This article is the 864th original work of Deep Dive Atom

'AI + Education' made NetEase Youdao a success

Author: Meng Fanliao

Editor: Deep Dive Atom Studio

At the beginning of 2019, Ding Lei publicly proposed the four major strategies of 'Games, E-commerce, Education, and Music,' and online education was included in the group's overall strategy for the first time. However, these four strategies have developed unevenly. Compared to the profitability of games and the user base of music, NetEase is still in a growth phase in the education sector.

Previously, NetEase Youdao's biggest issue was undoubtedly its losses. However, NetEase Youdao is about to reach a profit turning point. In the third quarter of 2024, net revenue reached 1.57 billion yuan, a year-on-year increase of 2.2%; net profit attributable to shareholders reached 86.25 million yuan, turning a loss into a profit year-on-year.

Through AI reconstruction, NetEase Youdao, which adheres to long-termism, has finally reaped the rewards, with rapid growth and innovative development in business areas such as smart hardware, online marketing services, and learning services.

Long-term adherence, finally reaping rewards

Established in 2006, NetEase Youdao was a product prepared by NetEase for the search market. Due to Baidu's obvious advantages, NetEase had to adopt differentiated competition. In 2007, it launched a dictionary business, becoming the first internet dictionary in China based on search engine technology. While gaining a user base and reputation, it also laid the foundation for NetEase Youdao's transformation into education.

In 2011, NetEase Youdao launched the note-taking application 'Youdao Note,' further enriching its product matrix. Since then, NetEase Youdao has continuously launched new learning applications, such as Youdao Spoken English Master, gradually venturing into the online education field. In 2016, NetEase Youdao officially launched Youdao Premium Class, marking its official entry into the online education market.

Although it successfully went public in 2019, NetEase Youdao's listing was not glamorous due to its continuously expanding losses and the seemingly endless wait for profitability. On the first day of listing, it fell nearly 30% below its issue price. In 2018, NetEase Youdao's total annual revenue was 732 million yuan, with a net loss of 209 million yuan. In 2019, total revenue was 1.305 billion yuan, a year-on-year increase of 78.27%; the net loss was 602 million yuan, a significant increase from 2018. Some people even questioned whether NetEase Youdao would suffer the same fate as Kaola.

After going public, despite severe losses, NetEase Youdao proposed a dual-wheel drive strategy of 'AI + Education,' dedicated to applying AI technology to the field of education. Although the future looks promising, the process may still worsen financial data. In 2020, NetEase Youdao's net loss was 1.7554 billion yuan, a year-on-year increase of 191.6%. In 2021, losses began to shrink, but the net loss still reached 1.03 billion yuan.

Under the concept of AI, NetEase Youdao has also actively deployed in the smart hardware field, launching smart hardware products such as the Youdao Dictionary Pen and Youdao Smart Pen. Relying on NetEase's self-developed technology platform 'Youdao AI Cloud,' these products provide users with a more convenient and efficient learning experience through AI technologies such as image recognition and voice interaction.

However, driven by the dual wheels of 'AI + Education,' NetEase's revenue has increased significantly. In 2020, NetEase Youdao achieved a total net revenue of 3.168 billion yuan, a year-on-year increase of 142.7%. In 2021, NetEase Youdao's annual revenue reached 4 billion yuan. In 2022, NetEase Youdao's net revenue was 5.013 billion yuan, a year-on-year increase of 24.8%. In 2023, total revenue was 5.389 billion yuan, an increase of 7.5% year-on-year. Along with the increase in revenue, NetEase Youdao's losses also shrank to 550 million yuan in 2023.

Entering 2024, NetEase Youdao achieved profitability in multiple quarters. For example, in the third quarter of 2024, net revenue reached 1.57 billion yuan, a year-on-year increase of 2.2%, and smart hardware achieved net revenue of 320 million yuan, a year-on-year increase of 25.2%. Among them, operating profit reached 110 million yuan, turning a loss into a profit year-on-year, setting a new record for single-quarter profit. It seems that NetEase Youdao has reached a turning point in annual profitability.

AI reconstruction enables Youdao to soar against the wind

With the advent of the 'Double Reduction' policy in 2021, online education began to transform. Later, East Study and Dong Yuhui seized this opportunity and surged ahead. TAL Education chose to increase the proportion of non-academic education business. However, NetEase Youdao's approach was AI reconstruction, redoing multiple business areas such as smart hardware, online marketing services, and learning services with AI.

Smart hardware is the most common transformation tool for education enterprises. For example, TAL Education achieved a year-on-year revenue increase of 50.4% to 619 million USD in the second quarter of fiscal year 2025 due to smart hardware. For NetEase Youdao, smart hardware is also a crucial part.

