Good day and welcome to the Youdao 2019 Fourth Quarter and Fiscal Year Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Pei Du, Investor Relations Director of Youdao. Please go ahead..

Thank you, operator. Please note this discussion today will contain forward-looking statements relating to future performance of the company and are intended to qualify for the safe harbor from liability as established by the U.S. Private Securities Litigation Reform Act.

Such statements are not guarantees of the future performance and are subject to certain risks and uncertainties, assumptions – on assumptions and other factors. Some of the risks are beyond the company's control and could cause actual results to differ materially from those mentioned in today's press release and this discussion.

A general discussion of the risk factors that could affect Youdao's business and financial results is included in certain filings of the company with the Securities of Exchange Committee, including its prospectus and associated amendment on the Form 424(b)(4) filed in conjunction with our recent IPO.

The company doesn't undertake any obligation to update these forward-looking information, except as required by law. During today's call, management will also discuss certain non-GAAP financial measures for comparison purposes only.

For the definition of non-GAAP financial measures and the reconciliation of GAAP to non-GAAP financial results, please see the 2019 fourth quarter and fiscal year financial results news release issued earlier today. As a reminder, this conference is being recorded.

Besides, a webcast replay of this conference will be available on Youdao's corporate website at ir.youdao.com. Joining us today on the call from Youdao's senior management is Dr. Feng Zhou, our Chief Executive Officer; Mr. Lei Jin, VP of Operations; Mr. Peng Su, our VP of Strategy and Capital Markets; and Mr. Wei Li, our VP of Finance.

I will now turn the call over to Dr. Zhou to review some of our recent highlights and strategic direction..

Thank you, Du Pei, and thank you all for participating in today's call. Before we begin, I would like to remind everyone that all numbers are based on renminbi. We are happy to report Youdao's best quarter as we finish 2019. We generated revenue of RMB 410 million in Q4, up 78% year-over-year.

And for the full year 2019, revenues were RMB 1.3 billion, also up 78% year-over-year. With six consecutive quarters of growth, Q4 gross billings for our online courses were up 211% year-over-year, accelerating faster than our growth in Q3 of 140% year-over-year. Yearly gross billings of online courses reached RMB 940 million, up 125% year-over-year.

We continue to build up a strong instructor and tutor team, reaching 151 instructors and 520 tutors by the end of 2019. Sales of our intelligent learning devices also continued to do well in Q4 after the launch of Youdao Dictionary Pen in August, reaching RMB 67 million of revenue in Q4, a 396% growth year-over-year.

When we became a public company in October, we told people we are an intelligent learning company. What I mean is that, first and foremost, technology is in our corporate DNA. We have deeply integrated our proprietary technology across our offerings to create a unique online learning experience.

For example, in 2019, we distributed over 60,000 Youdao Smart Pens to our students. This gives our students seamless real-time student-teacher interactions that mimic a physical classroom environment and personalized feedback. Second, the strength of our organic user base is another element that differentiates us.

By the end of 2019, the number of our total monthly average users have reached 108 million and it keeps on growing. This is a testament to the engagement of our users. And moreover, it's driving growth across our online courses and learning devices alike.

In fiscal year 2019, almost 40% of our new paid enrollments for online courses were driven by our organic traffic. These unique advantages set an important foundation for our future, and put us on track for achieving our goal of long-term and sustainable growth.

With this synopsis, I'd like to walk you through our performance initiatives with our online courses, intelligent learning devices, knowledge tools and marketing segments, and discuss how these items build up our plans for 2020.

Our yearly gross billings of our K-12 segment grew to RMB 454 million, representing a 166% increase year-over-year, accounting for 48% of our total gross billings from our online courses. For the fourth quarter, our K-12 gross billings were RMB 169 million, up 256% year-over-year.

Our junior high school segment, in particular, increased 580% year-over-year in Q4. Our strong growth came from continued enhancement to our course content and products. We will take 2 of our strongest subjects, for instance.

Our junior high school Chinese course was upgraded with new content that followed the new national exam syllabus, which cultivates students' literary and humanistic attainments. For our K-12 Physics programs, we developed a new content with multi-tiered levels of difficulty.

