Good day, and welcome to the Youdao 2022 Q1 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 US Private Securities Litigation Reform Act. Such statements are not guarantees of the future performance and are subject to the 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 forward-looking information, except as required by law. During today's call, management will also discuss certain non-GAAP financial measures for comparison purposes only.
For the definitions of non-GAAP financial measures and reconciliations of GAAP to non-GAAP financial results, please see the 2022 Q4 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.
Thank you, Jeffrey, and thank you all for participating in today's call. Before we begin, I would like to remind everyone that the financial information and non-GAAP financial information mentioned in this release is presented on a continuing operations basis, and all numbers are based on renminbi, unless otherwise specifically stated. We're pleased to report solid performance in the Q1 of 2022, following the cessation of our K-9 Academic AST business, with record high revenues and overall gross margin, as well as a significant improvement in operating loss. Q1 net revenue was RMB 1.2 billion, up 26.6% year-over-year and 14.5% quarter-over-quarter, a new record high. We also achieved an overall gross margin of 53.5%, another record high.
Given the disposal of K-9 Academic AST business, retrospective adjustments to the historical statements of operations have also been made for the previous periods, which provides a consistent basis of comparison for the financial results of the continuing operations. Furthermore, we narrowed operating loss by 41.6% year-over-year to RMB 125.1 million from a loss of RMB 214.3 million in Q1 2021. These results, amid a challenging macro environment, clearly reflects our strengthening fundamentals as well as the effectiveness of our strategy. Liquidity-wise, we have adequate funding for long-term growth. First, as of March 31st, 2022, Youdao's cash equivalents, restricted cash, time deposits, and short-term investments totaled RMB 1.2 billion. Secondly, our controlling shareholder, NetEase Group, has been supporting our long-term growth.
Until the date of this release, Youdao has received the various financial support from the NetEase Group, among others, including RMB 878 million short-term loans and $300 million revolving loan facility. In support of Youdao's future business, NetEase Group has agreed to provide financial support for our continuing operations. Now I'd like to share more details on our Q1 progress. First, let's look at smart learning devices. Our Q1 device revenues was RMB 253.2 million, representing an increase of 25.4% year-over-year. This is a remarkable growth given the COVID-related supply chain and sales channel challenges. In total, we sold 430,000 devices in Q1. As we discussed in past quarters, devices are a key growth area for us.
An important priority this year is to drive growth and synergy by scaling up R&D, updating existing product lines, and shipping new products. We strictly followed our strategy in Q1. We added new dictionary databases to Youdao Dictionary Pen, while we already have the most comprehensive dictionary database. We added 11 new series of English textbooks to Youdao Listening Pod, with a total reaching 19. In terms of new products, more recently in early April, we launched the Youdao Smart Light, a product in development for over a year. Youdao Smart Light is a smart desk lamp with integrated AI learning features. Powered by our advanced AI algorithms, it automatically analyzes users' hand and body movements while sitting at the desk, allowing the user to seamlessly access a host of AI learning functionalities while they are reading, writing, or doing homework.
You can point to an English word to look it up or tap a sentence to have it read to you, or ask it to check your arithmetic worksheet for you. It even tracks the user's sitting posture and will alert the user when detecting unhealthy postures. After we launched the Youdao Smart Light, the initial feedback is very positive. We plan to grow its popularity over the coming months as we did with other products. We are also looking forward to introducing additional smart devices this year as planned. Now let's talk about learning services. Our strategy here is to transition from an academic AST center business to a STEAM and vocational courses center business at an accelerated pace.
Since Q3 last year, Q1 is the Q3 in which our team scaled up our growth products like the Weiqi courses, and graduate school entrance exam courses, while at the same time closing down Academic AST courses. It has been a challenging process, and we have continued to deliver steady progress in Q1. Our new courses are growing quickly, which partially offset loss of revenue from Academic AST courses. Net revenue from learning services reached CNY 826 million in Q1 2022, up 36.1% year-over-year. If we were to compare with the learning service net revenue, including K-9 Academic AST business in Q1 2021, it declined by 17.3% year-over-year.
