Prospectus Summary
PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and financial statements and the related notes appearing elsewhere in this prospectus. In addition to this summary, we urge you to read the entire prospectus carefully, especially the risks of investing in the ADSs discussed under “Risk Factors,” “Business,” and information contained in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” before deciding whether to buy the ADSs. Investors should note that due to the restrictions on foreign investment in companies that engage in certain businesses under the PRC law, a significant portion of our businesses in the PRC described in this prospectus are operated through our VIEs. Investors should also note that Youdao, Inc. became our ultimate holding company recently through a series of transactions initiated by our controlling shareholder, NetEase, and has a limited operating history on a consolidated basis. See “—Our History and Corporate Structure” and “Risk Factors— Risks Related to Our Business and Industry—We have a limited history in operating on a consolidated basis and, particularly, operating certain of our products and services. This may make it difficult to evaluate our future prospects and the risks and uncertainties associated with these products and services.” NetEase is expected to continue to control us following this offering. For more information about NetEase and our relationships with NetEase, See “Our Relationship with NetEase.”Our Business
What is Youdao
Youdao makes learning happen.
For over a decade, Youdao has developed and used technologies to provide learning content, applications and solutions to users of all ages.
We’re the leading intelligent learning company in China with over 100.0 million average total MAUs* in the first half of 2019. Starting from online knowledge tools, we currently offer a comprehensive suite of learning products and services that are accessible, reliable and trustworthy.
Today, for tens of millions of people, Youdao is the go-to destination for looking up a word, translating a foreign language, preparing for an exam, and picking up a new skill. Through technology, we enrich the lives of people of all ages every day, guiding them on their journey of pursuing knowledge and sharing ideas.
What Youdao Offers
Youdao was founded in 2006 as part of NetEase, a leading internet technology company in China, dedicated to providing online services centered around content, community, communication and commerce. In 2007, we launched our flagship Youdao Dictionary, which is China’s number one language app in terms of MAUs in the first half of 2019, according to Frost & Sullivan. Youdao Dictionary had 51.2 million average MAUs in the first half of 2019.
The early success of Youdao Dictionary has enabled us to attract a massive user base, build a strong brand, and expand into a broad range of products and services addressing lifelong learning needs of pre-school, K-12 and college students as well as adult learners, including:
Let’s start with our online knowledge tools—a collection of dictionary, translation and writing tools empowered by leading technologies. Our tools are convenient, smart and powerful. We offer most of them for free, but monetize their massive user bases mainly through advertising. As these tools become ubiquitous in people’s lives, they’ve also helped drive organic user traffic to our online courses and other products and services.
Building on the popularity of our online knowledge tools, we set out to offer online courses, including Youdao Premium Courses, our flagship online course brand, with a strategic focus on K-12 students, as well as NetEase Cloud Classroom and China University MOOC. We deliver our Youdao Premium Courses in “dual-teacher” large classes through live streaming. We adopt this format because it allows us to make the best use of our teaching resources while maximizing flexibility and interaction for both our instructors and students. Our course designers, instructors and engineers work together to expertly create course materials covering a wide range of subjects, making sure they’re interesting, relevant and engaging.
We also offer a variety of interactive learning apps that enable students to study math, English and other subjects with a virtual teacher on their mobile devices. These fun and effective apps incorporate AI teaching to particularly cater to the learning habits of our students. Through social media such as Weixin/WeChat, users may access these apps and share their activities with friends. Moreover, our interactive learning apps provide an abundance of gamified features that help significantly increase younger students’ interest levels and drive their engagement.
We began to invest in building smart devices that further enhance users’ learning experience and efficiency. That’s how we invented Youdao Smart Pen, Youdao Dictionary Pen and Youdao Pocket Translator. Our approach to such devices is a seamless integration of AI algorithms and data processing into hardware devices that supplement our online knowledge tools and online courses.
Our products and services are built upon a common set of core technologies, which allows us to use data insights gained from individual product or service to help optimize our entire product and service portfolio. Our business has evolved significantly since inception and we’ve never stopped re-imagining and innovating our products and services. We’re doing this not only to cater to, but influence, the learning habits and lifestyles of our users, to fulfill their goals and enrich their lives. Since our inception, our apps have amassed over 1.3 billion cumulative downloads and more than 200 million student enrollments. Fueling all of these great achievements are our technologies. That’s why we’ll continue to invest in technology and products for our users, and for our long-term success.
Our net revenues increased by 67.7% from RMB327.2 million for the six months ended June 30, 2018 to RMB548.5 million (US$79.9 million) for the six months ended June 30, 2019. For the six months ended June 30, 2018 and 2019, we recorded net losses of RMB82.8 million and RMB167.9 million (US$24.5 million), respectively. Our net revenues increased by 60.5% from RMB455.7 million in 2017 to RMB731.6 million (US$106.6 million) in 2018. In 2017 and 2018, we recorded net losses of RMB163.9 million and RMB209.3 million (US$30.5 million), respectively.
