Youdao, Seeking $300 Million IPO, Incurs Mounting Losses

In the first half of 2019, Youdao's net revenue was 549 million yuan, with a net loss of 168 million yuan, almost double from the same period of 2018.

Author: Yaning Ying   

Youdao Inc., an e-learning unit of Nasdaq-listed Chinese internet technology company NetEase Inc. (Nasdaq: NTES), has filed for an initial public offering with the U.S. Securities and Exchange Commission. The company, which seeks to raise up to $300 million on Wall Street, has yet to turn profitable.

Since its establishment in 2006, Youdao has gradually formed four major lines of business: learning products, learning services, smart devices and interactive learning apps. The company operates in two segments: learning services/products and online marketing services. 

Its core profit model is to accumulate a large number of users by providing free or low-cost online learning products at trial, then through advertising introduce users to its paid online courses, interactive learning applications and other products. Hence, relying on revenue from registration or membership fees on these platforms, according to the company's prospectus.

The revenue of Youdao increased by 61% from 455.7 million yuan in 2017 to 732 million in 2018. However, its net loss widened 27% from 165 million yuan in 2017 to 209 million yuan in 2018. Moreover, the gap has further widened this year. For the first six months of 2019, Youdao reported losses of $27.6 million on revenue of $79.9 million. 

In a report published in late September on financial service platform Caijingshe, Haibin Zhu of Anxin Securities said that China's online education remains at a stage of development and the expenses are high, which means that companies in the sector generally accrue high losses.

According to the data in its prospectus, Youdao has been exploring different models to generate revenue. The company is consciously reducing the proportion of advertising revenue, making the growth of revenue more dependent on the continuous improvement of its learning products and high-quality user services. 

In 2017 and 2018, its net revenues from learning services and products, as well as from its online courses, reached 150 million yuan and 429 million yuan, respectively, accounting for approximately 32.9% and 58.6% of the total net revenue. Net revenues from online marketing services through the provision of different formats of advertisement, in the same period, were 306 million yuan and 303 million yuan, respectively, accounting for approximately 67.1% and 41.4% of net revenue.

Youdao has applied to list under the symbol "DAO" on the New York Stock Exchange.