Note that we were positively impacted by seasonality, because Q4 was a major renewal season and a large part of gross billings generated in Q4 were recognized as net revenue in Q1. As for STEAM courses, Youdao Chess expanded particularly fast, with its gross billings increasing 170% quarter-over-quarter. Besides, we established a strategic partnership with the Haidian Chess Association. In addition to courses, our Go and Chess user community has been growing at a fast pace. Here we have the Youdao Board Game Academy app, where users can play against others or learn Go or chess with the help of our proprietary AI technology. Every day, about 200,000 Go or chess games are played on the Youdao Board Game Academy app and our other assets.
This approach of combining courses and a community and AI-based app experience is a major competitive advantage for us. The courses and the app drive each other's growth. In addition, Youdao has become an official online testing and certification site for Weiqi academies in Beijing and Anhui Province. Through the tests, users can receive certifications for their skill by the Chinese Weiqi Association or Beijing Weiqi Association. Let's turn to vocational and adult education courses. In Q1, we upgraded our graduate school entrance exam courses, planning to offer a one-stop service for our customers. We also explored online merged offline courses to increase the learning efficiency and effectiveness. With ongoing upgrade, the gross billings from the graduate school entrance exam courses grew by over 160% quarter-over-quarter.
We also saw growing demand for other vocational courses, such as constructor certification courses and accounting courses, with gross billings increasing over seven times year-over-year in Q1. Our other endeavors, including education digitization business, dictionary and translation apps, and our charity initiatives, are also progressing smoothly in Q1. Looking ahead, we continue to implement our strategy of four growth pillars. That is smart devices, STEAM courses, vocational education, and education digitization. The first two, devices and STEAM courses, are at a larger scale and already a significant part of our business. The latter two are making good progress in product development and business model validation. We expect to see challenges, including this new wave of COVID in China. We intend to overcome them through our diversity of businesses, large user bases, and deep technical roots for innovation.
With that, I will turn the call over to Su Peng to give you more details on our financial performance. Peng Su.
Thank you, Dr. Zhou, and hello, everyone. Today, I will be presenting some financial highlights for the Q1 of 2022. We encourage you to read through our press release issued earlier today for further details. For the Q1 , total net revenue RMB 1.2 billion or $189.4 million. This represent an increase of 26.6% from the Q1 of 2021. Looking at this growth by segments. Net revenue from our learning services were RMB 826 million, or $130.3 million, increased by the 36.1% from the same period in 2021. We attribute this growth to the increased revenue generated from our learning services, which were further driven by the growth in active users compared with the same period of 2021.
Net revenue from our smart devices was RMB 253.2 million, or $39.9 million, increased by 25.4% from the same period in 2021, driven by the increase in sales volume of the Youdao Dictionary Pen in the Q1 of 2022. Net revenue from our online marketing services was RMB 121.4 million, or $19.1 million, representing a 12.7% decrease from the same period in 2021. For the Q1 , our total gross profit reached RMB 641.8 million, or $101.2 million, increased by 29.3% compared with the Q1 of 2021.
Gross margin for learning services was 63.9% for the Q1 of 2022, compared with 63.4% for the same period in 2021. Gross margin for smart devices was 33.7% for the Q1 of 2022, compared with 44.1% for the same period in 2021. Gross margin for online marketing services was 23.7% for the Q1 of 2022, compared with 16.4% for the same period in 2021. For the Q1 , total operating expense were RMB 766.9 million, or $121 million, compared with RMB 710.8 million for the same period of last year.
With that, for the Q1 , our sales and marketing expense were RMB 506.4 million, compared with RMB 548.7 million in the Q1 of 2021. Research and development expense were RMB 203 million, compared with RMB 127.7 million in the Q1 of 2021. Our operating loss margin was 10.4, 10.4% in the Q1 of 2022, compared with 22.6% for the same period of last year. For the Q1 of 2022, our net loss from our continuing operation attributable to ordinary shareholders was RMB 95.4 million, or $15.1 million, compared with RMB 219.3 million for the same period of last year.
non-GAAP net loss from continuing operations attributable to ordinary shareholders for the Q1 was RMB 70.9 million, or $11.2 million, compared with RMB 204.8 million for the same period last year. Basic and diluted net loss per ADS from continuing operations attributable to ordinary shareholders for the Q1 of 2022 was RMB 0.77, or $0.12. non-GAAP basic and diluted net loss from continuing operations per ADS for the Q1 was RMB 0.57, or $0.09. Our net cash used in continuing operations activities was RMB 425.6 million, or $67.1 million for the Q1 .
