportunities to invest in acquiring users, yes. But we'll see.

Yes. And for your question, yes. Yes. Indeed, we believe the sales marketing is definitely is about the driver of our business. But secondly, in the fundamental, like Doctor mentioned, product quality and the differentiation of the product raise also the fundamental issues to define about the structure of the total market.

About -- for example, if the students and parents choose our products now because of sales and marketing? It's because how -- what kind of services you can provide to them and what's kind of effect and the results or the consequence they can get from these courses. And so that's the key thing. That's the reason why we increased our work, our number of star teachers as well as the number of teaching assistants and simultaneously, with the increase of investment in this summer.

So we think that's the product and content of products will fundamentally change the structure of this competitive landscape or the other things. So that's why we spend more time to develop more the different devices and services from Youdao.

The next question comes from Thomas Chong with Jefferies.

(foreign language) My question is about our advertising services. Given our large user scale, can you comment about how this business line would trend in coming quarters? And separately, regarding our free cash flow, can you comment about, is there any time line talking about breakeven or positive?

(foreign language)

Thank you, Thomas. I will just do -- briefly translating for the Mr. Jin. And for the advertisement, although there is still have a very competitive landscape in the advertising sectors, but we think we found a very great opportunity for the -- especially for the young generation. Although in terms of the revenue, as well as the GP margin, we have improved a lot in this Q3 and compared with the same period of last year. So we think we are confident about the growth of our -- healthy growth of our advertisement business in the future. But at the same time, you'll see the growth rate of our different segments of our business, you will see our online courses grow much faster than advertisements. So we believe the future is we will -- majority of the revenue is generated from our courses and education-related business, like intelligent devices.

So as a percentage, the advertisement will be -- keep going down in the next few quarters, but we think that will be very healthy and a great business for us by now.

And this concludes our question-and-answer session. I would now like to turn the conference back over to Regina for any additional or closing comments.

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.

This concludes our conference. You may now disconnect. Thank you for attending.