Market Opportunities
Driven by mobile internet, AI and data analytics, China has seen the increasing prevalence of intelligent learning. Intelligent learning features the integration of technology with most aspects of the learning and teaching process to foster a more personalized, interactive, and adaptive learning experience. Intelligent learning companies are well positioned to attract and monetize a large and loyal user base through offering a comprehensive, synergetic suite of learning products and services.
The intelligent learning industry in China currently consists of AI-powered online courses, intelligent knowledge products and services, and institutional learning solutions. In recent years, this industry has grown quickly driven by rapid technological developments. According to Frost & Sullivan, the overall size of China’s intelligent learning industry reached approximately RMB103.4 billion in 2018, and is expected to grow to RMB719.8 billion in 2023, representing a CAGR of 47.4%.
In addition to China, other countries and regions, such as India, Indonesia and South America, present great opportunities in the field of intelligent learning for Chinese enterprises, due to their large population, scarce educational resources, and willingness to pay for education.
What Sets Youdao Apart
We believe the following competitive strengths differentiate us from our competitors:
How We Approach the Future
We seek to lead the development of intelligent learning industry in China by pursuing the following strategies:
Our Challenges
We face risks and uncertainties in achieving our business objectives and executing our strategies, including those relating to:
Our History and Corporate Structure
Our Major Business Milestones
In 2007, we launched our flagship Youdao Dictionary, China’s number one language app in terms of MAUs in the first half of 2019, according to Frost & Sullivan.
In 2011, we launched Youdao Cloudnote, China’s number one independent notetaking tool in terms of MAUs in the first half of 2019, according to Frost & Sullivan.
In 2012, NetEase launched NetEase Cloud Classroom, a platform offering online courses mainly targeting adults in China, which was acquired by us in May 2019.
In 2014, we strategically expanded offerings to include online courses by launching Youdao Classroom, which was rebranded as Youdao Premium Courses in 2016. In the same year, NetEase launched China University MOOC, a platform offering online courses primarily targeting college students and adults in China, which was acquired by us in May 2019.
Between 2016 and 2018, we continued to expand our suite of learning products and services by launching a portfolio of interactive apps catering to various age groups’ learning needs, which currently mainly include Youdao Math, Youdao Vocabulary Builder, Youdao Fun Reading, Youdao Speaking and Youdao Reading, and by launching our smart device offerings, which currently include Youdao Smart Pen, Youdao Dictionary Pen and Youdao Pocket Translator.
Our Corporate History
We commenced our operations in March 2006 through Youdao Information. In September 2007, Beijing NetEase Youdao Computer System Co., Ltd., or Youdao Computer, was incorporated in the PRC. Both of Youdao Information and Youdao Computer were then controlled by NetEase, our controlling shareholder.
In 2014, we strategically shifted our focus to the intelligent learning industry. Since then, we have successfully developed a variety of technology-driven learning products and services, including Youdao Premium Courses.
In November 2014, Youdao, Inc., our current ultimate holding company, was incorporated under the laws of the Cayman Islands.
In July 2016, Youdao (Hong Kong) Limited, or Youdao HK, was incorporated under the laws of Hong Kong. Youdao HK currently operates U-Dictionary, an online dictionary and translation app we offer primarily targeting users in selected overseas markets.
Between December 2016 and November 2017, through a number of transactions, we acquired the entire interests in Youdao Information and, through certain contractual arrangements, the control of Youdao Computer.
In April 2018, we issued a total of 6,814,815 Series A preferred shares to certain investors for an aggregate consideration of US$70.0 million. See “Description of Share Capital—History of Securities Issuances—Preferred Shares.”
Due to the restrictions imposed by PRC laws and regulations on foreign ownership of companies engaged in value-added telecommunication services and certain other businesses, Youdao Information entered into a series of contractual arrangements, as amended and restated, with each of Youdao Computer and Hangzhou NetEase Linjiedian Education Technology Co., Ltd., or Linjiedian Education, a company incorporated in the PRC in January 2019, as well as their respective shareholders, through which we obtained control over Youdao Computer and Linjiedian Education. See “—Our Corporate Structure and Contractual Arrangements.” Linjiedian Education was incorporated primarily with a view to undertake future businesses that may be subject to foreign investment restrictions under PRC law and currently does not operate any substantial business or hold any material assets. As a result, we are regarded as the primary beneficiary of each of Youdao Computer and Linjiedian Education. We treat them as our consolidated affiliated entities under U.S. GAAP, and have consolidated the financial results of these entities in our consolidated financial statements in accordance with U.S. GAAP. We refer to Youdao Information as our wholly foreign owned entity, or WFOE, and to each of Youdao Computer and Linjiedian Education as a VIE, in this prospectus. For more details and risks related to our VIE structure, please see “Our History and Corporate Structure—Contractual Arrangements with Our VIEs and Our VIEs’ Shareholders” and “Risk Factors—Risks Related to Our Corporate Structure.”
