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Youdao, Inc. (NYSE:DAO)
Q1 2020 Earnings Call
May 19, 2020, 9:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Good day and welcome to Youdao first-quarter 2020 earnings conference call and webcast. Today's conference is being recorded. At this time, I would like to turn the conference over to Pei Du, investor relations director of Youdao. Please go ahead.

Pei Du -- Investor Relations Director

Thank you, Mike. Please note the discussion today will contain forward-looking statements relating to future performance of the company and are intended to qualify for the safe harbor from liability as 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 the 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, including our annual report filed on Form 20-F. The company does not undertake any obligation to update these forward-looking statements, except as required by law. During today's call, management will also discuss certain non-GAAP financial measures for comparison purposes only.

For the definition of non-GAAP financial measures and the reconciliations of GAAP to non-GAAP financial results, please see the 2020 first-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, VP of operations; Mr. Peng Su, our VP of strategy and capital markets; Mr. Wei 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 -- Chief Executive Officer

Thank you, Du Pei, and thank you all for participating in today's call. Before we begin, I would like to remind everyone that all our numbers are based on renminbi. I would like to begin by offering my deepest sympathy to all the families affected by the coronavirus. We have been wanted as a society by the global pandemic.

As Chinese cities have gradually reopened, we continued to take steps to ensure the safety of our staff and students. Our free online courses went through January to February, and we are proud to have been able to successfully change courses to prioritize relief efforts and provide support to those cities that were the hardest hit, as well as our broader community. As an online service company, our operations were less impacted than some other businesses. We closed the first quarter with strong financial and operating results.

Growth from our core online learning business accelerated. Online courses generated gross billing of RMB 519 million, up 287% year over year and up 50% quarter over quarter, stronger than the 211% year-over-year growth in Q4 2019. Gross margins from our learning services segment also rose to 52% in the first quarter of 2020 as we continue to benefit from economy of scale. This is a large step up from 30% in Q4 2019 and 17% in Q1 2019.

Our intelligent learning devices also grew rapidly despite the virus' impact during January and February. Revenue from devices reached RMB 53 million, up 189% year over year. Operating cash flow was nearly RMB 50 million for the quarter, marking Q1 as our first quarter of positive cash operating cash flow since operating at this scale. Longer term, we are seeing improving cash change, but do expect to see some seasonal fluctuation.

Looking at our business segments. For online courses, gross billings from K-12 courses reached RMB 192 million and adult courses were at RMB 254 million, up 330% and 300% year over year, respectively. The growth came mainly from continued innovation of course content and products. Let me highlight a few areas of interesting progress for you.

First, we released new versions of junior high school Math and high school English courses. In particular, the Math course features localized content, delivered by both our instructors and teaching assistants. The courses quickly became popular, joining the ranks of junior high school Chinese and Physics courses, which have been best-selling courses since last year. Second, more and more courses feature real-time AI-driven interactions during and after the live course.

For example, in our new elementary math courses, students alternate between listening to instructions and practicing using our live stream personalized exercises. It is an important upgrade to the industry standard of new teachers at large class format, which we call Interactive Large Class model. As for content in new adult courses, we introduced English recitation camp. In Chinese, that's langsòng yíng, and English oral training, kouyu xùnliàn courses, which are being taught by two relatively new instructors.

These two popular courses are already profitable in Q1 partly because, again, a significant number of users from our Dictionary and other app. These users are interested in learning the language and overseas culture and lifestyle, which are offered by these courses. This shows that as we serve our users through more and more apps and in -- with courses in different ways, synergy between our business segments continue to grow. In line with our growth goals and to support our increasing enrollment, we grew our educator team to 164 instructors and 865 teaching assistants during the first quarter.

We have also improved their training, quality control and incentive bonuses. More recently, we also began our brand campaign for Youdao Premium Courses. In mid-April, we partnered with the renowned Chinese women's volleyball coach, Lang Ping, to be our brand spokesperson. Initial feedback has been positive.

