Good day and welcome to the Youdao 2021 Second Quarter Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Jeffrey Wang, Investor Relations Director for Youdao. Please go ahead..

Thank you, operator. Please note, the discussion today will contain forward-looking statements related to future performance of the company which 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 and other factors. Some of these 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 and Exchange Commission. The company does not 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 purpose only. For the definitions of non-GAAP financial measures and reconciliations of GAAP to non-GAAP financial results, please see the 2021 second quarter financial results news release issued earlier today.

As a reminder, this conference is being recorded. Besides, a webcast replay of this conference call 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. Wayne 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..

First, publishing of AST advertising is banned on most media platforms; second, access to capital markets is severely limited. For example, ASTs are not allowed to pursue IPOs; third, tutoring timing limitations.

For example, no school subject academic tutoring on weekends or holidays; fourth, academic ASTs are required to register as nonprofit going forward. We have been exploring strategic and operational changes to our tutoring business and setting new priorities for the whole company since the regulation was published on July 24.

First, as always, we are committed to embrace and fully comply with these laws and government policies.

We have already made changes to our business like stopping academic classes during the summer holidays and we are actively communicating with regulators on further changes like the nonprofit requirements as these have a major impact on our future operations. Therefore, we expect academic AST business will be severely limited in the coming quarters.

With that said, AST is not our sole business. The K-12 AST made up about 41.2% of our Q2 total revenue. We believe our other businesses which contributes over half of our revenue, are not directly impacted by the regulation. And we have several high-growth business lines in non-AST part of Youdao.

So while we step on the brakes on the AST side, we will be driving more growth on the non-AST side of our business. Ultimately, we think our deep technology roots and large user base gives us options and diversity much needed in this kind of challenging scenario.

Overall, when we add the two sides up, I expect this to be a speed bump in our journey, a headwind for a few quarters. Looking to the future, I see four pillars of growth in our non-AST business. Learning service -- learning devices, adult education, STEAM courses and education digitization solutions.

We have talked a lot about the learning devices and adult education opportunities in past calls and our team will keep innovating in these areas. In Q2, both these businesses are doing well.

We released Youdao Dictionary Pen Series 3, designed to be more friendly to elementary school and pre-K kids, more affordable and supports learning of arithmetic in addition to English and Chinese. As for the third growth area, STEAM courses, it is an area that is made more attractive now that the students have more time.

We believe we have a competitive advantage in online STEAM courses because we have been operating STEAM courses ever since 2018 and our teams are good at concentration, applying technology and also monetization in this area. In Q2, Youdao Weiqi continued scaling up nicely. Net revenue of Youdao Weiqi increased by 180% quarter-on-quarter.

We also launched advanced level small class courses of Weiqi for students that play more competitively. As for our programming courses, the retention rates reached an all-time high of nearly 90% in Q2. STEAM education is a great area and we will continue to launch more courses in coming quarters.

The last of the four growth areas is education digitization solutions. By that, we mean any product or service delivered in a business-to-business fashion or business-to-government fashion that uses digitization to improve learning and education. The customer could be schools, universities or enterprises.

This is the first time we discussed education digitization solutions on our call. We think it has huge potential. It fits Youdao very well and now is the right time to do it. According to Huatai Securities, the expected market size for education digitization is over RMB650 billion in 2023.

As for Youdao, with our expertise in AI, smart devices design and manufacturing as well as a deep understanding of teaching and learning, we believe we are well positioned to seize the opportunity in the rising education digitization market. Right now, we also have an innovative product in this area. Youdao Intelligent Learning Terminal.

It is an appliance that automates paper-based homework processing and provides learning diagnosis through AI technology at schools. It works by integrating scanning, printing and AI diagnosis in a single appliance.

Youdao helped Binjiang District in Hangzhou to facilitate education digitization and our Intelligent Learning Terminal was praised for helping instructors analyze students' learning and knowledge points and improve teaching quality and efficacy. We also continue investing in R&D to build up our learning technology.

In Q2, we released the Youdao Intelligent Practice System, our first fully adaptive practice and learning system. It is already in production, using our junior high school math courses and we plan to integrate it with our learning devices in the future. Going forward, here are our immediate action plans right now.

First, we have been streamlining our work force for K-12 AST business. We have been following the guidance from the government regarding how we are supposed to operate this segment in the future.

Second, for the online courses segment, we will focus on adult courses and STEAM courses that are in line with the policy direction, as I just talked about, K-12 students have more free time after double reduction. We believe demand for STEAM courses will significantly increase.

