Youdao, Inc. annual report, Q4 FY2022

Full document

Youdao, Inc. — FY2022 Form 20-F summary

Period note: This is an annual report for the fiscal year ended December 31, 2022, filed April 27, 2023—not a standalone 2022 Q4 report. Quarterly results are not clearly provided in the supplied filing text. Financial statements are prepared under U.S. GAAP; unless stated otherwise, amounts below are RMB.

Business context

Youdao is a China-focused intelligent learning company offering learning services, smart devices, online marketing services and education digitalization solutions. It operates mainly through PRC subsidiaries and contractual variable interest entities (VIEs). Academic after-school tutoring (Academic AST) was discontinued following PRC regulatory changes; its results are presented as discontinued operations. FY2022 comparisons below generally refer to continuing operations.

Financial performance and liquidity

  • Revenue: RMB5.013 billion, up 24.8% from RMB4.016 billion in 2021. Learning services generated RMB3.084 billion (+26.3%), smart devices RMB1.256 billion (+28.2%), and online marketing RMB672.4 million (+13.2%).
  • Profitability: Gross profit rose 30.0% to RMB2.586 billion; gross margin improved to 51.6% from 49.5%. Operating loss narrowed to RMB774.7 million from RMB943.2 million. Continuing-operations net loss narrowed to RMB739.8 million from RMB926.1 million. Total net loss, including discontinued operations, was RMB745.9 million versus RMB1.026 billion.
  • Expenses: Operating expenses increased 14.6% to RMB3.361 billion. Sales and marketing rose 12.1% to RMB2.328 billion; R&D rose 32.3% to RMB803.8 million.
  • Cash flow: Continuing operating cash outflow was RMB531.4 million, compared with RMB623.6 million in 2021. Total operating cash outflow, including discontinued operations, was RMB603.1 million. Continuing investing activities provided RMB125.8 million and financing activities provided RMB184.6 million.
  • Balance sheet and liquidity: Year-end cash and cash equivalents were RMB783.6 million; short-term investments were RMB232.2 million. Working-capital deficit was RMB1.309 billion, wider than RMB764.3 million in 2021. Current liabilities were RMB3.179 billion against current assets of RMB1.870 billion; total assets were RMB2.276 billion and shareholders’ deficit RMB1.542 billion.
  • Debt: Loans from NetEase included RMB878.0 million of short-term borrowings and RMB522.3 million of long-term borrowings at year-end. The long-term balance was drawn under a US$300 million revolving facility maturing March 31, 2024. The filing says NetEase provided a support letter in April 2023 committing financial support for the next 25 months from the report date.
  • Other metrics: Tutoring services contributed RMB2.886 billion, up 27.1%; smart-device revenue growth was attributed in part to newer products. The company reported no goodwill impairment in 2022, but recognized RMB10.3 million of impairment on long-term investments.

Changes versus the prior year

Revenue growth and improved gross margin were accompanied by narrower operating and continuing-operations losses. Learning-services and smart-device margins improved; online marketing margin eased to 27.4% from 28.1%. The net loss from discontinued operations fell to RMB6.1 million from RMB100.3 million, following the Academic AST disposal completed in February 2022. Despite lower operating cash outflow, the working-capital deficit increased, and NetEase borrowing remained substantial.

Outlook, risks and unusual items

  • Management expects costs and operating expenses to continue increasing in the near to medium term as it invests in R&D, product development, talent, sales and marketing, and education digitalization. The filing gives no numerical revenue or earnings guidance.
  • Management states that year-end liquidity, together with continued NetEase funding support, is expected to cover continuing operations, capital expenditures and other obligations for at least 12 months. This depends in part on continued financing support and the ability to manage working capital.
  • PRC tutoring regulation drove the exit from Academic AST. The company no longer offered academic-subject AST courses for compulsory-education or high-school students as of the report date. Requirements for non-academic tutoring and related permits remain subject to local interpretation and enforcement.
  • The VIE structure is a central risk: VIEs generated 70.1% of 2022 revenue, but the Cayman Islands holding company has no equity ownership in them and relies on contractual arrangements whose enforceability has not been tested in a PRC court. PRC regulatory action could disrupt control, consolidation or access to economic benefits.
  • Cash movement and distributions are subject to PRC restrictions, statutory reserves, foreign-exchange controls and regulatory approvals. No dividends are planned for the foreseeable future.
  • COVID-related infections after China relaxed restrictions significantly affected sales in December 2022 and Q1 2023, according to management. Other material exposures include licensing and data-protection requirements, regulatory oversight of overseas offerings, competition, and reliance on NetEase.
  • The auditor issued unqualified opinions on the financial statements and internal control. The critical audit matter was management’s estimate of customer learning periods used to recognize tutoring revenue. The PCAOB had regained inspection access in December 2022; future access remains subject to annual determination.

Most important facts for investors to verify

  • Whether operating cash burn and the RMB1.309 billion working-capital deficit remain manageable, and whether NetEase support is available on the stated terms.
  • How much of reported cash and other liquidity is unrestricted, accessible outside the PRC, and available to the listed holding company; restricted cash fell sharply from RMB749.8 million to RMB0.9 million.
  • Whether growth and margins in tutoring, devices and education digitalization can offset continued investment and the discontinued Academic AST business.
  • Current compliance, permits and enforcement status for non-academic tutoring, online content and other regulated services.
  • Any developments affecting VIE contractual control, cash transfers, overseas-listing filings or PCAOB inspection access.