Financial Data and Key Metrics Changes - Net revenues for Q1 2024 reached RMB 1.4 billion, marking a 19.7% year-over-year growth [6][19] - Income from operations amounted to RMB 29.9 million, a significant turnaround from a loss of RMB 195.8 million in the same period last year, marking the first profitable first quarter [6][19] - Total gross profit was RMB 681.5 million, representing a 13.2% increase from Q1 2023 [20] - Net income attributable to ordinary shareholders was RMB 12.4 million, compared to a net loss of RMB 204.4 million for the same period last year [22] Business Line Data and Key Metrics Changes - Learning Services revenue reached RMB 718 million, largely flat compared to the same period last year [7][19] - Digital content services within Learning Services generated net revenues of RMB 499.8 million, marking an 11% year-over-year growth [7][19] - Online marketing services achieved net revenues of RMB 492.7 million, representing a 125.9% year-over-year growth [12][20] - Smart devices segment net revenues were RMB 181.2 million, reflecting a 14.8% year-over-year decline, though the rate of decline has narrowed [14][19] Market Data and Key Metrics Changes - The online marketing services segment has sustained over 50% year-over-year growth for six consecutive quarters, driven by strong performance in Real-Time API (RTA) and domestic KOL advertising [12][20] - The total sales of AI-driven subscription services reached approximately RMB 50 million, representing a year-over-year increase of over 140% [10][19] Company Strategy and Development Direction - The company is focusing on three key areas: digital content services, online marketing services, and AI-driven subscription services [15][16] - The strategy includes maintaining financial discipline and focusing on high-growth businesses with strong competitive advantages [15][16] - The company aims to leverage industry trends and strengthen collaboration with the NetEase Group to enhance advertising placements and customer acquisition [13][16] Management Comments on Operating Environment and Future Outlook - Management expressed confidence in achieving sustainable profitability and highlighted the importance of integrating online and offline services to enhance customer reach [30][49] - The outlook for 2024 includes a focus on improving profitability in digital content services and expanding AI-driven subscription services [49][51] - Management emphasized the need for continuous technological improvements and customer acquisition strategies to sustain growth in online marketing services [31][35] Other Important Information - The company has launched new products and expanded sales channels in the smart devices segment, which is expected to stabilize and recover [14][46] - The gross margin for learning services improved to 63.1% in Q1 2024, compared to 62% in the same period of 2023 [20] Q&A Session Summary Question: What are the primary factors driving future growth in digital content services? - Management highlighted strong market demand and unique value propositions from AI capabilities as key growth drivers [24][25][26] Question: How can online marketing services achieve sustainable growth? - Management identified continued technological improvements, customer acquisition expansion, and overseas marketing as key factors for sustainable growth [31][33][37] Question: What are the main products for AI-driven subscription services? - Major products include Youdao Dictionary, Youdao Desktop Translation, and Hi Echo, with significant growth expected due to improved AI capabilities [38][39][42] Question: How does the company view the future development of the smart devices segment? - Management noted a strategic exit from low ROI sales channels and the introduction of new products, leading to a narrowed decline in revenues [44][46] Question: What is the outlook for 2024? - Management expects continued focus on digital content services, online marketing, and AI-driven subscriptions, with an emphasis on profitability and operational efficiency [49][51]

Exhibit 99.1 For investor and media inquiries, please contact: In China: Jeffrey Wang Youdao, Inc. Tel: +86-10-8255-8163 ext. 89980 E-mail: IR@rd.netease.com Piacente Financial Communications Helen Wu Tel: +86-10-6508-0677 E-mail: youdao@thepiacentegroup.com In the United States: Piacente Financial Communications Brandi Piacente Tel: +1-212-481-2050 E-mail: youdao@thepiacentegroup.com Youdao Reports First Quarter 2024 Unaudited Financial Results Hangzhou, China – May 23, 2024 – Youdao, Inc. ("Youdao" or the ...

Exhibit 99.1 For investor and media inquiries, please contact: In China: Jeffrey Wang Youdao, Inc. Tel: +86-10-8255-8163 ext. 89980 E-mail: IR@rd.netease.com Piacente Financial Communications Helen Wu Tel: +86-10-6508-0677 E-mail: youdao@thepiacentegroup.com In the United States: Piacente Financial Communications Brandi Piacente Tel: +1-212-481-2050 E-mail: youdao@thepiacentegroup.com Youdao Reports First Quarter 2024 Unaudited Financial Results Hangzhou, China – May 23, 2024 – Youdao, Inc. ("Youdao" or the ...

