August 6, 2019
William Lei Ding
Chief Executive Officer
Youdao, Inc.
No. 399, Wangshang Road, Binjiang District
Hangzhou 310051
Peoples Republic of China
Re: Youdao, Inc.
Draft Registration Statement on Form F-1
Submitted July 11, 2019
CIK No. 0001781753
Dear Mr. Ding:
We have reviewed your draft registration statement and have the
following comments. In
some of our comments, we may ask you to provide us with information so we may
better
understand your disclosure.
Please respond to this letter by providing the requested information and
either submitting
an amended draft registration statement or publicly filing your registration
statement on
EDGAR. If you do not believe our comments apply to your facts and circumstances
or do not
believe an amendment is appropriate, please tell us why in your response.
After reviewing the information you provide in response to these comments
and your
amended draft registration statement or filed registration statement, we may
have additional
comments.
Draft Registration Statement on Form F-1
Prospectus Summary
Our Business, page 1
1. We note your disclosure that "Youdao was founded in 2006 as part of
NetEase" and that
Youdao has operated "for over a decade." Clarify and prominently
disclose that the
company conducting this offering has a limited operating history on a
consolidated basis
and was recently formed following a series of transactions initiated by
your controlling
shareholder, NetEase. Disclose that you will continue to be controlled
by NetEase
following the offering.
William Lei Ding
FirstName LastNameWilliam Lei Ding
Youdao, Inc.
Comapany2019
August 6, NameYoudao, Inc.
August 6, 2019 Page 2
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FirstName LastName
2. Define and include a brief description of how you measure MAUs upon
first use.
Additionally, disclose that MAUs are derived from both of your
reportable segments.
Discuss the possible variance in the value of each user given how you
define the metric.
For example, disclose that certain MAUs could be one-time users who
access your
dictionary application as opposed to a frequent user who is taking one
of your courses.
Our History and Corporate Structure, page 4
3. Please reconcile your disclosure on page 4 that you launched Youdao
Premium Courses in
2014 with the disclosure in the first risk factor on page 16 that you
began to offer Youdao
Premium Courses recently in 2016.
4. Where you discuss the restrictions imposed by PRC law on foreign
ownership of
companies engaged in certain services, also disclose that as a result
of these restrictions
you do not directly own any substantive operations in China. Highlight
that if your PRC
VIEs and their shareholders fail to perform their obligations under
the contractual
arrangements, you could be limited in your ability to enforce the
contractual arrangements
that give you effective control, and if you are unable to maintain
effective control, you
would not be able to continue to consolidate the VIEs' financial
results with your financial
results. State the percentage of revenues in your consolidated
financial statements that are
derived from your VIEs. Disclose that you rely on dividends and other
distributions paid
to you by your PRC subsidiary, which in turn depends on the service
fees paid to your
PRC subsidiary from your VIEs. Confirm that you do not have unfettered
access to your
PRC subsidiary's and VIEs' revenues due to PRC legal restrictions on
the payment of
dividends by PRC companies, foreign exchange control restrictions, and
the restrictions
on foreign investment, among others.
5. Please include the beneficial ownership and voting power to be held by
NetEase in the
chart showing your anticipated post-offering ownership structure. Also
enlarge the chart
and accompanying text so that each is fully legible. Furthermore,
revise footnotes (5) and
(6) to the chart to disclose that Mr. William Lei Ding is the Chief
Executive Officer, a
director and the major shareholder of NetEase.
Risk Factors
Risks Related to Our Business and Industry
We have a limited history in operating certain of our products and services,
which makes it
difficult to evaluate our future prospects..., page 16
6. Highlight with greater specificity the challenges associated with your
limited operating
history and ongoing integration of recent acquisitions. Discuss the
risks inherent in
investing in a company that has not previously operated as a
stand-alone consolidated
entity.
William Lei Ding
FirstName LastNameWilliam Lei Ding
Youdao, Inc.
Comapany2019
August 6, NameYoudao, Inc.
August 6, 2019 Page 3
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FirstName LastName
Uncertainties exist in relation to new legislation or proposed changes in the
PRC regulatory
requirements regarding online private education, page 19
7. Revise the title of this risk factor to indicate that you do not
comply with certain PRC
regulatory requirements regarding online private education.
8. You disclose that Youdao Computer and certain operating subsidiaries
do not include
"training" in their authorized scope of business as they do not hold a
private school
operating permit. As Youdao Computer provides online learning
services, disclose the
scope of its business license and the business licenses of the
operating subsidiaries that
provide learning services, and explain how the business scopes would
cover the learning
services each provides.
PRC regulation of loans to and direct investment in PRC entities by offshore
holding
companies...may delay us from using the proceeds..., page 44
9. You disclose a series of regulatory restrictions and limitations with
respect to providing
funding to your PRC subsidiary through loans or capital contributions
(e.g., your PRC
subsidiary may not procure loans which exceed the difference between
its total investment
amount and registered capital). Quantify here and where applicable in
the prospectus the
extent to which you may make loans or capital contributions to your
PRC subsidiaries
based upon the applicable PRC restrictions.
