Q2 2023 Youdao Inc Earnings Call

Participants

Feng Zhou; CEO & Director; Youdao, Inc.

Jeffrey Wang; IR Director; Youdao, Inc.

Lei Jin; President; Youdao, Inc.

Peng Su; VP of Strategies & Capital Markets; Youdao, Inc.

Yongwei Li; VP of Finance & Senior Financial Controller; Youdao, Inc.

Brian Gong; Assistant VP & Equity Research Analyst; Citigroup Inc., Research Division

Caini Wang; Associate; China International Capital Corporation Limited, Research Division

Candis Chan; Research Analyst; Daiwa Securities Co. Ltd., Research Division

Lian Duan; Researcher; Huatai Securities Co., Ltd., Research Division

Thomas Chong; Equity Analyst; Jefferies LLC, Research Division

Presentation

Operator

Good day, and welcome to the Youdao 2023 Second Quarter 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 of Youdao. Please go ahead.

Jeffrey Wang

Thank you, operator. Please note the discussion today will contain forward-looking statements related to the future performance of the company, which are intended to qualify for the safe harbor from liability established by the U.S. Private Securities Litigation Reform Act. Such statements are not guarantees of the future performance and are subject to 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 would affect Youdao's business and its financial results is included in certain filings of the company with the U.S. Securities and Exchange Commission. The company does not undertake any obligation to update these forward-looking information, except as required by law.
During today's call, management will also discuss certain non-GAAP financial measures for comparison purpose only. For the definitions of non-GAAP financial measures and reconciliations of GAAP to non-GAAP financial results, please see the 2023 second quarter 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, our President; 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.