NetEase Youdao proactively restructured its hardware device sales channels, which previously caused revenue declines for multiple quarters. However, after completing the restructuring, NetEase Youdao's smart hardware began to regain momentum. In the third quarter, NetEase Youdao's smart hardware achieved net revenue of 320 million yuan, a year-on-year increase of 25.2%. During the reporting period, Youdao launched the Dictionary Pen X7 series, equipped with a 78 million-word dictionary and an AI camera.

NetEase Youdao CEO Zhou Feng previously stated that Youdao plans to increase high-end products in the third and fourth quarters, with a gross margin target of 40%. It is foreseeable that smart hardware will continue to perform well in the future. The improvement of the smart hardware business is inseparable from the contribution of large models. Previously, NetEase Youdao launched initiatives such as the domestic first educational large model 'Ziyue.'

In July 2023, six applications came with 'Ziyue,' and more than ten AI applications were launched within a year, covering various scenarios such as translation, essay correction, grammar elaboration, sentence analysis, physical education, oral practice, and homework tutoring. These provide efficient tools for NetEase Youdao's commercialization in the new era.

What enables NetEase Youdao to soar against the wind is AI marketing. As early as 2022, NetEase Youdao began deploying AI marketing, with its capabilities already covering AIGC creative advertising content, AI live streaming, KOL marketing, and data analysis, achieving a daily production of over 500 video materials and over 400 real-person materials per week.

In the first three quarters of 2024, NetEase Youdao's AI marketing revenue was 490 million yuan, 510 million yuan, and 490 million yuan, respectively, maintaining a high year-on-year growth rate of around 50% for eight consecutive quarters. This is far higher than the overall advertising market's year-on-year growth rate of 2.3%. Jin Lei, president of NetEase Youdao, believes that the growth in the advertising business is mainly due to advancements in AI, with enhanced data analysis and optimized algorithm models increasing monetization rates by over 90% while steadily improving team execution.

According to the '2024 China Digital Marketing Trends Report,' up to 44% of advertisers are turning to AI marketing. NetEase Youdao's first-mover advantage makes it easier for it to gain recognition from advertisers first.

In the future, NetEase Youdao will continue to increase its AI deployment. Zhou Feng mentioned that the entire product line of smart hardware will adopt more large model features to significantly enhance the user experience.

NetEase Youdao adheres to NetEase's core values

Ding Lei once had high hopes for the e-commerce business, believing that through e-commerce businesses such as NetEase Kaola and NetEase Yanxuan, another NetEase could be created in three to five years. However, as Kaola's development fell short of expectations, it was eventually sold, and NetEase Yanxuan alone could no longer meet the expectations for NetEase's e-commerce sector.

In the third quarter of 2024, net revenue from games and related value-added services was 20.9 billion yuan, accounting for nearly 80% of total revenue. As a core business, revenue from games and value-added services has a significant impact on NetEase, contributing substantial revenue and demonstrating long-term operational capabilities. On the occasion of NetEase's 20th anniversary, it proposed values of passion, users, and innovation. Although NetEase Games embodies NetEase's values, the nature of games still raises questions from many parents about NetEase Games.

As an online education brand under NetEase, NetEase Youdao has largely adhered to NetEase's core values.

NetEase Youdao has also inherited this tradition of innovation, driving the development of online education through technological innovation. For example, products such as Youdao Dictionary and Youdao Note were born out of technological innovation, not only meeting user needs but also promoting progress in the online education industry. From language learning to K12 education, to vocational education and lifelong learning, Youdao has actively explored and deployed to meet the needs of different users.

NetEase Youdao has always adhered to the concept of 'user-first,' continuously optimizing product functions and user experience. By deeply understanding user needs and pain points, Youdao can provide users with more precise and personalized online education services. By providing high-quality educational content and excellent services, Youdao has won the trust and praise of users and gradually established a good brand image.

In terms of social responsibility, NetEase Youdao provides learning opportunities and resources to more people through online education. For example, it has implemented public welfare projects targeting students in remote areas to help them access better educational resources and learning opportunities.

NetEase is committed to using the most advanced internet technology to enhance information exchange and sharing among people, providing high-quality products and services to a vast number of users, and realizing the mission and vision of 'gathering people's strength and creating a better life through technological innovation.' By inheriting and innovating NetEase's content genes, NetEase Youdao provides users with high-quality online education resources and learning experiences, promotes continuous development and innovation in the online education industry, and adheres to NetEase's core values.