Core Viewpoint - Youdao, Inc. reported its first-ever profitable first quarter and consecutive two quarters of profitability, driven by strong growth in online marketing services and AI-driven subscription services [1][4]. Financial Highlights - Total net revenues for Q1 2024 were RMB1.4 billion (US$192.8 million), a 19.7% increase from RMB1.2 billion in Q1 2023 [2][18]. - Net revenues from learning services decreased by 2.0% to RMB718.0 million (US$99.4 million) [2][18]. - Net revenues from smart devices decreased by 14.8% to RMB181.2 million (US$25.1 million) [2][18]. - Net revenues from online marketing services increased by 125.9% to RMB492.7 million (US$68.2 million) [2][18]. Gross Profit and Margin - Gross profit for Q1 2024 was RMB681.5 million (US$94.4 million), a 13.2% increase from RMB601.9 million in Q1 2023 [3][18]. - Gross margin for Q1 2024 was 49.0%, down from 51.7% in Q1 2023 [3][18]. - Gross margin for learning services was 63.1%, while for smart devices it decreased to 32.6% [3][18]. Operating Expenses - Total operating expenses for Q1 2024 were RMB651.6 million (US$90.2 million), down from RMB797.6 million in Q1 2023 [4][18]. - Sales and marketing expenses decreased by 19.4% to RMB455.4 million (US$63.1 million) [4][18]. - Research and development expenses decreased by 19.7% to RMB146.7 million (US$20.3 million) [4][18]. Income and Net Income - Income from operations for Q1 2024 was RMB29.9 million (US$4.1 million), compared to a loss of RMB195.8 million in Q1 2023 [4][18]. - Net income attributable to ordinary shareholders for Q1 2024 was RMB12.4 million (US$1.7 million), compared to a net loss of RMB204.4 million in Q1 2023 [4][18]. Cash and Financial Support - As of March 31, 2024, Youdao's cash and equivalents totaled RMB326.0 million (US$45.2 million), down from RMB527.1 million at the end of 2023 [6][18]. - Youdao has received financial support from NetEase Group, including RMB878.0 million in short-term loans and US$123.7 million in long-term loans [6][18]. Share Repurchase Program - The company has repurchased approximately 6.6 million ADSs for around US$30.4 million under its share repurchase program, which was authorized for up to US$40.0 million [7][18]. Future Strategy - The company plans to focus on digital content services, online marketing services, and AI-driven subscription services, leveraging its AI capabilities to enhance educational applications [1][4].

Investment Rating - The report maintains a "Buy" rating for the company, with a target price adjusted from $5.30 to $5.10, indicating a potential upside of 42.1% from the current price of $3.59 [1][2][9]. Core Insights - The company is expected to achieve revenue growth of 16% year-on-year in Q1 2024, reaching 1.35 billion RMB, aligning with previous expectations and slightly above market forecasts [1]. - The adjusted net loss for Q1 2024 is projected to be 46 million RMB, significantly better than prior expectations of 97 million RMB and market estimates of 87 million RMB, indicating improved business health and a continued decline in marketing expenses as a percentage of revenue [1][2]. - The strategic focus is on reducing losses while emphasizing growth in high school and advertising segments, with expectations of a 25%-30% growth in high school business for the year [2]. - The introduction of the updated large model "ZiYue" 2.0 and new hardware products is anticipated to enhance product competitiveness and long-term commercialization potential [2]. Financial Summary - Revenue is projected to grow from 5,013 million RMB in 2022 to 6,177 million RMB in 2024, reflecting a compound annual growth rate (CAGR) of approximately 14.6% [3][10]. - The company is expected to reach breakeven in adjusted net profit by 2024, with a forecasted net profit of 2 million RMB, transitioning from a net loss of 640 million RMB in 2022 [3][10]. - The gross profit margin is expected to stabilize around 49% in 2024, with operational efficiency improving as the company scales its high school business [3][10].

Core Viewpoint - Youdao, Inc. will report its first quarter 2024 financial results on May 23, 2024, before the U.S. market opens, with a teleconference scheduled for the same day to discuss the results and answer questions [1]. Company Overview - Youdao, Inc. is an intelligent learning company in China, focusing on developing technologies for learning content, applications, and solutions for users of all ages. The company offers a range of products including online knowledge tools, smart devices, STEAM courses, and education digitalization solutions [2][3]. - Founded in 2006 as part of NetEase, Inc., Youdao has established itself with popular tools such as Youdao Dictionary and Youdao Translation, and has expanded into interactive learning applications [2].

