Youdao, Inc. (NYSE:DAO) Q2 2025 Earnings Call Transcript

Youdao, Inc. (NYSE:DAO) Q2 2025 Earnings Call Transcript August 14, 2025

Youdao, Inc. misses on earnings expectations. Reported EPS is $-0.02093 EPS, expectations were $-0.00174.

Operator: Good day, and welcome to the Youdao 2025 Second Quarter Earnings Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Mr. Jeffrey Wang, Investor Relations Director of Youdao. Thank you, and over to you.

Jeffrey Wang: Thank you, operator. Please note 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 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 reconciliations of GAAP to non-GAAP financial results, please see the 2025 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. Wayne 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: 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 based on renminbi, unless otherwise specifically stated. Strong execution of our AI Native Strategy drove robust financial results in the second quarter, highlighted by our first profitable second quarter. Operating income was RMB 28.8 million compared with an operating loss of RMB 72.6 million in the same period last year. Net revenues reached RMB 1.4 billion, an increase of 7.2% year-over-year. Operating cash inflow was RMB 185 million, down 26.1% year-over-year, primarily due to the strategic scaling back of certain STEAM and adult courses, which reduced the gross billings.

Next, let’s review our progress by business lines. Net revenues from learning services rose 2.2% year-over-year to RMB 657.8 million in Q2, driven primarily by the strong performance of Youdao Lingshi. Within the Learning Services segment, net revenues from Digital Content Services reached RMB 447.4 million. As a strategically focused initiative, Youdao Lingshi achieved exceptional results with net revenues growing approximately 30% year-over-year. On the product front, our large language model, Confucius, continued to power innovation. In Q2, we introduced the AI Essay Grading feature, designed in line with exam grading standards to provide comprehensive personalized evaluation and generate tailored feedback reports. The feature received widespread acclaim upon launch, driving Q2 retention rate above 75%, a historical high.

We also leveraged LLM Confucius’ capabilities to create personalized learning plans, further enhancing learning efficiency and outcomes. For our STEAM courses, we broadened enrollment channels, driving a year-over-year increase of roughly 15% in gross billings for programming courses. User satisfaction continues to rise with Q2 retention rates hitting a record high of over 75%. Additionally, we signed 12 gold medalists from the National Olympiads in Informatics to strengthen our top-tier teaching and R&D team, laying a strong foundation for future student services. On the app side, total sales of AI-driven subscription services rose approximately 30% year-over-year to nearly RMB 80 million in Q2, setting a record high. During the quarter, we released Confucius 3, our latest education LLM powering our education and translation services, an open sourced Confucius 3-Math, China’s first reasoning model dedicated to math education.

Combining large- scale reinforcement learning with algorithmic innovations, Confucius 3-Math delivers state-of-the-art accuracy with exceptional cost efficiency, 15x the inference performance of DeepSeek-R1 at just USD 0.15 per million tokens, well below typical LLM cost, enabling the low-cost deployment of professional-grade math AI applications. One notable milestone is Scholar AI, [Foreign Language], launched in May, which has already attracted over 1 million cumulative users. Designed to support students and scholars in research paper writing, it offers AI-powered plagiarism detection, proof reading and other tools to improve academic work. Powered by Confucius 3-Math, we also upgraded our Mr. P AI Tutor to achieve over 95% accuracy for K-12 math problem solving and tutoring.

Mr. P AI Tutor received the Gold Me Award, the highest honor granted to developers on the Xiaomi App Store. Additionally, Youdao Dictionary was named China’s top 50 most valuable AGI innovators in 2025. Moving to our Online Marketing Services segment. Q2 net revenues reached a record RMB 632.9 million, up 23.8% year-over- year, driven by strong demand from the gaming industry and Chinese clients expanding overseas. Gross margin was 25.8%, down 13 percentage points from a year ago, primarily due to the initial onboarding of new clients. We continue to expect this segment’s gross margin to stabilize in the 25% to 35% range over the medium to long term. Gaming was a highlight this quarter. We deepened collaboration with NetEase Games and other gaming advertisers on both domestic and overseas campaigns, driving gaming ad revenue growth of more than 50% year-over-year, a trend we expect to sustain under stable macroeconomic conditions.