Based on the data gathered by our complementary Smart Pen, additional explanatory videos were added to emphasize questions that many students answered incorrectly. Moving to our adult segment. Annual gross billings were RMB 296 million, up 57% year-over-year.

And for the fourth quarter, gross billings for our adult education segment were RMB 112 million, up 145% year-over-year. In October, we launched a more comprehensive course in Practical English, following the major content and future upgrades.

We also added more exercise features such as human-to-machine interactive oral practices using voice and neuro-machine translation technologies to boost the learner's level of engagement and provide immediate feedback. These changes were well received.

And the conversion rate jumped by 50% following these product upgrades, even with an increase in ASP. In Q4, the gross billings of our Practical English reached RMB 86 million, a 308% increase year-over-year and a 117% increase quarter-over-quarter.

To further grow our adult education segment, we are currently enhancing our graduate entrance exam course content and products as the next step in our adult user's learning process.

For our growing STEAM education courses, we launched a number of programs in 2019 targeting our early learners, including Youdao Kids program, Youdao Math, Youdao Fun Reading and Youdao Kids English. Let me talk a little bit more about the Kids' coding courses. Our course is highly differentiated.

We adopted a large class 2-teacher model for teaching kids 2 program, While a lot of our peers used a small class or 1-on-1 format. Our course works because of the sophisticated in-class practice system we implemented. In Q4, we achieved over 80% of retention for our kids programming courses.

This is a testament to the effectiveness of our approach, combining great contents with advanced technology. In Q4, we also added a Python language course for our Kids' programming courses, which is a natural progression for those enthusiastic young coders who have mastered graphics or block-based programming.

Many of our courses come with a Smart Pen. This considerably enhance our offerings both to students and to – and for upgrading our courses. With the Smart Pen, students gain an interactive experience like into that of an in-class experience.

For example, students gain immediate feedback on quiz results and can interact with tutors in real time, similar to face-to-face teaching. In the meantime, our Smart Pen also brings skill closer to our students with the ability to use data collection to further improve the way we help our users learn.

In tandem with our technology, we are constantly recruiting and training our service teams. By the end of the year, our tutoring team was composed of 520 employees, and we currently have 3 tutoring bases located in Guangdong, Guangzhou, Nanjing and Xi'an.

Throughout 2019, we were busy implementing operating procedures and improving our training processes. In Q4, we also substantially enhanced our process management systems used by our tutoring and growth teams.

These activities have led to an increase in conversion rate from Q3 to Q4 and an expected increase in retention rate after winter-spring season compared with the summer-fall season of 2019. Turning to our intelligent learning devices segment, we are seeing excellent adoption. In 2019, learning devices yielded RMB 152 million in revenue.

44% of those revenues or RMB 67 million were recognized in the fourth quarter driven largely by the successful launch of our second-generation Dictionary Pen in August. Within 2 months of its release, the device had become the best seller in the digital dictionary category of multiple e-commerce platforms.

We also started distributing the product through off-line channels in the fourth quarter, with current distribution in 3 provinces. In Q4, over 100,000 units were sold. We are working to further grow our off-line channels to more areas in 2020.

Looking at our online knowledge tools, in 2019, average MAUs on our platforms were up 12% year-over-year to 108 million and 114 million MAUs in the fourth quarter. We go through continuous iterations during the year, introducing new tools for our huge and growing user base.

For Youdao Dictionary, we upgraded new audio features and added comprehensive content to suit various learning scenarios. We also implemented personalized course recommendations based on user profiles to help direct traffic to corresponding online courses and intelligent learning products.

For U-Dictionary, we rolled out Magic Translate, a new translation feature for mobile phones to support our expanding overseas traffic. Users frequently use Magic Translate for text chatting and other online social activities, such as Facebook or WhatsApp.

In 2019, U-Dictionary's average MAUs increased by 75% to 14 million, with the average MAUs for the fourth quarter up 50% year-over-year to 16 million. We saw the largest increase in Latin America and Arabic-speaking countries, where the number of U-Dictionary users grew by more than 300%.