PART I [Key Information](index=7&type=section&id=ITEM%203.%20KEY%20INFORMATION) This section details Youdao's corporate structure, including VIEs, and discusses associated risks, regulatory developments, and HFCAA implications - Youdao operates through a VIE structure due to PRC restrictions on foreign investment, with investors purchasing securities of a Cayman Islands holding company, not the PRC operating entities[19](index=19&type=chunk) VIE Contribution to Total Net Revenues and Assets | Year/Date | VIE Revenues as % of Total Net Revenues | VIE Assets as % of Total Consolidated Assets | | :--- | :--- | :--- | | **2021** | 68.5% | N/A | | **2022** | 70.1% | 34.6% (as of Dec 31) | | **2023** | 77.0% | 49.3% (as of Dec 31) | - The PCAOB vacated its determination regarding auditor inspections in December 2022, mitigating immediate HFCAA trading prohibition risks, though future risks remain subject to annual review[21](index=21&type=chunk)[221](index=221&type=chunk) - In 2023, VIEs transferred **RMB 3,287.5 million (US$463.0 million)** to PRC subsidiaries as service fees, though PRC restrictions may limit cash availability outside China[25](index=25&type=chunk)[27](index=27&type=chunk) - Recent PRC regulations, including cybersecurity and overseas listing measures, introduce new filing requirements and potential reviews, creating uncertainty for future capital-raising activities[34](index=34&type=chunk)[38](index=38&type=chunk)[169](index=169&type=chunk) [Risk Factors](index=16&type=section&id=3.D.%20Risk%20Factors) This section details principal risks across business, VIE structure, PRC operations, and ADS holdings, including net losses, regulatory changes, and dual-class share limitations - The company recorded net losses of **RMB 745.9 million** in 2022 and **RMB 550.1 million (US$77.5 million)** in 2023, and may not achieve future profitability due to heavy investments[82](index=82&type=chunk) - Compliance with PRC's \"Alleviating Burden Opinion\" materially affected the business, leading to cessation of K-9 Academic AST courses and ongoing regulatory uncertainty for non-academic tutoring[71](index=71&type=chunk)[72](index=72&type=chunk) - The VIE structure faces substantial uncertainties under PRC laws, with potential severe penalties if contractual arrangements are deemed non-compliant, including forced relinquishment of VIE interests[181](index=181&type=chunk)[185](index=185&type=chunk) - The PRC government may intervene in operations at any time, increasing oversight over overseas offerings, which could materially change the business and potentially devalue ADSs[208](index=208&type=chunk)[211](index=211&type=chunk) - The dual-class share structure grants Class B shares three votes per share, with Class B shares representing **89.5%** of total voting power as of March 31, 2024, limiting other shareholders' influence[272](index=272&type=chunk)[273](index=273&type=chunk)[274](index=274&type=chunk) [Information on the Company](index=63&type=section&id=ITEM%204.%20INFORMATION%20ON%20THE%20COMPANY) This section provides a comprehensive overview of Youdao's business, history, and organizational structure, detailing its evolution into a technology-focused intelligent learning company and its complex regulatory landscape - Following PRC regulatory changes, Youdao ceased its Academic AST Business in Q4 2021, completing its transition to a technology-focused intelligent learning company in 2022[287](index=287&type=chunk) - In 2023, the company launched \"Ziyue,\" China's first education-specific LLM, powering new AI-driven tools like 'Hi Echo' and 'Mr. P AI Tutor'[287](index=287&type=chunk)[317](index=317&type=chunk) - The company's business is segmented into Learning Services, Smart Devices, Education Digitalization Solutions, and Online Marketing Services[309](index=309&type=chunk) - As of March 31, 2024, Youdao holds **428 patents**, **431 trademarks**, and **328 copyrights** in the PRC, forming its intellectual property base[358](index=358&type=chunk) [History and Development of the Company](index=63&type=section&id=4.A.