On Thursday, Youdao (NYSE:DAO) discussed first-quarter financial results during its earnings call. The full transcript is provided below.

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Access the full call at https://ir.youdao.com/

Summary

Youdao Inc reported a 3.8% increase in net revenues to RMB 1.3 billion for Q1 2026, with operating profit at RMB 57.5 million despite a 44.7% decline due to strategic investments in AI.

The company launched several AI initiatives including Confucius 4, Emotivoise 2, and Lobster AI, aiming to enhance their educational and advertising offerings.

Net revenues from online marketing services grew by 20.9% year over year, driven by increased demand for performance-based advertising and strategic AI investments.

The Smart Devices segment saw a 42.6% decline in revenue, focusing on SKU health and inventory management over volume growth.

Management emphasized the importance of AI in their strategy, highlighting the development of specialized models and AI native applications to drive growth and profitability.

Full Transcript

Operator

Good day and welcome to Youdao Inc's first quarter 2026 earnings conference call. Today's conference is being recorded at this time. I would like to turn the conference over to Mr. Jeffrey Wong, Investor Relations Director of Youdao Inc. Please go ahead.

Jeffrey Wong (Investor Relations Director)

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 Fund liability as established by the U.S. climate 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 Inc'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 2026 Fourth 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 Inc's corporate website. Joining us today on the call from Udao Senior Management are Dr. Feng Zhou, our Chief Executive Officer, Mr. Leijin, our President, Mr. Peng Xu, our Senior VP, and Mr. Wayne Lee, our VP of Finance. I will now turn the call over to Dr. Zhou to review some of our recent highlights and strategic direction.

Feng Zhou (Chief Executive Officer)

