Youdao, Inc. — FY2020 Form 20-F
Reporting period: Fiscal year ended December 31, 2020; filed April 28, 2021. This is an annual report, not a standalone fourth-quarter filing, and the provided financial data do not give clear Q4-only results. Financial statements are prepared under U.S. GAAP; amounts below are RMB unless stated otherwise.
Business context
Youdao provides online learning services and courses, learning devices, online knowledge tools, and online marketing services, primarily in China. In 2020, learning services contributed 68.1% of revenue, learning products 17.0%, and online marketing services 14.9%. The company reported approximately 120.2 million average total monthly active users. Its PRC operations substantially depend on VIE contractual arrangements; VIEs generated 76.8% of FY2020 revenue.
Financial performance and liquidity
| Metric | FY2020 | FY2019 |
|---|---|---|
| Revenue | RMB3,167.5 million | RMB1,304.9 million |
| Gross profit / gross margin | RMB1,454.3 million / 45.9% | RMB370.6 million / 28.4% |
| Operating loss | RMB1,805.8 million | RMB600.9 million |
| Net loss | RMB1,753.4 million (US$268.7 million) | RMB601.5 million |
| Net loss per ordinary share/ADS | RMB15.53 (US$2.38) | RMB6.68 |
| Net cash used in operating activities | RMB321.6 million | RMB372.3 million |
| Cash and cash equivalents at year-end | RMB609.2 million | RMB173.3 million |
- Learning services revenue grew 207.9% to RMB2,154.7 million; learning products revenue rose to RMB540.0 million; online marketing revenue increased 4.4% to RMB472.9 million.
- Segment gross margins were 53.1% for learning services, 34.1% for learning products, and 26.6% for online marketing services. The corresponding FY2019 margins were 26.7%, 29.2%, and 30.8%.
- Sales and marketing expense increased to RMB2,697.0 million from RMB622.9 million, equal to 85.1% of revenue. Total operating expenses were RMB3,260.1 million, or 102.9% of revenue.
- Online-course gross billings, a non-GAAP measure, were RMB3,135.4 million versus RMB939.5 million. Youdao Premium Courses gross billings were RMB2,816.8 million. Year-end deferred revenue was RMB1,440.5 million, mainly reflecting customer payments for courses not yet recognized as revenue.
- At December 31, current assets were RMB1,851.6 million and current liabilities RMB3,393.6 million, a working-capital deficit of RMB1,542.0 million. Cash, short-term investments, and time deposits totaled approximately RMB1,194.5 million.
- NetEase Group short-term loans were RMB878.0 million, bearing interest of approximately 3.5%–3.9%. Total liabilities were RMB3,477.4 million; shareholders’ equity was negative RMB1,407.1 million.
- Investing activities provided RMB761.0 million, primarily reflecting maturities of time deposits and short-term investments; financing activities provided RMB26.6 million. Capital expenditures were RMB36.9 million.
Material changes versus FY2019
- Revenue increased 142.7%, driven mainly by online courses: online-course revenue grew 230.8%, with Youdao Premium Courses paid enrollments rising from approximately 833,000 to 2.097 million.
- Gross margin improved substantially, led by learning services, which management attributed to scale benefits and optimization of faculty compensation.
- Despite revenue growth, net loss widened to RMB1,753.4 million. The major driver was the sharp increase in sales and marketing expenditure, including marketing spend of RMB2,100.3 million versus RMB474.9 million.
- Operating cash outflow narrowed, while year-end cash rose. Short-term investments increased to RMB585.0 million from RMB121.1 million; time deposits fell to RMB0.3 million from RMB1,325.7 million.
- Year-end working capital shifted from a RMB271.2 million surplus in 2019 to a RMB1,542.0 million deficit in 2020.
Outlook, commentary, risks, and unusual items
- Outlook: No quantified revenue, margin, or earnings guidance is provided. Management plans to grow online-course enrollments and billings per enrollment, broaden monetization through enterprise services, subscriptions and devices, and manage costs. It expects sales and marketing and R&D investment to continue; profitability is not assured and losses may increase in the near term.
- Liquidity support: NetEase agreed not to demand repayment of the RMB878.0 million loans during the 12 months following the report and to extend them in 11-month periods upon request while it controls Youdao. In April 2021, after year-end, Youdao disclosed a US$300 million NetEase revolving facility and a separate US$150 million bank facility guaranteed by NetEase. The report also states that a February 2021 follow-on offering generated approximately US$231.6 million net proceeds. These are post-period events, not FY2020 operating cash generation.
- Regulatory exposure: Youdao disclosed uncertainty over PRC online-education licensing and filing rules and said certain operations may not be fully compliant. It had completed filings for major online after-school training platforms and most educational apps, while other app filings remained in preparation. Potential consequences include fines, suspension, or other sanctions.
- Structure and market risks: The company relies on VIE contracts rather than direct ownership for a substantial part of its China business. It also flags dependence on NetEase, competition, data and privacy regulation, and possible NYSE delisting risks related to U.S. audit-inspection requirements. The filing states that its auditor was not subject to PCAOB inspection in China; the audit opinion on the financial statements and internal controls was unqualified, and management and the auditor concluded ICFR was effective as of year-end.
- COVID-19 and unusual items: Management said COVID-19 did not materially adversely affect overall business growth, results, liquidity, or financial condition through the report date, while noting temporary cuts to some advertisers’ budgets. Free online courses had recorded over 15 million enrollments by March 2020. A COVID-related VAT exemption contributed RMB51.9 million to “others, net” in 2020. Youdao also disposed of its Cloudnote business to a NetEase-linked investee in December 2020, retaining a 37.5% interest; the transaction was accounted for under common control and was not treated as discontinued operations.
- Contingencies and seasonality: The company reported ordinary-course litigation but did not expect a material adverse outcome and recorded no material litigation liability. Learning revenue is typically stronger in the second and fourth quarters; online marketing activity is seasonally weaker in the first quarter. The filing provides no standalone Q4 financial figures.
Most important facts for investors to verify
- Whether course-enrollment growth and gross billings convert into recognized revenue and operating cash flow, given the large deferred-revenue balance and management’s learning-period estimates.
- Whether marketing spending can be reduced or generate sufficient returns: FY2020 sales and marketing expense exceeded 85% of revenue.
- Liquidity and refinancing dependence: verify the terms, availability, and drawdown of the post-year-end credit facilities, and the ongoing support and repayment terms for NetEase loans.
- Progress on all required education-platform and app filings, teacher qualifications, and any changes in PRC education, advertising, or data-protection rules.
- VIE enforceability, cash-transfer restrictions, and the extent to which reported consolidated cash is accessible to the Cayman Islands parent and ADS holders.
- Audit-inspection and listing developments, as well as the effect of dual-class voting control and NetEase’s influence over corporate decisions.