Youdao Q1 2025 Earnings Call Transcript

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May 15, 2025

There are 7 speakers on the call.

Operator

Good day, and welcome to Yodao's First Quarter twenty twenty five Earnings Conference Call. All participants are in listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Jeffrey Wang, Investor Relations Director.

Operator

Please go ahead.

Speaker 1

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 future performance and are subject to certain risks and uncertainties, assumptions and other factors.

Speaker 1

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.

Speaker 1

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 twenty twenty five first quarter financial results news release issued earlier today. As a reminder, this conference is being recorded. A web coverage replay of this conference call will be available on UDAO's corporate website at ir.udao.com. Joining us today on the call from UDAO's senior management are Doctor.

Speaker 1

Feng Zhou, our Chief Executive Officer Mr. Lei Jin, our President Mr. Peng Zhu, our Senior President and Mr. Wayne Li, our VP of Finance. I will now turn the call over to Doctor.

Speaker 1

Zhou to review some of our recent highlights and strategic direction.

Speaker 2

Thank you, Jeffress, 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. In the first quarter, we significantly boosted profitability while executing our AI native strategy through product development. Operating income reached a Q1 record of RMB104.0 million, surging 247.7% year over year. Net revenues were RMB1.3 billion, declining 6.7%, primarily due to decreased learning services revenue.

Speaker 2

Operating cash outflow narrowed by 34.7% to RMB255.5 million, reflecting stronger financial efficiency. Product R and D accelerated in Q1. We launched Confucius one, our first open source reasoning model. We trialed with key clients, Youdao Magic Box, an AI powered app creator suite. We also introduced Space One, our first large screen tutoring pin.

Speaker 2

These advances reinforce our AI native strategy, that is applying large language model to critical learning and advertisement scenarios, serving real world challenges, driving user satisfaction and business growth. Now let's look at our business lines. In the first quarter, although net revenues from learning services segment declined by 16.1% year over year, the rate of decline narrowed by approximately five percentage points compared to the previous quarter. Net revenues covered the segment's costs and operating expenses and yielded meaningful profits. Within the Learning Services segment, net revenues from digital content services were RMB410.8 million in Q1.

Speaker 2

The product team enhanced Youdao Ling Shi's college planning solution using our proprietary Confucius LLM. The upgraded AI college admission advisors now features six integrated components, 20 fourseven online Q and A services, comprehensive university and program databases, specialized proprietary courses and materials, professional assessment tools, and AI powered recommendation system for school selection and predictive admission analytics. This comprehensive ecosystem has significantly improved our differentiated user experience, contributing to over 25% year over year gross billing growth in Q1 and recently improved retention rates. In STEAM courses, our programming courses saw strong gross billing growth of over 40% year over year, fueled primarily by strong demand for GESP, that is great examination of software programming, preparation courses and more efficient customer acquisition channels. Our AI driven subscription services generated nearly RMB70 million in Q1 sales, growing over 40% year over year.

Speaker 2

On the model development front, we open sourced Confucius O1 in Q1, a lightweight 14,000,000,000 parameter reasoning model that delivers competitive K-twelve performance, while being significantly more cost effective and easier to deploy than larger alternatives. We also enhanced our flagship translation models through multimodal fusion and online direct preference optimization, BPO training, achieving quality improvements, cost reductions and increased adoption. The translation model now processes over 1,500,000,000.0 tokens daily as of April, representing 100% growth since Q1. Additionally, we recently started self hosting full size DeepSeq R1 inference for our products, instead of relying on third party DeepSeq model services, improving latency and stability while reducing costs at the same time. Moving on to our applications.

Speaker 2

The upgraded Mr. P AI Tutor now features a multimodal visual system with over 92% accuracy for K-twelve problem solving, up from 85% last year and is available across both the Mr. P app and our hardware devices. We recently launched Youdao AI Podcaster system, Youdao Wunda, an innovative audio synthesis platform that instantly converts text documents like PDF, Word files and web pages into studio quality podcasts, earning a featured recommendation on the Apple App Store. We also introduced our AI powered academic paper plagiarism detection system, which detects AI generated content in academic writing, while providing actionable suggestions to enhance originality and quality.

Speaker 2

Turning to online marketing services. Q1 net revenues rose 2.6% year over year to million. Our performance based advertising client base grew by 20% year over year in Q1, reflecting the successful scaling of our client acquisition efforts, a key driver for future performance ad growth. In overseas advertising, we have recently secured official Google Partner certification, complementing our existing TikTok partnership. These collaborations provide access to premium ad inventory and optimization tools, enabling more impactful international campaigns.