Thank you, 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. Youdao delivered a solid start in 2026. Net revenues were RMB 1.3 billion, up 3.8% year over year. Operating profit was RMB 57.5 million, marking our seventh consecutive quarter of operating profitability. While operating margin improved sequentially by 0.5 percentage points to 4.3% year over year. Operating profit declined 44.7%, primarily reflecting our proactive investments in core strategic initiatives, including AI, as well as a high comparison base from the restructuring of Learning Services in the same period last year. Net operating cash outflow narrowed significantly by 63.6% year over year to RMB 93.1 million, supported by successful AI product launches in Q1 and a strong pipeline ahead. We remain focused on delivering full year improvements in profitability and cash flow in 2026. We continue to advance the AI technologies that drive our business growth. Just this week we released Confucius 4, our open source learning large language model. Its most important new feature is multimodal input enabling industry leading capabilities in solving and teaching K12 subjects that require visual understanding such as geometry. We also released Emotivoice 2, our open source high fidelity AI text to speech model with advanced features including cross lingual voice cloning. In addition, we launched Confucius Translation 4, our latest AI translation model delivering industry leading performance across 40 languages. With that, let me walk through the performance of each business line. During this quarter, net revenues from the learning services segment were RMB 627.5 million up 4.2% year over year. Youdao Ling Shi maintained strong momentum with growth growing by over 20% year over year in Q1 product. Improved innovation remained a key driver of this growth. Powered by our proprietary Confucius LLM, we launched English AI Essay Grading this quarter, further enhancing our differentiated AI powered learning experience. The feature provides personalized high quality feedback reports in approximately one minute, improving learning outcomes for students while increasing operational efficiency for teaching assistants. Early adoption has been encouraging with approximately 10,000 assays graded by AI to date. Our programming courses maintained strong momentum in the first quarter with gross billings growing by over 20% year over year, supported by ongoing product enhancements and the strategic expansion of our user acquisition channels. In addition to business growth, our students continue to achieve outstanding results in top tier competitions, winning one gold, one silver and two bronze models at the 43rd National Olympiad in Informatics Winter Camp. In addition, one student was selected for the Chinese national team and won a gold medal at the 2026 International Winter AI Olympiad. These results underscore the depth of our teaching capabilities and the strength of our programming education ecosystem within learning services. Our AI driven subscription services continued their robust growth trajectory in the first quarter, total sales exceeded RMB 100 million representing year over year growth of over 70%. We also continue to iterate our proprietary Confucius LLM with a focus on high utility learning and productivity scenarios, further enriching our AI agent mix. This quarter we launched two new AI agent products. The first is Lobster AI, a personal AI desktop assistant designed for productivity and secure deployment. Lobster AI enables enterprises individual users to deploy powerful customized AI agents while maintaining data privacy. Since its open source release, it has gained strong traction among the global developer community and surpassed 5,000 stars on GitHub the second is an AI native knowledge base designed for complex knowledge synthesis. Powered by a dynamic reasoning architecture. Youdao Baoku can decompose complex queries, perform multi round verification and provide precise citations. It helps users transform large volumes of materials into structured multimodal outputs including chart rich presentations and mind maps, helping users improve knowledge work productivity in addition to launching new AI native products, we continue to upgrade our core applications. The AI Simultaneous Interpretation feature in Youdao Dictionary and Yoda Desktop Translation saw user engagement increase by over 100% year over year. This growth was driven by two key upgrades. First, the deployment of our Confucius 3 translation LLM which reduces the latency by approximately 50% and second, the evolution of the feature from a translation tool into a more autonomous AI agent enabling more natural interactions and and deeper contextual understanding. Our technical capabilities were further validated at the 14th National Interpretation Contest where Youdao won championships in eight of the 16 AI track language categories, demonstrating the strength of our AI translation systems. In the first quarter, our online marketing services maintained strong momentum, generating R&B 611.1 million in net revenues up 20.9% year over year. Growth was primarily driven by increased demand for performance based advertising supported by our continued investments in AI technology. Gaming remained a core advertising vertical and continued to demonstrate resilience and steady growth. At the same time, we captured emerging opportunities in fast growing sectors, particularly AI applications and short form dramas. By integrating advanced AI capabilities with vertical specific marketing scenarios, we achieved over 50% year over year advertising revenue growth in each of these emerging sectors. On the product front, we continue to leverage our vertical advertising LLM to enhance product and service quality. In Q1 we launched an upgraded version of Infinese, our one stop AI platform for KOL marketing. The upgrade focused on two key areas. First, workflow Synergy infanteats now enables brands to manage the full collaboration lifecycle from top tier influencers to KoCs through a streamlined online workflow that significantly shortens collaboration cycles. Second, AI powered self service. The platform automates influencer recommendations and content creation, lowering entry barriers while improving execution efficiency. Since the upgrade, Infinease has received positive feedback from KOLs and marketers. To date, nearly 60,000 influencers globally have registered on the platform, providing a solid foundation for future expansion. Gross margin for online marketing services was 29.6% in the first quarter, largely stable year over year and up 1.8 percentage points, sequentially marking the second consecutive quarter of sequential improvement. Turning to our Smart Devices segment, net revenues were RMB 109.4 million in the first quarter, down 42.6% year over year, we continue to exercise operational discipline in this segment, prioritizing SKU health, inventory management and profitability over near term volume growth. At the same time, our products continue to receive strong external recognition this quarter. The Youdao Tutoring Pen was honored as the best Educational Hardware solution at the 2026 EdTech Awards and was the only Chinese product to receive this distinction. In addition, Youdaoo's SpaceX was recognized as an AI benchmark by Wall Street CM reflecting continued recognition of our AI capabilities and educational value. Looking ahead, we remain firmly committed to our AI native strategy. By continuously refining our vertical LLMs for learning and advertising and expanding our AI agent matrix, we are enhancing how users learn, work and market while creating new opportunities for sustainable growth. As we continue to improve user experience, we remain focused on driving continued improvements in profitability and cash flow in 2026. With that, I'll hand the call over to Supong for a deeper dive into our financial results. Thank you,