Risks Related to the ADSs and This Offering
An active trading market for our ordinary shares or the ADSs may not develop
and the trading
price for our ADSs may fluctuate significantly, page 51
10. Address the risks that the company's dual-class share structure with
differing voting rights
may render its shares ineligible for inclusion in certain stock market
indices, which could
adversely affect share price and liquidity.
You may face difficulties in protecting your interests, and your ability to
protect your rights
through U.S. courts may be limited..., page 54
11. Revise your disclosure under this risk factor to address whether a
controlling shareholder
owes fiduciary duties to a company and its minority shareholders under
Cayman Islands
law. Discuss how any fiduciary duties owed by a controlling
shareholder may differ
under Cayman Islands law from U.S. corporate law and how that might
affect the ability
of minority shareholders or the company to protect their respective
interests.
William Lei Ding
FirstName LastNameWilliam Lei Ding
Youdao, Inc.
Comapany2019
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Use of Proceeds, page 62
12. In light of the statutory limits and required regulatory approvals
with respect to your
ability to make loans and capital contributions to your PRC
subsidiaries and VIEs, please
quantify the amount of loans or capital contributions you anticipate
being able to make to
your PRC subsidiaries following this offering. Discuss any specific
regulatory approvals
you expect to seek and/or receive in connection with allocating the
net proceeds of this
offering and address how long it will take to receive these approvals.
Also disclose, if
true, that you expect the IPO proceeds to be used in the PRC in the
form of RMB and,
therefore, your VIEs will need to convert any capital contributions or
loans from U.S.
dollars to RMB.
Contractual Arrangements with Our VIEs and Their Respective Shareholders, page
72
13. We understand that you operate your value-added telecommunications
services in China
through Youdao Computer, one of your VIEs, due to restrictions imposed
by PRC laws on
foreign ownership of certain companies. We note that your other VIE,
Linjiedian
Education, currently does not operate any substantial business or hold
any material assets.
It is unclear why Linjiedian Education was set up as a VIE and why
your wholly owned
subsidiary (Youdao Information) entered into a series of contractual
arrangements with
Linjiedian Education. Explain your intentions for Linjiedian
Education.
Business Cooperation Agreements, page 75
14. Describe the purpose and material terms of each of the business
cooperation agreements.
Our Relationship with NetEase, page 75
15. Discuss whether management or the board has implemented any structural
protections
intended to minimize or protect against conflicts of interest that may
arise between the
company and NetEase. For example, disclose whether directors who owe
fiduciary duties
to both the company and NetEase will participate in decisions about
arrangements
between the two companies, and address their obligations to present
certain opportunities
to each company.
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Key Factors Affecting Our Results of Operations, page 78
16. Given your history of net losses for the two most recent fiscal years,
please address
management's plan for profitability.
William Lei Ding
FirstName LastNameWilliam Lei Ding
Youdao, Inc.
Comapany2019
August 6, NameYoudao, Inc.
August 6, 2019 Page 5
Page 5
FirstName LastName
Our ability to increase our paid student enrollments, page 79
17. We note your disclosure regarding the increase in paid student
enrollments from 2017 to
2018 and that this is affected by the size of your student base and
your ability to convert
users and students of your free or low-price courses into paid student
enrollments. To
better understand this key performance indicator, please discuss
trends in the factors that
influence your ability to increase paid student enrollments. For
example, disclose the
number of courses that are free and low-priced compared to the number
of courses that
have paid student enrollments for each type of online course offering:
(i) Youdao Premium
Courses; (ii) NetEase Cloud Classroom; and (iii) China University
MOOC. In addition,
discuss how student enrollments have increased, but your ratio of paid
student enrollments
has decreased. We refer to the disclosure on page 119 of the increase
in student
enrollments versus the increase in paid student enrollments in your
Youdao Premium
Courses for 2017 and 2018.
Our ability to broaden monetization channels, page 80
18. You explain that your future prospects and revenue growth depend in
part on your ability
to monetize your user base, content, and technologies in new ways.
Explain with
specificity how you intend to further diversify your solutions and
monetization
channels accordingly.
Our ability to manage our costs and expenses effectively, page 80
19. We note your disclosure that you believe you will be able to achieve
operational synergies
as you integrate the May 2019 acquisitions of NetEase Cloud Classroom,
China
University MOOC and NetEase Kada, from the NetEase Group due to these
businesses
benefiting from your experience and expertise in this area. Since both
you and these
businesses have been and continue to be controlled by NetEase, please
clarify why the
acquired businesses did not already benefit from this experience and
expertise.
Results of Operations, page 91
20. As you disclose management reviews Average Total MAUs as a key
performance metric,
you should include a discussion of the metric for each period
presented. Additionally,
please disclose whether management uses any key performance metrics
for your online
marketing services segment. In that respect, we note that for the year
ended December 31,
2017, you generated the majority of your net revenues from this
segment.
Net revenues, page 91
21. Please expand the discussion of changes in net revenues from period to
period
by quantifying the impact of the increase in tuition fees.