Looking at our balance sheet, as of March 31st, 2022, our contract liability, which mainly consists of the deferred revenue generated from our learning services, were CNY 729.5 million, or $115.5 million, compared with CNY 1.1 billion as of December 31st, 2021. At the end of the period, our cash equivalents, restricted cash, term deposit, and short-term investments totaled CNY 1.2 billion, or $183 million. This concludes our prepared remarks. Thank you for your attention. We would now like to open the call to our questions. Operator, please go ahead.
We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the key. To withdraw your question, please press star then two. If you would like to ask your question in Chinese, we ask that you please repeat it in English for everyone on the call. Once again, that was star then one to ask a question. At this time, we will pause momentarily to assemble the roster. Our first question will come from Elsie Sheng from Morgan Stanley. Please go ahead.
Thank you, management, for taking my question. I'd like to ask about the non-academic or the STEAM courses business. Could you give us more color in terms of the progress of this business and also the competitive landscape in this business? Thank you.
Yeah. Hi, Elsie. Yeah, this is Feng Zhou. Yeah, I'll take your question. As I discussed in our prepared remarks, we were making good progress here. Yeah, STEAM courses achieved rapid growth again in Q1. As you probably know, Go and chess are a strong area for us. Yeah, we've operated Go and chess courses added together for about two years now. Our teams are experienced, and we have a differentiated product strategy. Yeah. Again, that is to combine excellent teaching staff with polished interactive course materials and also with AI tutoring and online community. In terms of progress in Q1, we are already a market leader for Go course, and we keep getting new customers every quarter.
Chess was particularly a bright spot for Q1. As I said, gross billings for chess in Q1 increased by over 170% quarter-over-quarter. Chess caters to a smaller, probably smaller than Go, but more affluent population compared to Go. We believe both are good businesses for us, so we will focus on both these courses. Again, our courses are very differentiated from our peers. We provide an integrated experience to our users. We made particular progress with the AI and the online community this quarter.
We upgraded the app experience so that the AI is more helpful when the students actually go review their chess games and their Weiqi or Go games. This improves their learning. We improved the matching between the players, so that they have a better experience when they go to the app, and they get to match with a player with similar skill levels. This improves their learning experience a lot. As always, our approach is to really pick good areas to work on and patiently produce the best product in that area.
We did that with our devices with the Weiqi, and we are doing that with chess. We believe that is the recipe for success. We don't intend to have too many courses, too many products. We want to be focused. Apart from Go and chess, we actually plan to pick one or two other areas to also be our focus going forward in this non-academic course area. We will share more information with the new products when we have them. Thank you.
The next question comes from Hongjie Gao with CICC. Please go ahead.
Thanks for taking my question and also congratulations for the good performance. My question is, can you give us more color on the new product, Youdao Smart Light, and how was the sales performance and what is the momentum for this new product compared to, you know, that Youdao Dictionary Pen? Thank you.
Thank you. This is Peng Su. I will take this question. The first is just try to emphasize again about the numbers of the Q1 with the performance of our smart devices is we catch a favorable window of the new school semester opening and generate revenue of RMB 253.2 million, representing an increase over almost 25% year-over-year from smart devices segment in the Q1 . For the Youdao Smart Light, go back to your questions, we have the success of the AI desk lamps and has been welcomed by the customer first.
We think the first number we can share is the performance about the first batch of the Youdao Smart Light has been sold out within the first month since its launch in early April, reflecting the great demand from the markets. We think the reason behind why we can see the very positive feedback from the market is we think this we did create a lot of different innovative product experience via our products. For example, we are at a high purchase ratio on JD.com till now.
Fingertip word search and the sentence intensive readings, and we think we are the top two functions that are mentioned as well as the price by our customers. We think that's the, that's what we are. What we did is just try. We always try to provide high quality products to the market to meet the demands from the customers. We think we will keep moving on and try to upgrade more functions to our smart device. We think it will be
We get very positive feedback from the market. Although right now it's still in the very early stage, and we think we are still a long way to go, but we are confident about the performance of these new products in the long run. We expect we can share more information and the numbers or data with you in the Q2 earnings, and we think that we have enough time to analysis of all the feedback from our customer, and we can provide more products to the market. Thank you.