Additionally, Youdao Kids' Dictionary was selected as one of the Apps On Display in Apple stores throughout China. After the review of our learning services and products , I would like to briefly discuss our online marketing services.

Despite the continued weakness in the overall advertising market, revenues from our online marketing services grew nearly 50% year-over-year, reaching RMB 453 million in 2019 and reached RMB 99 million in the fourth quarter. Our overseas media alliance have increased in Southeast Asia and the Middle East.

We also enhanced our offerings in 2019 with newly developed automated tools. In Q4, online marketing revenue grew by 5% year-over-year due to the relatively weak results in the performance ad segment. Going forward, we expect the ad market to remain volatile, and we will manage it with flexibility.

In summary, over the past year, our system helps drive our strong growth, particularly in courses such as junior high school Chinese, – physics and Practical English as well as our Smart Pen and Dictionary Pen 2.

Armed with the replicable content, products, operational knowledge, tutor and growth services team and a large user base, we have established the groundwork for sustainable growth.

To further strengthen this model, in 2020, we will focus on enhancing our content and adding new premium products while simultaneously instituting operational efficiencies that allow us to further benefit from economy of scale.

We are excited to enter another year of rapid growth that help our students and parents, and create value for all of our constituents and stakeholders. Before I turn the call over to Su Peng, who will walk you through our financials, I would like to touch on something that concerns ourselves, the coronavirus outbreak.

As China's leading online education service platform, NetEase Youdao has a social responsibility to assist in any way we can. Currently, we are providing 3 online courses as well as other supporting measures and services to school, students and parents. This can go a long way in promoting content and emotional stability during these uncertain times.

Starting on January 24, we were the first company in the industry to offer free winter courses to K-12 students in Wuhan City and Hubei province. We then officially launched a nationwide initiative to offer complementary K-12 courses to help students review key points and improve on problem-solving skills.

As for the college students, China University MOOC connected the 800 universities, covering 4,000 professors requests across all provincial administrative regions, except Hong Kong and Taiwan. We're hopeful that there will be a solution to the virus soon. In the meantime, we stand ready to assist people in need.

With that, I would like to turn the call over to Su Peng to review our financial performance. We will then open the call up for questions.

Su Peng?.

Thank you. Thank you, Dr. Zhou, and hello, everyone. Today, I will be presenting some financial highlights for the 2019 fiscal year and the fourth quarter. We encourage you to read through our press release issued earlier today for the further details.

We saw excellent gains across many of our primary metrics while we are building our business scale and offering. We are simultaneously working to balance our investment in our operations to best position us for sustainable growth over the long term. For the fourth quarter, we had a total net revenue of RMB 410.4 million or the US$59 million.

This represents an increase of 78.4% from the fourth quarter of 2018. If we look at this growth by segment, net revenue from our learning services and products grew by 128.6% year-over-year to RMB 311.9 million or US$44.8 million. We attribute this growth to strong growth in the K-12 paid student enrollment.

Net revenue for the online marketing services were RMB 98.5 million or US$14.2 million, flat compared with the prior year period. For the fourth quarter of 2019, our total gross profit was RMB 122.4 million or US$17.6 million compared with RMB 68.3 million for the fourth quarter of 2018.

Gross margin for learning services and products improved to 29.3% for the fourth quarter of 2019, up from 21.6% for the fourth quarter of 2018. The large margin growth was primarily attributable to the effects of the economics of scale and the further optimization of our business and the faculty compensation structure.

Gross margin for online marketing services was 31.6% for the fourth quarter of 2019 compared with the 41.4% of the – for the fourth quarter of 2018. The decrease was mainly the result of the more revenue generated from advertisement through the third-party Internet properties and the international markets, which carry lower gross margin.

As a reminder, we are still in the early stage of cultivating our online learning business. Over time, we expect to improve our margin profile as we further grow our paid student enrollments and realize more economics of scale.