Speaker 2

Technology remains at the heart of our advertising strategy. Leveraging our Confucius LLM, we launched the Youdao Magic Box, an AI powered creative suite that automatically produces high quality ad assets, including images, videos and dynamic templates. This innovative solution is poised to play a pivotal role in transforming content creation workflows. In addition, we have deepened the collaboration with NetEase Group through two operational initiatives. First, we strengthened our partnership with NetEase Games, driving over 50% year over year growth in advertising revenue from gaming industry clients.

Speaker 2

Second, we enhanced the collaboration with NetEase Cloud Music, expanding the range of advertising scenarios available to advertisers. Gross margin from online marketing services moderated to 30.5 in Q1, an approximately four percentage point decline year over year. This primarily reflects our strategic emphasis on client acquisition, as newer clients typically impact margins during initial onboarding. Looking ahead, we anticipate the segment's gross margin to stabilize between 25% to 35% in the medium to long term. Our Smart Devices segment delivered RMB190.5 million in Q1 revenues, representing a 5.1% year over year growth.

Speaker 2

In February, we introduced Youdao Space one, an AI powered large screen tutoring pen featuring our Confucius Multimodal LLM. This innovative device offers precise image recognition, photo to speech conversion and voice dictation capabilities, significantly broadening application scenarios while improving the learning experience. The product's strong market reception was evident as the initial inventory sold out within ten days, contributing to over 20% year over year growth in our Dictionary Pan revenue during the quarter. Moving forward, we will accelerate the integration of our Confucius large language model across both learning and advertising verticals, executing our AI native strategy to elevate user experiences while driving greater growth. Having achieved our first full year operating profit in 2024, we are now strategically positioned to maintain this positive trajectory, targeting accelerated profit growth and achieving operating cash flow breakeven for full year 2025.

Speaker 2

With that, I'll pass the call to Shu Peng for a detailed review of our financial performance. Thank you.

Speaker 3

Thank you, Doctor. Zhou, and hello, everyone. Today, I will be presenting some financial highlights from the first quarter of twenty twenty five. We encourage you to read through our press release issued earlier today for further details. For the first quarter, total net revenue were RMB1.3 billion or US178.9 million dollars representing a 6.7% decrease from the same period of 2024.

Speaker 3

Net revenue from our learning services were RMB602.4 million or US83 dollars representing a 16.1% decrease from the same period of 2024. The year over year decrease was mainly because we continue to take a strategic approach to customer acquisition, which place greater emphasis on high ROI, return on investment engagements. We believe despite the short term revenue decline, this strategy has enhanced the overall resilience and operational efficiency of our business. Net revenue from our smart devices were RMB190.5 million or US26.3 million dollars up 5.1 from the same period of 2024, which was primarily driven by the continued increase in sales of Youdao Decrease in the first quarter of twenty twenty five. Net revenue from our online marketing services were RMB505.4 million or US69.6 million dollars representing a 2.6 increase from the same period of 2024.

Speaker 3

For the fourth quarter, our total gross profit was RMB614.2 million or US84.6 million dollars representing a 9.9% decrease from the same period of 2024. Gross margin for learning services was 59.8 for the first quarter of twenty twenty five compared with 63.1% for the same period of 2024. Gross margin for smart devices was 52.3% for the first quarter of twenty twenty five compared with 32.6% for the same period of 2024. Gross margin for online marketing services was 3.5% for the first quarter of twenty twenty five compared with 34.3% for the same period of '24. For the first quarter, we reduced our total operating expense to RMB 510,200,000.0 or US70.3 million dollars compared with RMB651.6 million for the same period of last year.

Speaker 3

Looking at our expense in more details. Sales and marketing expense declined to RMB357.6 million compared with RMB255.4 million in the first quarter of twenty twenty four. Research and development expense decreased to RMB115.5 million compared with RMB146.7 million in the first quarter of twenty twenty four. Our operating income margin was 8% in the first quarter of twenty twenty five compared with 2.1% for the same period of last year. For the first quarter of twenty twenty five, our net income attributable to ordinary shareholders was RMB76.7 million or US10.6 million dollars an increase of over six times from RMB12.4 million for the same period of last year.

Speaker 3

Non GAAP net income attributable to the ordinary shareholders for the first quarter was RMB31.7 million or US11.3 million dollars significantly increased from RMB20.3 million for the same period of last year. Basic and diluted net income per ADS attributable to the ordinary shareholders for the first quarter of twenty twenty five were RMB0.65 or US0.09 dollars and RMB0.64 or US0.09 dollars respectively. Non GAAP basic and diluted net income per ADS attributable to ordinary shareholders for the first quarter was RMB0.69 or US0.1 dollars and RMB0.68 or US0.09 dollars respectively. Our net cash used in operating activities was RMB255.5 million or US35.2 million dollars for the first quarter. Looking at our balance sheet, as of 03/31/2025, our contract liabilities, which mainly consist of deferred revenue generated from our lending services, were RMB711.2 million or US98 million dollars compared with RMB961 million as of 12/31/2024.