The next question comes from Brian Gong of Citigroup. Please go ahead.
Good evening. Thanks management for taking my question. This is Katrina asking on behalf of Brian. My question is, how should we look at the margin trend for the Q2 of 2022 and the full year? Have we done any cost optimization measures, and how should we think about the cost control going forward? Thank you.
Hi, Brian, thank you for your question. This is Wayne. I will add some color for the margin trend for 2022. As you've seen, in this quarter, we achieved a new high record in overall gross margin at 53%. Therefore, we are very confident about the improvement in our gross margin in the long run. For learning service segment, which is the largest segment from revenue perspective, we have always seeking to optimize the cost structure and to achieve economies of scale to get better gross margin. On a full year basis, we expect the average gross margin of learning services for 2022 will keep stable when compared with last year. Meanwhile, we also note that the seasonal fluctuation on a quarter-over-quarter basis in its gross margin is due to the seasonality of the recognized revenue.
For the smart devices segment, which is another significant segment, where we continue to invest in R&D and other resources, and we expect to achieve some growth on a year-over-year basis. However, the lockdown policy caused by the pandemic have been making a significant impact on the production and the delivery of our smart devices, which further result in more uncertainties on both sales and the trend of gross margin for this segment. We expect, improved gross margin of smart devices with, realization of the greater economies of scale. However, we need to keep close eye on the uncertainty around the margin of smart devices. Considering the margin of smart devices is relatively lower than the learning service segment at current stage, if a higher revenue portion from smart devices is achieved, the overall gross margin level is expected to be lower.
As for operating margin, on one hand, we put efforts on improving the efficiency of sales and the marketing as well as staff cost. On the other hand, we continuously strengthen our technical and R&D investment to keep our technical advantages. As you see, improved operating margin was achieved in this quarter, and we have tried to seek a better performance in operating margin in the long run. Which is helpful. Thank you.
The next question comes from Linda Huang of Macquarie. Please go ahead.
Hi, management. Thank you for taking my question. My question is regarding the recent pandemic. We all know that this COVID-19 situation remains fluid. How is the impact from the recent pandemic outbreak, like, in Shanghai and Beijing? If the city lockdown or the social distance restriction remains, do we have any, like, contingency plan to mitigate the impact? It would be great if management can elaborate on learning devices and the learning services business. Thank you very much.
Thank you, Linda. This is Su Peng. I will take this question. Indeed, the recent COVID-19 issues in some cities in China actually have some impact on our business. We also come out with some contingency plan and try to mitigate the impact. We will divide it into two parts because with the different impact on this business. As for the learning service segments, that's one of our majors, we have revenue generated from. I think first is our services is primarily delivered via the Internet, so we don't need really the physical contact with our customer. Most of our services have been offering via the online channels instead of the offline learning centers.
We think about we have very limited impact on the learning online learning services with business. That's the first part. Secondly, for the, they do have some impact on our smart devices segment. It's because of the smart devices, whatever they purchase, it's online or they purchase from the retail store, we have to deliver our products to our customer. That will be related to logistics, transportation issues. We think about right now, indeed that part, we have some challenging things regarding logistics and transportations for our products to our customers. We think about that will be the short term impact.
In the long run, we don't think by now there's any impact on the demand from our customers regarding the services provided by our smart devices from Youdao because we see a very strong momentum and a demand from customers in the last several quarters. You can see the growth rates and the growth trend of our smart devices business in the last several quarters. I think in the long run, that will go back to normal. Indeed, we are doing something to mitigate the impact short term.
For example, we are setting up the new warehouse in Tianjin, Chengdu, Wuhan and other area in mainland China, and to delivering the smart devices directly to the regional distributors. We think about that's what we did, and we hope we can just mitigate about impact short term. We expect to see the business go back to normal right after the impact, the COVID has been closed. I think that's what we expect. Right now we are still in the middle of the Q2, and we expect to share more information after we finish our Q2 seasons. Thank you.
Thank you very much. Just a very quick follow-up. Do you see this, the logistics disruption, are the situations getting better off or this remains similar in April and May?