Feng Zhou

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.
In Q2 2023, our net revenues came in strong and reached RMB 1.2 billion, representing a year-over-year increase of 26.2%. Loss from operations narrowed to RMB 289.1 million, marking a year-over-year improvement of 36.5%. Net cash provided by continuing operating activities stood at RMB 133 million, reflecting growth of 27.6% year-over-year. We are on a clear path to achieving profitability.
As for our business segments, learning services and online marketing services continued to be our current main driver of growth, both reaching record levels of sales. In the meantime, we are making solid progress in learning devices R&D. And we are leading the charge to apply AIGC in education by rapidly releasing applications with generative AI.
In the first half of the year, we see an overall positive trend in key financial indicators. Net revenues amounted to RMB 2.4 billion, indicating an increase of 9.9% year-over-year. Loss from operations in the first half reduced to RMB 484.9 million, improving by 16.4% year-over-year. Net cash used in continuing operating activities reached RMB 304 million, marking a 5% year-over-year improvement.
For our learning services segment, Q2 sales of digital content exceeded RMB 800 million, reaching a record high. Customer retention rate across the services was over 60%, leading to over RMB 200 million in operating cash inflow for this area. In addition to our learning content, we launched an AI University Application Adviser, (foreign language), in Q2 to support students in their college selection process. Users were quick to adopt this tool, leading to over 2 million page views.
Online marketing services maintained the rapid growth momentum for the last 2 quarters. Net revenues reached RMB 303 million in Q2, a historical high, representing an increase of 98.7% year-over-year. Moreover, gross profit margin improved by 4.2% year-over-year. These achievements were primarily due to advancements in our app platform driven by AI algorithms.
First, we used proprietary AI technology to effectively identify and track the topics and products, matching the audiences of specific key opinion leaders with accuracy rates approaching 90%, resulting in more precise ad placement. Second, AIGC not only reduced the time for producing ad materials by more than 80%, which drove better user satisfaction but also reduced production costs for certain ad materials by over 90%, driving the improvement in gross margin. Positive trends in video content services and online marketing services in Q2 is expected to continue in the second half.
Regarding our STEAM courses. On the policy front, the Ministry of Education announced that starting from June 20 this year, primary and secondary schools will add new programming courses to their curriculum. This new policy is expected to further expand the demand for programming content and services from families.
Youdao recently hosted the seventh Wisdom Cup Computer Programming Contest for primary and secondary school students in Beijing's Haidian District in Q2, which showcased Youdao's influence in the field of programming. In addition, both programming and Go courses performed well with retention in Q2 with the retention rates for the advanced classes approaching 70%. Besides, a student from the champion class won the Go Championship at Jiangsu Mind Sports Games.
In terms of the smart devices, total revenues of smart devices were down by 7.4% in Q2 year-over-year. We're still in a transitional period for our devices business, mostly due to sluggish consumer spending in recent months and our stricter sales and marketing budget control.
Both Youdao Dictionary Pen and Youdao Listening Pod performed well during the June 18 shopping festival, topping the charts for 4 consecutive years and 2 consecutive years, respectively, on JD.com for both sales volume and number of units sold in this category. In addition, Youdao Listening Pod was updated to support Youdao Learning OS, featuring additional apps such as Chinese Children's Encyclopedia, Collins Big Cat Reading and Youdao AI Listening, further enriching users' experiences.
More recently, in August, we released Youdao Dictionary Pen X6 Pro and the Youdao Listening Pod Pro. We believe in the long-term prospects of learning devices as they are convenient, helpful and affordable for consumers. We're focusing on two things to drive growth and profitability. One is new products, which we will have more to be released in Q4. And second is optimization to our marketing and sales, which is underway.
Then let's discuss our progress with AI. As a leading education technology provider in China, we have always been proud of our capabilities in technological innovations. We believe large language models and AIGC presented a great innovation and growth opportunity for us. In July, we announced our proprietary large language model, Ziyue, optimized for education applications and have successfully deployed it to six applications, starting from the second quarter.
We believe we are among the fastest in adopting LLM and making the most solid business product in this area in China. I'm happy to report that one of Ziyue's applications, the AIBox feature in Youdao Translation, has already driven nearly 100% year-over-year growth of translation subscription and over 200% year-over-year growth of subscription fees. AIBox provides very convenient in-application AI features, like sentence refinement, grammar correction, writing suggestions and summarization.
In July, we also launched the first digital human language coach in China named Echo. Echo teaches spoken English one-on-one. And thanks to large language model technology, she understands the learner very well. She is fun to talk to and provides high-quality feedback and really helps the learner improve their language acquisition.
Echo made its debut at the World Artificial Intelligence Conference in Shanghai, receiving great enthusiasm from the audience and media. 2 weeks later -- 2 weeks ago, Echo became generally available in Youdao Dictionary Pen X6 Pro. And the reviews so far are great. And we expect Echo and more AIGC launches to drive our business growth in the coming months.
Looking ahead, we believe education could be among the top verticals for large language models. This technology provides great potential for personalization of the learning experience, effective guidance throughout the learning prospect and integration of knowledge across subjects. That summarizes our business operations in Q2.
At a high level, our strategy this year is twofold. First, we prioritize driving healthy growth by offering high-quality digital content services. Secondly, we dedicate efforts to accelerate the innovation of generative AI into our products and services. In Q2, our teams made both significant progress in both areas. The user demand for high-quality learning products and services remain consistently high. Leveraging our strength in content creation, user understanding and technological capabilities, we are committed to continuously delivering exceptional products that address the needs of our users.
Finally, I would like to share Youdao and NetEase Group have both approved a proposed amendment to the aforementioned USD 300 million revolving loan facility to extend the maturity date of the facility, including loans already drawn from it, until March 31, 2027. In addition, we announced that the Board of Directors have approved an amendment to the foregoing program to increase the total authorized repurchase amount by additional USD 20 million. These demonstrate the long-term support from NetEase and the confidence from Youdao's management.
Thank you. And now it's Su Peng to give you an update on our financials.

