Youdao, Inc. (DAO) Earnings Call Transcript & Summary

Good day, and welcome to Youdao's Second Quarter 2026 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Mr. Jeffrey Wang, Investor Relations Director of Youdao. Please go ahead.

Thank you, operator. Please note that 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 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 this discussion. A general discussion of the risk factors that could affect Youdao's business and financial results is included in certain company filings 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 2026 second quarter financial results news release issued earlier today. As a reminder, this conference is being recorded. A webcast replay of this conference call will also be available on Youdao's corporate website at ir.youdao.com. Joining us today on the call from Youdao's senior management are Dr. Feng Zhou, our Chief Executive Officer; Mr. Lei Jin, our President; Mr. Peng Su, our Senior VP; and Mr. Yongwei 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.

Thank you, Jeffrey, and thank you all for participating in today's call. Before we begin, I would like to remind everyone that all numbers are denominated in renminbi unless otherwise stated. We maintained solid momentum in the second quarter, delivering robust results. Net revenues for the quarter reached RMB 1.5 billion, representing a 3.5% year-over-year increase. In terms of profitability, we achieved a record high in Q2 with operating profit reaching RMB 111.5 million, nearly fourfold year-over-year. This marks our eighth consecutive quarter of operating profitability, representing a critical step towards our goal of healthy and sustainable development. Meanwhile, net cash inflow from operating activities was RMB 334.2 million, up 80.7% compared with the same period last year. These strong quarterly results also drove strong first half performance. In the first half of 2026, total net revenues reached RMB 2.8 billion, up 3.6% year-over-year, while operating profit increased 27.3% to a record RMB 169 million. We also generated RMB 241.1 million in net operating cash flow compared with a net outflow of RMB 70.5 million in the same period last year, reflecting a substantial improvement in cash generation. Let me begin with an update on our progress in AI technology and computers, our proprietary large language model. AI remains a key driver across our business. During the second quarter, we continued to translate advances in our LLM capabilities into practical products and applications across our business lines. First, we rolled out Computers4 in the second quarter with significant upgrades in multimodel voice and translation capabilities. The new model delivers stronger performance in visual math and physics reasoning, particularly on complex diagrams, we also improved its reasoning architecture and training data to significantly reduce inference costs. In translation, an optimized acceleration mechanism increased inference speed by approximately 80%. Second, our growing portfolio of AI agents was showcased at the 2026 World AI Conference. Products, including LobsterAI, Hi Echo, Youdao Baoku, InfunEase and iMagicBox, together with Compicious4 demonstrated how AI is moving beyond basic Q&A towards executing more complex tasks across learning, work and advertising scenarios. Beyond technological advances and user adoption, our AI capabilities also continued to gain recognition and support from authorative bodies. In Q2, the Beijing Key Laboratory of artificial intelligence for multilingual translation co-founded by Youdao was officially launched. Going forward, we will continue advancing end-to-end multilingual translation models and accelerate their application across learning, international conferences and cross-border trade. I will now walk through the performance of each of our business lines during the second quarter. Net revenues from learning services were RMB 795.6 million, up 20.9% year-over-year, primarily driven by the strong performance of Youdao Lingshi, one of our strategic focused areas. AI continued to play an increasingly important role across our learning ecosystem. Following the strong reception of our AI English assay grading feature launched in the first quarter, grading volume more than doubled sequentially in Q2. Together with AI-powered CRIs recommendation and college mission advisory services, these differentiated AI capabilities helped enhance the user experience and contributed to a retention rate of over 75% for Youdao in the second quarter. For our programming courses, continued product upgrades and channel expansion helped to broaden the user base while improvements in the learning experience supported a retention rate of over 75% in the second quarter. Within learning services, our AI-driven subscription products generated approximately RMB 100 million in sales during the second quarter, up more than 20% year-over-year. Our AI simultaneous interpretation feature also maintained strong momentum with user engagement by approximately 100% year-over-year. We also launched what we believe is the world's first 14 language cross-lingual accident-free voice cloning technology, enabling rapid voice replication across languages while preserving the speakers' emotional characteristics. This is broad adoption, we open sourced to the model weights and 2 chains for local deployment and commercial use, significantly lowering the barrier to multilingual content production. Meanwhile, Hi Echo continued to perform strongly with second quarter gross billings increasing by more than 100% year-over-year. The product also received positive feedback from both domestic and international users at WAIC. Turning to online marketing services. Net revenues were RMB 584.4 million in the second quarter, down 7.7% year-over-year. The decline reflects our deliberate focus on higher quality, higher-margin opportunities as we continue to prioritize the long-term health and profitability of the business. As a result, gross margin improved to 28.7%, up approximately 3 percentage points year-over-year. At the same time, we continue to make progress in client acquisition and retention, adding more than 100 new clients during the quarter and increasing advertiser retention by approximately 5 percentage points sequentially. Our AI application and short form drama advertising businesses also maintained strong momentum with revenues growing more than 50% year-over-year for the second consecutive quarter. On the product side, we recently launched the second generation of our AI app placement optimizer, further improving advertising efficiency and quality. Unified account management provides centralized access across accounts, simplifying campaign operations. Automated push notifications delivers real-time data updates to help users respond more quickly. Intelligent alerts provides 20/7 anomaly detection with second level response times, helping reduce wasted ad spend and operational losses. Together, these upgrades further enhance advertiser value and strengthen the long-term health of our marketing ecosystem. Moving to smart devices. Improving profitability remains our primary objectives. Net revenues were RMB 86.8 million in the second quarter, down 31.5% year-over-year. While the overall operational health of the business continues to improve. Our market position remains strong during the June 18 shopping festival. Youdao Dictionary Pen ranked #1 in sales in its category on both JD.com and Tmall for the seventh consecutive year. Our Youdao tutoring plan also received recognition from several government authorities for its application of AI in education, including the Ministry of Education, the Cyberspace Administration of China and the Ministry of Industry and Information Technology. We also recently launched the Youdao Dictionary Pen XH, featuring an expanded database of 80 million operative words and AI-powered photo-based tutoring across multiple subjects. Initial market response has been positive. Looking ahead, we will continue to execute our AI native strategy, leveraging our technical capabilities to deepen the application of vertical [ OMs ] across learning and advertising. We will also continue expanding our portfolio of AI agents to enhance user experience and satisfaction supporting further improvements in our key financial metrics in the second half of the year. With that, I will hand over the call over to Peng Su for a deeper dive into our financial results. Thank you.