Regarding adult education, we have seen a strong growing demand for professional certificate and interest-based courses and we continue to offer competitive products to drive sustainable growth in this area. Thirdly, for learning products, we will continue leveraging our advantages in ed-tech and innovation to further drive growth.

We always hope that Youdao's smart learning devices present a great opportunity for growth. We already have achieved scale and profitability in our Dictionary Pen products and we will continue to launch more new products to strengthen our leadership in learning products.

Fourthly, for education digitization solutions business, as I introduced just now, there is a huge demand and it is in line with the government's policy direction. We will leverage our advantages to meet the rising demand for public -- from public schools, universities and et cetera. Looking ahead, we are very confident with our plans.

As we have a strong team, we offer high-quality products and so we have long-term support from our parent company, NetEase. NetEase today announced that it has adopted a share purchase program of up to US$50 million of Youdao's outstanding ADS for a period not to exceed 36 months beginning on September 2, 2021.

Under the terms of this program, NetEase may purchase Youdao's ADS in open market transactions on the New York Stock Exchange. The purchase program may be suspended or discontinued at any time. Along with continuing optimizing our business, we are also dedicated to fulfilling our social responsibilities as a corporate citizen.

We always strive to help where we can, leveraging our strengths to help communities in need. For instance, facing the recent hefty rain storm in Henan Province, Youdao joined hands with public welfare institutions to provide post-disaster reconstruction and instructor support for 10 to 15 schools and kindergartens.

These activities are expected to support at least 10,000 students in affected areas and we will continue making ongoing contributions to society in the future. With that overview, I will now turn the call over to Su Peng to review our operational and financial results in Q2. We will then open to questions.

Su Peng?.

Thank you, Dr. Zhou and hello everyone. Today, I will be presenting some operational and financial highlights from our 2021 second quarter. We encourage you to read through our press release issued earlier today for further details. Dr. Zhou introduced the strategic and operational change to our tutoring business and our new priority just now.

Then I will add more color on the operating side in Q2. First of all, in terms of the adult segment of premium courses, the revenue account for 21.5% of the total net revenue in Q2. The Extraordinary Memory, Feifan de jiyi, course was the biggest one from the gross billing perspective in Q2.

In the meantime, an upgraded version of the practical English course has been launched recently; English for All Enjoyment Camp [ph] offers immersive teaching from the first person view, it's optimized the education and training model based on the learning characteristics and the learning habits of the adult.

Furthermore, the upgraded course presents language learning scenario by using AI technology and integrate learning, practice and test to improve the concentration of students. The Intelligent Assessment System tracks the students' learning conditions to help them customize their learning course accurately from the five major dimensions.

In short, enhancing service by AI technology has made education and the training easier. As for China University MOOC, means massive open online course, the leading MOOC platform in China and also the major online courses platform for Chinese University students.

137 courses has been certified as the national level premium online courses for vocational education by Ministry of Education. Looking at our Youdao Dictionary, we added a new function named High Reading in Q2.

It is the first learning app that supports real-time assessment of oral English and the professional sound monitoring in China, making oral English learning more efficient. As for the WOW Community, WOW Trend [ph] we launched in Q1, it grew fast with MAU of more than 10 million in Q2.

The monthly active users of our learning apps in Q2 reached more than 113 million. Besides, gross billing from new users contributed by organic traffic increased by 97.3% year-over-year and gross billing from the total organic traffic accounted for 28.4% of all gross billings in Q2. Then, I will be presenting the financial highlights in Q2.

Total gross billing from our online courses reached RMB1.1 billion for the second quarter, up 99.7% year-over-year and the gross billing from our premium courses rose to RMB1 billion, up 124.1% year-over-year. Gross billings from our K-12 segment accounted for 76.7% of the total gross billing in second quarter.

Paid student enrollments for premium courses were up by 129% year-over-year. Paid student enrollments from our K-12 and adult segments accounted for 86.6% and 13.4% of the paid student enrollments for premium courses, respectively. For the second quarter, total net revenue reached a record RMB1.3 billion, or US$200.3 million.

This represents an increase of 107.5% from the second quarter of 2020. Looking at this growth by segment; net revenues from our learning services were RMB921.1 million, or US$142.7 million, up 112.4% from the same period in 2020.

We attribute this growth to the increased revenue generated from our online courses which were further driven by the increase in paid student enrollments for both K-12 and adult courses of Youdao Premium Courses.