Our partnership with Lang Ping is set to extend multiple quarters, and we look forward to a fruitful relationship. Let's turn to another segment, our intelligent learning devices. In Q1, revenue from our intelligent learning devices reached RMB 53 million, up 189% year over year. The increase was primarily driven by sales of our Youdao Dictionary Pen 2, which has become known among students and parents as an indispensable and fun-to-write device.

Online distribution was strong in Q1. Off-line distribution was negatively impacted by the closures caused by the coronavirus in January and February. By March, off-line distribution has returned to previous levels. We plan to launch new devices later this year to support student's learning needs.

In terms of our app, we introduced a major version of our Dictionary app, bringing more functionalities like document translation to the front page. We also launched AI essay assessment, AI Lùnwén Pínggding, a feature that automatically grades and offer suggestions for improving English essays submitted by the users. This feature leverages our proprietary AI technology and uses state-of-the-art transformer architecture and transfer learning techniques. We also made progress with our organic traffic conversion, with our conversion rates from this channel increasing by 5% year over year.

As a result, K-12's gross billings from organic traffic grew 236% year over year during the first quarter. Also, since the pandemic, Chinese University MOOC has provided teaching tools and teaching infrastructure throughout China, helping 60,000 instructors at 1,200 universities to facilitate over 120,000 courses. As one of the most commonly used learning platforms for college students, Chinese University MOOC had over 40 million registered users and approximately 14 million daily active users at its peak during the first quarter. At the end of April, we released the overseas versions of Chinese University MOOC and we received positive feedback from the Chinese Ministry of Education.

Now for our online marketing segment. Our advertising revenues were RMB 99 million in the first quarter, up 10% year over year and 1% quarter over quarter. In the coming periods, we'd expect the advertising sector to continue to face macro challenges. We plan to manage these fluctuations with flexibility.

2020 is no doubt a very unique year for all of us. For the education industry, it may well be a pivotal year where online education adoption and product innovation become greatly accelerated. We believe Youdao is well-positioned to capture this opportunity. We are confident that we have a strong pipeline of courses and products for the rest of the year.

Our teams are hard at work to get them ready for the summer and falls months. We cannot wait to have more students and parents to try them. With that overview, I will now turn the call over to Su Peng to review our financial results. We will then open the call up for questions.

Su Peng?

Peng Su -- Vice President of Strategy and Capital Markets

Thank you, Dr. Zhou, and hello, everyone. Today, I will be presenting some financial highlights from our 2020 first quarter. We encourage you to please read our press release issued earlier today for further details.

We start the year off on a strong note with healthy gains across many of our primary financial metrics. Our business scaled rapidly. On a year-over-year basis, we grew our revenue, gross billings, deferred revenue, gross margin, and we had positive operating cash flow for the period. For the first quarter, total net revenue were RMB 541.4 million or USD 76.5 million.

This represents an increase of 139.8% from the first quarter of 2019. If we look at this positive growth by segment, net revenue from our learning services and products grew 226.4% year over year to RMB 442.1 million or USD 62.4 million. We attribute this growth to a strong growth in K-12 paid student enrollments and gross billing per paid student enrollment of Youdao Premium Courses on a year-over-year basis. Net revenue for online marketing services were RMB 99.3 million or USD 14 million, up nearly 10% compared to the same period of 2019.

For the first quarter of 2020, our total gross profit greatly improved, reaching RMB 235.7 million or USD 33.3 million, compared with RMB 52.9 million for the first quarter of 2019. Gross margin for learning services and products improved to 48.7% for the first quarter of 2020, up from the 18.5% for the first quarter of 2019. The large market growth was primarily attributable to effects of economies of scale and further optimization of our business and the faculty compensation structure. Gross margin for online marketing services was 20.5% for the first quarter of 2020, compared with 30.8% for the first quarter of 2019.

The decrease was mainly the result of more revenue generated from advertisement through the third-party Internet properties and the international markets, which carry lower gross margin. For the first quarter, total operating expense were RMB 411.7 million or USD 58.1 million, compared with RMB 131.1 million for the same period last year. We continue to invest in technology, student acquisition and acquiring new talent features to support our growing business over the long term. In tandem with this investment, we are increasing our top line and restructuring our model to become more efficient and to recognize economies of scale.

