Youdao, Inc. (DAO) Q2 2026 Earnings Call Transcript

Good day and welcome to UDAO's second quarter 2026 Erniex Conference Call. All participants will be listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star and one on your telephone keypad. To withdraw your question, please press star and two. Please note, this event is being recorded. I would now like to turn the conference over to Mr. Jeffrey Wong, Investor Relations Director of UDAO. 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 now guarantees of the future performance and are subject to certain risks and uncertainties, exceptions, 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 UDOT'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 this 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 reconcilations 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 Yudao's corporate website at ir.yudao.com. Joining us today on the call from Yudao's senior management are Dr. Feng Zhou, our chief executive officer, Mr. Lei Jin, our president, Mr. Peng Su, our senior VP, and Mr. Wen Li, our VP of finance. I will now turn the call over to Dr. Zhou to reveal some of our recent highlights and strategic direction.

Dr. 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 NNB unless otherwise stated. We maintained solid momentum in the second quarter, delivering robust results. Net revenues for the quarter reached R&B $1.5 billion, representing a 3.5% yearly increase. In terms of profitability, we achieved a record high in Q2, with operating profit reaching R&B $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 R&B $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 profits 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 as last year, reflecting a substantial improvement in cash generation. Let me begin with an update on our progress in AI technology and Confucius, our proprietary large language model. AI remains a key driver across our business. During the second quarter, we continued to translate advances in our LRM capabilities into practical products and applications across our business lines. First, we rolled out Confucius 4 in the second quarter with significant upgrades in multi-model 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 Lobster AI, HiEcho, Youdao Baoku, Infinix, and iMagicBox, together with Confucius 4, demonstrated how AI is moving beyond the basic Q&A towards executing more complex tasks across learning, work, and advertising scenarios. Then technological advances in user adoption, our AI capabilities also continue to gain recognition and support from authoritative bodies. In Q2, the Beijing Key Laboratory of Artificial Intelligence for Multilingual Translation, co-funded by Yodau, 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. Network news from learning services were RMB 795.6 million, up 20.9% year-over-year. Primarily driven by the strong performance of Yodalingshi, 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 essay grading feature launched in the first quarter, grading volume more than doubled sequentially in Q2. Together with AI-powered quiz recommendation and college admission advisory services, these differentiated AI capabilities helped enhance the user experience and contributed to a retention rate of over 75% for Youdao Lingshi 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 R&B 100 million in sales during the second quarter, up more than 20% year-over-year. our ai simultaneous interpretation feature also maintains strong momentum with user engagement by approximately 100 percent year-over-year we also launched what we believe is the world's first 14 language cross-lingual accent-free voice cloning technology enabling rapid voice replication across languages while preserving the speaker's emotional characteristics To support broad adoptions, we open-sourced the model, weights, and tool 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 growth savings increasing by more than 100% year-over-year. The product also received positive feedback from both domestic and international users at WAIT. Turning to online marketing services, net revenues were R&B $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 percent up approximately three 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 advertising advertiser retention by approximately five percentage points sequentially. Our AI application and short-form drama advertising businesses also maintain 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 ad 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 by 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 objective. Net revenues were R&B $80.6 million in the second quarter, down 31.5% year-over-year, while the overall operational health of the business continued to improve. Our market position remains strong. During the 6-18 shopping festival, Yodau Dictionary Pen ranked the number one in sales in its category on both JD.com and Timo for the seventh consecutive year. Our Yodau tutoring pen 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 Yodal Dictionary Pen X8, featuring an expanded database of 80 million authoritative 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 LRMs 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, Dr. Toh, and hello, everyone. Today, I will be presenting some financial highlights from the second quarter of 2026. We encourage you to receive our press release issue earlier today for further details. For the second quarter, total net revenue were R&B $1.5 billion, U.S. dollar $216.2 million, representing a 3.5% increase from the same period of 2025. Net revenue from our learning services were R&B $795.6 million, U.S. dollar $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 period of 2025. Net revenue from our smart devices were R&B $86.8 million, or U.S. dollar $12.8 million, representing a 31.5% decrease from the same period of 2025, primarily due to the decline in demand for smart learning devices. Net revenue from our online marketing services were R&B $584.4 million, or U.S. dollar $86.1 million, representing a 7.7% decrease from the same period of 2025. The year-over-year decrease reflects Yodau's discipline-strategic approach to engage acceptance, which plays a greater emphasis on high ROI engagement. Yodau believes this strategy has enhanced the overall operational efficiency of its business. To the second quarter, our total gross profit was RMB $716.9 million, for US$ 105.7 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 2006, compared with 59.8% for the same period of 2025. Gross margin for smart devices was 32.8% for the second quarter of 2006, compared with 41.5% for the same period of 2025. Gross margin for online marketing services was 28.7% for the second quarter of 2006, comparables 25.8% for the same period of 2005. To the second quarter, our total operating expense was R&B 605.3 million, or your dollar 89.2 million, comparables R&B 580.6 million for the same period of the last year. Looking at our expense in more detail, sales and marketing expense for the second quarter of 2016 will RMB $424.1 million, compared with RMB $401.8 million in the second quarter of 2025. Search and development expense for the second quarter of 2016 will 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 2016, compared with 2% for the same period of last year. For the second quarter of 2006, our net income attributable to the ordinary shareholder was R&B $73.8 million, OUSD $10.9 million, compared with net loss attributable to the U.S. ordinary shareholders of the $17.8 million for the same period of last year. Non-GAAP net income attributable to the ordinary shareholder for the second quarter was R&B 90.6 million or US dollar 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 shareholder for the second quarter of 2006 or RMB 0.62 or US dollar 0.09 and the RMB 0.61 or US dollar 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 US$0.11, and RMB 0.75, or US$0.11, respectively. Our net cash provided by operating activity was RMB 334.2 million, or US$49.3 million for the second quarter. Looking at our balance sheet, as of June 30, Our contract liability, which mainly consists of the flow revenue generated from our lending services, were RMB 835.1 million, OUS dollar, 123.1 million, compared with RMB 847.7 million as of December 31st, 2035. At the end of the period, our cash, cash equivalents, current and unemployment restricted cash, and the short-term investment, total on the $849.3 million, or U.S. dollar, $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.