Speaker 3

At the end of the period, our cash, cash equivalents, current and non current restricted cash and short term investments totaled RMB424.5 million or US58.5 million dollars 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

We will now begin the question and answer session. Your first question comes from Brian Gong with Citi.

Speaker 4

Yes. Thanks a lot for taking my question. A very quick question on AI. I noticed our AI tutor integrated deep seated ahead of our peers in the first quarter. So from a medium to longer perspective, how does management view the depreciation between your thoughts, large language model profusions and other large language models in educational scenarios?

Speaker 4

Thank you.

Speaker 2

Hi, Brian. So let me take the question. From day one of large language model development in back in early twenty twenty three, we've emphasized the importance of embracing open technologies. So this year, the release of Deep Seacar one provided the perfect opportunity for us to exercise that strategy. So that is why we are the first in the ad tech industry to integrate it into our LM stack and Mr.

Speaker 2

P AI Tutor in Q1, giving users options for of models to solve K-twelve problems. So at the same time, our proprietary model, Confucius, has been evolving since 2023. In January, we released a major leap with Confucius one, actually before the DeepSeek R1 release. So Confucius one was the first open source educational reasoning model capable of step by step exposition, while being far more GPU efficient than general purpose models. So this next generation Confucius is now also deeply integrated across our learning services.

Speaker 2

So AI driven subscriptions and also smart devices. Solidifying our leadership in deploying large language models for education in China. So let me highlight three key advantages of combining open and proprietary technologies for you. The first we believe is this dual approach enhances user experiences. Confucius delivers faster responses, while DeepSeek R1 often provides more comprehensive answers.

Speaker 2

We've observed that users very naturally adopt the computers for quick checks and the DeepSeek for in-depth explanation. So currently, actual usage is split roughly evenly. Second, we believe open technologies accelerate our teams and technology growth. Just as Google Android leverages the Linux kernel, we benefit from the broader ecosystem while contributing back. This dynamic environment pushes our teams to iterate faster, keep us at the forefront of innovation.

Speaker 2

Thirdly, computers excels in education specific scenarios. So thanks to the continuous refinements, it outperforms general purpose models in a few very important areas. First is translation quality. Conversus leads the industry in translation accuracy, a core capability for our platforms, while operating at a fraction of the cost of general purpose models. As noted earlier, we've completed our year long transition from NMT to LAM translation, now processing over 1,500,000,000 tokens every day.

Speaker 2

The second strength of Confucius model is Q and A accuracy. So with recent multi model upgrades, Mr. PAI Tutor achieves over 92% accuracy in K-twelve problem solving. So that is a seven point year over year improvement over last year, significantly surpassing standalone DeepSeq performance in these scenarios. So we're also optimizing our use of DeepSeq by migrating DeepSeq R1 inference to our fully internal deployment.

Speaker 2

We've achieved 99.9% availability, lower latency and also greater cost efficiency with further optimization still ongoing. So our progress has gained a lot of recognition. Actually, the Time Magazine recently ranked Youdao as the world's number two ad tech company among over 7,000 firms, underscoring our leadership in our deployment and operational excellence. So moving forward, we'll deepen our focus on educational verticals, enhancing Mr. Pi's accuracy, while also expanding Confucius into more areas, including lesson planning, grading and assessments.

Speaker 2

So exciting products and model updates are coming this summer and we look forward to sharing them soon. Thank you.

Speaker 4

Thank you.

Operator

Your next question comes from Liping Zhao with CICC. Good evening, Doctor. Zhou, Mr. Xu and Ms. Li.

Operator

My question is about your learning service. So I noticed that the net revenue from learning service segment remind year over year decline during the first quarter. When does you project the segment's revenue to return to growth? Thank you.

Speaker 3

Thank you, Brenda. This is Hu Feng. I will handle the question first. And I think our adjustment for the learning services segment initiated last year remain ongoing right now. And we have intensified our focus on service with robust demands and significant growth potentials such as Youdao Ling Shu, well scaling back nonessential offering.

Speaker 3

And as we mentioned in the last two quarters, it will be accomplished in this year. And although the net revenue from the learning services segment still declined from year over year basis in Q1, the rate of decline narrowed by roughly 5% compared to the previous quarters. This improvement was primarily driven by the resilient performance of the Youdao Lingxus during these quarters. And we believe there are several points to support the sustainable growth of the Youdao Lingxus business. The first is about the China's paid college entrance exam advisory service market has been demonstrating significant growth potentials in recent years, driven by the evolving college and school selection rules under the new Gaokao policies and sometimes the family's urgent needs to bridge the information gaps.

