Youdao Q2 2025 Earnings Call Transcript

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Provided by Quartr
August 14, 2025

Key Takeaways

  • Positive Sentiment: Strong execution of AI native strategy delivered a profitable Q2 with operating income of RMB 28.8 million versus a loss last year and net revenues up 7.2% to RMB 1.4 billion.
  • Positive Sentiment: Youdao Ling Shi revenues grew approximately 30% year-over-year to RMB 447.4 million, driving a record retention rate above 75% with new AI essay grading and personalized learning plans.
  • Positive Sentiment: Online marketing services net revenues climbed 23.8% year-over-year to RMB 632.9 million, led by >50% growth in gaming ads and expanding overseas client demand.
  • Negative Sentiment: Smart devices revenues fell 23.9% year-over-year to RMB 126.8 million as legacy models matured and marketing spend was cut, though a new AI-powered device is due to launch next week.
  • Neutral Sentiment: Advertising gross margin dipped to 25.8% from 39.1% due to onboarding new clients, but is expected to stabilize within a 25%–35% range over the medium to long term.
AI Generated. May Contain Errors.
Earnings Conference Call
Youdao Q2 2025
00:00 / 00:00

There are 7 speakers on the call.

Operator

Good day and welcome to the Yota of twenty twenty five 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 Eurodarf. Thank you and over to you.

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 the 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 UDA's business and financial results is included in certain company filings with the U. S. Securities and Exchange Commission. The company does not undertake any obligation to update these forward looking information, except as required by law.

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 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 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 Su, our Senior VP 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 directions.

Speaker 2

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 RMB28.8 million compared with an operating loss of RMB72.6 million in the same period last year. Net revenues reached RMB1.4 billion, an increase of 7.2 year over year.

Speaker 2

Operating cash inflow was RMB185 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 RMB657.8 million in Q2, driven primarily by the strong performance of Youdao Ling Shi. Within the Learning Services segment, net revenues from digital content services reached RMB447.4 million. As a strategically focused initiative, Youdao Ling Shi achieved exceptional results, with net revenues growing approximately 30% year over year.

Speaker 2

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.

Speaker 2

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 and 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 RMB80 million in Q2, setting a record high. During the quarter, we released the Confucius III, our latest education LLM powering our education and translation services. An open source Confucius three Math, China's first reasoning model dedicated to math education.

Speaker 2

Combining large scale reinforcement learning with algorithmic innovations, Confucius three Math delivers state of the art accuracy with exceptional cost efficiency, 15 times the inference performance of DeepSeek R1 at just US0.15 dollars per million tokens, well below typical LM costs, enabling the low cost deployments of professional grade mass AI applications. One notable milestone is Scholar AI, Zheishu Cha, launched in May, which has already attracted over 1,000,000 cumulative users. Designed to support students and scholars in research paper writing, it offers AI powered plagiarism detection, proofreading and other tools to improve academic work. Powered by Confucius three Math, we also upgraded our Mr. P AI tutor to achieve over 95% accuracy for K-twelve math problem solving and tutoring.

Speaker 2

Mr. PaiTutor received the Gold Me Award, the highest honor granted to developers on the Xiaomi App Store. Additionally, Youdao Dictionary was named the China's top 50 most valuable AGI innovators in 2025. Moving to our online marketing services segment. Q2 net revenues reached a record RMB632.9 million, up 23.8% year over year, driven by strong demand from the gaming industry and Chinese clients expanding overseas.

Speaker 2

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 twenty five percent to 35% range over the medium to long term. Gaming was a highlight this quarter. We deepened the collaboration with NetEase Games and other gaming advertisers on both domestic and overseas campaigns, driving gaming ads 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 Gen AI powered advertising technologies.

Speaker 2

We launched the AI App 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 Antifrost 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 J and AI 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 JN AI will create substantial value for advertisers and fuel our long term growth.

Speaker 2

We see significant growth potential in the advertising business, in gaming, e commerce, overseas markets and JN AI 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 RMB126.8 million, primarily attributable to two factors. First, certain high end dictionary pay 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.

Speaker 2

Within this segment, we focused on Youda Dictionary Pen, which maintained its market leadership, securing the number one spot in sales on jd.com and Tmall during the six eighteen shopping festival for the sixth consecutive year. We also expanded our mid range coverage with the launch of UDOT X-ray 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.

Speaker 2

Before I conclude, let me quickly recap a strong first half. We significantly enhanced our large language model portfolio, launching Confucius three and open sourcing both Confucius one and Confucius three Math. Our learning services hit new highs with Lingxi 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 Gen AI capabilities, fueling strong Q2 growth. Financially, H1 total net revenue reached RMB2.7 billion, up slightly year over year, while operating income surged to a record million from a loss of RMB42.6 million a year ago.