With that in mind, sales and marketing expense for the first quarter were RMB 299.2 million, compared with RMB 64 million in the first quarter of 2019. Research and development expense for the first quarter were RMB 84.1 million, compared with RMB 54.9 million in the first quarter of 2019. Our operating loss margin was 32.5% in the first quarter of 2020, compared with 35% for the same period of last year. For the first quarter of 2020, our net loss attributable to ordinary shareholders was RMB 169.4 million or USD 23.9 million, compared with a loss of RMB 102 million for the same period last year.

Non-GAAP net loss attributable to ordinary shareholders for the first quarter was RMB 161.9 million or USD 22.9 million, compared with a loss of RMB 101.2 million for the comparable period of last year. Basic and diluted net loss per ADS for the first quarter was RMB 1.52 or USD 0.21. Non-GAAP basic diluted net loss per ADS for the first quarter was RMB 1.45 or USD 0.20. Our net cash generated from operating activities for the first quarter was RMB 49.7 million or USD 7 million.

Looking at our balance sheet. As of March 31, 2020, our contract liabilities, which mainly consists of our deferred revenues for our online courses, were RMB 603 million or USD 85.2 million, compared with RMB 456.8 million as of December 31, 2019. At the end of the period, our cash, cash equivalents, time deposits and short-term investments totaled RMB 1.7 billion or USD 236.8 million. Again, we are focused on meeting our long-term objectives.

We will continue to prudently manage our costs and strike a balance between top-line growth and expense. This concludes our prepared remarks. Thank you for your attention. We would now like to open the call for your questions.

Operator, please go ahead.

Questions & Answers:


Operator

[Operator instructions] And the first question we have will come from Sheng Zhong of Morgan Stanley. Please go ahead.

Sheng Zhong -- Morgan Stanley

Hi, management, thank you for taking my question. And congratulations on the strong gross billing growth and gross margin improvement. We also see that the sales and marketing spending also increased a lot. Like you said, you're doing brand campaigns.

So may I ask your plans for the summer, on the summer promotion? And especially this summer holiday could be shorter than usual. So what's the plan for K-12 students' education for summer? And my second question is, can you give more color about your young children's programs progress? You developed a lot of good interactive courses and apps. So on this part of business, what's your target and future plans? Thank you.

Feng Zhou -- Chief Executive Officer

Thank you, Sheng Zhong. So regarding the summer, yes, so obviously, we are looking -- the teams are working hard on this right now. So we have allocated sales and marketing budget for the summer campaign. So as we talked about before, so summer is the right time to acquire users.

Yes, these users, when they enter our service through the summer, they normally have higher lifetime values. So last year was the first time we did a summer customer acquisition campaign. This year, we have more experience, so we will likely allocate more budget for that. So we do believe we will have a better, more successful campaigns.

With that said, as we talked about, we always look at the unit economy as of our business very carefully. So essentially, we allocate a large budget, then we operate on a week-to-week basis, looking at the results, the ROIs and adjust the plan accordingly. And so we have been doing a lot of preparation for the summer. So for example, you look at our teaching assistant numbers, they've grown, and they're still growing.

And on top of last year's three cities, Xi'an, Nanjing and Guangzhou as our teaching assistant operating centers, we added centers in Shenzhen and Chengdu. So right now, we have five teaching assistant centers across the country. And you talked about shorter-than-usual summers. Currently, we believe there will be limited impact of this change.

Because the parents and students, if we look at them right now, they are still very engaged in their learning. And so without major changes to their behavior, we believe the summer, there could be changes, but the impact will be limited. We will have five weeks of summer courses between the July to end of August. That's the current plan.

And yes, another thing is that if we compare online courses to off-line, there will be more flexibility for changes for online companies. So we think we have more flexibility there. Yes. So that's for your first question.

The second one is about young children's program, so we call them as teen courses. So for these courses, we think they represent a very promising segment. And one progress we can report here is that in Q1, there are three courses that we believe the first stage of the content investment has been completed. So these are Kids Programming, Youdao Fun Reading and Youdao [Inaudible].

So for these teams, they have completed their current state of content investments. So they are complete. And the numbers, if we look at them, they are pretty good. And they have also hired more operation staff.