Peng Su

Thank you, Dr. Zhou, and hello, everyone. Today, I will be presenting some financial highlights from the second quarter of 2023. We are encouraging you to read through our press release issued earlier today for further details.
For the second quarter, total net revenue were RMB 1.2 billion, or USD 166.4 million, representing a 26.2% increase from same period in 2022. Net revenue from our learning services were RMB 680.9 million, or USD 93.9 million, representing a 20.8% increase from the same period in 2022, primarily driven by the strong sales performance of digital content services compared with the same period of 2022.
Net revenue from our smart device were RMB 222.2 million, or USD 30.6 million, down 7.4% from the same period in 2022, primarily due to the decreased demands for the intelligent learning products in the second quarter of 2023. Net revenue from our online marketing services were RMB 303.6 million, or USD 41.9 million, representing a 98.7% increase from the same period in 2022. The increase was mainly attributable to the increased demands for the performance-based advertisement through the third parties' Internet properties.
For the second quarter, our total gross profit was RMB 567.2 million, or USD 78.2 million, representing a 38.4% increase from the second quarter of 2022. Gross margin for learning services was 57.4% for the second quarter of 2023 compared with 52.2% for the same period in 2022. Gross margin for smart devices was 35.8% for the second quarter of 2023 compared with 30.6% for the same period of 2022. Gross margin for online marketing services was 31.9% for the second quarter of 2023 compared with 27.7% for the same period in 2022.
For the second quarter, total operating expense were RMB 856.3 million, or USD 118.1 million, compared with RMB 864.9 million for the same period of last year. With that, for the second quarter, our sales and marketing expense were RMB 587.7 million compared with RMB 596 million in the second quarter of 2022. Research and development expense were RMB 205.1 million compared with RMB 208.4 million in the second quarter of 2022.
Our operating gross margin was 24% in the second quarter of 2023 compared with 47.6% for the same period of last year. For the second quarter of 2023, our net loss from continuing operations attributable to ordinary shareholders was RMB 299.2 million, or USD 41.3 million, compared with RMB 453.9 million for the same period of last year. Non-GAAP net loss from continuing operations attributable to ordinary shareholders for the second quarter was RMB 283.6 million, or USD 39.1 million, compared with RMB 435.8 million for the same period of last year.
Basic and diluted net loss from continuing operation per ADS attributable to ordinary shareholders for the second quarter of 2023 was RMB 2.45, or USD 0.34. Non-GAAP basic and diluted net loss from continuing operation for ADS attributable to ordinary shareholders for the same quarter was RMB 2.32, or USD 0.32. Our net cash provided by the continuing operating activities, was RMB 133 million, or USD 18.3 million, for the same quarter.
Looking at our balance sheet. As of June 30, 2023, our contract liabilities, which mainly consists of the deferred revenue generated from our learning services, were RMB 1.2 billion, or USD 167.3 million, compared with RMB 1.1 billion as of December 31, 2022. At the end of the period, our cash, cash equivalents, restricted cash, time deposits and short-term investments totaled RMB 680 million, or USD 93.8 million.
This concludes our prepared remarks. Thank you for your attention. We will now open the call to your questions. Operator, please go ahead.

Question and Answer Session

Operator

(Operator Instructions) And our first question today will come from Brian Gong with Citi.

Brian Gong

I have a very quick one on our plan on AIGC technology. What AI applications will be launched in the second half of this year? And what impact will they have on our business in your view?

Feng Zhou

Yes, this is Zhou Feng. Yes, we announced our proprietary large language model, Ziyue, for education in July. We are looking to leverage this breakthrough technology to drive both short-term and future growth. So we have plans for both in the coming months and also for the longer term. So in the short term, we've already launched six applications of AI, including our digital human language coach named Echo, AIBox 2.0 and AI Translation, et cetera.
So the first line of work for us is to deploy these applications to more of our services, apps and devices and start to drive business growth with these new capabilities. So in fact, it is already driving growth as early as in Q2. For example, AIBox 1.9 already drove nearly 100% year-over-year growth of translation subscriptions and over 200% year-over-year growth of subscription fees in Q2 as we just discussed in the prepared remarks.
We've also launched Echo, our digital human language coach and English grammar instruction feature in the latest Youdao Dictionary Pen X6 Pro launched earlier this month. Echo is the first large language model-based digital human language coach in China. So this is a groundbreaking product. It is liked a lot by our customers from our feedback.
And our AI grammar instruction feature is also the first of this kind in learning devices. Our users tell us that, "We like these two new features because they are really helpful and engaging." We will continue to upgrade these features over the coming months. And we plan to launch and monetize them on other platforms, for example, on phones. So Echo and other features will be on phones, too.
One of the strengths of AIGC product from our observation is that consumers are willing to pay for them because they are really useful and helpful. This has been shown to be true by the tremendous growth of products like Midjourney and ChatGPT. So we do not need to go through the free-to-use model to kind of indirectly monetize these products. Instead, they could be monetized directly from day 1. So this shortens the investment cycle of these products.
Regarding entirely new applications, I am also happy to share that we plan to launch more LLM-based applications in Q4 this year. There are other aspects of the English language learning that AIGC can really help with, not only grammar. And there are other subjects that we should provide AIGC products for.
Now our teams are now more familiar with how these language models work and have accumulated substantial experience in their applications. So we are able to quickly iterate and build more applications. So more applications will come in Q4 this year. So in short, we are off to a good start of the degree of projects. So we entered the market early. And it is already driving growth and it has a great long-term potential.
So looking further ahead, generative AI represents a transformative opportunity for the education technology sector as well as a lot of other industries as we all know. So it has the potential to allow much more personalized learning and to increase the productivity of the overall education courses. So we are also starting early in LLM with the aim to drive long-term future growth.
So for that purpose, the basic LLM technology is important. And we believe what's more important is the application scenarios. We are looking at a lot of the different scenarios in education. And because we are early into the game, our teams have more experience. So we believe we can maintain the early lead that we already have enjoying in this area. So overall, we are bullish about combining large language models in education. And we'll keep innovating in this area.

