Youdao, Inc. — 2019 Form 20-F Summary
Business context and reporting period
This is an annual report for the fiscal year ended December 31, 2019, not a standalone fourth-quarter filing. Youdao provides online courses, learning apps and tools, smart devices, enterprise technology services, and online advertising. Financial statements are prepared under U.S. GAAP. In May 2019, Youdao acquired NetEase Cloud Classroom, China University MOOC, and NetEase Kada from its controlling shareholder, NetEase. Because the businesses were under common control, results were retrospectively presented as though included throughout the periods shown.
Financial and operating performance
Amounts below are RMB unless otherwise stated; 2019 U.S. dollar translations are included where reported.
| Metric | 2019 | 2018 |
|---|---|---|
| Net revenue | 1,304.9 million (US$187.4 million), up 78.4% | 731.6 million |
| Gross profit / gross margin | 370.6 million / 28.4% | 216.5 million / 29.6% |
| Operating expenses | 971.5 million | 435.6 million |
| Operating loss | 600.9 million | 219.1 million |
| Net loss | 601.5 million (US$86.4 million) | 209.3 million |
| Net loss attributable to ordinary shareholders | 637.4 million; RMB6.68 loss per share/ADS (US$0.96) | 239.2 million; RMB2.80 loss per share/ADS |
| Net cash used in operating activities | 372.3 million (US$53.5 million) | 100.3 million |
| Cash and cash equivalents at year-end | 173.3 million (US$24.9 million) | 41.7 million |
- Learning services and products revenue rose 98.7% to RMB851.9 million, representing 65.3% of revenue. Online marketing revenue rose 49.6% to RMB453.0 million, or 34.7% of revenue.
- Online-course revenue increased 84.4% to RMB607.6 million. Non-GAAP gross billings for online courses reached RMB939.5 million, versus RMB418.1 million in 2018. Gross billings are based on course sales and refunds and are not GAAP revenue.
- Learning-services-and-products gross margin improved to 27.1% from 21.8%; online-marketing gross margin declined to 30.8% from 40.6%. The overall margin fell as advertising distribution through third-party platforms and international markets carried lower margins.
- Sales and marketing expense increased 191.9% to RMB622.9 million, including RMB499.2 million of advertising expense. R&D expense rose 49.6% to RMB275.4 million. Total operating expenses grew 123.0%.
- At December 31, 2019, current assets were RMB2.03 billion and current liabilities RMB1.76 billion, producing working capital of RMB271.2 million, compared with deficits in 2017 and 2018. Cash, time deposits, and short-term investments totaled approximately RMB1.62 billion.
- Short-term loans from NetEase were RMB878.0 million (US$126.1 million), bearing interest at approximately 3.5%–3.9%. NetEase agreed not to demand repayment during the 12 months from April 29, 2020, and to extend the loans for 11 months upon Youdao’s prior written request while NetEase controls Youdao.
- Investing cash outflow was RMB1.084 billion, mainly reflecting placements into time deposits and short-term investments. Financing cash inflow was RMB1.588 billion, chiefly from the October 2019 IPO and concurrent private placement.
Material changes, outlook, and notable items
- Management attributed growth to more paid enrollments, higher billings per enrollment, expanded K-12 courses, increased smart-device sales, and stronger performance-advertising distribution. Youdao Premium Courses enrollments increased to about 833,000 from 643,000; K-12 enrollments rose to about 359,000 from 126,000.
- Management plans to expand online courses, paid content, smart devices, and technology licensing, while seeking operating efficiencies. It expects continued investment in sales, marketing, and R&D, and cautions that expenses may rise and losses may increase in the short term. The filing provides no specific revenue, earnings, or margin guidance.
- Completion of the IPO triggered RMB18.4 million of share-based compensation expense in fourth-quarter 2019; total 2019 share-based compensation was RMB25.1 million. The company reported no material effect from COVID-19 on results through the filing date, but described future effects as uncertain; it had offered free online courses, with more than 10 million enrollments reported.
- Key risks include continued losses and cash burn; reliance on NetEase financing and commercial relationships; evolving PRC licensing and online-education rules; and the VIE structure, through which entities accounted for 76.5% of 2019 revenue. The filing says some K-12 instructors lacked required qualifications (about 78.6% had obtained them as of the report date) and certain regulatory filings were incomplete or still being prepared.
- The company reported that management considered disclosure controls effective at year-end, but the 20-F did not include management’s internal-control assessment or auditor attestation under the new-public-company transition relief. The filing also notes that the PCAOB could not inspect the China-based auditor at that time.
Important facts for investors to verify
- Whether course billings, deferred revenue, enrollments, retention, and refunds continue to convert into recognized revenue and operating cash flow; revenue is recognized over course learning periods.
- The durability of growth and margins after the NetEase education-business acquisition, and the extent to which reported comparisons reflect retrospective common-control accounting.
- The pace of sales and marketing spending, share-based compensation, and progress toward reducing operating losses and cash outflow.
- Availability and terms of NetEase loans, the company’s dependence on NetEase, and whether cash and investments are accessible to fund PRC operations and obligations.
- Progress in obtaining education, app, and other regulatory filings and instructor qualifications, and any changes affecting the VIE arrangements.
- Cash-flow classification and liquidity: 2019 investing outflows largely reflect deposits and investments, while operating cash flow remained substantially negative.