So the teams are ready, too. So basically, we think they're ready to scale that business. Yes, I think that's for the young children's programs. Thank you.

Operator

Next we have Mark -- I'm sorry. Next we have Mark Li of Citi.

Mark Li -- Citi -- Analyst

Hi, management. Congratulations on the results. I hear you're sharing about the content development and the student interaction class progress. May I know, for these course transformation, what is your plan for the teacher and teaching assistant numbers? What's your plan for the, let's say, later this year because of these course developments? Thank you.

Feng Zhou -- Chief Executive Officer

Yes. Thank you, Mark. I believe you're asking about the interactive large class content model we talked about. So we think these are very important and promising improvement to the product model, which we think is going to be more and more important this year and going forward.

Because many players in the market have been successful in scaling up the business, and now when users -- when parents look at our products, what they are looking for is that, "Do these products offer differentiation? Do they offer ways for my kid to be engaged in the learning? Do they offer superior learning results?" And the numbers, when we look at them, they show us that when we add interactions to these courses, we have more engaged students, we have better teaching results. And these contents, they are produced, and they work in tandem with our teaching staff. So the teaching staff is do -- at the center position here. So we will hire more teachers, instructors this year.

And compare that, we will have even more teaching assistants to be hired this year as we scale up the business. So the instructors, the teachers, their number doesn't really correlate with the number of students we have. But the teaching assistants, they scale mostly linearly with the number of students. So we're looking to hire more instructors and add more teaching assistants.

And the scale of growth for the number of teaching assistants will be larger than the instructors. And of course, we will look at how to improve operating efficiency here. So we believe that will be a strength of our team because we will be very good at using technology, using different ways to using IT systems to improve the efficiency. I hope that answers your question.

Mark Li -- Citi -- Analyst

Yes. Thank you.

Operator

Next, we have Alex Xie of Credit Suisse. Alex, your line might be muted.

Alex Xie -- Credit Suisse -- Analyst

Sorry. Hi, management, thank you for taking my questions, and congratulations on very strong results. My first question will be about GP margin. The GP margin improvement in learning services segment is really impressive.

Would you please share a bit more color on the GP margin of your K-12 courses? I think it should be even higher than the blended learning services? And how much of your learning services GP margin improvement is from the staff compensation structure change, percentage of the revenue? And secondly, I would like to ask Youdao Premium Courses. I think in this quarter, both student enrollments and ASP grew significantly quarter over quarter. Do you think this is mainly due to the traffic surge post COVID-19? Or how do you look at the outlook? Is it sustaining momentum? Thank you.

Feng Zhou -- Chief Executive Officer

Yeah. Regarding the GP margin, I will first give some general remarks, and Wei will give you details. So yes, so overall, the learning services courses, the GP margin is 52%. And currently, we do not give out the separate numbers for K-12.

Yes, as you can see, it's a significant growth. And going forward, so because we are improving on the economy of scale, and as we talk about, so some of our instructors' new contracts came into effect in January 1 this year. So that's the two drivers. And on both fronts, we're working more -- we will deploy.

So we expect to achieve kind of industry standards margin level over time. And of course, in the short term, they may fluctuate. So Wei?

Wei Li

Yes. Thank you, Dr. Zhou. I'd like to give more details.

We expect our GP margin of our learning services to be further improved, following, first, the benefit of some of new continued strategy. Our learning services revenue increased roughly this quarter and we except the online large class education format will be more widely adopted. So it will add to our ability to scale. Second, we continue to optimize our compensation structures.

More instructors are rewarded by performance bonus. We're expecting lower revenues share will show basically for our top performance instructors, the sharing model, along with our increased revenue investment. Finally, we continue to improve our efficiency. For example, we are optimizing the payment and cost of learning materials as well, which also results in cost savings.

However, as mentioned by Dr. Zhou, on a short-term basis, the gross margin will fluctuate with certain student and load factors. For example, sometimes, it's more teaching assistants for this coming season. But at that time, the revenues has not set in our income statement, which is half full, Alex.