We will now begin the question and answer session. To ask a question, you may press star N1 on your telephone keyboard. If you are using a speakerphone, please pick up your handset before pressing the key. To withdraw your question, please press star and two.

At this time, we will pause momentarily to assemble our roster. Our first question comes from Brian Gong with Siri.

Please go ahead.

Good evening, management. Thanks for taking my question.

I want to ask about the ongoing the integration of the computers in large language model has built a cost in the momentum across our business and financial performance. So I would like to ask the management, what is the cost of this model, and are there new product launches in the pipeline targeting this capability?

Thank you.

Hello, Brian. Yeah, I will take the question. For large language models, we focus on areas where we see strong user demand, significant potential for value creation, and also differentiated strength for your DAF. In addition to translation, which has long been one of our core strengths, I'd like to highlight two areas today, advanced voice and audio, and mathematics learning. So in both areas, we believe UDAO has significant strengths. For voice, we have seen a strong user adoption for several years already. The success of our products, Hi-Echo and UDAO simultaneous interpretation, demonstrated clear demand for high-quality, low-latency voice interactions in both learning and communications. In Q2, user engagement with simultaneous interpretation increased by approximately 100% year-over-year. So while higher cost growth billings also grew by more than 100%. So one recent development I want to highlight is Confucius IV TTS. As we discussed in our prepared remarks, this modern text-to-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 math learning is highly demanded by users, and it's also an area where we have strong technology and learning expertise. Math is, we all know, a challenging subject for many learners, And it's foundational to almost all our STEM disciplines. So at the same time, students' needs in math learning are highly personalized and often resolve around very specific problems and knowledge gaps. So this makes math learning a significant opportunity for AI to provide personalized explanation, to provide diagnosis, practice, and tutoring at scale. So Confucius IV significantly improved reasoning for visual 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.

Yeah, thank you.

Our next question comes from Jing Wan with CICC. Please go ahead.

Good evening, management. Thank you for taking my question. My question is also about AI, but it's more about AI features of Lingshu's AI IC grading. We all know that Lingshu's AI IC grading feature has earned well-spread user recognition. Do we plan to further expand its AI-powered features in Lingshu in the future? Thanks.

Thank you. This is Fengshu. I will handle the question first. Yeah, and for the Lingshu, we will always see the AI creating values for Lingshu in two important ways. by improving the learning experience and also expanding what we can offer to the users and by improving the scalability and operational efficiency of our services. Over the past four years, powered by our continuing investments in our lifelong remodel computers, YodelingCube has focused on resolving the core pinpoints across the learning and college application scenarios. Through continuous products, refinements, and exploration of the latest use case, we have built 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, Yu Dao Ling Shi has crafted granular and personalized intelligent learning solutions. The first is about the personalized learning path recommendations. Centered around specific knowledge points, dysfunction time points are still the weak areas to generate a tailor-made learning plan by targeting the shortfall directly and eliminating redundant practice. It boosts the learning efficiency allowed. And second is about the AI quiz recommendations. Deverating individual learning profile within the Yu Dao Ring Shi's Intelligent Learning System. This feature dynamically recommended adaptive exercise helps students master core concepts through the application and the variations. And the third is the AI essay grading for Chinese and English based on the explicit evaluation rubrics. This features diagnose writing floors with high precession and provide target optimizations suggestions, helping students to polish their writing skills efficiently. And the last is the AI-based college admission advisors. Extending beyond academic learning will all ensure leverage is massive user space and extensive industry data to offer the professional AI-based college application advisory services. By sensing users' performance, strengths, interests, and risk preference, it intelligently generates multiple well-balanced application strategies to guide 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, we will ensure a cheaper retention rate exceeding the 75%, maintain an industry-leading level, and demonstrate high user satisfaction with our AI-interactive courses. So for us, AI is not simple and additional features will ensure. It will become important drivers of both users' value and business efficiency, helping us to improve the quality, scalability, and the long-term economics of our business. I hope to answer your questions. Thank you.