Yeah. We think about it. It's getting better and better with the times. It still depend on regions. I think that's because in different regions they have different policy regarding on the COVID issue, COVID impact issue. In general, we see that it's getting better, and we expect that trend will keep moving on, and we can just deliver more products to our customers.
Okay. I got it. Thank you very much. Much appreciated.
Thank you, Linda.
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 updates on education digitization strategies and the edtech market? Thanks.
This is Lei Jin. I would like to highlight the education digitization advocated by national macro policy in the recent years, including the new infrastructure for education, 14th Five-Year Digital Economic Development Plan, and as well as annual working plan of the Ministry of Education in 2022. Therefore, enhancing investment in education digitization is clear from the national level. The central government hopes to improve the quality of its citizens' digitized approach. Youdao could use our own software, hardware, AI advantage and rich teaching experience to help public school and our customers to achieve it. Education digitization business needs to focus on localized services, but due to the impact of the epidemic prevention and control, the opportunity to contact school has been reduced. There are some partial delays in the progress of solution implementation.
I believe it is only a short-term impact. We are still confident in this business in long run. Although this is still early stage and there are some epidemic impacts, we have received a lot of official recommendation in China. Firstly, Youdao project on smart education quality system and the teaching plan was included in the first batch of 5G plus smart education pilots by the Ministry of Industry and Information Technology and the Ministry of Education. Secondly, we were also honored to be included in the new phase of adult education by the Beijing Municipal Science and Technology Commission as a constituent of the Zhongguancun Science Park and the Beijing Association for Science and Technology.
Thursday, our smart learning terminal was selected as the recommended product in 2021 by People's Daily as the People's Quality Summit for its innovation and the improvement of on-campus teaching. According to the statistics from Ministry of Education, there were more than 500,000 schools of all level and types nationwide in 2021, with more than 290 million in-school students and 80 million full-time teachers. In terms of the potential market size of the education digitization, it is targeted to be over RMB
650 seating in 2033. Thank you.
The next question comes from Candice Chan of Daiwa. Please go ahead.
Great. Good evening, management. Thank you for taking my questions. I would like to ask about your adult education business and how it does the growth outlook look like in this year? Also, can you share a little bit more colors on our device pipeline for this year? Thank you.
Thank you, Candice. This is Zhou Feng. First, regarding the vocational and adult courses. Current objectives for the teams are to basically upgrade our courses and focus on the growth products. As you probably know from the past few quarters. The adult courses segment for us has seen some challenges for the past few quarters. One of the key reason is that demand for English courses, which were a large part of the business, was significantly impacted by COVID. We are not out of the transitional period yet. With that said, we have actually several bright spots in Q1.
We saw good progress on graduate school entrance exam courses. The gross billings from the graduate school entrance exam courses grew by over 160% quarter-over-quarter. Another bright spot is constructor certification courses. It is a vocational course to help prepare for the exam to acquire a professional constructor certificate. The gross billings of this course increased, actually, over 10 times year-over-year in Q1, although from a low base. Given the current macro environment of the government actually very actively promoting vocational education and overall strong demand from the sector. We think that the prospect is actually quite bright.
We will be patient here and spend time growing new products, perfecting the courses. We believe vocational and adult courses have a bright future. That's for vocational and adult courses. Regarding pipeline for our devices. We said we will have other new products this year. We already had one out. The Youdao Smart Light, it's in the early April. And we expect to launch another new category of smart device in the H2 of this year. That's our current plan.
Moreover, we will also continue to upgrade the smart devices portfolios in preparation for the sales season of the new school year, that's in September. Our lineup is basically right now it's like this, we have the Dictionary Pen as our flagship product. We have the Smart Light and the Listening Pod as new upcoming products. These two products are becoming more and more popular. If we compare this with last year, last year we only have the Dictionary Pen, and we achieved good growth with the one category of product. This year we have a more comprehensive lineup. This allows for a larger addressable market.
Internally, it allows more sharing of technology, expertise and personnel among the product lines. We think this is a good strategy and a lineup for us. The plan is to have another category of new product in the H2 of the year. Yeah, I hope that's helpful. Thank you.
Very clear. Thank you, Zhou.
This concludes the question and answer session. I would like to turn the conference back over to Jeffrey Wang for any closing remarks.
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 US. Have a great day.
The conference has now concluded. Thank you for attending today's presentation, and you may now disconnect.