On the product front, we continue to invest in GenAI-powered advertising technologies. We launched the AI ad placement optimizer in Q2, an end-to-end AI-driven agentic solution covering demand analysis, strategy formation, data analytics and iterative optimizations. We also significantly upgraded our anti-fraud system to enable real-time diagnosis and automated monitoring of ad delivery, including traffic requests, clicks and conversions, improving service quality and strengthening our risk control framework. These advances build on iMagicBox, our AI creative generation product introduced in Q1. Our team continues to move quickly in the GenAI-powered ad technology space, delivering fully integrated services from creative production and placement to post-campaign analytics.

We believe we are still in the early stages of a new cycle in which GenAI will create substantial value for advertisers and fuel our long-term growth. We see significant growth potential in the advertising business in gaming, e-commerce, overseas markets and GenAI applications and remain focused on capturing these opportunities to build a strong foundation for sustained growth. Next, in our Smart Devices segment, business health improved in Q2, while net revenues declined 23.9% year-over-year to RMB 126.8 million, primarily attributable to 2 factors. First, certain high-end Dictionary Pen models approached the end of their product life cycles during the quarter. Second, we reduced the marketing expenditure in hardware to prioritize business health at this stage.

Within this segment, we focused on Youdao Dictionary Pen, which maintained its market leadership, securing the #1 spot in sales on JD.com and Tmall during the 618 shopping festival for the sixth consecutive year. We also expanded our mid-range coverage with the launch of Youdao Dictionary Pen S7 Pro and A7 in Q2. Looking ahead, I remain confident in the long-term potential of AI-powered devices. I’m excited to share that we will be unveiling a new AI-powered smart device next week. Please stay tuned. Before I conclude, let me quickly recap a strong first half. We significantly enhanced our large language model portfolio, launching Confucius 3 and open sourcing both Confucius-o1 and Confucius 3-Math. Our learning services hit new highs with Lingshi achieving a 75% retention rate and the launch of successful new AI apps like Scholar AI.

In advertising, we expanded our customer base, deepened relationships with key accounts and deployed more GenAI capabilities, fueling strong Q2 growth. Financially, H1 total net revenue reached RMB 2.7 billion, up slightly year-over-year, while operating income surged to a record RMB 132.8 million from a loss of RMB 42.6 million a year ago. Looking ahead, we will continue to advance our AI native strategy, driving scenario-based optimizations of our large language models and agents to serve both learning and advertising customers. Our goal is clear: enhance our learner productivity and deliver higher return on advertising. With industry-leading AI technology and operational expertise, we remain committed to sustainably create customer value while further strengthening our financial performance.

With that, I will hand over to Su Peng for a deeper dive into our financial results. Thank you.

Peng Su: Thank you, Dr. Zhou, and hello, everyone. Today, I will be presenting some financial highlights from the second quarter of 2025. We encourage you to read through our press release issued earlier today for further details. For the second quarter, total net revenue were RMB 1.4 billion or USD 197.9 million, representing a 7.2% increase from the same period of 2024. Net revenue from our learning services were RMB 657.8 million or USD 91.8 million, representing a 2.2% increase from the same period of 2024. Net revenue from our smart devices were RMB 126.8 million or USD 17.7 million, representing a 23.9% decrease from the same period of 2024. Net revenue from our online marketing services were RMB 632.9 million or USD 88.3 million, representing a 23.8% increase from the same period of 2024.

The year-over-year increase was mainly attributable to the increased demand from the gaming industry and overseas markets, which was driven by our continued investment in AI technology. For the second quarter, our total gross profit was RMB 609.4 million or USD 85.1 million, representing a 4.3% decrease from the same period of 2024. Gross margin for learning services was 59.8% for the second quarter of 2025 compared with 60% for the same period of 2024. Gross margin for smart devices was 41.5% for the second quarter of 2025 compared with 30.3% for the same period of 2024. Gross margin for online marketing services was 25.8% for the second quarter of 2025 compared with 39.1% for the same period of 2024. For the second quarter, we reduced our total operating expense to RMB 580.6 million or USD 81 million compared with RMB 709.3 million for the same period of last year.

Looking at our expense in more details. Sales and marketing expense declined to RMB 401.8 million compared with RMB 515.7 million in the same quarter of 2024. Research and development expense was decreased to RMB 128.3 million compared with RMB 153 million in the second quarter of 2024. Our operating income margin was 2% in the second quarter of 2025 compared with operating loss margin of 5.5% for the same period of last year. For the second quarter of 2025, our net loss attributable to the ordinary shareholders was RMB 17.8 million or USD 2.5 million compared with RMB 99.5 million for the same period of last year. Non-GAAP net income attributable to ordinary shareholders for the quarter was RMB 12.5 million or USD 1.7 million compared with non-GAAP net loss attributable to the ordinary shareholders of RMB 96 million for the same period of last year.