Feng Zhou -- Chief Executive Officer

Yes. Regarding the second question about ASP and also future trainings. So ASP for our Premium Courses grew by about 158%, actually from CNY 627 to CNY 1,618 this quarter year over year -- first quarter last year, this quarter. And actually, K-12 ASP is relatively flat, actually down a little bit.

The adult courses ASP grew about CNY 450 to CNY 2,000. So there, we have -- so mainly, we are seeing a couple of things here. So the mix change is the reason for the adult courses. As we go from a more kind of college English test-type courses to more kind of courses tailored to working users.

So these new courses have higher ASP. And quarter over quarter, K-12 also grew. And so going forward, the whole quarter, obviously, it benefited from the traffic resulting from the coronavirus. And on the other hand, we are also seeing that as we have more comprehensive course offerings and our quality and also service level become higher.

So it's driven by those factors. And the coronavirus effect, we think it will still be there for a couple of quarters, still -- maybe lower, in a lower significance. But the other part, obviously, we will keep working on higher quality, better service. So we think overall, it's still a lot of tailwinds for the business.

I hope that answers your question.

Alex Xie -- Credit Suisse -- Analyst

Yes, very helpful.

Operator

Next, we have Thomas Chong with Jefferies.

Thomas Chong -- Jefferies -- Analyst

Thanks management for taking my questions. I have a question regarding the trend in the operating expenses. How should we think about market expenses as a percentage of revenue in the coming quarters? And with that, can you comment about our trend in terms of the operating cash flow, as well as the timing to profitability? Thank you. [Foreign language]

Feng Zhou -- Chief Executive Officer

OK, I'll take the first question about the marketing, and then Wei will talk about the operating cash flow. And thank you for the Chinese question. Yes. So in terms of marketing expense, so we always look at the business from the perspective of long-term growth.

So when we look at it in this way, the conclusion for us is that -- so we have much better business fundamentals now, we have better conversion, better retention, better signing up rates. So the team did that work. So that's the drivers for the first quarter's results. And when we look at that and when we look at the market, the users, the parents, they are very interested in online courses this year.

So that's why we said that we have allocated a relatively large budget for the summer because we believe this year is the right time to acquire more users and to set up for next years and later growth. So we do expect the marketing expense to go up. However, as we said, we are very much focused on the unit economics. So we will make sure that the marketing dollars that we spend, they correspond to good unit economics and that they are well spent essentially.

So I hope that answers your question. And Wei?

Wei Li

OK. In terms of operating cash flow, as the fundamental of our business keeps improving, the gross billing growth has accelerated and that there is more economy of scale. We have achieved positive operating cash flow in the first quarter, and we expect the operating cash flow will improve over time along with our fundamentals, though there may be some seasonal fluctuations in the short term. Long-term fundamentals on our book and our financial performance will reflect the fundamental improvement over time.

In the first quarter, we achieved positive operating cash flow due to the following factors. First, strong gross billing performance. Second, higher gross margin due to the economy of scale and the executive compensation structure optimization. Third is more efficiency in cash flow management on our receivables and payables.

Again, looking forward, our long-term improvement on our cash flow will continue with some short-term fluctuation. For the profitability time line, we do not provide detailed qualitative guidance for profitability. As usual, we expect the projection to be on track, and we would like to add more color on this. You can see our business fundamentals have improved across the board.

The revenue increased, particularly with GP margin improved, as just mentioned, and we have the increasing economies of scale. We believe it's a good time now to invest more in our R&D and marketing to serve more users' learning needs and accelerates our capability. As we see more people planning to take the online learning solutions, we will continue to invest to ensure our product is appreciated, especially in terms of buying AI technology to enhance student learning experience. This is my answer.

Operator

Next, we have Yuzhong Gao of CICC.

Yuzhong Gao -- CICC -- Analyst

Congrats on the positive operating cash flow. So my first question is on the competition. So wondering what is our view on the current competitive landscape? And maybe what are some of the strategies that we have to kind of set us apart from other players in the business? And the second question is on your curriculum development. So we have seen -- you guys really have put a lot of focus to your education content and teaching technology.