%20History%20and%20Development%20of%20the%20Company) This section traces Youdao's key milestones, including its strategic shift to intelligent learning, recent AI product launches, corporate history, IPO, and a condensed consolidating financial schedule - The company completed its NYSE IPO on October 25, 2019, and raised approximately **US$231.6 million** in net proceeds from a February 2021 follow-on offering[290](index=290&type=chunk) Condensed Consolidating Schedule - Total Assets (as of Dec 31, 2023) | Entity Group | Total Assets (RMB in thousands) | | :--- | :--- | | Youdao, Inc. | 2,943,626 | | Other Subsidiaries | 572,775 | | Primary beneficiaries of VIEs | 1,767,554 | | VIEs and their subsidiaries | 2,028,232 | Condensed Consolidating Schedule - Third-Party Net Revenues (FY 2023) | Entity Group | Third-Party Net Revenues (RMB in thousands) | | :--- | :--- | | Other Subsidiaries | 1,052,123 | | Primary beneficiaries of VIEs | 205,027 | | VIEs and their subsidiaries | 4,132,058 | [Business Overview](index=69&type=section&id=4.B.%20Business%20Overview) This section details Youdao's business as a technology-focused intelligent learning company, outlining its four main offerings, core technologies, revenue models, and the extensive PRC regulatory framework governing its operations - Youdao Dictionary, the company's flagship product, is China's leading language app with **45.8 million** average MAUs in 2023[304](index=304&type=chunk) - The company's core technologies include Optical Character Recognition (OCR), Neural Machine Translation (NMT), Automatic Speech Recognition (ASR), and its proprietary Large Language Model (LLM) \"Ziyue\"[308](index=308&type=chunk) - Revenue is generated from sales of smart devices, learning service tuition, online marketing advertising, premium tool subscriptions, and technology licensing fees[348](index=348&type=chunk)[349](index=349&type=chunk)[350](index=350&type=chunk)[352](index=352&type=chunk)[353](index=353&type=chunk) - The company is subject to extensive PRC regulations covering telecommunications, foreign investment, private education, data security, cybersecurity, and online content, significantly impacting its operations[369](index=369&type=chunk)[376](index=376&type=chunk)[386](index=386&type=chunk)[430](index=430&type=chunk) [Organizational Structure](index=106&type=section&id=4.C.%20Organizational%20Structure) This section details Youdao's corporate structure, including its Cayman Islands holding company, PRC subsidiaries, and VIEs, outlining the contractual arrangements that enable control and financial consolidation, with VIEs contributing **77.0%** of 2023 net revenues - The company's PRC subsidiaries, Youdao Information and Youdao Hangzhou, control the VIEs through contractual arrangements as foreign-invested enterprises[510](index=510&type=chunk) - Contractual arrangements enable Youdao to be the primary beneficiary of the VIEs, allowing consolidation of their financial results under U.S. GAAP[510](index=510&type=chunk) - Service fees charged by PRC subsidiaries to VIEs are a key mechanism for economic benefit transfer, amounting to **RMB 2,881.0 million (US$405.8 million)** in 2023[510](index=510&type=chunk) [Operating and Financial Review and Prospects](index=109&type=section&id=ITEM%205.%20OPERATING%20AND%20FINANCIAL%20REVIEW%20AND%20PROSPECTS) This section provides management's discussion and analysis of Youdao's financial performance, covering results of operations, segment revenues, liquidity, capital resources, and critical accounting policies, with a focus on the strategic shift post-Academic AST Business disposal - The company disposed of its Academic AST Business in compliance with 2021 PRC regulatory changes, with historical results now reported as discontinued operations[529](index=529&type=chunk)[596](index=596&type=chunk) Consolidated Results of Operations (Continuing Operations) | Metric (RMB in thousands) | 2022 | 2023 | % Change | | :--- | :--- | :--- | :--- | | **Net Revenues** | 5,013,182 | 5,389,208 | 7.5% | | **Gross Profit** | 2,586,416 | 2,767,462 | 7.0% | | **Gross Margin** | 51.6% | 51.4% | -0.2 p.p. | | **Loss from Operations** | (774,680) | (466,326) | 39.8% (Improvement) | | **Net Loss from Continuing Operations** | (739,778) | (550,117) | 25.6% (Improvement) | Net Revenues by Segment (RMB in thousands) | Segment | 2022 | 2023 | % Change | | :--- | :--- | :--- | | Learning services | 3,084,375 | 3,148,114 | 2.1% | | Smart devices | 1,256,446 | 909,192 | -27.6% | | Online marketing services | 672,361 | 1,331,902 | 98.1% | - The company had a working capital deficit of **RMB 1,799.3 million** as of December 31, 2023, relying on NetEase Group's financial support, including a revolving loan facility extended to March 2027[612](index=612&type=chunk) [Directors, Senior Management, and Employees](index=129&type=section&id=ITEM%206.