Basic and diluted net loss per ADS attributable to the ordinary shareholders for the second quarter of 2025 were RMB 0.15 or USD 0.02. Non-GAAP basic and diluted net income per ADS attributable to the ordinary shareholders for the second quarter was RMB 0.11 or USD 0.02 and RMB 0.1 or USD 0.01, respectively. Our net cash provided by the operating activities was RMB 185 million or USD 25.8 million for the same quarter. Looking at our balance sheet as of June 30, 2025, our contract liabilities, which mainly consist of deferred revenue generated from our online learning services were RMB 856.7 million or USD 119.6 million compared with RMB 961 million as of December 31, 2024. At the end of the period, our cash, cash equivalents, current and noncurrent restricted cash and short-term investments totaled RMB 617 million or USD 86.1 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.

Q&A Session

Operator: [Operator Instructions] Our first question comes from the line of Vicky Wei from Citi.

Yi Jing Wei: Could management provide an update on the third quarter outlook for Youdao Lingshi?

Peng Su: Thank you for the question. This is Peng Su. I will handle the question first. And in Q2, Youdao Lingshi kept growing year-over-year with revenue increasing by roughly 30%. The retention rate exceeded about 75%, reaching a record high. It indicates that the user satisfaction for our products also reached a record high level. It is a solid foundation for the subsequent development, we believe. Youdao Lingshi, we think is a key initiative of the application education scenarios by our large language models, computers. In the second half of this year, we will continue to leverage the robust capability of the Confucius Large Language Model to further enhance the products and services quality and expand our user space. Regarding on the product updates, the 2 major developments are planned for the second half of this year.

First is the AI Essay Grading features rolled out in the Q2 this year, which provides users with professional Chinese essay feedback. Its specialized targets and timely grading has received best grades and positive feedback from our users. In the second half of this year, we will expand the AI Essay Grading to cover the English essay as well, enabling the users to more efficiently improve their English writing skill. Second, we will launch the AI tutoring. Powered by Confucius 3.0, it offers a more timely and tailor-made and precise assistance to the users, helping them to resolve the questions and improve the learning efficiency and outcomes. In terms of the user acquisition, since our AI interactive courses format was introduced in 2022, users’ learning outcome has been shown sustained and rapid improvement.

Youdao Lingshi’s reputation among the users continue to strengthen, which will help us to serve more users in the future. Additionally, we are actively expanding the acquisition channels and have achieved positive results in exploring localized user acquisition strategies. In summary, we think we feel very comfortable about the products of Youdao Lingshi right now, and we will definitely keep investing for the technology as well as update about the quality of all the products. And we are confident that Youdao Lingshi will maintain the momentum in the second half of this year and in the future. I hope that answers your question.

Operator: Our next question comes from the line of Jing Qiang from China International.

Jing Qiang: My question is about the smart device segment. I wonder will the smart device segment year-over-year revenue decline in this quarter, see some improvement in the second half of this year?

Feng Zhou: Yes, I’ll take this question. So for the full year of 2025, the main focus or objective for the smart devices segment is to further improve business health. So although the revenue declined in Q2, but encouragingly, in both Q1 and Q2, the health of our hardware business improved compared with the same period last year. So from a product strategy and also growth standpoint, we will continue to focus on Dictionary Pens and also our new category this year, Tutoring Pens. We think both these categories present a lot of opportunities for growth in the future. So the Dictionary Pen market, we are both the pioneer and also the clear market leader, ranking #1 in sales for 5 consecutive years. So the Tutoring Pen, that’s a new category we introduced earlier this year.

So what’s interesting about Tutoring Pen is that because of the use of our large language model, Confucius, so it is able to address key pain points in math and other subjects — basically all subjects in K-12 learning. So — and in particularly for middle school and high school students. So I think that’s a very important segment of market and the product, what we see is that it already resonates strongly with both students and parents. So we think this is a market with significant growth potential. And next week, as I just said, we will launch a new tutoring, new product. That’s — I can say it’s a new Tutoring Pen product. So we expect its enhanced user experience to drive improvements in the segment’s metrics in the second half of this year.