Thank you, [indiscernible] hello, everyone. Today, I will be presenting some financial highlights from the second quarter 2026. We encourage you to read our press release issued earlier today for further details. For the second quarter, total net revenue of RMB 1.5 billion or USD 216.2 million, representing a 3.5% increase from the same period of 2025. Net revenue from our learning services were RMB 795.6 million or USD 117.3 million, representing a 20.9% increase from the same period of 2025. The year-over-year increase was primarily driven by the strong momentum of tutoring services compared with the same here of 2025. Net revenue from our smart devices were RMB 86.8 million or USD 12.8 million representing a 31.5% decrease from the same period of 2025, primarily due to the line in demand for smart devices, smart learning devices. Net revenue from our marketing services were RMB 584.4 million or USD 86.1 million, representing a 7.7% decrease from the same period of 2025. So year-over-year, decrease reflects without disciplined strategic approach to engage acceptance, which places a greater emphasis on higher ROI return on investment engagements. We would now believe this strategy has enhanced the overall operational efficiency of its business. For the same quarter, our total gross profit were RMB 716.9 million or USD 5.7 million. representing a 17.6% increase from the same period of 2025. Gross margin for learning services was 65.5% for the second quarter of 2026 compared with 59.8% for same period of 2025. Gross margin for smart devices was 32.8% for the second quarter of 2026 compared with 41.5% for the same period of 2025. Gross margin for online marketing services was 28.7%, for the same quarter of 2026 compared with 25.8% for the same period of 2025. For the second quarter, our total operating expense were RMB 605.3 million or USD 89.2 million, compared with RMB 580.6 million for the same period of last year. Looking at our expense in more detail. Sales and marketing expense for the second quarter of 2026 were RMB 424.1 million, compared with RMB 401.8 million in the second quarter of 2025. Research and development expense for the second quarter of 2026 were RMB 142 million compared with RMB 128.3 million in the second quarter of 2025. Our operating income margin was 7.6% in the second quarter of 2026 compared with 2% for the same period of last year. For the second quarter of 2026 our net income attributable to the ordinary shareholder was RMB 73.8 million or USD 10.9 million compared with net loss attributable to the ordinary shareholders of the RMB 17.8 million for the same period of last year. Non-GAAP net income attributable to the ordinary shareholders for the second quarter was RMB 90.6 million or USD 13.4 million compared with RMB 12.5 million in the same period of last year. Basic and diluted net income per ADS attributable to the ordinary shareholders for the second quarter of 2026 were RMB 0.62 or USD 0.09 and RMB 0.61 or USD 0.09, respectively. Non-GAAP basic and diluted net income per ADS attributable to the ordinary shareholders for the second quarter was RMB 0.76 or USD 0.11 and RMB 0.75 or USD 0.11, respectively. Our net cash provided by operating activity was RMB 334.2 million or USD 49.7 million for the second quarter. Looking at our balance sheet, as of June 30, 2026 our contract liability, which mainly consists of the revenue generated from our learning services were RMB 835.1 million or USD 123.1 million compared with RMB 847.7 million as of December 31, 2025. At the end of the period, our cash, cash equivalents, current and non-current restricted cash and short-term investments, total RMB 849.3 million or USD 125.2 million. This concludes our prepared remarks. Thank you for your attention. We would now like to open the call to your questions. Operator, please go ahead.