Thanks. That's very clear.

The next question is from Thomas John with Jeffrey. Please go ahead.

Good evening. Thanks, management, for taking my question. Could management share the outlook for online marketing services in the first quarter?

Hi. This is Jinlei. Thank you for your questions. In the second quarter, our advertising business became more popular. with the growth margin improving by about 3 percentage points. We expect the growth margin to continue improving year-over-year in the third quarter. Our online marketing revenue grew from about R&B 100 million in the first quarter of 2022 to about R&B 600 million per quarter in the first half of this year. This growth was driven by our continued investment in AI and data capabilities, which has helped us expand into new business opportunities. Whenever we capture key opportunities, revenue experience rapid acceleration in the subsequent In the third quarter, it will focus on the three areas. The first one is sensing our AI plus advertising capabilities. We are integrating AI into all parts of our advertising business through our priority vertical RRM. One is KOL marketing. After upgrading Infinite in the first quarter, we plan to launch and oversee KOL marketing agents in the third quarter to help Chinese companies reach global markets more efficiently. The other is programming advertising. Launching in the second quarter, our second-generation AI-80 placement optimizer improves traffic matching and helps increase targeting accuracy and operating efficiency. The second is expanding our advertiser base. With the support of our team and AI capabilities, we added more than 100 new advertisers in the second quarter. And in the third quarter, we will focus on fast-growing sectors, such as AI applications and short-form dramas, both in China and overseas. The third, improving probability. We will continue to improve growth margins through two initiatives, using UDOT IMG Bus to reduce the cost of producing advertising creatives, and using the AI-AD Placement Optimizer to identify more cost-effective traffic. In summary, over the medium to long term, we will continue to apply AI to programmatic advertising and QR marketing. This will help improve advertisers' ROI while supporting our growth in both revenue and profitability. In the short term, we will continue to prioritize practical and sustainable growth over rapid extension. We will also keep upgrading our advertising and QR marketing tools to support the future growth. Thank you.

Our last question comes from the line of Bo-Chan with Hu-Tai Securities. Please go ahead. Go ahead.

Thanks for taking my question. This is Zhang Bo from Huanhan. Could management share the outlook for the growth margin in the third column? Thank you.

Thank you, Zhang Bo. This is Wenling. I will answer your question. As reflected in our financial results, we delivered an impressive performance in the gross margin level, reaching 47% in the first half of this year, representing a year-over-year improvement of around 2 percentage points, especially a gross margin for online marketing services and learning services expanded by 1 percentage point and 3 percentage point year-over-year respectively. I will give more details on the reason why for the improvements on the profitability and its outlook by segment. In terms of online marketing services, the margin expansion in our advertising business stems from the data execution of our AI native strategy and profitability priority discipline. As for AI native strategy, the agents such as the AI AD placement optimizer and the magic box have significantly boosted productive across AD planning, user profiling, and creative asset production. As for probability-priority approach, we proactively prevent certain AD opportunities with relatively low ROI, focusing our resources instead on campaigns that deliver higher value to users. Second, learning services. The improvement in learning services' gross margin was primarily driven by AI-enhanced learning efficiency and skilling benefits. On the AI empowerment side, features such as AI essay grading for Chinese and English and the AI quiz recommendation have been widely adopted. These tools effectively elevated the efficiency of our teaching assistants, which in turn boosted both the student retention rate and the gross margin. On the economics of skill side, as cost revenue has steadily declined since the second half of 2025, we expect the economics of skill in learning services to become even more pronounced throughout 2026 which drives further gross margin expansion as a step of smart devices similar to the broader consumer electronic industry our smart devices segment has faced the cost pressure from the rising memory costs alongside a reduction in hardware economic of scale. Consequently, the gross margin for smart devices stood at around 37 percent in the first half of this year, down roughly 11 percentage points year-over-year. Although memory costs are likely to maintain elevation in the near term, architecture and The engineering improvement designed to reduce memory reliance will meaningful mitigates margin compression. With new product launch planned for the third quarter, we anticipate the gross margin of smart devices to recover to over 40% in the second half of the year, narrowing the year-over-year decline. Looking ahead, we will further deepen the AI-native strategy and broaden LLM integration across all product lines while maintain rigorous cost and operation efficiency optimization. This strategy will maintain central throughout the 2026, giving us confidence in delivering strong growth margin performance and achieving meaningful breakthroughs at the operating profit level in second half of 2026. I hope the information mentioned is helpful.

Thank you.

Ladies and gentlemen, this concludes our question and answer session. I would like to turn the conference back over to the management for any closing remarks.

Thank you once again for joining us today. If you have any further questions, please feel free to contact us at UDAO directly or reach out to Pearson Financial Communications in China or the U.S. Have a great day.

Ladies and gentlemen, the conference has now concluded. Thank you for attending today's presentation. You may now disconnect.