The efficiency we are gaining from the optimization of our faculty compensation model will also greatly improve our margin as the bulk of associated costs are upfront. For the fourth quarter, total operating expense were RMB 326.5 million or US$46.9 million compared with RMB 118.6 million for the same period last year.

We continue to invest in technology, student acquisition and acquiring talent teachers. Building our sustainable growth business is our goal, which means we are focused on doing it right, not just on short-term financial optics – optic gains.

This investment are under planning and that we are increasing our top line and structuring our model to become more efficient and recognized economic of scale. With that in mind, sales and marketing spend for the fourth quarter was RMB 205.8 million compared with RMB 54.1 million in the fourth quarter of 2018.

Research and development expense for the fourth quarter were RMB 89.3 million compared with RMB 50.6 million in fourth quarter of 2018. Our operating loss margin was 49.7% in the fourth quarter of 2019, down from a 21.9% for the same period last year.

For the fourth quarter of 2019, our net loss attributable to ordinary shareholders was RMB 205.7 million or US$29.5 million. Non-GAAP net loss attributable to ordinary shareholders for the fourth quarter was RMB 186.1 million or US$26.7 million. Basic and diluted net loss per ADS for the fourth quarter was RMB 1.95 or US$0.28.

Non-GAAP basic and diluted net loss per ADS for the fourth quarter was RMB 1.76 or US$0.25. Our net cash used in operating activities for the fourth quarter was RMB 29.4 million or US$4.2 million. Again, we are focused on meeting our long-term objectives.

We will continue to prudently manage our cost and strike a balance between top line growth and expense. Turning to our full year results, our total revenue for the fiscal 2019 increased by 78.4% to RMB 1.3 billion or US$187.4 million.

Net revenue from our learning services and products for the fiscal 2019 grew by 98.7% year-over-year to RMB 851.9 million or US$122.4 million. Net revenue from online marketing services were up 49.6% year-over-year for the fiscal 2019 to RMB 453 million or US$65.1 million.

Total gross profit for 2019 was RMB 370.6 million compared with RMB 216.5 million in 2018. Total operating expense for the year increased to RMB 971.5 million or US$139.6 million compared with CNY 435.6 million in 2018. For the year, net loss attributable to ordinary shareholder was RMB 637.4 million or US$91.6 million.

And the basic and diluted loss per ADS was RMB 6.68 or US$0.96. Looking at our balance sheet. As of December 31, 2019, our contract liability, which mainly consists of deferred revenue, were RMB 456.8 million or US$65.6 million compared with RMB 177.5 million as of December 31, 2018.

At the end of the period, our cash, cash equivalents, time deposits and short-term investments totaled RMB 1.6 billion or US$232.7 million. This concludes our prepared remarks. Thank you for your attention. We would now like to open the call to your questions. Operator, please go ahead..

Certainly, we will now begin the question-and-answer session. [Operator Instructions] The first question comes from Mark Li of Citi. Please go ahead..

Thank you management for the time. I have two questions. One is, I want to know more, given the unfortunate virus incident, could you share more about the online operating metric? We have seen like a bit color on the online students, we – or the traffic that we get.

Or any plan for the servicing and retention? And the second question is, I would like to know our promotion or retention plan for the upcoming spring semester for both K-12 and adults segments. Thank you..

Thank you, Mark. Yes, so the first – regarding the virus, so our first priority is always the health of our employees and customers. So – and with that said, the outbreak significantly raises the awareness of online education. So business-wise, it's very positive for our courses. So we are doing several things.

So first is, as we talked about, we are offering free courses to our users. And the – most of the results for the free course is actually branding awareness. So a lot of users are – through these free courses, they get to know Youdao and get to know online education for the first time.

So actually, there's one number I can share with you, there are – there have been over 10 million free student – free course enrollments since we launched the campaign on January 24, so over 10 million enrollments there. So the second thing we're doing is, at the same time with the free courses, we are also offering low-cost trial courses.

Most of these courses are the same with the before, but we do a little bit of an adjustment to some of them. And so that low cost to trial courses, so what we are seeing is, of course, much lower user acquisition costs over the period of time and also better conversion rates. So that's the second thing.

