"In the third quarter of this year, our four core pillars, namely learning products, vocational education courses, STEAM courses and education digitization solutions, had strong momentum. We have been making great endeavors to improve the learning efficiency of our users. Besides, we are also taking steps to further fulfil our commitment to society," said Dr. Feng Zhou, Chief Executive Officer and Director of Youdao.

"Youdao has always been dedicated to complying with laws and regulations. As previously disclosed, we plan to dispose of our academic AST business as part of our efforts to comply with regulatory requirements. We will continue to adapt our business to the evolving regulatory environment and drive long-term sustainable growth through innovative technologies and products," Dr. Zhou concluded.

Third Quarter 2021 Financial Results

Net Revenues

Net revenues for the third quarter of 2021 were RMB1.4 billion (US$215.3 million), representing a 54.8% increase from RMB896.0 million for the same period of 2020.

Net revenues from learning services were RMB995.7 million (US$154.5 million) for the third quarter of 2021, representing a 65.9% increase from RMB600.4 million for the same period of 2020. The year-over-year growth from learning services was primarily attributable to increased revenues from tutoring services, which were further driven by the growth in paid student enrollments during the period in the second quarter of 2021.

Net revenues from learning products were RMB254.5 million (US$39.5 million) for the third quarter of 2021, representing a 56.0% increase from RMB163.1 million for the same period of 2020, primarily driven by the substantial increase in sales volume of Youdao Dictionary Pen in the third quarter of 2021.

Net revenues from online marketing services were RMB137.0 million (US$21.3 million) for the third quarter of 2021, representing a 3.4% increase from RMB132.6 million for the same period of 2020.

Gross Profit and Gross Margin

Gross profit for the third quarter of 2021 was RMB785.6 million (US$121.9 million), representing a 90.9% increase from RMB411.6 million for the same period of 2020. Gross margin increased to 56.6% for the third quarter of 2021 from 45.9% for the same period of 2020.

Gross margin for learning services increased to 66.2% for the third quarter of 2021 from 53.9% for the same period of 2020. The increase was driven by improved economies of scale and ongoing optimization of Youdao’s faculty compensation structure.

Gross margin for learning products increased to 33.7% for the third quarter of 2021 from 29.8% for the same period of 2020. The improvement was mainly attributable to the substantial rise in sales volume of Youdao Dictionary Pen 3.0, which carries a higher gross margin than other learning products.

Gross margin for online marketing services was 29.2% for the third quarter of 2021, compared with 29.5% for the same period of 2020.

Operating Expenses

Total operating expenses for the third quarter of 2021 were RMB914.9 million (US$142.0 million), representing a decrease of 29.9%, compared with RMB1.3 billion for the same period of last year.

Sales and marketing expenses for the third quarter of 2021 were RMB650.2 million (US$100.9 million), representing a decrease of 43.4% from RMB1.1 billion for the same period of 2020. This decrease was due to the reduction in marketing expenditures in K-12 tutoring services in the third quarter of 2021 due to the changing regulatory environment as previously disclosed.

Research and development expenses for the third quarter of 2021 were RMB193.3 million (US$30.0 million), representing an increase of 59.7% from RMB121.0 million for the same period of 2020. The increase was primarily due to higher payroll-related expenses associated with a larger number of course development and technology professionals.

General and administrative expenses for the third quarter of 2021 were RMB71.4 million (US$11.1 million), representing an increase of 94.8% from RMB36.6 million for the same period of 2020. The increase was mainly attributable to an increase in employee headcount and related expenses in the third quarter of 2021.

Loss from Operations

Loss from operations for the third quarter of 2021 was RMB129.3 million (US$20.1 million), compared with RMB894.0 million for the same period in 2020. The margin of loss from operations was 9.3%, compared with 99.8% for the same period of last year.

Net Loss Attributable to Youdao’s Ordinary Shareholders

Net loss attributable to Youdao’s ordinary shareholders for the third quarter of 2021 was RMB128.9 million (US$20.0 million), compared with RMB877.8 million for the same period last year. Non-GAAP net loss attributable to Youdao’s ordinary shareholders for the third quarter of 2021 was RMB101.0 million (US$15.7 million), compared with RMB865.7 million for the same period last year.

