Youdao, Inc. annual report, Q4 FY2021

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Youdao, Inc. — FY2021 Form 20-F Summary

Period note: This is an annual report for the fiscal year ended December 31, 2021, not a Q4 filing. It does not provide a clear standalone Q4 financial result; the figures below are annual unless otherwise stated. Financial statements are prepared under U.S. GAAP. Amounts are RMB unless indicated.

Business context

Youdao operates learning services, smart devices, online marketing services and education digitalization solutions, primarily in China. Following the 2021 regulatory crackdown on academic after-school tutoring, it discontinued its Academic AST business; the disposal was completed in February 2022 without consideration and with an immaterial disposal loss. Historical Academic AST results are presented as discontinued operations. Youdao is transitioning toward technology-focused learning products, STEAM and adult and vocational education, and school-focused digitalization solutions.

Financial and operating performance

  • Revenue: Continuing-operations revenue was RMB4.016 billion (US$630.2 million), up 58.9% from RMB2.527 billion in 2020. Learning services contributed RMB2.441 billion (+61.3%), smart devices RMB980.4 million (+81.6%), and online marketing RMB593.9 million (+25.6%). Tutoring services revenue within learning services was RMB2.271 billion (+65.9%).
  • Discontinued business: Academic AST generated RMB1.339 billion of 2021 revenue and a RMB100.3 million net loss, presented separately from continuing operations.
  • Profitability and margins: Gross profit rose 79.6% to RMB1.989 billion; gross margin increased to 49.5% from 43.8%. Segment margins in 2021 were 59.8% for learning services, 36.9% for smart devices and 28.1% for online marketing. Operating loss widened to RMB943.2 million from RMB851.5 million. Continuing-operations net loss was RMB926.1 million; net loss attributable to ordinary shareholders from continuing operations was RMB895.4 million. Total net loss, including discontinued operations, was RMB1.026 billion, improved from RMB1.753 billion in 2020. Non-GAAP continuing-operations loss attributable to ordinary shareholders was RMB788.3 million.
  • Costs and unusual items: Operating expenses increased 49.7% to RMB2.932 billion, including sales and marketing of RMB2.078 billion and R&D of RMB607.4 million. The company recorded RMB56.8 million of impairment on acquired intangible assets and RMB7.0 million of impairment on long-term investments.
  • Cash flow: Net cash used in continuing operating activities was RMB623.6 million, compared with RMB9.9 million in 2020. Including discontinued operations, operating cash use was RMB1.346 billion. Continuing investing activities provided RMB42.7 million; continuing financing activities provided RMB1.784 billion, mainly from the 2021 follow-on offering and NetEase borrowing.
  • Liquidity: At year-end, cash and cash equivalents were RMB322.8 million, restricted cash RMB749.8 million, and short-term investments RMB503.8 million. Restricted cash relates to government-custodied prepaid tuition and should not be assumed freely available. Working-capital deficit narrowed to RMB764.3 million from RMB1.542 billion.
  • Debt: Year-end NetEase borrowings included RMB878.0 million of short-term loans and RMB255.0 million of long-term loans drawn under a US$300 million revolving facility maturing March 31, 2024. The filing reports a further US$30 million (about RMB190 million) drawn in 2022 before the report date. Short-term loans bore 3.5%–3.9% interest; 2021 interest expense was RMB31.6 million.
  • Other metrics: Tutoring gross billings were RMB2.520 billion (+26.5%); tutoring deferred revenue was RMB973.9 million at year-end. Average total MAUs were approximately 112.5 million in 2021.

Changes versus the prior year

  • Revenue growth continued, led by learning services and smart devices; online marketing also recovered. Overall gross margin improved by 5.7 percentage points.
  • Operating loss increased despite higher gross profit as sales, marketing, R&D and administrative spending rose. Management cited expansion, hiring and promotion as key drivers.
  • Continuing-operations net loss increased to RMB926.1 million from RMB799.0 million, while total net loss declined substantially because discontinued-operation losses fell from RMB954.3 million to RMB100.3 million.
  • Cash use from continuing operations increased materially. The working-capital deficit improved, but liquidity remained dependent on financing support and access to cash held across PRC entities.

Outlook, risks and contingencies

  • Management expects costs and operating expenses to rise in the near to medium term as it invests in technology, products, talent and sales and marketing. It expects smart devices and learning services to remain growth areas, but gives no quantified financial guidance and does not assure future profitability.
  • China’s tutoring rules have already led to the Academic AST disposal. Requirements affecting non-academic tutoring and academic tutoring for grades 10–12 remain uncertain and could require further changes or cessation of offerings.
  • Youdao is a Cayman Islands holding company reliant on contractual VIE arrangements for a substantial part of its China operations. VIE revenues represented 68.5% of group revenue in 2021. The arrangements have not been tested in a PRC court; enforceability and regulatory treatment are uncertain.
  • Liquidity risks include continuing losses, working-capital deficits, short-term NetEase loans and reliance on NetEase’s stated support for the next 12 months after the report date. PRC rules also restrict transfers and dividends offshore.
  • Regulatory risks include evolving Chinese rules on overseas listings, cybersecurity, personal information and data security. The filing said the company had not been required to obtain CSRC permission or undergo a CAC cybersecurity review as of the report date, but future requirements were uncertain.
  • The PCAOB was unable to inspect the company’s China-based auditor under the conditions described in the filing; the company warned that HFCAA-related trading restrictions or delisting could follow if inspection access remained unavailable.
  • COVID-19 had mixed effects; management said it had not materially harmed the company overall but could not predict future effects. Ordinary-course legal claims were disclosed; management did not expect their resolution to have a material adverse effect. No material off-balance-sheet arrangements were reported.
  • The company reported effective disclosure controls and internal control over financial reporting as of year-end, with an unqualified auditor opinion. The auditor nevertheless identified revenue recognition estimates for average customer learning periods as a critical audit matter.

Important facts for investors to verify

  • Confirm Q4-specific performance from quarterly disclosures; this annual filing does not provide clear standalone Q4 results.
  • Review the Academic AST disposal, discontinued-operations presentation and comparable-year figures to distinguish continuing from discontinued business.
  • Assess the availability and restrictions on cash, particularly the RMB749.8 million of restricted cash, and the company’s ability to meet short-term obligations.
  • Track NetEase loan balances, repayment terms and the continuing availability of NetEase financial support.
  • Monitor implementation of tutoring, cybersecurity, data-protection and overseas-listing regulations, as well as PCAOB inspection and HFCAA developments.
  • Evaluate VIE contractual enforceability and the extent to which the company can access earnings and assets held by VIEs and PRC subsidiaries.