The third thing is that, overall, we are spending more on – actually on our marketing budget. So most of that is actually around the low-cost trial courses. So this enables us to ramp up the business faster. And the coronavirus situation has negative impact for our other businesses, for advertising and smart devices business.

For the smart devices business, this mostly impacts our off-line sales. However, these are currently smaller businesses for us. So overall, it's positive. And for promotion and retention for spring courses, so if you look at our basic approach. We're basically doing 2 things, so one is performance ad-based customer acquisition.

So low-cost trials like 3 or 48 courses, some free trials. And these will continue to do, and we will probably spend more on that. And given that we have better conversion now, so these we think are the right time to do the investment. And we are – the second thing we do is – it's different from our peers.

We have a lot of organic traffic, over 100 million of MAUs. So we've always been optimizing the organic traffic conversion methodologies, so mostly from our Dictionary app and Translation app. And so if you look at our numbers, we've almost doubled the amount of – number of new users – new course users from this organic traffic source in 2019.

And we believe we can do more in 2020. So we've rolled out course recommendation based on user profiles in Q4, and we are doing more targeting improvements. And also, we have a new version of Dictionary out in December. If we look at it, so there are more learning-oriented content in the Dictionary version.

And on the same page, you have – you can have oral English practice services, you have listening comprehension content and also some trial courses. So this blend well, and we are doing – we're doing that, and we believe we'll get good results.

And from a macro point of view, we believe it's – this is the right time to do investment because we are seeing the perfect storm of adoption for online education, mature enough large class dual-teacher model, which we've been always been focused on; a new generation of instructors who are really good at teaching online, and of course, people staying at home due to the coronavirus.

So – and during the process, we – the last point I want to make is that we require a healthy UE for each product that we promote. So we do not promote solely based on the revenue we want to achieve. We look at the UE of these courses a lot. Yes, I hope that answers your question..

Yes, thank you Feng Zhou and management..

The next question comes from Sheng Zhong of Morgan Stanley. Please go ahead..

Hey, good morning management. Thank you for taking my questions. So I have two questions here. The first one is about the student acquisition cost. Can you please break down your sales and marketing costs to the adult business and the K-12 business? And regarding the – yes, a lot of things happened, coronavirus.

So regarding the – your outlook about the competition of the online education, what's your plan or strategy for the student acquisition in this year? And the second one is, can you please share some color about your top five teacher revenue contribution of your K-12 and college business? Thank you..

Thank you, Sheng. This is Su Peng. I believe for the first question, for acquisition cost for the adult and kid whole business in the Q4 last year, in 2019, maybe compared with the Q3, we see the cost fully decreased in the cost that we've guided for new student acquisition. It's decreased season over season.

That's because – firstly, that's because of seasonality issues. And for the – all the education business, always the summertime is, so they will be the most expensive seasons for the – to acquire new users. And secondly, we believe for the adult and the K-12 student acquisitions, we expect that in the future, so we do see the decreased trend.

But we – right now, we don't know if it's a long-term trend or mid or short term. It's only the short-term performance of the market. So we will keep our eye to the market, and we expect to see more and – the results from the market, and again, get back to you to give you more information about the customer acquisition cost, it's trend in the future.

And for your second question about how to – our teacher contributions. We believe our faculty and the kind of business structure, first, has been significantly optimized to better reflect the industry standards. We also maintain a highly competitive planning risk we believe, therefore, we retained the top talents.

So that's definitely the most important thing for everyone. And also in the Q4, our top 20 instructors contribute about 73% of our revenues from the Youdao Premium courses. And first, it's not only the teachers – individual teachers because they all have the teams, so that shows the team's effort. It's not only the – only one teacher.

So as we expect to hire more instructors, we expect the concentration will be come down in the longer term. So currently, we only have the two instructors as doing the revenue share models. And most of the – some teachers, their – the service contract will be ended in the December 31 – as of December 31, 2019.