In May 2019, we acquired certain online learning businesses, including NetEase Cloud Classroom, China University MOOC and NetEase Kada, from the NetEase Group, as we believe these offerings generally appeal to different target audiences from, and as a result complement, Youdao Premium Courses, our existing online course brand and enable us to reach a broader student base. Since the acquired businesses were controlled by NetEase both before and after the acquisition, such transactions are accounted for as business combinations under common control. Therefore, our consolidated financial statements included elsewhere in this prospectus reflect the results of such acquired businesses as if the current corporate structure, including the acquired businesses in May 2019, had been in existence throughout the periods presented. See our consolidated financial statements and the related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus.
Our Corporate Structure and Contractual Arrangements
Current PRC laws and regulations impose certain restrictions or prohibitions on foreign ownership of companies that engage in value-added telecommunication services and certain other businesses. We are a company registered in the Cayman Islands. Youdao Information, our PRC subsidiary, is considered a foreign invested enterprise. To comply with the foregoing restrictions imposed by PRC laws and regulations on foreign investments, we conduct a significant portion of our businesses in China through Youdao Computer, one of our VIEs, based on a series of contractual arrangements between us and our VIEs and their respective shareholders. As a result of these contractual arrangements, we exert effective control over, and are considered the primary beneficiary of, our VIEs and consolidate their operating results in our financial statements under the U.S. GAAP. For a summary of the contractual arrangements by and among Youdao Information, Youdao Computer and the shareholders of Youdao Computer, see “Corporate History and Structure—Contractual Arrangements with Our VIEs and Our VIEs’ Respective Shareholders.” In 2017 and 2018 and for the six months ended June 30, 2019, the amount of revenues generated by our VIEs accounted for 87.9%, 82.9% and 79.6%, respectively, of our total net revenues. As a result, our ability to pay dividends depends upon the dividends paid by our subsidiaries which, in turn, depends on the payment of service fees to our PRC subsidiaries by our VIEs in the PRC pursuant to these contractual arrangements. In 2017 and 2018 and for the six months ended June 30, 2019, the amount of service fees paid to our PRC subsidiaries from our VIEs was RMB233.7 million, RMB395.2 million (US$57.6 million) and RMB236.6 million (US$34.5 million), respectively. We expect that the amounts of such service fees will increase in the foreseeable future as our PRC business continues to grow.
In the opinion of Tian Yuan Law Firm, our PRC legal counsel, the contractual arrangements among our PRC subsidiaries, our VIEs and our VIEs’ shareholders are valid, binding and enforceable under current PRC laws. However, our PRC legal counsel has also advised us that there are substantial uncertainties regarding the interpretation and application of current or future PRC laws and regulations. Accordingly, the PRC regulatory authorities may take a view that is contrary to the opinion of our PRC legal counsel. It remains uncertain whether any new PRC laws or regulations relating to VIE structures will be adopted or if adopted, how they would affect our VIE structure. We have been further advised by our PRC legal counsel that if the PRC government authorities find that the agreements that establish the structure for operating our value-added telecommunication services and other business do not comply with PRC government restrictions on foreign investment in such businesses, we could be subject to severe penalties including being prohibited from continuing operations. Additionally, these contractual arrangements may not be as effective as direct ownership in providing us with effective control over our VIEs. If our VIEs or their shareholders fail to perform their respective obligations under such contractual arrangements, we could be limited in our ability to enforce such contractual arrangements that give us effective control over our business operations in the PRC and may have to incur substantial costs and expend additional resources to enforce such arrangements. We may also have to rely on legal remedies under PRC laws, including seeking specific performance or injunctive relief, and claiming damages, which we cannot assure will be effective. Additionally, the ability of our PRC subsidiaries to pay dividends to us is limited by PRC legal restrictions on the payment of dividends by PRC companies and foreign exchange control restrictions, among others, which prevents us from having unfettered access to our PRC subsidiaries’ and VIEs’ revenues. Our access to our VIEs’ revenues is also limited since we do not have direct ownership in our VIEs and have to rely on the payment of service fees by our VIEs to our PRC subsidiaries. For a more detailed description of the risks related to these contractual arrangements, please see “Risk Factors—Risks Related to Our Corporate Structure.”
The following chart shows our corporate structure, including our principal subsidiaries and VIEs, after giving effect to the contemplated issuance and sale of Class A ordinary shares in this offering, assuming no exercise of the underwriters’ option to purchase additional ADSs, and the issuance and sale of Class A ordinary shares in connection with concurrent private placements to Orbis, based on an assumed initial public offering price of US$ per ADS, the mid-point of the estimated public offering price range shown on the front cover of this prospectus.
Notes:
Equity interest Contractual arrangements, including the cooperation agreement, operating agreement, equity pledge agreement, exclusive purchase option agreement, shareholder voting right trust agreement and loan agreement. See “Our History and Corporate Structure—Contractual Arrangements with Our VIEs and Our VIEs’ Respective Shareholders.”