Basic and diluted net loss per American Depositary Share (“ADS”) attributable to ordinary shareholders for the third quarter of 2021 was RMB1.05 (US$0.16), compared with RMB7.73 for the same period of 2020. Non-GAAP basic and diluted net loss per ADS attributable to ordinary shareholders was RMB0.82 (US$0.13), compared with RMB7.63 for the same period of 2020.

Balance Sheet

As of September 30, 2021, Youdao’s cash, cash equivalents, restricted cash, time deposits and short-term investments totaled RMB1.3 billion (US$201.7 million), compared with RMB1.2 billion as of December 31, 2020. For the third quarter of 2021, net cash used in operating activities was RMB628.7 million (US$97.6 million), capital expenditures totaled RMB22.1 million (US$3.4 million), and

depreciation and amortization expenses amounted to RMB7.7 million (US$1.2 million). Youdao’s ability to continue as a going concern is dependent on management’s ability to implement an effective business plan in future periods in light of the changing regulatory environment, generate operating cash flows and continue to be able to obtain outside sources of financing as necessary for Youdao’s future development. Since its formation, Youdao has received various financial support from the NetEase Group, among others, currently including a RMB878.0 million short-term loan and US$300.0 million revolving loan facility. In support of Youdao’s future business, NetEase Group has agreed that the short-term loan will be automatically extended for a period of eleven months each time upon Youdao’s prior written request.

As of September 30, 2021, the Company’s contract liabilities, which mainly consisted of deferred revenues generated from Youdao’s tutoring services, were RMB1.1 billion (US$175.8 million), compared with RMB1.4 billion as of December 31, 2020.

Update on Disposition of Academic AST Business

As previously disclosed, Youdao plans to dispose of its after-school tutoring services for academic subjects included in China’s compulsory education system (the “Academic AST Business”), as part of its efforts to fully comply with applicable PRC regulatory requirements. Youdao currently expects the transaction to be completed by the end of 2021, subject to execution of the definitive agreements and regulatory approval. There can be no assurance regarding the ultimate timing of the proposed transaction or that the transaction will be completed. In the third quarter of 2021, revenues from Youdao’s Academic AST Business accounted for approximately 25% of its total revenues.

Conference Call

Youdao’s management team will host a teleconference call with simultaneous webcast at 6:00 a.m. Eastern Time on Tuesday, November 16, 2021 (Beijing/Hong Kong Time: 7:00 p.m., Tuesday, November 16, 2021). Youdao’s management will be on the call to discuss the financial results and answer questions.

Dial-in details for the earnings conference call are as follows:

A live and archived webcast of the conference call will be available on the Company’s investor relations website at http://ir.youdao.com.

A replay of the conference call will be accessible by phone one hour after the conclusion of the live call at the following numbers, until November 23, 2021:

About Youdao, Inc.

Youdao, Inc. (NYSE: DAO) is a leading intelligent learning company in China dedicated to developing and using technologies to provide learning content, applications and solutions to users of all ages.

Building on the popularity of its online knowledge tools such as Youdao Dictionary and Youdao Translation, Youdao now offers online courses covering a wide spectrum of age groups, subject matters, learning goals and areas of interest. In addition, Youdao has developed a variety of interactive learning apps and smart learning devices. Youdao was founded in 2006 as part of NetEase, Inc. (NASDAQ: NTES; HKEX: 9999), a leading internet technology company in China.

For more information, please visit: http://ir.youdao.com.

Non-GAAP Measures

Youdao considers and uses non-GAAP financial measures, such as gross billings and non-GAAP net income/(loss) attributable to the Company’s ordinary shareholders and non-GAAP basic and diluted earnings/(loss) per ADS, as supplemental metrics in reviewing and assessing its operating performance and formulating its business plan. The presentation of non-GAAP financial measures is not intended to be considered in isolation or as a substitute for the financial information prepared and presented in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”).