Supong

Thank you Dr. Zhou and hello everyone. Today I will be presenting some financial highlights from the first quarter of 2026. We cover the Please read through our press release issued earlier today for further details. For the first quarter total revenue RMB 1.3 billion or US$195.4 million representing a 3.8% increase from the same period of 2025. Net revenue from our learning services were 627.5 million or US$91 million, representing a 4.2% increase from the same period of 2022. Net revenue from our smart devices was RMB 109.4 million or US$15.9 million, representing a 42.6% decrease from the same period of 2025, primarily due to the decline in demand for smart devices. In first quarter of 2026. Net revenue from our online marketing services were RMB 611.1 million or US$88.6 million, representing a 20.9% increase from the same period of 2025. The year over year increase was mainly attributable to the increased demands for performance based advertisements through the third party Internet properties which was driven by our continued investment in AI technology. For the first quarter, our total gross profit profit was RRMB 602.3 million or US dollar 87.3 million, nicely flat compared with the same period of 2025. Gross margin for learning services was 60.2% for the first quarter of 2026 compared with 59.8% for the same period of 2025. Gross Margin for smart devices was 39.9% for the first quarter of 2026 compared with 52.3% for the same period of 2025. Gross Margin for online marketing services was 29.6% for the first quarter of 2023 compared with 30.5% for the same period of 2025. For the fourth quarter, our total operating expenses were RRMB 544.8 million for US dollar 79 million compared with RRMB 510.2 million for the same period of last year. Looking at our expense in more detail, sales and marketing Expense for the first quarter of 2026 were RRMB 382.2 million compared with RRMB 357.6 million in the first quarter of 2005. Research and development expense for the first quarter of 2026 or RRMB 115.4 million remain stable with the same period of 2025. Our operating income margin was 4.3% in the first quarter of 2026 compared with 8% for the same period of last year. For the first quarter of 2026, our net income attributed to the ordinary shareholders were RRMB 38.6 million for US dollar 5.6 million compared with RRMB 76.7 million for the same period of last year. Non GAAP net income attributable to the ordinance shareholder for the first quarter of was RRMB 44.9 million or USD 6.5 million compared with RRMB 81.7 million for the same period of last year. Basic and diluted net income per ADS attributable to the ordinary shareholder for the first quarter of 2026 were RRMB 0.33 or US$0.05 and RRMB 0.32 or respectively. Non GAAP basic and diluted net income per ADS attributable to the ordinary shareholder for the first quarter was RRMB 0.38 or US$0.06 and RRMB 0.37 or US$0.05 respectively for netcash using operating activity was RRMB 93.1 million or US$13.5 million for the first quarter. Looking at our balance sheet as of March 31, 2026, our contract liability, which mainly consists of deferred revenue generated from our rental services will RRMB 667 million US dollar 96.7 million compared with RRMB 847.7 million as of December 31, 2025. At the end of period Our cash cash equivalents current and non current restrict cash and short term investment totaled RMB 515.2 million or USD 74.7 million. This concludes our prepared remarks. Thank you for your attention. We would now like to open the call for your questions. Operator, please go ahead.

Operator

Thank you. We will now begin the question and answer session. To ask a question, you may press Star then one on your telephone keypad. If your question has already been addressed and you'd like to remove yourself from queue, please press Star then two. Once again, that's Star than one if you have a question, Today's first question comes from Brian Gong at Citigroup. Please go ahead.

Feng Zhou (Chief Executive Officer)

