Netease’s “soft and hard way”

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Intelligent hardware products contributed 163 million yuan in the third quarter, a year-on-year increase of 289.3%.
By stone Jin
According to the IPO news, the intelligent learning company Netease Youdao (NYSE: Dao) released its third quarter performance report up to September 30, 2020 on November 19, 2020.
According to the financial report, the net income of Netease Youdao in the third quarter of 2020 is 896 million yuan (RMB, the same below), with a year-on-year increase of 159.0%, which is higher than the consensus expectation of the market, but also creates the fastest growth rate since it landed on the NYSE on October 25, 2019.
Among them, the net income of learning services and products mainly composed of online courses and intelligent hardware was 763 million yuan, an increase of 239.1% year-on-year.
In terms of gross profit rate, the gross profit rate of Netease Youdao in the third quarter was 45.9%, an increase of more than 20 percentage points compared with the same period in 2019, of which the gross profit rate of learning services and products was 48.8%.
Based on this growth rate, a number of domestic and foreign first-line investment banks, including Citigroup, Jeffery, CICC, etc., have maintained their “buy” rating on Netease in their research reports published after the financial reports were issued, and the target prices given by the three were US $42, US $45.7 and us $46 respectively.
As of November 20, the U.S. stock closed, Netease Youdao’s share price was $31.47. This means that the aforementioned investment banks still place high expectations on Netease Youdao’s performance for a period of time in the future.
K12 and intelligent products double wheel drive, software and hardware linkage effect is more and more prominent
Of course, K12 business is still Netease Youdao’s main growth driver.
In the third quarter, the sales volume of Youdao excellent course K12 business was 676 million yuan, with a year-on-year increase of 368.9%, accounting for 77% of Youdao excellent courses, an increase of 10% compared with the same period in 2019. In terms of user data, the number of paid regular price courses increased by 437.9% to 498700.
It is worth noting that, in order to ensure that the number of students keeps rising, the number of tutors of Netease Youdao has reached 3368 by the end of the third quarter, while the lecturers have always adhered to the famous teacher line. At present, more than 70% of the large class teachers of Netease Youdao come from Tsinghua University, Peking University and the top 50 universities in the world.
In addition, the sales volume of adult courses business in the third quarter also increased by 185.4% to 201 million yuan. From the perspective of product composition, the sales of star course “logic English” increased by more than 100% year-on-year, while the sales of practical English course released in 2020 increased by more than seven times.
It is not difficult to find that Netease Youdao adopts the “point to surface” approach in adult course business, and inclines its products to high customer price, high value skill learning and interest oriented courses by establishing star products with credibility.
This has also directly led to an increase of 55.4% in the price per person of Youdao excellent course from 905 yuan in the same period of 2019 to 1406 yuan this year.
Intelligent hardware products are the biggest bright spot in Netease Youdao’s Q3 financial report. Its revenue contribution in the third quarter was 163 million yuan, with a year-on-year increase of 289.3%. For the first time, it surpassed online marketing services and became the second largest revenue source of Netease Youdao.
In the past “double 11” Shopping Festival, the star product “Youdao dictionary pen” once again became the sales champion of electronic dictionary category on Jingdong and tmall platforms. In the fourth quarter, Netease Youdao’s three generation dictionary pen products will be officially launched, or will further strengthen its leading position in intelligent learning equipment.
It is worth mentioning that in the conference call of financial analysts, Netease Youdao management also revealed that more than 70% of Youdao lexicographer users in the third quarter came from K12 business, and the number is still growing rapidly.
In other words, the synergy effect formed between Netease Youdao software (online courses) and hardware (intelligent products) has become more and more obvious – both can serve as the entrance of traffic, feed back the business of the other party continuously, thus forming a benign closed-loop.
On the other hand, Netease Youdao’s intelligent learning products have become one of its “long-term moats”.
First, Netease Youdao has accumulated enough popularity and user base for its continuous investment in the technology and innovation of intelligent learning products in the past, forming a certain first mover advantage; second, in such a fierce online education competition, many education companies are willing to combine AI with teaching content, but few enterprises are willing to pay attention to hardware products, which is no doubt Will give birth to more imagination space for Netease Youdao.
“In the past two years, we are very happy to see that Youdao dictionary pen is redefining the traditional category of learning hardware by enhancing consumer value and fully releasing the potential of AI technology,” Zhou Feng, CEO of Netease Youdao, said in a conference call with analysts
The largest single quarter marketing investment in the year and the value accumulation under the healthy single economic model
In addition to the substantial growth of performance, another group of more interesting data in the financial report is: Netease Youdao’s marketing expenses in the third quarter were 1.148 billion yuan, much higher than 231 million yuan in the same period of 2019.
As the time window (summer vacation) for every K12 educational technology company to “gather the strength of the whole company”, the third quarter is often the one with the largest brand launch and marketing efforts, and its ultimate goal is undoubtedly to compete for as many new users as possible.
In this quarter, Netease Youdao exclusively named Hunan Satellite TV’s popular variety show dingdong online! Good teacher; before and after the release of the related film “champion” by Lang Ping, the spokesperson of Youdao boutique course, Netease Youdao took advantage of the opportunity to launch large-scale offline bus stop signs and cinema line patch ads. In addition, Youdao dictionary also announced in the third quarter that Wang Yuan, a youth idol, became the spokesperson and launched the brand-new “star voice” function as the first star.
It is undeniable that such a radical marketing strategy will inevitably make Netease Youdao continue to lose money while bringing about a substantial increase in business scale.

Whether in the analyst conference call, this year’s major public occasions and internal discussions, Zhou Feng always stressed that Netease Youdao’s launch was carried out under the premise of strictly ensuring the health of the single economic model.
In Zhou Feng’s view, doing business should not be regarded as a simple arithmetic problem. The idea that “how much market expenses are equivalent to how many students are enrolled” is not desirable. He prefers to regard this process as a kind of dynamic adjustment, focusing on the healthy growth, which contains a lot of innovation opportunities.
In fact, in the first 11 months of 2020, the trend of online education industry is becoming more and more obvious. The essential reasons are as follows:
First, the epidemic situation has led to a “forced” increase in the penetration rate of online education. After further education in the market, the acceptance of online education by teachers, students and parents has reached an unprecedented high point, and larger brands will be more easily trusted;
Secondly, such an important window of the industry’s rapid development means that the pattern of head players may be determined this year and next. This is not difficult to explain why ape tutoring and homework help, the two most popular educational technology companies in the primary market, chose to complete two rounds of financing with repeatedly high scale in this year.
As far as Netease Youdao is concerned, its content, technology, service and other aspects or areas that it has been better at in the past, while its experience in marketing and brand operation is relatively weak.
To some extent, the huge marketing investment in the third quarter can be regarded as Netease Youdao can make up for its own shortcomings as far as possible, so as to obtain a greater and more continuous revenue growth.
This year, Fengyi has accumulated a large number of intangible assets this year.
“For example, the summer vacation has brought about a large number of customer relationships between students and parents. By strictly tracking the unit economics of each grade and discipline, these investments will bring returns to the company in the future. Through the rapid growth process, we have accumulated a large number of intangible assets such as talents, subject content, teacher IP, dau flow pool, DT business technology, teaching technology and other intangible assets. At the same time, the process of contacting a large number of users is the process of accumulating key brand equity. Therefore, our strategy is to accelerate investment on the premise of value accumulation. “Zhou Feng said.