Operator

Our next question today will come from Kelly Wang of CICC.

Caini Wang

This is Caini Wang from CICC. So in terms of the smart devices, since we have released the Youdao Dictionary Pen X6 Pro and Listening Pod Pro earlier this month, so would you like to provide an update on the user feedback for these new smart devices? And also, as we saw a slight decline in revenue in the smart devices sector this quarter, does management still maintain our confidence in the long-term prospects of this business? Would you might give us more color on this?

Feng Zhou

Yes, thank you. Yes, this is Zhou Feng again. As we mentioned, we launched Dictionary Pen X6 Pro and Youdao Listening Pod Pro earlier this month. So let me provide a bit of update. For the X6 Pro Dictionary Pen, this is our flagship product. And the most popular features were the 100-day ultra-long standby time, English grammar instruction, digital human language coach and test and analysis from the popular [53] series, (foreign language).
So these are the four most popular features we got from user feedback. The users like these features very, very much. So what's exciting for us is that the AIGC language coach is actually among the most popular feature. It's been the #3 feature. So it's one of the most popular features. So we're happy to share that for the first 20 days of August, driven by the popularity of X6 Pro and X6, our new Dictionary Pen activations were up by more than 20% year-over-year. So that's for the new Dictionary Pen product.
As for Youdao Listening Pod Pro, the most popular features from user feedback is the AI player and AI dialogue. These two features are the most popular. As from kind of new product sales activations, so we've observed that year-over-year increase in new activations of our Listening Pod line, so this year is higher in activation than the same period last year. That's also for the first 20 days in August. And as I discussed in the prepared remarks, we will have new devices to be released in Q4. So we are looking forward to bringing in more new products to our customers in Q4 this year. So that's a quick update on new products.
And now let's discuss our thinking in regards to the current market environment. Now recently, the consumer electronics industry exhibited overall weakness due to the -- mostly the macro cycle. The demand for smart learning devices, although relatively resilient compared to other categories, was also affected to some extent. We are continuingly monitoring the market conditions and optimizing our operations.
Right now for Q2 and Q3, we are focusing on user satisfaction and profitability, two things: user satisfaction and profitability. In Q2, we moved out of some low return on investment sales channels and reduced our costs. So this contributed to the slightly lower year-over-year device revenues. We believe this is the right approach in this market, given our overall objective of sustainable growth and moving towards company-wide profitability.
We're also actively adjusting the price points because, for example, the new X6 Dictionary Pen is priced that [RMB 499], a relatively low-priced one. The product has very good experience and also a very good profitability for us. So this is one example of us kind of covering -- adjusting our -- the price points we cover. So the X6 is very popular right now, along with the very popular flagship, X6 Pro.
So that's a quick summary of our current operating tactics regarding smart devices. So we're focusing on user satisfaction with our best product and also driving profitability of the business, not absolute scale growth. And we are doing all this by actively managing our R&D process and also very importantly, sales and marketing costs with discipline.
Now looking ahead to the long term, I believe learning devices still have a relatively low penetration rate, representing a significant opportunity for growth. And the market size growth observed in the overall market over the last few years indicates that this upward trend is there. According to a research report released by the Internet Society of China, (foreign language), in July this year, the market size of learning devices is projected to increase from RMB 24.9 billion in 2019 to an estimated RMB 43.1 billion in 2022.
So Youdao is poised to be a leading brand in this space with our expansive user base, strong product design capabilities and also commitment to advanced technologies, like the large language models. So we believe the slowdown is temporary. And we are optimistic about the long-term opportunity. Yes, I hope that answers your question.