Yeah, thanks management for taking my question and congratulations on decent results. So my question is about our AI. So we have noticed that you launched Lobster AI and Youdao Baoku, in the fourth quarter. Could the management share the strategy regarding your AI applications? Thank you. Thank you Brian. AI applications are clearly gaining momentum in 2026 driven by the explosive growth of both AI chat and AI coding in recent months. So for Yoda, our focus is on capturing this opportunity in the areas that we have strong capabilities in education, productivity and advertising. So we are approaching this opportunity in AI from several dimensions. The first dimension is models and algorithms. So it is increasingly clear that beyond the foundation models there are significant opportunities in not pre training but post training, fine tuning, reinforcement, learning and development of vertical and specialized purpose built models. So this is where we are focused at. So our goal is to in the model area is to basically build specialized models that deliver unique intelligence for our users and customers. And this has already become one of our key differentiators in education and also in advertising. For example, we recently released the Confucius 4, our open source education RM. So one of its most important feature is vision input that has been specially trained for education scenarios. So what this does is this enables strong capabilities in solving and explaining K12 problems that requires a vision input, for example the geometry questions, geometry prompts. So this direct supports our K12 learning products. As you know math and geometry and all these different visualized problems are really really important for students. So similarly we recently released the Confucius Translation 4, our latest translation model. It supports real time Voice translation across 40 languages and operates at less than 1/10 of the cost of general purpose large language model. So making it highly suitable for large scale commercial deployment of these really really popular kind of live translation and voice interpretation services which has become more and more popular. So the second dimension is applications. So Lobster AI and Yotaobao are both exciting new products. So compare with our early AI products, these two are a little bit special. They are designed to be more intelligent, more agentic and more capable of handling long running, complex high value tasks for our users. So Lobster AI is a personal AI desktop assistant that can support a wide range of use cases from creative exploration to productivity in professional settings. So Youdao Baoku, in contrast, is a more specialized tool that focuses on deep research and personal knowledge management. So both products have significant long term potential. So going forward we will continue to upgrade our AI applications to make them more intelligent, grow their user base and explore monetization opportunities. So beyond these two new products, our existing applications also continue to so AI simultaneous interpretation of Udao dictionary and translation maintained strong growth in Q1, so also recently we added the Voice to Voice live translation feature. So expanding beyond the existing Voice to Text live translation so so sales of AI simultaneous interpretation grew by over 100% year over year for the second consecutive quarter in Q1. Another one of our app is Scholar AI, or that's also an AI agent for it's specifically for academic integrity, so colleges, students and researchers can use it to identify potential signs of AI generated content in academic papers and research manuscripts. So with the rapid growth of AI capabilities, so academic integrity in this setting has become increasingly important. So in Q1, scholar AI achieved a pretty remarkable sales growth of over 200% year over year. So the third and last dimension of how we kind of use AI is making your dao ourselves AI native. So this is equally important in the AI area. Companies need to become AI native internally, not just launch AI products externally. So this requires continuous iteration across our workflows, systems and organizational practices. So for example, deploying AI coding internally has recently become a priority for us. We believe it can significantly improve our engineering productivity as models have really advanced. So this transformation has accelerated meaningfully since the end of last year. So in our education teams, the AISA grading feature we discussed in our prepared remarks is another example of how we are transforming our team's work, our tutors in this case. So we are also working on multiple projects to enable our internal IT systems for education businesses. So finally, we recently released SyncFlow, an aggregation platform for AI inference services. So it is an AI infrastructure product based on capabilities we first developed and used internally. So this I think is a good example that reflects our broader approach. So we build AI capabilities for our own operations, validate them in real business scenarios, and then extend them into products and services where they make sense in other people, other companies settings. So overall AI is core to our strategy and our next stage of growth. So by advancing specialized models, release AI native applications and also transform our work internally with AI, we are strengthening our competitive position in education, productivity and in advertising. So we're also creating new opportunities for sustainable revenue growth, profitability and cash flow improvements. I hope that answers your question. Thank you.

Operator

Thanks. That's very clear. Thank you very much. Thank you. And our next question today comes from Li ping Zhao with CICC. Please go ahead.

Feng Zhou (Chief Executive Officer)

Good evening Dr. Zhou and Suzong. Thanks for taking my questions. I'm curious about the retention for Youdao Ling Shi. Could management share some colors on the recent updates? Thank you. Thank you Brandon. I'll handle the question first if anyone have one more comment. And yeah, before we talk about recent retentions performance, I want to emphasize from the midterm to long term perspective about the top level policy design has already unlocked an expensive growth Runway for the Darling Shi. First, you know, according to the Education Powerhouse Construction plan and the 2026 Government Work Report, there is a clear mandate to accelerate the expansion of high school education educational resources. Furthermore, during the 15th Five Year Plan period it's expected to add over 2 million new high school seats that has been public released recently and this capacity expansion will trigger the structural growth in high school educational demands. As a pioneer deeply rooted in these sectors, Udal insurer is uniquely positioned to be a primary benefit of this policy driven skill dividend. In the first quarter we launched the English AI Assay grading features it immediate markets acclaim led an over 20% year over year increase from the gross speeding serving as a powerful validation of our products efficiency and market competitiveness. Then let us talk about the recent retention activities. We have seen a very strong momentum with the retention rate exceeding 75% continuing its upward year over year trajectory. This high level of the retention is the testament to the user recognizations of our AI interactive learning formats and high quality services. It also solidifies the foundations for the growth in the Q2 and through the four years looking ahead, we will continue to leverage our Confucius Large language model to deepen our footprint in the differentiated AI interactive learning format. We are committed to the expanding the AI application across the entire learning lifecycle from diagnostics assessments and personalized learning paths to the knowledge expansion QA and the college entrance consultant services. Our goal is to bridge the gap between the technology and accessibility, bring the efficiency of the AI driven learning to more users nationwide. I hope that answer your question. Thank you Brandon.

Li ping Zhao

Thanks. That's helpful.

Operator

Thank you. And our next question today comes from Thomas Chong at Jefferies. Please go ahead.