So I’d also like to share 2 points regarding the long-term development of our device business. First is I remain optimistic about the medium- to long-term prospects of AI-powered hardware. According to [indiscernible], China’s AI hardware market, excluding smartphones and cars is projected to exceed RMB 1 trillion for the first time in 2025 and is expected to maintain a compound annual growth rate of 18% for the next 5 years. Of course, that contains a lot of categories. But for educational smart device specifically, the report predicts the market size to be expected to be RMB 34 billion in 2025. So that’s a sizable market, and it’s expected to grow further. So leveraging our strong AI capabilities, we will continue to broaden the application scenarios of our smart hardware and work to improve users’ learning and work efficiency and outcomes.

So that’s one. The second point I want to make is that we see great potential for deepening the synergy between hardware and our learning services. So for example, our Tutoring Pen can accurately identify users’ learning profile, such as whether he’s in elementary, middle or high school or his learning — actual learning needs, specific needs. So with that level of precision, we can expand hardware and our learning services integration to unlock more cross-selling opportunities. So this approach also helps reduce our overall sales and marketing expenses and improving operational efficiency. So if you look at our overall sales and marketing to revenue ratio in Q2, it was 28%. It’s already down roughly 11 percentage points year-over-year. So we see further room for improvement and partly — so when we work on the integration of hardware and our learning services.

Operator: Our next question comes from the line of Thomas Chong from Jefferies.

Thomas Chong: My question is about advertising.

Operator: Really sorry to interrupt, Mr. Thomas Chong. Really sorry to interrupt. We are not able to hear you clearly. If you’re using any external headset, may we request to use the speaker mode, please — sorry, the handset mode.

Thomas Chong: My question is about advertising. What are the specific application of AI ad placement optimizer in advertising as well as the potential impact on future financial metrics?

Lei Jin: This is Jin Lei. Thank you for your questions. The application scenario of AI Ad Placement Optimizer covers the entire advertising delivery process. Prior to AD delivery, AI Ad Placement Optimizer can conduct intelligent 24/7 Q&A with customers by analyzing [Technical Difficulty] delivery data through our DMP. It automatically explore target audience and traffic streams while intelligently generating [indiscernible] audience targeting strategies. Post AD delivery, leveraging campaign data and our large language model computers, AI Ad Placement Optimizer intelligently generates delivery diagnostics and attribution analysis reports. Those output drives utility optimization for subsequent audience targeting and strategy deployment, making advertising simpler and smarter.

AI Ad Placement Optimizer enable end-to-end AI decision-making throughout the advertising workflow, demand analysis, strategy formulation, intelligent delivery, data analytics and attribution and optimization iteration. The data processing capacity significantly exceed human capabilities, operating 24/7 with faster iteration cycles. The solution launched at the end of the Q2 and has been deployed to several advertisers in programmatic advertising campaigns, receiving positive feedback. Furthermore, integrated with iMagicBox that’s launched earlier this year, we delivered a comprehensive AI-powered support across the full advertising life cycle from creative development and material production to deliver attribution and optimization iteration, leveraging our robust AI capabilities.

Medium to long term, AI Ad Placement Optimizer will support both advertising revenue growth and profitability improvement for us. Firstly, it will enhance advertisers’ return on investment, driving increased budget allocation from existing clients on our platform. Concurrently, broader adoption will expand our advertiser base. Those factors collectively accelerate our advertising revenue growth. Secondly, the solution identify cost-efficient, high-quality traffic while maximizing data utilization from our DMP, thereby strengthening the profitability from our online marketing services segment.

Operator: Our next question comes from the line of Bo Zhan from Huatai Securities.

Bo Zhan: This is from Zhan Bo from Huatai. Given the year-over-year decline in operating cash inflow during Q2, do we have any revision on the target for achieving operating cash flow breakeven this year?

Yongwei Li: Thank you, for your question. This is Wayne. I will take your question. As you have noticed, we generated operating cash flow of RMB 185 million in Q2. Although this represents a decrease compared to the same period of last year, it does not alter our annual target of achieving operating cash flow breakeven. This is primarily related to the following factors. First, our profitability has been improving, indicating sustained long-term cash flow enhancement. From a profitability perspective, we achieved an operating profit of around RMB 133 million in the first half of this year, a significant improvement in financial health compared to a loss of RMB 42.6 million in the same period of last year. This profit improvement stems from our continuous enhancement of our product and service capabilities through AI technology and the reduction in operating expenses, which will inevitably lead to cash flow improvement over the long term.