So we – all of them have renewed a new contract with us. We expect it will drag down our gross margin in the future. And we also in the – we also standardized and protected our content of the many performance structure. So we believe in the future, we will provide standardized – more standardized and content and product to our students.

I hope that will be helpful. Thank you..

Yes, let me add some points to – thanks, Sheng Zhong. Let me add some to the plan for this year. I believe you asked how we are going to grow for this year. So the near-term focus is focusing on where we are doing great. So – because, overall, the growth of the business is doing well. And we will focus on expanding those courses that we are doing great.

So this is mainly courses in junior high and high school. So Chinese, Physics and also recently, Math. So we've historically been strong in Chinese and Physics. And for the last in maybe 2 quarters, Math has improved a lot.

So – and I believe junior high and high school are good segments because students here are under more pressure from exams and there are kind of urgent needs to get a successful training. And the other focus, at least for the first half of this year, is building up the service capacity. So we now have a 520 tutors. That's not enough.

And we have – the good thing is that we already have very experienced leaders in these teams. So hiring is their number one priority now. And we also have good – already have good operating procedures and IT systems already, so that's good. And so the team's are doing teams. And these will grow quickly.

We expect to have at least a few thousands of them of service employees, of tutors, at the end of 2020. Yes, I hope that answers your question..

Yes, thank you for the color. Thank you very much..

The next question comes from Alex Xie of Crédit Suisse. Please go ahead..

Hi, management. Thank you for taking my questions. So my first question will be about our GP margin outlook. I have seen the learning services, GP margin have been in the improving trend. What will be the outlook for 2020 and the key initiatives to lift the GP margin? And secondly, I think you also mentioned – Dr.

Zhou also mentioned, the conversion rates improved in the last quarter.

So what about the quarter-over-quarter retention rate for your K-12 normal-priced students from the autumn classes to the winter classes? That – what is the level? Or what is the improvement year-over-year? And do you think you still have some more room to go? And what can you do to improve it? And thirdly, I would like to ask about the Practical English business.

I think it's performing quite strong. But I would like to ask you to share a little more about the tutor structure and the user profile of this business. I think they – is it just Chong Ting alone or a group of teachers led by Chong Ting. And is the customer group mainly college students or white collar employees? Thank you..

Thank you for your question, Alex. This is Wei. I will take your first question on the gross margin. The gross margin improvement is one of our focus areas, and we expect our gross margin learning segment to be improved with more benefit received from math upscales and better cost out efficiency.

The largest drivers in our gross margin improvement was somewhat below. Firstly, a reduced around the sharing with our instructors due to the reduced reliance for our teachers. More instructors are rewarded by performance-based bonus.

Secondly, the better cost efficiency that's started is the back of our investment in teacher training and technology under our belt. We can continue to expand our business without significant amounts of additional investment at this time. Finally, I think more benefit from the achievements of economics of scale.

The online large class model seems accepted by more and more users and the stability was expected to continue. This is my answer for the first question. I hope this is helpful..

Yes. So we were very confident about GP margin. So we already see a little bit of results in Q4, and we'll have more improvements in 2020. So let me answer the second question. So regarding the conversion rates and retention rates. So basically, we are seeing high single-digit, percentage-wise, improvements year-over-year for both these numbers.

So for conversion number, with – the key number we're looking at is our 48 3 trial courses. So we've been able to do high single-digit percentage improvement to the conversion number over the same period in 2018. And for retention, in Q4, we are looking at, actually retention users from the fall semester to spring semester this year.

So it is done – this is done in Q4 as the fall courses were going on. So – and most of that conversion is done Q4. There is still a little bit left in Q1. But we can already see that retention from the fall semester to spring semester this year is much improved than before.

It's high single digits, as I said, percentage-wise improvements over the same period in 2018. And we believe we are competitive in terms of conversion. And it is, of course, due to better service. We have many more tutors than before, and they are better trained. And also, it's due to high-quality content.

The iterated approach we used in developing the content kind of having the teachers go back and forth with our operational staff and keep improving the course. They have been able to do it for maybe 2 years, 3 years now, and we've been good at that. So – yes, so I hope that answers your question.