%20DIRECTORS,%20SENIOR%20MANAGEMENT%20AND%20EMPLOYEES) This section details the company's leadership, compensation, board structure, and workforce, including director and executive officer information, share incentive plans, employee demographics, and major shareholder voting power - In 2023, aggregate cash compensation to directors and executive officers totaled **RMB 17.5 million (US$2.5 million)**[650](index=650&type=chunk) - The company has two share incentive plans, with options to purchase **3,680,851** ordinary shares outstanding under the 2015 Plan as of March 31, 2024[653](index=653&type=chunk)[659](index=659&type=chunk) - As of December 31, 2023, the company had **4,364** full-time employees, with **49.9%** teaching staff and **23.0%** in R&D[677](index=677&type=chunk)[678](index=678&type=chunk) Major Shareholder Voting Power (as of March 31, 2024) | Shareholder | Total Voting Power % | | :--- | :--- | | NetEase, Inc. | 67.2% | | Peng Ke Holdings Inc. (Dr. Feng Zhou) | 20.6% | [Major Shareholders and Related Party Transactions](index=137&type=section&id=ITEM%207.%20MAJOR%20SHAREHOLDERS%20AND%20RELATED%20PARTY%20TRANSACTIONS) This section details major shareholders and related party transactions, primarily with NetEase Group, including services exchanged and significant outstanding loans as of year-end 2023 Key Related Party Transactions with NetEase Group (FY 2023) | Transaction Type | Amount (RMB in thousands) | | :--- | :--- | | Services and products provided to NetEase Group | 79,932 | | Services and products purchased from NetEase Group | 181,344 | | Interest expenses on loans from NetEase Group | 69,472 | Loans from NetEase Group (as of Dec 31, 2023) | Loan Type | Amount (RMB in thousands) | | :--- | :--- | | Short-term loans | 878,000 | | Long-term loans | 630,360 | [Financial Information](index=139&type=section&id=ITEM%208.%20FINANCIAL%20INFORMATION) This section confirms the inclusion of consolidated financial statements, addresses legal proceedings, and outlines the company's dividend policy of retaining earnings for business expansion - The company plans no future dividends, intending to retain earnings for business operation and expansion[695](index=695&type=chunk) [Additional Information](index=141&type=section&id=ITEM%2010.%20ADDITIONAL%20INFORMATION) This section provides supplementary details on corporate governance, including the dual-class share structure, and outlines tax implications for holding ADSs or shares in the Cayman Islands, PRC, and United States, including PFIC risk - The company's dual-class share structure grants Class B ordinary shares three votes per share, while Class A ordinary shares receive one vote per share[706](index=706&type=chunk) - The company believes it was not a PFIC for 2023, but its status is subject to annual determination and potential change based on asset composition and ADS market price[283](index=283&type=chunk)[745](index=745&type=chunk) - If classified as a PRC resident enterprise, dividends to non-PRC enterprise shareholders and ADS sale gains could be subject to a **10%** withholding tax[727](index=727&type=chunk) [Quantitative and Qualitative Disclosures About Market Risk](index=149&type=section&id=ITEM%2011.%20QUANTITATIVE%20AND%20QUALITATIVE%20DISCLOSURES%20ABOUT%20MARKET%20RISK) This section discusses the company's exposure to market risks, primarily interest rate risk on cash holdings and foreign exchange risk due to currency mismatches, with inflation risk noted as a possibility - The company's primary market risks are interest rate risk on cash holdings and foreign exchange risk due to currency mismatch between RMB and USD[755](index=755&type=chunk)[756](index=756&type=chunk) PART II [Material Modifications to the Rights of Security Holders and Use of Proceeds](index=152&type=section&id=ITEM%2014.%20MATERIAL%20MODIFICATIONS%20TO%20THE%20RIGHTS%20OF%20SECURITY%20HOLDERS%20AND%20USE%20OF%20PROCEEDS) This section details the full utilization of net proceeds from the 2019 IPO (**US$213.2 million**) and 2021 follow-on offering (**US$231.6 million**) for technology, marketing, and general corporate purposes - The net proceeds from the 2019 IPO (**US$213.2 million**) and 2021 follow-on offering (**US$231.6 million**) have been fully used for technology, product development, marketing, and general corporate purposes[769](index=769&type=chunk)[772](index=772&type=chunk) [Controls and Procedures](index=153&type=section&id=ITEM%2015.%20CONTROLS%20AND%20PROCEDURES) This section confirms the effectiveness of the company's disclosure controls and internal control over financial reporting as of December 31, 2023, as concluded by management and attested by the independent auditor - Management concluded that as of December 31, 2023, the company's disclosure controls and procedures, and internal control over financial reporting, were effective[774](index=774&type=chunk)[775](index=775&type=chunk) [Other Information](index=153&type=section&id=ITEM%2016.