Peng Su

Yes. And Caini, this Peng. I'll address only one point added after Dr. Zhou's comments. And we think the X6 Pro is totally different or the innovative, the most innovative Dictionary Pen compared with all the Dictionary Pen released in the past year. It's because it used to be the hardware of students to learn English more efficiently. And right now, we think we not only just enhanced the features of the dictionary functions, and at the same time, we also added about the service content, like the Echo interactive language training program as well as the grammar instructing program.
That will be the most useful features for the students when they learn the language. So we believe after the added services, they can create more interactive between the users and our hardware that we can help us to know more about their demand for the -- in the long run. So we think that will be a totally different product compared with the hardware. So we feel confident about the X6 Pro growth in the mid-term and long run. And like doctor mentioned, we expect our future products, we can enable more features of large language models into our hardware.

Feng Zhou

Yes, more exciting products coming later in Q4.

Operator

Our next question is from Thomas Chong of Jefferies.

Thomas Chong

My question is regarding the online marketing side. What were the driving factors behind the rapid growth in revenue from online marketing services over the past 3 quarters? Furthermore, what are the key direction for the later half of this year?

Lei Jin

This is Lei Jin. The online marketing service has already a robust growth for the 3 quarters in a row with nearly 100 percentage for Q2. And Q2 is the first quarter this online marketing revenue exceeded RMB 300 million. Internally, there are mainly two factors that drive the growth. Firstly, the advancement of AI technology has improved the margin of accuracy in our ad platform. [QL] can effectively reach the users across various major platforms. Our in-house AI technology allow us to accurately identify the relevant streams associated with the [QL,] achieving accurate rate of nearly 90%. This enabled us to deliver highly processed advertising and help our clients with their target audience faster and more accurately.
Secondly, we upgraded the data and analytics abilities of our ad platform. This more and more convinced us that we can enhance and optimize the traffic and the advertisement materials based on our effectiveness and is resulting in improved advertising performance. Externally, despite a sluggish consumer environment, there is still a strong consumption (inaudible) among the young people aged between 18 and 35 in gaming, cosmetics and fast-moving consumer goods. Our ad clients would like to capitalize the purchasing intent of the young people. As for Youdao, a lot of young people are using our products. And we have a deep understanding of them.
In the second half of the year, we will focus on two key directions with ad. Firstly, we will focus on overseas ad marketing. This is a strong demand. We have an advantage in terms of resources, language capabilities and experience in this field. With our in-house AI technology recommendation (inaudible) and the intra-network translation, we can connect over 1 million (inaudible) worldwide, directly reaching more than 2 billion users in over 55 countries and regions. Those are reaching Chinese brand to overseas expansion.
Secondly, we will further enhance our data capabilities. Since the upgrade of our ad platform in Q4 last year, we have seen the huge benefit of the real-time and accurate data in helping our users' decision-making and posting on the ad revenue. By the end of this year, we will strive to further enhance our ad platforms to give our clients better marketing performance.

Operator

Our next question today will come from Candis Chan of Daiwa.

Candis Chan

I have a question regarding the learning services. Can management talk about our coming focus for the learning services in the second half this year both on the K-12 and also the adult segment?

