Decent Financials To Push Youdao Toward Profitability In Burgeoning Industry

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While operating income increased by nearly 80%, NetEase Youdao's net losses are still expanding. The net loss in 2019 exceeded CNY 600 million, with an increase in income and no increase in profit. 

Youdao's operating costs have been increasing year after year. In 2018 and 2019, operating costs accounted for about 70% of operating income, of which the operating costs of learning services and product business increased from CNY 335.1 million in 2018 to CNY 620.7 million in 2019, accounting for two-thirds of overall operating cost.

The firm's three-fee expenditures increased significantly in 2019, of which the growth in marketing expenses was the most prominent, rising from CNY 213 million in 2018 to CNY 622 million and accounting for 47.7% of the operating income. This significant growth indicated that Youdao had invested nearly half of its annual revenue in marketing in 2019. 

NetEase's gross profit margin decreased from 29.6% in 2018 to 28.4%  in 2019. Obviously, the gross profit margin of 28.4% cannot offset the rising expenses.

In contrast, Youdao's revenue increased, reaching CNY 3.16 billion up 143% year-on-year the following year, even though the increase in revenue net losses reached a staggering CNY 1.75 billion. 

Boosted by the COVID-19 epidemic, the online segment showed continuous growth. In 4Q 2020, Youdao's K12 business sales reached CNY 767 million, a year-on-year increase of 354.6%. As a result, the company's net income from online courses-based learning services increased by 198.8% year-on-year to CNY 732 million. 

There are two key factors behind it. One is the substantial increase in the number of people paying for regular K12 courses, reaching 659,200 in Q4, an increase of 309.2% year-on-year; the second is the continuous increase in customer unit prices. 

K12 has become Youdao's most important business. The continuous expansion of the user base has led to an increase in gross profit margin. The gross profit margin of Q4 learning services increased from 30% in the same period last year to 53.9%. 

The corresponding price is fierce marketing. Q4 sales and marketing expenses were CNY 805 million, compared with CNY 206 million in the same period last year, an increase of 290.78% year-on-year. 

For the whole year of 2020, NetEase Youdao spent CNY 2.7 billion on marketing, a full four times that of 2019. 

Favorable macroeconomic developments 

Multiple factors are aligning with the favorable situation of COVID-19, creating a suitable environment for Youdao to grow its businesses. We will be mentioning some of the driving factors that should help the Chinese online education industry grow in the coming years, setting up a solid platform for Youdao to become successful.

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