Youdao defines gross billings for a specific period as the total amount of consideration for tutoring courses sold mainly on Youdao Premium Courses, NetEase Cloud Classroom and China University MOOC, net of the total amount of refunds, in such period. The management uses gross billings as a performance measurement because the Company generally bills students for the entire course tuition at the time of sale of the courses and recognizes revenue proportionally over an average of the learning periods of different courses. Youdao defines non-GAAP net income/(loss) attributable to the Company’s ordinary shareholders as net income/(loss) attributable to the Company’s ordinary shareholders excluding share-based compensation expenses, amortization of intangible assets from business combination, impairment on long-term investments, adjustment for GAAP to non-GAAP reconciling items for the income/(loss) attributable to noncontrolling interests, and income tax effects of above GAAP to non-GAAP reconciling items. Non-GAAP net income/(loss) attributable to the Company’s shareholders enables Youdao’s management to assess its operating results without considering the impact of these items, which are non-cash charges. Youdao believes that these non-GAAP financial measures provide useful information to investors in understanding and evaluating the Company’s current operating performance and prospects in the same manner as management does, if they so choose.

Non-GAAP financial measures are not defined under U.S. GAAP and are not presented in accordance with U.S. GAAP. Non-GAAP financial measures have limitations as analytical tools, which possibly does not reflect all items of expense that affect our operations. In addition, the non-GAAP financial measures Youdao uses may differ from the non-GAAP measures uses by other companies, including peer companies, and therefore their comparability may be limited.

The presentation of these non-GAAP financial measures is not intended to be considered in isolation from or as a substitute for the financial information prepared and presented in accordance with GAAP. For more information on these non-GAAP financial measures, please see the table captioned “Unaudited Reconciliation of GAAP and non-GAAP Results” set forth at the end of this release.

The accompanying tables have more details on the reconciliations between our GAAP financial measures that are most directly comparable to non-GAAP financial measures. Youdao encourages you to review its financial information in its entirety and not rely on a single financial measure.

Exchange Rate Information

This announcement contains translations of certain RMB amounts into U.S. dollars (“US$”) at specified rates solely for the convenience of the reader. Unless otherwise stated, all translations from RMB to

US$ were made at the rate of RMB6.4434 to US$1.00, the exchange rate on September 30, 2021 set forth in the H.10 statistical release of the Federal Reserve Board. The Company makes no representation that the RMB or US$ amounts referred could be converted into US$ or RMB, as the case may be, at any particular rate or at all.

Safe Harbor Statement

This press release contains forward-looking statements. These statements are made under the “safe harbor” provisions of the U.S. Private Securities Litigation Reform Act of 1995. Statements that are not historical facts, including statements about the Company’s beliefs and expectations, are forward-looking statements. Forward-looking statements involve inherent risks and uncertainties, and a number of factors could cause actual results to differ materially from those contained in any forward-looking statement. In some cases, forward-looking statements can be identified by words or phrases such as “may,” “will,” “expect,” “anticipate,” “target,” “aim,” “estimate,” “intend,” “plan,” “believe,” “potential,” “continue,” “is/are likely to” or other similar expressions. The Company may also make written or oral forward-looking statements in its reports filed with, or furnished to, the U.S. Securities and Exchange Commission, in its annual reports to shareholders, in press releases and other written materials and in oral statements made by its officers, directors or employees to third parties. Statements that are not historical facts, including statements about the Company’s beliefs and expectations, are forward-looking statements. Forward-looking statements involve inherent risks and uncertainties. Further information regarding such risks, uncertainties or factors is included in the Company’s filings with the SEC. All information provided in this press release is as of the date of this press release, and the Company does not undertake any duty to update such information, except as required under applicable law.

Note 1:

The conversion of Renminbi (RMB) into United States dollars (USD) is based on the noon buying rate of USD1.00=RMB6.4434 on the last trading day of September (September 30, 2021) as set forth in the H.10 statistical release of the U.S. Federal Reserve Board.

Note 2:

Representing redeemable noncontrolling interest arising from business acquisition.

Note 1:

The conversion of Renminbi (RMB) into United States dollars (USD) is based on the noon buying rate of USD1.00=RMB6.4434 on the last trading day of September (September 30, 2021) as set forth in the H.10 statistical release of the U.S. Federal Reserve Board.