Net revenues from our learning products were RMB206.3 million, or US$32 million, up 138.8% from the same period in 2020, driven by the substantial increase in Youdao Dictionary Pen sales volume. Net revenues from our online marketing services were RMB166 million, or US$25.7 million, representing a 60.8% increase from the same period in 2020.

For the second quarter, our total gross profit reached RMB676.7 million, or US$104.8 million, up 140.4% compared with the second quarter of 2020. Gross margin for learning services increased to 57.9% for the second quarter of 2021, up from 51.7% for the second quarter of 2020.

The increase was driven by the improved economics of scale and ongoing optimization of Youdao's faculty compensation structure. Gross margin for learning products increased to 43% for the second quarter from 32.4% for the same period in 2019.

The improvement was mainly attributable to the substantial rise in sales volume of Youdao Dictionary Pen Series 3 which carry a higher gross margin than other learning products. Gross margin for online marketing services was 32.7% for the second quarter of 2021, compared with 28.5% for the same period in 2020.

The increase was mainly attributable to higher sales of performance-based advertisement through third-party Internet properties which had an improved gross margin profile over the last year.

For the second quarter, the total operating expenses were RMB1.2 billion, or US$189.1 million, compared with RMB564.6 million for the same period in the last year. With that, for the second quarter, our sales and marketing expenses were RMB973.2 million compared with RMB445.2 million in the second quarter of 2020.

Research and development expenses were RMB180 million, compared with RMB91.4 million in the second quarter of 2020. Our operating loss margin was 42.1% in the second quarter of 2021, compared with 45.4% for the same period of last year.

For the second quarter of 2021, our net loss attributable to ordinary shareholders was RMB524.4 million, or US$81.2 million, compared with RMB257.8 million for the same period of last year.

Non-GAAP net loss attributable to ordinary shareholders for the second quarter was RMB525 million, or US$77.5 million, compared with RMB250.5 million for the same period last year. Basic and diluted net loss per ADS for the second quarter was RMB4.29, or US$0.66.

Non-GAAP basic and diluted net loss per ADS for the second quarter was RMB4.09, or US$0.63. Our net cash used in operating activities for the second quarter was RMB249.1 million, or US$38.6 million.

Looking at our balance sheet, as of June 30, 2021, our contract liabilities which mainly consisted of the deferred revenue for our online courses, were RMB1.4 billion, or US$213.1 million, compared with RMB1.4 billion as of December 31, 2020.

At the end of the period, our cash, cash equivalent, restricted cash, time deposits and short-term investments totaled RMB1.9 billion or US$294.4 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..

[Operator Instructions] And our first question comes from Sheng Zhong of Morgan Stanley. Please go ahead..

Thank you for taking my question. My question is, actually, you mentioned that in current regulatory environment, you will focus more on the non-K-12 space.

But my question is, wondering what this means for K-12 tutoring business? Will you keep it or gradually exit this market? And if you have any operation adjustment plan you can share with us, that will be great. Thank you..

Learning devices, STEAM courses, adult courses and education digitization solutions. These are all in line with the overall government direction and already -- it's not something that we come up after the policy or reform. It's something that we've been working on for some time.

And these four areas are all high-growth areas for us, yes, if you actually look at the numbers. So that is clear for us right now. And what -- that's also what many of our teams are hard at work focusing on. I hope that answers your question. Thanks, Sheng Zhong [ph]..

Thank you very much..

The next question comes from Brian Gong of Citi. Please go ahead..

Yes, thanks management for taking my question. My question is about the competition on learning devices, adult education and STEAM education.

So do you think the competition of those areas will become more intensified since after the new regulation, new policy, other AST names? There are also -- some of them are also looking to come into this area to find new growth drivers. Yes, that's my question. Thank you..

Thank you, Brian. This is Su Peng. Yes, we -- the first is, we always believe that the intelligent learning devices will provide huge opportunities for the ed-tech companies. And in China, there's nearly about 200 million K-12 students as well as even more backlog learners aspire to improve their learning efficacy.

Also parents right now are ready to invest in education. Yes, indeed, with growing demand, probably many of the other companies have already entered the segment.

However, what we think about these for the intelligent learning products, there are some really technical barrier to the entire process, including the development, production and sales, where we think that Youdao has made substantial improvement in the area for the long time and achieved exceptional results.