So Su Peng, can you take the third one? No, the third one is actually about Practical English, and I'll do that. So yes, we – the adult segment is doing really well. So if you look at it, gross billings have increased 145% year-over-year, yes. So – and so within that, Practical English is actually particularly doing well.

So in Q4, we have a major content and feature upgrade. And you asked whether that's just Logic English is one teacher. So 2 things there. So one is – actually, in addition to Logic English, starting Q4, we are – we just released 2 other courses in addition to Logic English, and they've been ramping up pretty well. So it's not only Logic English.

Logic English has been our best seller for at least 2 years now. So right now, we have 2 more titles, 2 more courses. And within Logic English, it's right now a fairly large team. Within Logic English, we have at least 4 or 5 additional teachers. So it's not only Chong Ting. We have more teachers.

And so it basically – kind of sort of a testament to the approach we've been talking about from the start. We are going from 1 to 2 teachers to kind of full fledged production teams for learning English or kind of getting certificates are kind of present needs for these professionals and they have – or call it students. They have the money to pay.

And also, there's less seasonality. So we like this business. And one thing – the other thing is that if you look at the market, so off-line English learning institutions are actually kind of having some difficulty right now. And we believe it's – it will last some time. So demand is actually shifting online.

And our teams are kind of capturing that window of opportunity right now. And we are quite competitive in this space. So we have a – strong in our original content, as you see. And we are using a lot of technology. So it's not that we are kind of moving the course online from off-line. It's not that simple.

So the – so in Logic English, the students can practice English with the computer, and they can get a lot of useful feedback from the algorithm, so it's very useful to them. And these courses have pretty good economics. So it's – so we used low-priced products like CET-4 and CET-6.

But right now, we mostly kind of move on to courses like Practical English. And the user – regarding user demography, these users are mostly white collar workers, some college students. But white collar workers are the largest segment of the students. Yes, thank you. Thank you,.

Thank you Feng Zhou for detailed answers. That’s very helpful..

[Operator Instructions] The next question comes from Thomas Chong of Jefferies. Please go ahead..

Hi, good morning. Thank you management for taking my questions. Given our solid set of results, with GP market improvement as well as efficiency in sales and marketing expenses and a number of – huge base of free traffic will be converted in coming quarters. Is there any change in terms of the time line for profitability? Any color would be great.

And my second question is about the regulatory environment in China.

How we should think about the trend going forward?.

Thank you for your question. I would like to address your first question. We do not provide the detailed qualitative guidance on the timing of profitability. With that said, we are unchanged in our business plan, and I'd like to give you some additional information.

On the top line, as to learning segment, in 2019, we have a strong growth, 75% year-over-year increase in learning services and nearly 400% year-over-year increase in learning products. We will replicate the experience to produce good courses to drive further growth in the top line.

In terms of gross margin, with the achievements of economics of scale and the faculty compensation structure optimization, we expect the gross margin will improve continuously, as just said, and to get closer to the industry level over time.

On the other side, we will continue to invest more in our servicing capability, such as recruiting more teaching assistants and building AI technology to enhance students' learning experience. We also believe this is a good time to do more marketing and branding activity to acquire more users, which helps to accelerate our stability.

Wish this is helpful for your first question. Thanks..

Lei Jin, it's okay, you take the second question of – regarding the regulatory environment?.

Yes. It's – with the regulation, we work heavily on the regulation movement. And it's important that they are incumbent in this regulation. And all of our – 9 Youdao act in the first they will call and approve the lease, which is published by the Ministry of Education in this Q4.

Our free courses are now to come back at the same pace as public school classes. But other – our gear towards our view of the key concepts from previous semester to help students to prepare for the new semester. Therefore, we are carefully – we are fully confident not exceeding the pace of the public schools.

We remain alert to public school curriculum schedules across different regions in China. Our team has carried out several [indiscernible] regarding the course content, curriculum scheduling and support the operating service. That's my answer. Thank you..

Thank you..

The next question comes from Natalie Wu of Youdao. Please go ahead..