%20Other%20Information) This section covers corporate governance, including audit committee expertise, accountant fees, share repurchase programs, foreign private issuer status, and the company's cybersecurity risk management program Principal Accountant Fees (RMB in thousands) | Service | 2022 | 2023 | | :--- | :--- | :--- | | Audit Fees | 8,200 | 8,200 | | Tax Fees | — | 90 | | Other Fees | 150 | 150 | | **Total** | **8,350** | **8,440** | - The company has a share repurchase program authorized for up to **US$40.0 million**, with approximately **6.6 million** Class A ordinary shares purchased as of March 31, 2024[785](index=785&type=chunk) - Controlling shareholder NetEase has a share purchase program for up to **US$50.0 million** of Youdao's ADSs, with approximately **2.7 million** ADSs purchased as of March 31, 2024[784](index=784&type=chunk) - The company's cybersecurity risk management program is overseen by a committee chaired by the CEO, reporting to the audit committee[793](index=793&type=chunk) PART III [Financial Statements](index=157&type=section&id=ITEM%2018.%20FINANCIAL%20STATEMENTS) This section presents the audited consolidated financial statements for Youdao, Inc. for fiscal years 2021-2023, prepared under U.S. GAAP, including the independent auditor's report confirming fair presentation and effective internal controls - The independent auditor, PricewaterhouseCoopers Zhong Tian LLP, issued an unqualified opinion on the consolidated financial statements and internal control over financial reporting as of December 31, 2023[807](index=807&type=chunk)[808](index=808&type=chunk) - A critical audit matter identified was the estimation of the average learning period for customer revenue recognition, due to significant management judgment[814](index=814&type=chunk) Consolidated Balance Sheet Highlights (RMB in thousands) | Item | Dec 31, 2022 | Dec 31, 2023 | | :--- | :--- | :--- | | **Total Assets** | 2,276,156 | 1,666,195 | | **Total Liabilities** | 3,753,430 | 3,795,298 | | **Total Shareholders' Deficit** | (1,541,845) | (2,167,064) | Consolidated Cash Flow Highlights (RMB in thousands) | Item | 2022 | 2023 | | :--- | :--- | :--- | | Net cash used in operating activities | (603,123) | (438,145) | | Net cash provided by investing activities | 125,823 | 125,573 | | Net cash provided by/(used in) financing activities | 184,649 | (18,942) |

Core Viewpoint - Youdao, Inc. is expected to perform better in 2024 compared to 2023, with a favorable outlook not fully reflected in its valuations, maintaining a Buy rating for the stock [3]. Revenue Growth Expectations - Youdao's revenue for fiscal 2023 increased by 8% to RMB5,389 million, aligning closely with market expectations of RMB5,393 million [4]. - The online marketing services business is a key growth driver, with revenue surging by 98% to RMB1,332 million, attributed to rising demand for performance-based advertisements, particularly in gaming, entertainment, sports, and O2O sectors [4]. - The company is exploring new growth opportunities in the gaming industry and has become an authorized advertising agency for TikTok, indicating potential for overseas expansion in online marketing services [4]. - The smart devices business, which includes products like the Youdao Dictionary Pen and Smart Learning Pad, saw a revenue decline of 28% to RMB909 million in 2023, but is expected to return to growth following sales channel optimization [4]. Profitability and Loss Reduction - Youdao's net loss decreased from RMB640 million in FY 2022 to RMB475 million in FY 2023, with expectations for further narrowing of losses in FY 2024 [5]. - Improvements in the smart devices business profitability are anticipated due to a shift to a more online-focused sales approach, which should yield better returns [5]. - Increased utilization of AI in learning services is expected to enhance gross margins, as it allows for greater productivity among teachers [5]. Valuation Insights - Analysts project Youdao's revenue growth to improve from 7.5% in 2023 to 14.8% in 2024, with net loss expected to contract to RMB93 million [6]. - The market values Youdao at a price-to-sales multiple of 0.57 times and a free cash flow yield of 7.3%, indicating attractive valuations given the low price-to-revenue ratio and high cash flow yield [6].