So could you maybe share with us some of the latest progress you have made and your future plans? [Foreign language]

Feng Zhou -- Chief Executive Officer

Yeah, thank you. This is Zhou Feng, I will take the questions. So obviously, I'm talking about competitive landscape. I cannot comment on specific competitors.

So I'll talk about the general trend. So I think 2020 is shaping up to be a key year. Yes, so more consumers are looking for courses. And I think we're lucky that we're ready essentially, so in terms of content, teaching personnel, service capacities.

So this is one of the key things here that -- a couple of players are ready, we are ready. So we think these players will be better in the competition. So among the players, I think one point, I think, talking about differentiation. One point that we talked about last year, I think, reflects our vision best, that is we believe that our online courses will provide equal or better experience than off-line.

So I think that's the really important thing here. Whoever can realize that will have an advantage. So we believe delivering the best experience, that's the result, that's the learning results. And we are working really hard on this.

So let me give you two examples. So first is top-notch instructors. So we have a system to pick them and also build courses in London. For example, doing a high school Chinese course by -- about logic.

Yes. So everyone loves the course. So we pick the instructor, see if he has a lot of potential, and we build the course around him, and reiterate it over and over by getting user feedback. And that's the way we work.

So we have successfully been able to turn out multiple courses through this model. So we have Logic English. We have middle school, high school Physics. And now in Q1, we have successful Math class for June next quarter.

Yes. So this is how we work. Obviously, another point, in addition to instructors, it's the tech innovation. We talked about interactive large class format or model.

This is a new world right now, so we believe that it's going to be important. Essentially, I think we've had many, many different things. And this interactive large class format, of course, we think it's going to be important because one of the major challenge for students for online courses is basically a minimum amount now that you -- the parents bought the course and the students, they don't listen to it, they don't pay attention. And we think that by adding real-time interaction, real-time, AI-driven interaction to live courses, it's a major change on a similar scale as adding live video to it and also adding teaching assistants to it.

They all improve the class. And by adding interaction to it, it's another level of improvement to that. So obviously, we also talked about AI English essay assessment essay guide. Yes, this is for anyone who's studying English essays.

This is -- will know this is really important. Yes, of course, everyone will have -- apart from products, from experience, everyone will have good marketing, efficient sales and lead conversion. We've made a lot of progress on that. And we think we will be strong in terms of these areas.

But we think the strongest part for us is the product, the instructors and how do we combine second and best concepts. Yes, I hope that answers your first question. The second question is regarding curriculum and teaching curriculum development? Yes. So I think, when we talked -- already talked some about that.

Maybe talking a little bit more is how we iterate the courses, what we call that more course iteration system. So this is a way to -- after we get the instructors, this is the approach we take to finally reach a good course. So we use a lot of quantitative evaluation of different teaching methods, and we get other teachers, our operating staff and also students to listen to the courses and provide feedback. So normally, after three to six months that we can reach good quality levels for each particular course.

So we've already done a lot of this and we have good asset. Yes. I hope that answers the question. Thank you.

Yuzhong Gao -- CICC -- Analyst

Yes, very helpful, Dr. Zhou.

Operator

And next, we have Binnie Wong of HSBC.

Binnie Wong -- HSBC -- Analyst

Thank you for taking my question here. I just want to understand in terms of -- remember, earlier, we talked about having old like the Youdao organic app and then direct traffic to the online courses. Just want to see what is the percentage we are seeing here? And then, in terms of the retention rates from these users, any update would be helpful. And speaking of that, in terms of our user acquisition strategy this year, and if you look at our other like online peers, right, they have been using very innovative ways to create a community effect to drive growing new users.

So can we just get an understanding in terms of how much percentage of our users are like new users, old users? And is that rising? And any update on our user acquisition? Thank you.

Feng Zhou -- Chief Executive Officer

So Binnie, this is Zhou. And for your first question about our organic users conversions, we think if you see in our earnings release, we also mentioned about number of the paid student enrollments, our organic traffic grew about 226% year over year compared with the first quarter of 2019. So I think that shows a strong trend of organic conversions for our paid student enrollment in the last year. And we expect it will be growing.

