Youdao Sets the Bar With Q2 Results; Shares Rally 23%
The NetEase-backed edtech platform may be the only oasis of stability in China's education space right now.
CapitalWatch Staff
CapitalWatch Staff
Aug. 31, 2021 14:21
Youdao Sets the Bar With Q2 Results; Shares Rally 23%

Youdao (NYSE: DAO) was the top gainer among Chinese stocks by midday Tuesday, its shares soaring 23% after the company released its second quarter results, showing doubled revenue and surging paid student enrollments.

The e-learning platform, backed by Chinese tech giant NetEase (Nasdaq: NTES; HKEX: 9999), booked $200.3 million in revenue in the three months through June, at an increase of 108% year-over-year. Gross billings of online courses also nearly doubled to $167.6 million, and gross billings of Youdao Premium Courses increased 124% to $158.7 million, according to the report. Gross margin improved to 52.3% from 45.2% in the same period of 2020.

Youdao enjoyed improved performance across all business segments in the second quarter, with revenues from learning products soaring 139% and those from online marketing services rising 61%. The core learning services segment generated the majority of Youdao's revenues, at $142.7 million, a 112% growth from the same period last year, the company said.

Feng Zhou, the chief executive officer and director of Youdao, highlighted the launch of its self-developed Intelligent Practice System during the second quarter. The platform "deeply and seamlessly integrates teaching and research with advanced technology and can quickly customize learning paths for students, significantly improving their learning outcomes," Zhou said in a statement today.

Net loss in the second quarter was $81.2 million, or 66 cents per share. Non-GAAP losses were $77.5 million, Youdao said. Operating expenses during the period widened 116% year-over-year, as Youdao has intensified its sales and marketing efforts, higher payroll-related expenses associated with a larger number of course development and technology professionals, and an increase in employee headcount on the general and administrative side.

Zhou also noted Youdao's aid efforts during the recent floods in Henan Province. He said, "Youdao joined hands with public welfare institutions to provide post-disaster reconstruction and instructor support for 10 to 15 schools and kindergartens, which are expected to cover at least 10,000 students in the affected areas."

The company also commented on the recent regulatory tightening in China's afterschool tutoring space, the so-called "double-reduction" policy aiming to lessen the burden on parents and students in primary and middle school by capping afterschool study time and fundraisings. 

"Although our K-12 businesses are expected to be materially affected by heightened regulatory requirements, we will continue to adapt our business to the changing regulatory environment and drive sustainable growth in the long run through innovative technologies and products," Zhou said.

Last month, CapitalWatch covered Youdao's opportunities in China's edtech space after the new policies take effect. The company's diversified portfolio and a lower reliance on the K-12 segment as compared with other industry leaders such as New Oriental Education & Technology Group Inc. (NYSE: EDU; HKEX: 9901) and TAL Education Group (NYSE: TAL), as well as Youdao's growing share in the markets of learning products and adult courses place the company in a strong position.

It is perhaps for this reason that Youdao's stock has fared better than most of its offline peers over the past few months. Trading at $12.79 per share by midday Tuesday, DAO shares are up 34% in a month, while TAL is down 11% and New Oriental is up 2%. To compare, New Oriental has lost 87% of its market valuation year-to-date, TAL Education has lost 93% since early January, and Youdao has lost about 50%. After all, operating a tech-powered e-learning company entails a different kind of restructuring when push comes to shove.

So far, Youdao is the first Chinese education provider to hold an earnings conference since the regulatory changes were imposed. And that's another sign of the company's confidence in long-term growth.

By midday Tuesday, Youdao was the biggest gainer among Chinese stocks.

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