[Indiscernible] Thank you for taking my questions. I have a couple of questions here. First 2 are regarding to your K-12 business. Just firstly, this run rate in 2019, what percentage of the new enrollment converted from your organic traffic? And what's your expectation for this year? And secondly, you mentioned that – Dr.

Zhou, you mentioned that you have accumulated over 10 million free course enrollments during this outbreak. Just wondering how much of them to be converted into the full-priced course enrollment? We'd love to hear management's thoughts on that. And last question is regarding the smart devices.

You have a very robust shipment of smart devices in the second half of last year, especially the Dictionary Pen.

I'm just wondering how much revenue is contributed by that single product in the fourth quarter? And I'm also wondering if there would be any chance that we could see some synergies between the Dictionary Pen and your K-12 online courses this year. Any thoughts would be helpful..

Yes, thank you. Thank you, Natalie, for joining our company. I was joking. Okay. Yes, so regarding the K-12 organic traffic, so this is a very important work for us. So we have a dedicated team doing this. So we keep improving. So in 2019, so as I talked about, 40% of new paid students – to paid students enrollments actually came from our organic traffic.

So mostly Dictionary, some from Translation app. And we actually have close to 20 apps now. So quite a few of them are very popular. So gross – another number is that gross billing of our K-12 course attributable to our organic traffic actually increased 92% year-over-year in 2019. So we almost doubled the amount of conversions from organic traffic.

And – so 2020, so we think we – in 2020, we still have a lot to do. And I talked about the new version of Dictionary, so it is an important version. So if you look at it, it's quite different from the versions before.

So we are basically transitioning from a – kind of a tool, a dictionary tool to an app that's tailoring to people's many different needs in terms of learning. So not only dictionary look-up, also kind of all-English practice, listening comprehension of English practice, and also some non-English learning activities.

And this provides a much better approach for us to – much better platform for us to embed our courses within the Dictionary. So be sure to take a look. And we are using a lot of data, and this is natural if you look at where we're coming from. So we had good AI technology and good big data technology.

So it's only natural that we apply those technologies to get better user conversions. So we're collecting users' profiles, as we talked about last time. We are looking at users' click behavior within our assets. So we won't – so we expect to see a lot of improvements in organic traffic conversion this year.

And second question is regarding the 10 million free course enrollment. So we think this is mostly regarding brand. So we expect conversion to be low. With that said, so we are treating this very seriously. So we are offering the users the best course possible. Maybe they are shorter, they are lighter than our paid full courses.

But we still to put the best teachers there. So it will help our brand. And we believe there will be a significant amount of conversion. But the rate will be lower because we are not kind of promoting very actively our paid course within those free courses. But it's a very good thing, I think. So lastly, about the smart devices.

So let me give you some numbers. So one number we can share is that we have – we distributed approximately 100,000 Dictionary Pen in Q4. So we are still early. We're only in 3 provinces off-line right now. So we expect to extend to more areas.

And total devices revenue is – for the whole year, is RMB 150 million price in terms of the year, so about 400% growth year-over-year. And we do think there will be a lot of synergies between the devices and also the courses. So we are actually trying different things.

So we are including – very primitive, we're including coupons of our courses in the package. So users will – a lot of users don't know yet that Youdao offers online courses, so this will actually help that. And the other thing is that we've recently just connected the Dictionary Pen to our Dictionary app.

So there's a – in the Dictionary app, there is actually a button for Dictionary Pen. So these 2 can be used together. So – and yes. So we will – as we talked about before, so we plan to include promotions of courses within some of our smart devices. And we will do that organically.

So not kind of intrusive to the user, but we will basically do it as they do a look at it and think it's useful. Yes, I hope that's helpful..

Yes, that’s very helpful. Thank you much Feng..

[Operator Instructions] This concludes the question-and-answer session. I would like to turn the conference back over to management for any additional or closing remarks..

Thanks once again for joining us today. If you have any further questions, please feel free to contact us at Youdao directly or reach out to TPG Investor Relations in China or in the U.S. Have a good day. Thank you..

This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day..