William Lei Ding
FirstName LastNameWilliam Lei Ding
Youdao, Inc.
Comapany2019
August 6, NameYoudao, Inc.
August 6, 2019 Page 6
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Cost of revenues, page 92
22. For period to period changes in costs associated with learning
services and products,
please tell us what consideration you gave to quantifying and
discussing the increases in
faculty members and related salaries and benefits, as well as any
increases in the cost of
course materials, etc. In regard to online marketing services costs,
please consider
quantifying and explaining increases in traffic acquisition costs and
payroll-related
expenses.
Holding Company Structure, page 98
23. Disclose that the payment of dividends to you by your PRC subsidiaries
depends on
service fees paid to your PRC subsidiaries by your VIEs in China.
Disclose the amount of
services fees paid to your PRC subsidiaries from your VIEs in the last
two fiscal years.
Disclose whether you expect these levels to continue in the future.
Description of Share Capital
Ordinary Shares, page 159
24. You disclose that upon any sale, transfer, assignment or disposition
of any Class B
ordinary shares by a holder thereof to any non-affiliate of such
holder, each of such
Class B ordinary shares will be automatically and immediately
converted into one Class A
ordinary share. Explain the meaning of "affiliate" for purposes of
this provision and
describe any exceptions to the automatic conversion.
Financial Statements
Consolidated Balance Sheets, page F-3
25. Please give pro forma effect to the automatic conversion of your
Series A convertible
redeemable preferred shares into ordinary shares, in a separate column
presented
alongside your most recent historic balance sheet.
Consolidated Statements of Operations and Comprehensive Loss, page F-5
26. We note you generate revenue from learning services and products.
Please separately
state on the face of your income statement revenues from tangible
products and revenues
from services, pursuant to 5-03(b)1 of Regulation S-X, or advise us.
27. Please state separately the amount of cost of tangible goods sold and
the amount of cost of
services, pursuant to 5-03(b)2 of Regulation S-X, or advise us.
William Lei Ding
FirstName LastNameWilliam Lei Ding
Youdao, Inc.
Comapany2019
August 6, NameYoudao, Inc.
August 6, 2019 Page 7
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FirstName LastName
Note 1. Operations and Reorganization
(b) VIE arrangements, page F-11
28. We note your disclosure of the contractual agreements that provide the
Company with
effective control over the VIEs, presumably enabling the company to
have power to direct
the activities that most significantly affects the economic
performance of the VIEs. Please
clarify how the contractual agreements convey power to direct the
activities of the VIEs
and what those powers entail.
29. We note that the Cooperation Agreement between Youdao Information and
Youdao
Computer provides that the VIE share "a portion of its monthly income"
with the WFOE.
Please describe in greater detail and clarify how the operating and
cooperation agreements
convey substantially all of the economic benefits to the company. For
example, explain
whether the agreements provide that the VIEs pay annual service fees
to the WFOE in
an amount that is equivalent to all of their net income.
Note 2. Summary of Significant Accounting Policies
(m) Revenue Recognition, page F-20
30. We note that the learning periods of your Youdao Premium Courses
generally range from
one month to 12 months. Please disclose the typical or average
duration of learning
periods for live streaming and pre-recorded courses over which you
ratably recognize
revenue.
31. We note your representation that the company is the "primary obligor"
in your
arrangements with advertising customers. We also note you rely on and
make payments
to operators of third-party internet properties to implement your
performance obligations.
Please provide us your analysis regarding whether you are the
principal or an agent in
your arrangements with customers, where you rely on third party
implementation
partners. We refer you to ASC 606-10-55-36 through 55-40 and 50-12(c).
Note 20. Unaudited Pro Forma Loss per Share, page F-43
32. Please clarify the wording of the first paragraph of this footnote as
it currently states pro
forma net income (loss) per share is not presented while you also
present this information
in the same footnote.
General
33. Please supplementally provide us with copies of all written
communications, as defined in
Rule 405 under the Securities Act, that you, or anyone authorized to
do so on your behalf,
present to potential investors in reliance on Section 5(d) of the
Securities Act, whether or
not they retain copies of the communications.
William Lei Ding
FirstName LastNameWilliam Lei Ding
Youdao, Inc.
Comapany2019
August 6, NameYoudao, Inc.
Page 8
August 6, 2019 Page 8
FirstName LastName
34. We note references throughout the prospectus to a report commissioned
by you and
prepared by Frost & Sullivan. Please provide us with copies of this
report with cross-
references from the underlying factual support to the relevant
statements in the prospectus.
You may contact Joseph Cascarano, Staff Accountant, at (202) 551-3376
or Robert S.
Littlepage, Accountant Branch Chief, at (202) 551-3361 if you have questions
regarding
comments on the financial statements and related matters. Please contact Joshua
Shainess,
Attorney-Adviser, at (202) 551-7951 or Kathleen Krebs, Special Counsel, at
(202) 551-
3350 with any other questions.
Sincerely,
Division of
Corporation Finance
Office of
Telecommunications