[Operator Instructions] Our first question comes from [ Brian Gong ] with Citi.

I want to ask about the ongoing integration of the [indiscernible] in language model has still positive momentum across our business and financial performance. So I would like to ask management what is the core strength of this model? And are there new product launches teams or pipelines targeting this capability?

Brian, I will take the question. For large language models, we focus on areas where we see strong user demand, a significant potential for value creation and also differentiated strength for Youdao. In addition to translation, which has long been one of our core strengths, I'd like to highlight 2 areas today. Advanced voice and audio and mathematics learning. So in both areas, we believe Youdao has significant strength. For voice, we have seen strong user adoption for several years already. The success of our products, Hi Echo, and Youdao simultaneous interpretation demonstrated clear demand for high-quality, low-latency voice interactions in both learning and communications. In Q2, user engagements with simultaneous interpretation increased by approximately 100% on year-over-year. So while higher cost gross billings also grew by more than 100%. So 1 recent development I want to highlight is Confucius4-TTS. As we discussed in our prepared remarks, this modern texture speech model supports cross lingual accent free voice cloning across 14 languages while preserving speaker identity and emotional expressions. So we see broad potential applications in areas such as cross lingual learning, multilingual content creation, dubbing and international communications for this model. So we plan to launch more voice-related models and products in the coming months. So the second area I want to highlight is mathematics. Mathematics is another very important focus for us. AI-driven maths learning is highly demanded by users. And it's also an area where we have a strong technology and learning expertise. Math is -- we're -- a challenging subject for many learners and it's foundational to almost all STEM disciplines. So at the same time, students' needs in maths learning are highly personalized and often resolve around very specific problems and knowledge gaps. So this makes maths learning a significant opportunity for AI to provide personalized explanation to provide diagnosis, practice and tutoring at scale. So Confucius4 significantly improved [indiscernible] listening for vision math and physics problems particularly those involving complex diagrams. Going forward, we plan to introduce additional model capabilities and also AI agents for math learning with similar opportunities across other STEM subjects. I'm also pleased to share that we plan to launch multiple new AI agent and model products in September next month. So we will continue expanding our models and agent capabilities around these key areas. So we look forward to share more very soon. Yes. Thank you.

Our next question comes from [ Jin Han ] with CICC.

My question is also about AI, but it's more about AI features of -- Lingshi AI as grading. We all know that Lingshui's AI Essay grading feature has earned broad user recognization. Do we plan to further expand its AI-powered features in Lingshi in the future?

Thank you. This is Peng Su. I will handle the question first. Yes, and for Lingshi, we will receive the AI creating values for Lingshi in 2 important ways. By improving the learning experience and expanding what we can offer to the users and by improving the scalability and operational efficiency of our services. Over the past 4 years, powered by our continued investments on our lifeline model Confucius, Youdao has focused on resolving the core in pain points across the learning and college application scenario. Through continuous product refinements and exploration of its use case. We have built a comprehensive AI interactive courses and service metrics. This platform empowers students to enhance their learning quality and efficiency, winning broad acclaim from our users. At the core learning features level, Youdao Lingshi has crafted the granular and personalized intelligence learning solutions. The first is about the personalized learning path recommendations, centered around specific knowledge points, is function time point are still the weak areas to generate a tailor-made learning learning plan by targeting shortfall directly and eliminating redundant practice. It boosted the learning equation a lot. And second is about the AI recommendations, leveraging individual learning profit within the Youdao Lingshi intelligence learning system. This feature dynamically recommendation adaptive exercise help students master core concept through the application and variations. And the third is the AI Essay Grading for Chinese and English based on the explicit evaluation Rubrix. This feature signals writing floors with high precision and provide target optimization, suggestions, helping students to polish their writing skill efficiently. And the last is the AI-based college admission advisers, expanding beyond academic learning would all ensure leverage its massive user base and extensive industry data to offer the professional AI-based college application advisory services [indiscernible] users' performance, strength, interest and risk preference, it intelligently generates multiple well-balanced application strategies to get candidates in their decision-making process. Our retention metrics serve as a strong proof of our service capabilities. In the second quarter of this year, Youdao Lingshi achieved retention rate exceeding the 75% maintaining an industry level -- the industry-leading levels and demonstrate high user satisfaction with our AI direct courses. So for us, AI is not simple and additional features for sure. it become important drivers of both users value and business efficiency, helping us to improve the quality, scalabilities and the long-term economics of our business. I hope I answered your questions. Thank you.