Speaker 3

In Q1, we launched an upgraded AI college admission advisers powered by our large language models, offering the user professional, efficient and tailor made one stop services. This service gained immediate users' recognizations and driving the Youdao Linksys Q1's gross billings to grow by over 25% year over year. And looking forward, we expect a sustained rapid growth of our AI college admission advisers. Our computer's modeling continuous advancements will further refine the recommendation accuracy via our pricing, which at least adds less than 10% of the traditional advisory fee and make quality guidance accessible to more families. At the same time, we just noticed about the recent education construction plan online has been released, which emphasized cultivating the top tier's innovative talents and including the outstanding talent program for exceptional high school students.

Speaker 3

We will definitely actively monitor the policy development and leverage our premium resources and product expertise to capitalize on these emerging opportunities. And in summary, we anticipate completing our segment restructuring in the second half of this year with revenue stabilizations expected thereafter. For our flagship Yudai Lucher services, we project both revenue and profit to achieve the year over year growth in this year. Thank you, Brandon.

Operator

Thank you. Your next question comes from Thomas Chong with Jefferies.

Speaker 5

Hi, good evening. Thanks management for taking my question. My question is about online marketing services. As we see revenue from online marketing services has remained at around million for six consecutive quarters, When does management anticipate a reacceleration in revenue growth? Thank you.

Speaker 6

Hi, this is Lei Jin. Assuming the stable market conditions and the execution of our business plan, we expect online marketing services revenue will show stronger growth momentum in the second half of this year compared to the first half, driven by three key factors. First, accelerated overseas advertising expansion. After obtaining approval's official partnership letters in Q1 and completing certification, we are now implementing collaborative initiatives that should contribute meaningful to H2 revenue. Additionally, our TikTok advertising revenue maintains a strong growth in Q1, a trend we expect to continue through the year end.

Speaker 6

Second, automated AI powered advertising solutions. Our Q1 launch of Youdao Magic Box, an AI driven one click ADA Creator tool, marked the first step to our enhanced capabilities. We are currently developing our AI advertising optimizer with beta version 19 in Q2 and a full release planned for H2. This system will automatically generate content strategies, including targeting scenarios and budget allocation, aligned with advertiser objectives while continuously optimizing through real time RLM, insights and adaptive recommendation models. Third, deepen the collaboration with NetEase Group.

Speaker 6

In Q1, we leveraged our advertising and data analytics expertise to enhance the efficiency of NetEase gaming promotions. In particular, for global promotions, our overseas influencer network now encompasses 15,000,000 creators across 75 countries, reaching over 2,000,000,000 users directly. NetEase advertising brand results grew steadily in Q1. This positive trajectory is expected to continue. Regarding tariff impact, while the uncertainty duties may present challenges for acquiring overseas e commerce clients, This segment currently represents a minimal portion of total AD revenue, making the overall effect negligible.

Speaker 6

We should note that H2 performance remains subject to macroeconomic conditions in domestic and international markets, which could introduce operational variabilities. Thank you.

Operator

Your next question comes from Bo Zhan with Houtai Securities.

Speaker 5

Hello. Thanks for taking my question. This is John Wu from Huatai. My question is, last year was you got first full year of Mobility. Among the four quarters, the second quarter reported operating loss.

Speaker 5

Is there a possibility of profitability in the second quarter this year?

Speaker 4

Thank you, Zhang Guang. This is Wei Lin. I will take your questions. Our financial performance throughout 2024 and Q1 twenty twenty five demonstrated significant and sustained profitability improvements. This progress validates the success of our strategic initiatives across three critical areas.

Speaker 4

First, sharpened focus on high margin digital content, advertising and AI powered subscriptions second, comprehensive AI native transformation boosting operational efficiency. The last one is the simplified cost optimization. By concentrating the focus on Youdao Lichen online marketing services and other key initiatives, we have successfully contained the losses from non core operations. Our AI integration has revolutionized multiple business functions from cost operations to AD production and R and D, delivering higher efficiency and profitability levels compared to our historical performance. Historically, Q2 has remained unfeasible mainly due to two seasonality reasons.

Speaker 4

First, Q2 is traditionally the weakest quarter for revenue generation for learning services and smart devices. Second, substantial sales and marketing campaigns for summer enrollments, which typically begin in June. For Q2 this year, we will maintain our strategic priorities like language model deployment and cost development, while further optimizing our cost structure in line with our full year profitability growth. Our ongoing investments in core offerings like RyuDalin may temporarily raise the These programs designed to

Speaker 3

extend a

Speaker 4

competitive position and drive full fiscal profitability. In summary, expect to significantly reduce Q2's operating losses year over year while acknowledging potential macroeconomic uncertainty that may affect results. Wish it is helpful. Thank you.

Operator

This concludes our question and answer session. I would like to turn the conference back over to Jeffrey Long for any closing remarks.

Speaker 1

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

Operator

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

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