In the second half of this year, we will continue leveraging our AI advantages to enhance operational efficiency and optimize cost and expenses. We are confident in achieving accelerated operating profit growth for the full year of 2025. Second, our operating cash flow demonstrated improvement from a year-over-year basis in the first half of this year. Compared to operating cash outflow of RMB 140.8 million in the first half of 2024, we received approximately RMB 70 million in the first half of this year, representing an improvement of around 50%. Thirdly, our operating cash flow exhibit seasonality. Q1 is typically the weakest quarter within a year due to the payment for last year annual bonus. Excluding additional investments in our key initiatives such as AI technology and Youdao Lingshi, the cash flow performance in the second half of this year is expected to be stronger than the first half.

Fourthly, the relatively slower pace of cash flow improvement compared with the operating profit growth is mainly linked to the change in our business mix. Previously, our faster-growing segment was Learning Services, which operates on a prepayment model, which typically results in cash flow improvement preceding profit improvement in our income statement. In the recent quarters, the Learning Services segment is in a proactive transition, while the faster-growing segment is our online marketing services. Advertising business usually involves granting advertiser acquired period, which typically bring 1 or 2 quarters lag when comparing the profit results with the cash flow performance. While developing the business, we always strictly control our credit policy in order to improve our cash flow position.

In summary, despite the uncertainty of competition and the macro conditions, we are confident in achieving the target of operating cash flow breakeven this year.

Operator: Our next question comes from the line of Linda from Macquarie.

Linda Huang: I have 2 questions. The first one is regarding advertisement. In the announcement, you also mentioned about the strong growth coming from gaming and coming from overseas market. Can you elaborate more about the growth driver behind these 2 segmentation? And how — what is your outlook for 2026? The second one is about the buyback. We noticed that the $40 million buyback authorization almost moved up. And do we have any like new buyback scheme?

Jeffrey Wang: Linda, it seems there is some connecting issue. Would you please kindly repeat your questions again?

Linda Huang: Okay. The first one is about advertisement. So I just want to know that whether you can give us some detail regarding for gaming and overseas market? And what is the outlook for 2026? The second one is about the share buyback because we used $33.8 million. And so do we have any new scheme because it’s close to $40 million of arrangement?

Feng Zhou: Sure. I’ll take the question first. So the — so you’re asking about the gaming advertisement and overseas. So gaming is doing really well in Q2. So we talked about the gaming — revenue from gaming actually increased 50% year-over-year. And we — so we serve the top game providers in China, both in the domestic market and also overseas. And NetEase games and along with several other game providers are both growing quickly as our client. And for games, we do both brand-oriented kind of KOL marketing and also the more performance-oriented advertising. So both are growing nicely. So that’s a very quick update on games. And overseas market, we — as you know, we signed partnerships with TikTok last year and with Google this year.

And both partnerships are going on well. And we are also working — so one update I can provide regarding Google is that revenue with Google has increased triple digit percentage-wise. So overseas also contributes to our growth significantly. Yes, so that’s for overseas. Regarding the buyback, do you have anything?

Peng Su: Linda, this is Su Peng. I think I will handle the second question first. And for the share buyback, yes, we do announce about $40 million share buyback plans about several quarters ago. And right now, we still — you can based on my filings, they still have several million still left, and obviously we will process the rest of our budget for the share buyback in the next few quarters. And secondly, as my colleague mentioned about in the call, and we feel very confident about we can definitely receive the full year operating profit in this year. So that means we can have more capability on our financial balance sheet to present a new plan maybe in the next few quarters. That depends on the market as well as depend on investment in technology, especially.

We think that we will spend more money and that will be more meaningful investment in the long run. So we definitely will take care of our — clearly of our [indiscernible] balance sheet and to looking for the best strategies to balance this investment as well as the share buyback plan in the next — in the future. I think I hope to answer your second question. And for the first question, I just add some more color — a little bit more color in the — for the Dr. Zhou’s comments. And because in our announcement — press announcement, we mentioned about the growth of the advertisement in Q2 is because of the growth of the business in the gaming industry and overseas market. And as you can — if you see the trend of the gaming market, the peak season roughly is in the second quarter and third quarters and especially in the third quarter.

So for the trend of the second half of this year, we expect we can just accelerate our growth for the advertisement. So I think that will be domestically for the gaming as well as the market in the overseas. So I think that is the trend — share a little bit of trend all the colors of the advertising business.

Operator: This concludes our question-and-answer session. I would like to turn the conference back over to the management for closing comments.

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

Operator: Thank you. The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.