Investment Rating - The report assigns a "Buy" rating for the company, Youdao (DAO US), with a target price of $5.30, indicating a potential upside of 21.6% from the current price of $4.36 [4][10]. Core Insights - The company's business health has improved, leading to better-than-expected profits. In Q4 2023, total revenue increased by 2% year-on-year to 1.48 billion RMB, surpassing market expectations [1][2]. - The growth in revenue was primarily driven by the advertising business, which saw a significant increase of 97% year-on-year, while learning services and smart hardware revenues declined by 3% and 45%, respectively [1]. - The adjusted net profit reached 69 million RMB, doubling from the previous year, as the company focused on improving business health and profitability [1][2]. Summary by Sections Financial Performance - In Q4 2023, total revenue was 1.48 billion RMB, with a year-on-year growth of 2%. The revenue breakdown showed learning services at 784 million RMB, smart hardware at 222 million RMB, and advertising at 474 million RMB [1][6]. - The gross margin decreased by 3 percentage points year-on-year, primarily due to a decline in the proportion of learning services [1][6]. - The company expects total revenue in Q1 2024 to grow by 16% year-on-year, with learning services, hardware, and advertising projected to increase by 10%, 10%, and 45%, respectively [1][7]. Revenue Forecast - The revenue forecast for 2024 estimates total revenue to reach 6.32 billion RMB, reflecting a year-on-year growth of 17.2% [3][11]. - The company anticipates high school education revenue to grow by 25-30% in 2024, driven by strong demand and quality supply [2][3]. Valuation Adjustments - The report adjusts revenue expectations for high school and advertising upwards while lowering forecasts for literacy and hardware. The target price remains at $5.30, with a valuation method that excludes the impact of literacy business [2][3]. - The valuation for the high school business is set at 15 times the 2024 earnings, which is below the online education sector average of 20 times due to lower growth expectations compared to peers [2].

Investment Rating - The report maintains a "Buy" rating for Youdao, indicating an expectation that the company's stock will outperform the benchmark index by more than 20% over the next 6-12 months [3]. Core Insights - Youdao achieved record high operating profit and operating cash flow in Q4 2023, with operating revenue of 1.48 billion RMB, a year-on-year increase of 1.8% and a quarter-on-quarter decrease of 3.8% [3]. - The company's GAAP operating profit reached 76.28 million RMB, up 209% year-on-year, while the GAAP net profit attributable to shareholders was 56.48 million RMB, a 359% increase year-on-year [3]. - Non-GAAP net profit attributable to shareholders was 69.28 million RMB, reflecting a 123% year-on-year increase [3]. - The total operating revenue for 2023 was 5.39 billion RMB, a year-on-year increase of 7.5%, with a non-GAAP net loss of 475.4 million RMB, narrowing by 25.7% year-on-year [3]. Summary by Sections Financial Performance - Q4 2023 operating revenue was 1.48 billion RMB, with a year-on-year growth of 1.8% and a quarter-on-quarter decline of 3.8% [3]. - The learning services revenue was 780 million RMB, down 2.8% year-on-year, while smart hardware revenue fell 45.3% year-on-year to 220 million RMB [3]. - Online advertising revenue surged to 470 million RMB, a 96.9% increase year-on-year, driven by effective advertising demand from third-party platform collaborations [3]. Cost Management - Marketing expenses were significantly reduced, with sales, management, and R&D expense ratios at 29.8%, 3.6%, and 11.4% respectively, showing improvements from the previous year [3]. - The overall sales/management/R&D expense ratios for 2023 were 42.1%, 4.1%, and 13.8%, respectively, indicating a decrease in costs [3]. AI Development - The company launched a new AI product matrix in January 2024, including the "Ziyue Education Model 2.0" and several innovative applications, enhancing its product offerings [3]. - The AI language model technology is expected to be applied more extensively in smart devices and online marketing in 2024, broadening monetization channels [3]. Valuation - The report projects revenues of 6.24 billion RMB, 6.99 billion RMB, and 7.64 billion RMB for 2024, 2025, and 2026 respectively, with corresponding price-to-sales ratios of 0.60, 0.54, and 0.49 [4].