So we expect the trend will keep growing for all our -- and we expect to convert students from organic traffic. So thinking of the our -- we still has a very big pool of our -- thinking of a number of MAU of our apps, in-house Dictionary apps, as well as Translators app. So for the retention rate for our organic users, we didn't really break down about the -- really the retention rates or organic conversion. But if you see that, I think that's all the users, they are -- do have our branding image in their minds before they use our courses products, they use -- are our users or apps users.

They are using our apps to -- looking for the -- help for the learning. So we expect that they do have the better understanding about our product, product quality, as well as our high-quality services. So that's the first question. And for the second one, we think that -- that's a related question, I think.

We are always -- we have over 100 million monthly average users of our apps. So we think we always have a very pretty unique way to grow our business for the education products. And so we also -- we always convert our users from organic users pool to our education products. And indeed, as Tom Chong mentioned in his previous questions, we will also invest in some market users and as well as recruit talented teachers in the future.

We expect we can get -- we always can be balanced how we grow. We always have the choice and flexibility to how much we allocate to the marketing because we do have very deep users pool from our app. So I hope that answers the question. Thank you.

Operator

Next, we have Jessie Xu of Nomura.

Jessie Xu -- Nomura Instinet -- Analyst

Hi, good morning management. Thank you for taking my question, and congratulations for a very strong quarter. My question is regarding industry outlook. So just wondering what do you think of the industry outlook in three to five years? Do you expect the average size of an online large class to become larger? Or should we expect more diversified and innovative product offerings? I appreciate it a lot if you could share some of your thoughts on this.

And what is your corresponding strategy? Thank you.

Peng Su -- Vice President of Strategy and Capital Markets

Yes, this is Su Peng. Yes. So we still think the industry is at a very early stage. And obviously, we have low -- very low -- pretty low penetration if you look at online in terms of the total online plus offline tutoring industry.

So we have a pretty long runway ahead of that. And with that said, obviously, we talked again and again about the importance of differentiation because as parents get to know and students get to know better and better about online courses, they will naturally ask questions about what's your -- what's unique about your course. And that's why we've been focused on that from day one. And our recent quarter has, obviously, benefited from investments in this area.

And if you look at the whole category, I think it's useful to recognize it as a content-driven industry. So it's not like -- it's content-driven, it's not a completely tech-driven or platform-based kind of business. So we're looking at some brand effects, but we don't have a lot of network effect in this industry. So with that said, I think we will have -- we don't need to kind of worry about the kind of space to be different -- to be differentiated.

So the leading players, I believe, it's a lot of opportunity to differentiate. So maybe like -- a little bit like automobiles, so you can have innovations for many years, maybe since 1950 to 2000. A lot of innovation in cars, everybody has different sizes, different features, and people really like them. So we think for online courses, we are looking at such a market.

So it's not a winner-take-all. You have to be different. You have to invest in your teaching resources, invest in your technology. And that's what we plan to do.

And we -- as in previous questions, we talked about the invented large class model we are introducing this quarter. And we -- previously, we talked about the Smart Pen, using those in both during the live course and also after the course, as the homework. And so we think that's the -- I hope that answers your question.

Jessie Xu -- Nomura Instinet -- Analyst

Yes, very helpful.

Operator

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

Pei Du -- Investor Relations Director

Thank you once again for joining us today. If you have any further questions, please don't hesitate to contact us at Youdao directly or reach out to TPG Investor Relations. Have a good day. Thank you.

Feng Zhou -- Chief Executive Officer

Thank you.

Peng Su -- Vice President of Strategy and Capital Markets

Thank you.

Operator

[Operator signoff]

Duration: 56 minutes

Call participants:

Pei Du -- Investor Relations Director

Feng Zhou -- Chief Executive Officer

Peng Su -- Vice President of Strategy and Capital Markets

Sheng Zhong -- Morgan Stanley

Mark Li -- Citi -- Analyst

Alex Xie -- Credit Suisse -- Analyst

Wei Li

Thomas Chong -- Jefferies -- Analyst

Yuzhong Gao -- CICC -- Analyst

Binnie Wong -- HSBC -- Analyst

Jessie Xu -- Nomura Instinet -- Analyst

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