Dunle

Hi, good evening. Thanks management for taking my questions. Could management provide an outlook for the advertising business in Q2? Thank you. Hi, this is Dunle. The rapid essence of our advertising business in recent years is at its core driven by our AI evolution. AI agents like ImagineBox have revolutionized the ad creative efficiency while the AI ad placement optimizer have significantly boosted ROI through precision providing and real time bidding strategies. This has propelled our ad net revenue from RMB 1.3 billion in 2023 to RMB 2.5 billion in 2025. Consequently, advertising had jumped from 25% to 43% of our total revenue becoming part of our goals last in the first quarter of this year. The momentum remains unabated with net revenue reach RMB 611.1 million, a 20.9% year over year increase. Looking ahead, we have confidence in the long term development perspective of advertising. We are empowered programmatic advertising and QR marketing Through our vertical ad LLM achieving a high efficiency matrix between people and the business content. We will focus our strategic layout on following high potential protocols. The first one is gaming. This remains our cornerstone. By commanding netease deep gaming DNA with Yoda's cutting edge technology, we continue to consolidate our present in both domestic and overseas gaming marketing. The second is the AI applications. We anticipate that this will be the core incremental growth driver. The global explosion of RM and the AI agent has created a surge in demand for position user acquisition. Our programmatic capabilities are perfect fit for those digital products. The third is globalizing Chinese brand. There is a robust demand for the Chinese manufacturers and the brands going global. For instance, the new energy vehicle industry is shifting from product centric marketing to the brand plus ecosystem strategy. We intend to capture this global brand opportunity by leveraging our QR marketing paired with the massive reach of parametric ads. The first is social apps and finance. We will leverage our expertise in data security and content ad placement to address the high barrier marketing need of those sectors. In addition, I would like to highlight that the advertising business has to remain the primary contributor to our operating profit. Thank you.

Thomas Chong (Equity Analyst)

Thank you.

Operator

Thank you. And our next question today comes from Bozon at Whiteide securities. Please go ahead.

Dan Bongtan

Thanks for taking my questions. This is Dan Bongtan. My question is could management elaborate on the seasonality of operating profit set?

Feng Zhou (Chief Executive Officer)

Thank you Sambor for your question regarding seasonality. Your dot financial metrics has historically exhibited pronounced seasonality to provide a clear picture I will address our business seasonality through three dimensions revenue, operating profit and cash flow. First, seasonality of Value, our top line performance typically follows as stronger the second half year the second half of the year (H2) pattern, with the third quarter usually being our annual peak. This pattern is primarily attributable to the following factors by segment in terms of advertising, the second half of the year (H2) is sponsored by the Q3 Peak for gaming and entertainment marketing during the summer vacation followed by Q4 Christmas holiday season, which drives both domestic and overseas marketing demand. In respect of learning services, the summer and winter break represents the intensive period for Service delivery and Q3 is usually the peak season. As for smart devices, sales typically peak during the start of a new academic year, especially in Q3. The second seasonality of operating profit, typically higher revenue levels in the second half of the year drive higher operating profit. Meanwhile, quarterly operating profit is also affected by a range of other factors including business restructuring or strategic investment in key areas. Taking 2025 as an example, 2025 was an anomaly due to our strategic restriction of learning services, we proactively focused on your darling SHI while scaling back investment in Steam and add up costs. The revenue in H1 was largely a lagging effect from the second half of the year (H2) 2024 customer acquisitions, while sales, marketing and R and D expenses for H1 2025 were slashed significantly. This results in typically high operating profit in the first half of last year. Alongside the accelerated application of core AI technology and steady improvements in health metrics of your darnish, we increased investment in marketing and R and D resources. Despite robust revenue performance in the second half of the year (H2), operating profit is relatively low in the second half of 2025. For 2026 this year, we expect the profit pattern to return to historical norms with the second half of the year (H2) outperforming H1. Given the factor above, we place greater emphasis on the operating profit growth over longer term, which better reflect the overall financial health of our business. Third, Seasonality of Cash Flow Our operating cash flow generates the net outflow in Q1 and Q3 which are pre customer acquisition phase and inflow in Q2 and Q4, which major retention cycle in Q1 this year, our cash flow position continued to improve rapidly with the net operating cash outflow narrowed by 54% year over year. In summary, on the premise of stable macroeconomic environment, we are making good progress on delivering a rapid improvement in both operating profit and operating cash flow for the full year 2023. Thank you,

Dan Bongtan

thank you, thank you.

Operator

And that concludes the question and answer session. I'd like to turn the conference back over to management for any additional or closing comments?

Feng Zhou (Chief Executive Officer)

Yeah. 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 US Have a great day.

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