If you go back to two years ago and about -- we released our Dictionary Pen Series 2 in August 2019. With this resource, we had established a good market reputation and recognition and we think we have pushed the barriers, made impressive message to the parents -- in parents' mind.

So we think we are in the leading -- we are -- definitely we will be the leading one. At least, we are the leading one in the learning device sector. So we are thinking about -- we are really confident to face about the competition in these sectors. The second thing is about the adult education product.

Yes, if you see about the numbers, net revenue from our adult education business is up about over 100% year-over-year in Q2. And also, we are successfully operating the two different SKU or the content or the product in our pipeline. First is what we call practical English, English product. It's a language learning product.

Second is called the Extraordinary Memory. That's kind of to help people to train their memory capabilities. So that -- they are two different -- entirely different products with different core value to our users.

So I think -- we think about -- so we have capable -- we are capable to operating the two -- develop and operate the two entirely different SKU at the same time with our adult education team. And secondly, for this part, because we are always trying to leverage our organic traffic from our core asset, Youdao Dictionary app.

So as we mentioned, we have launched about several new functions in the first half of this year, will translate a new High Reading program.

So we think about -- so through that program, we can know more -- we can learn a lot of the users' behavior through these two different functions and we expect we can know more their demand through their activity in our apps. So we can just provide more product for their demand.

So we think about it because we have always had this organic traffic for us. So we think about we will definitely -- will have a leading position for this -- in this adult education sector. Yes, we think that's -- that's what we think about at present.

In addition, as doctor mentioned, we found another very good opportunity in 2B services and 2B business. It's not only has huge demand but it's also consistent with the policy directions. It's called -- we call it digitalization education business.

It's -- we think it's providing a new opportunity to improve education in classroom, enhance the management of the education system but also consider innovative mode of delivery.

Our innovative intelligent learning terminal boosts digitization for primary and high school across China and we adopt intelligent educational solutions to help the self-study and the personal teaching that we think about improving the efficacy and reduce burden for the both teachers and students. We hope that answers your question. Thank you, Brian..

Brian, this is Feng Zhou. Yes, let me add a few words. So yes -- so the question is about competition in these new areas. Of course, we will see a lot of competition and we already see companies coming up with new products and services already. So the way we think about it is that we view ourselves as a product company.

So that's the -- and we think we have product-focused companies and service-focused companies in education and both models are good but I think for some products, for some things, so this is -- this will lead to different ways of doing things and different competitiveness.

And for hardware for devices, it's obviously product because you actually hold the product. So we think for devices, we absolutely have advantage here because we've been doing it for a couple of years and we have very strong teams -- very strong product teams. So defining [indiscernible] refining and selling these products.

And also for STEAM, we think we are stronger online. So that's why we've always been focusing on the online side of tutoring education. And for STEAM courses, we will also focus on online.

And it's a bit different from the academic courses in the sense that STEAM courses at least should be more attractive and more friendly to the students because it's extracurricular, right? Yes. So we think we have good experience and a good track record in creating really attractive STEAM courses like the Weiqi, the Go game courses.

So we think we will be able to create more of these really successful SKUs. And -- yes -- so I hope that's helpful. Thank you..

Yes, thank you very much. That's very helpful..

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

Hi, management. Thank you for taking my questions. My first question is about your customer acquisition strategy and customer acquisition costs. I think you will shift your being focused to the non-K-12 segments. How should we think about them in the future? And my second question is about the profitability of your non-K-12 business lines.

Would you please share with us some of your ideas about what kind of margins could your non-K-12 business achieve in your business plan? Thank you..

Alex, this is Su Peng. I will take the first question first and I think before I go to question, it's about adult. It's committed to fully complying with Beijing after-school tutoring measures and similar measures to be adopted by the other local governments and if I need to implement the requirements of the central government's opinions.

And for the customer acquisition strategy for the non-K-12 after-school tutoring business and first of all, for the STEAM and adult education, we definitely will leverage the existing user traffic and attach more importance to the conversions and contribute by our organic traffic to boost the conversion rate and expand our users, too.

As for the WOW Community, we recall the WOW Community launched in Youdao Dictionary in Q1, grew fast with MAUs of more than 10 million in Q2. And I think that will show our capabilities to boost our organic traffic volumes in our Dictionary apps.

So, I think for the adult business, I think, first of all, you have to create the high-quality content and products before you're spending on the marketing dollar to sort of customer acquisitions. And so, we think about all the strategies for the customer acquisition.

We -- internally, we try to -- always try to provide high-quality process and create the high-quality content to our customer first.