Feng Zhou

This is Zhou Feng. So digital content services are the largest part of our learning services business segment. As we mentioned in the prepared remarks, digital content services are actually a bright spot. Its sales reached RMB 800 million in Q2. It's the first time, it's a record high. And retention is also at a high level of around 60%.
So within the digital content category, in Q2 we launched the AI University Application Adviser to support students in their college selection process. So this is -- we think going forward, this is going to be important because it allows us to touch many users. So in this -- since its launch, it's already gained over 2 million page views as we mentioned in the prepared remarks.
So if you look at digital content service over the last 5 quarters, so it's actually been growing very healthily over the course -- over the last 5 quarters as our learners keep adopting this new form of interactive online learning. So it's different from online learning before. So it's a new form with video materials, with personalized practice and also AI feedback.
So it's great for us to see that users are -- more and more users adopt this new form and the business is growing very quickly. So we're happy to see that. So we expect digital learning content and learning services as a whole to continue to perform well in the second half. So we will enhance online learning further by investing in educational R&D to create high-quality content and also improve our personalized assessment and feedback system, which is a strong feature of our systems.
Furthermore, our collaboration with Shaanxi History Museum for immersive learning on Youdao Literature, that project was a great success. So we have more IP collaboration planned for this year, offering users more opportunity to learn about Chinese culture through immersive experiences.
So the second category of learning services is the STEAM courses, including mainly Go courses and kids programming. So Youdao became a GSP certification service center. GSP is a graded examination of software programming of the China Computer Federation in the first half of the year. In addition, as an exclusive online education partner, Youdao hosted the seventh Wisdom Cup as we talked about.
So in the second half of the year, we will continue to focus on our strength in the STEAM area, which is two leading online course systems for students are enthusiastic about, Go and also competitive programming, respectively. So we already upgraded our programming courses for the summer. And we'll move on to upgrade our fall and winter courses in the second half.
Another project we have ongoing for STEAM customers is we also plan to offer more offline activities and events for our customers. We've had offline events like Go game events and competitive programming events for years. And they are particularly popular this time because parents and students are eager to go out and participate in community activities and events. So given our huge online learning audience and also our experience in organizing offline STEAM events, we are working to provide more STEAM event opportunities to our learners and families in the second half of the year and to drive engagement and growth.
Lastly, in terms of adult courses, we made positive progress in Q2. Despite macro challenges, we launched a [digitalized] product for mass preparation for postgraduate entrance exam, which provide knowledge teaching, step-by-step guidance and personalized practice. So this product has been very well received by users with a next-day retention rate of over 50%.
So in the second half of the year, we will continue to focus on postgraduate entrance exam courses in the adult category because of strong demand. It is projected that college graduates and postgraduate exam participants will exceed 12 million and 5 million, respectively, in 2024, both historical highs. We will strive to further explore and expand -- utilize the product with a specific focus on enhancing our English progression for postgraduate entrance exams. That's our plans for learning services. I hope that answers your question.

Operator

Your next question will come from Lian Duan of Huatai Securities.

Lian Duan

Duan Lian from Huatai Securities. Just a quick one, will the ongoing investments in AI result in a significant increase in the R&D expenses in the second half of this year?

Yongwei Li

This is Wayne. Thank you for your question. I will take your question. In terms of R&D investment, we are prudent on it. And we believe our AI investment is continuing as more focused education scenarios, not widespread for all scenarios. As just mentioned by Dr. Zhou, our recent AI investment mainly focused on fixed applications such as large language model based in translation in English grammar instruction and AI [essay instruction]. Just a reminder that this is not our first time we invested in AI area. Youdao is gaining in implementing AI technology. And such technologies has being widely applied in our learning services and smart devices.
At the same time, we have received the benefit from adopting more effective development methods, which enhance our R&D efficiency. For example, in the first half of this year, although we deployed our proprietary large language model in certain education scenarios, we still experienced around 6% year-over-year decline in R&D expenses when compared to the same period last year, which mainly contributed from our efficiency improvements with more comprehensive experiences in AI investments and saving costs through applying AIGC technology.
The introduction of AIGC has resulted in a notable enhancement in work efficiency. For instance, the implementation of AIGC has led to a 50% increase in the efficient production of content for our courses' teaching materials. We anticipate that such improvements will be continued in the business. Both cost saving in AI investments and the application of AIGC technology enable us to accumulate substantial technological expertise and the knowledge for further advancements.
By the end of this year, we plan to launch more AI application efforts. We will continuously balance our investment in large language models and applications. We believe our team will gain more experience on it and will develop a clear understanding on investment yield with greater effectiveness. We expect the effectiveness of the application side will continue to improve.
Going forward, we are continuously on a clear path to achieving profitability. And we will continue to optimize the structure of our R&D investment. For example, eliminating R&D expenditure on those unclear prospective projects so that we can allocate the savings to our preferred AI project. Above all, we will enhance investment in AI, but we do not expect a significant year-over-year increase in overall R&D expense in the second half year. I wish it is helpful.

Operator

And that concludes the question-and-answer session. I would like to turn the conference back over to management for any additional or closing comments.

Jeffrey Wang

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 Piacente Financial Communications in China or the U.S. Have a great day.

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.