And then, we just -- before we release to the public, we always will take it through several rounds about internal taps for the auto content and we will just refine the content and -- again and again to make sure we provide the high-quality content to our customers. We think that will be the strategy for us ongoing for adult education.

And for the STEAM products, definitely, we will also build up several different new content in our pipeline and to create more cross-selling scenario for the kids over six years old. And we think we will -- right now, we are operating a successful product like Weiqi like kids programming.

And we expect we will have the other STEAM courses will be online -- will be available for the kids over six years old in the fall semesters. We hope we can create the most scenario for them to do the cross-sell between our existing customer. I hope that will answer your question. And the second question is about profitability.

Yes, we think about -- it's just like we always emphasize, we always care about a healthy business model and a healthy unit economics, at least to operate our business. Before it became a successful business model, definitely, that will be the healthy business first.

And so if you go to the different sectors, you'll see our learning devices and that will be the great examples. We will just improve our gross profit margins year-over-year and we see the tremendous uptick about our gross margins in the -- compared with the last year in this year in the learning devices.

And also you can see about we improved almost all of our operating metrics year-over-year since we became the public company.

And when we think about it, we will always keep that trending and we expect that will be the -- every single segment in our businesses have a very bright future and have potentially -- it's a great opportunity for us to develop our business; so we think about it.

We just keep that on track and keep moving forward and keep improve our operating metrics. That will be a profitable business in the long run. I hope that will be helpful for your questions [ph]..

Got it. Thank you very much..

The next question comes from Thomas Shen of Nomura. Please go ahead..

Thank you, management, for taking my questions. I have one question about how should we forecast the impact from the recent regulations for after-school tutoring? Any colors on the top line or margins will be very helpful. Thank you..

Hi Thomas, this Lei Jin. Firstly, Youdao is committed to fully complying with the Beijing AST measures and the similar measures given by other local governments. Youdao needs to implement the requirements of the central government opinion.

In compliance with Beijing AST measures, we stopped offering the extended AST classes on weekend, national holidays and the current high school breaking period in Beijing. Such measures are expected to have a material impact on our existing K-12 academic cost business.

In the first quarter of this year, the revenue from K-12 AST classes accounted for less than 50% of our total revenue. Youdao is an intelligent learning company, not just a totalitarian company. So we will double reduction as external process. This does not change our long-term reversion and we are truly optimistic about the long-term development.

In the medium term, I think this is maybe 12 months [indiscernible] we will exclude a few quarters for transition. The whole K-12 AST makes up about 41% of our Q2 total revenue. And computer education, grade 1-9, subject to make up about 24% of Q2 total revenue.

At the same time, we run a diversified business with other significant segments that are not impacted by the regulation. Our non-AST business is already quite big at over 50% of our revenue and growing about 100%. So we think we are in a good shape. We will manage the process carefully and prudently.

We, Youdao management team, has a long-term vision and commitment and we are confident to navigate the challenges and have a better position in the market. In addition, NetEase is supporting us in the long run..

Thank you. It was helpful..

The next question comes from Thomas Chong of Jefferies. Please go ahead..

Hi, good evening. Thanks management for taking my questions.

May I ask about the outlook in terms of the operating expenses like R&D, sales and marketing and G&A in the next couple of quarters? In particular, about the sales and marketing side, should we expect it will materially slowing down in the next couple of quarters? And on the head count, any color about what we should expect the head count by the end of this year? Thank you..

Hi Thomas, thank you for your question. This is Wayne. As just mentioned by Dr. Zhou, we are stepping on the brakes on the AST side. At the same time, we are driving more growth on the non-AST side, our businesses such as smart devices, education digitalization solutions.

Therefore, I think it is not easy to have a clear direction for the change of the operating expense at the whole financial level. As just mentioned, Youdao is an ed-tech company and we have multiple businesses. K-12 AST is not our sole business.

And the non-K-12 businesses revenues for second quarter this year was about 60% which -- there is no direct negative impact from the double reduction policy. I'm willing to share two points on the channel of operating expenses for our K-12 AST which represents part of our financial outlook.

First, according to the government policy, publishing AST advertising on most media platform is banned. We stopped AST advertising for K-12 such as [indiscernible] and the branding activity for our causes which resulted in a sharp decrease in marketing expenses we spend. Second, we will downsize the K-12 AST business scale.

As we mentioned, the head count, considering the limited tutoring time, the salesperson and the tutoring classes on K-12 will be reduced accordingly. For the R&D investment, I think we are an AI technology company, we will continue to invest a lot in our other business. So there's a chance it will be continuing to increase for R&D.

Finally, I'd like to emphasize, the diversification is our -- one of our advantages. We will try to take any chance to grow our business but the precondition is to fully embrace and comply with the law and the government policy. Thank you..

Thank you..

The next question comes from Liping Zhao of CICC. Please go ahead..

Good evening, management. Thanks for taking my questions. I have two questions here.

First, this recent policy encourage students to study at home or at school, will this stimulate the demand for our educational smart devices? And any plan for the new product launch of our smart devices? And secondly, related -- second question related to the share purchase program.

We noticed that NetEase announced the share purchase program of US$50 million of Youdao's ADR. Could management elaborate a little bit more on the reason behind it? Thank you..

Yes, thanks. So regarding the first question about learning devices, you asked about any plans for new products in this area. Yes, so we actually do have new products very recent time. So tomorrow, yes -- so yes, I'll just -- you guys will be the first to know.

Tomorrow, we will launch a new version of the Dictionary Pen in collaboration with People's Education Press. They've been in charge for that. So tomorrow, September 1, we will launch this new Dictionary Pen that has features that work directly with the students' textbooks.

So this is one of the most asked about feature that the parents and students need and we have finally been able to work out all the details and it launches tomorrow and we are very looking forward to; you guys will like it.

And I think a couple of days after that, yes, we will have another product that's related to language learning -- also language learning. But the other -- another side of language learning. Yes, not the reading part. So you can guess what it's about. How do you learn a language, right? So you read or you do what? So, we also like that product very much.

And we think we will know -- so we will know how the students react to it. But as we talked about, September is a start of school, so it's a very important period for any products related to learning.

So we think that the two new products, along with the existing Dictionary Pen that are selling very well; so we think that we have a very good product lineup for this school year. Yes, thanks..

The next question comes from Candis Chan of Daiwa. Please go ahead..

Sorry, operator. I think we have the second question, right. Yes, so this question regarding the share repurchase -- share purchase program for -- from NetEase. So I introduced in my prepared remarks that NetEase today announced that there's a share purchase program approved for up to US$50 million of Youdao's shares.

And it starts two days from now, lasting at most three years. So it's -- so NetEase will purchase Youdao's shares on the open market. So the -- NetEase announced the share purchase program. And I think on one hand, it demonstrates the strong support for Youdao's business for our long-term development.

So, as you all know, so NetEase has supported us on multiple occasions. For example, providing us with the credit line a couple of quarters back. And this shows again their support. I think that's very important in this market scenario.

And on the other hand, I think NetEase certainly hope -- would hope NetEase -- Youdao has as a good performance in the capital market in the long run. So I think that's for the share purchase program and we will provide you with more updates when we -- if we have more in the future. Yes, thank you..

The next question will now come from Candis Chan of Daiwa. Please go ahead..

Hi, management. Thank you for taking my question. I just want to quickly follow-up on your comments about the downsizing of the K-12 business.

Can you just quantify the restructuring costs for this K-12 AST business? And how would that impact your cash flow position?.

Candis, thank you for your question. For K-12 restructuring costs, we believe each player will incur additional costs such as compensation cost for dismissed staff, cancelation costs for the rental office and certain impairment loss for prepaid office materials. However, I think different players might face different situations.

As just mentioned by Dr. Zhou, Youdao already has a good basis for non-K-12 business. And in the future, we expect to be driving more growth on the non-AST side of our business. Part of K-12 talents will join the non-K-12 business, such as STEAM classes and adult education. They will continue to create valuation for us.

Let's say, compared with other tutoring companies, we have relatively low additional cost on the compensation side and we will offer more opportunity to our talent. Second, as an online company, there are fewer fixed costs such as rental fee to be considered during the restructuring.

Finally, we believe the restructuring cost is closely linked to the final policy of non-for-profit organization for K-12. Currently, we are actively communicating with the regulators on the detailed policy and -- for non-for-profit organization but the policy is still underway.

So we will fully compliant with the government policy and we still need to wait for the final policy. Wish it is helpful for your questions..

Yes. Thank you very much..

And that concludes the question-and-answer session. I would like to turn the conference back over to management for any additional or closing comments..

Thank you 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 the U.S. Have a great day..

The conference is now concluded. Thank you for attending today's presentation and you may now disconnect..