Speaker 2

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 a higher return on advertising with industry leading AI technology and operational expertise. We remain committed to sustainably create customer values while further strengthening our financial performance. With that, I'll hand over to Su Peng for a deeper dive into our financial results. Thank you.

Speaker 3

Thank you, Doctor. Zhou, and hello, everyone. Today, I will be presenting some financial highlights from the 2025. We encourage you to read through our press release issued earlier today for further details. For the second quarter, total net revenue were RMB1.4 billion or US197.9 million dollars representing a 7.2% increase from the same period of 2024.

Speaker 3

Net revenue from our learning services were RMB657.8 million or US91.8 million dollars representing a 2.2% increase from the same period of 2019. Net revenue from our smart devices were RMB126.8 million or US17.7 million dollars representing a 23.9 percent decrease from the same period of 2024. Net revenue from our online marketing services were RMB632.9 million or US88.3 million dollars 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 RMB609.4 million or US85.1 million dollars representing a 4.3% decrease from the same period of 2024.

Speaker 3

Gross margin for learning services was 59.8% for the same quarter of 2025 compared with 60% for the same period of 2024. Gross margin for smart devices was 41.5% for the 2025 compared with 30.3% for the same period of 2024. Gross margin for online marketing services was 25.8% for the same quarter of 2025 compared with 39.1% the same period of 2024. For the second quarter, we reduced our total operating expense to RMB58.6 million or US81 million dollars compared with RMB709.3 million for the same period of last year. Looking at our expense in more details.

Speaker 3

Sales and marketing expense declined to RMB401.8 million compared with RMB516.7 million in the same quarter of 2024. Research and development expense was decreased to RMB128.3 million compared with RMB153 million in the 2024. Our operating income margin was 2% in the 2025 compared with operating loss margin of 5.5% for the same period of last year. For the 2025, our net loss attributable to the ordinary shareholder was RMB17.8 million or US2.5 million dollars compared with RMB99.5 million for the same period of last year. Non GAAP net income attributable to the ordinary shareholders for the same quarter was RMB12.5 million or $1,700,000 compared with non GAAP net loss attributable to the ordinary shareholders of RMB96 million for the same period of last year.

Speaker 3

Basic and diluted net loss per ADS attributable to the ordinary shareholders for the 2025

Operator

were RMB0.15 or US0.02 dollars Non GAAP basic and diluted net income per ADS attributable to the ordinary shareholders for the second quarter of

Speaker 3

RMB0.11 or US0.02 dollars and RMB0.1 and or US0.01 dollars respectively. Our net cash provided by the operating activities was RMB185 million or US25.8 million dollars for the same quarter. Looking at our balance sheet as of 06/30/2025, our contract liabilities, which mainly consist of deferred revenue generated from our online learning services, were RMB856.7 million or US119.6 dollars compared with RMB961 million as of 12/31/2024. At the end of the period, our cash, cash equivalents, current and non current restricted cash and short term investments totaled RMB670 million or $86,100,000 This concludes our prepared remarks. Thank you for your attention.

Speaker 3

We will now like to open the call to your questions. Operator, please go ahead.

Operator

Thank you. We will now begin with the question and answer session. Our first question comes from the line of Vicky Wei from Citi. Please go ahead.

Speaker 4

Thanks management for taking my question. Could management provide an update on the third quarter outlook for

Speaker 3

Shi? Thank you. You. Thanks for your question. This is Peng Shi.

Speaker 3

I will handle the question first. And in Q2, Youdao Youdao Ling Shi 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 satisfactions for our products also reached a record high level. It has solid foundations for the subsequent development, we believe.

Speaker 3

With all the mature, we think, is a key initiative of the application education scenarios by our large library models, computers. In the second half of this year, we will continue to leverage the robust capability of the computer's large library model to further enhance the products and services quality and expand our user space. Regarding on the product updates, the two major developments are planned for the second half of this year. First is the AI SE grading features rolled out in Q2 this year, which provide users with professional Chinese SE feedback. Its specialized targets and timely greetings has received widespread positive feedback from our users.

Speaker 3

In the second half of this year, we will expand AI's 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 as well. It offers a more timely, 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. Duolingo's reputations among the users continue to strengthen, which will help us to serve more users in the future.

Speaker 3

Additionally, we are actively expanding the acquisition channels and have achieved positive results in exploring localized users acquisition strategies. In summary, we think we feel very comfortable about the products of the Youdao LingQueue 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 Links will maintain the momentum in the second half of this year and in the future. I hope that answers your question. Thank you.

Operator

Mr. Vicky Yai, does that answer your question?

Speaker 4

Thank you.

Operator

Thank you. Our next question comes from the line of Jing Yuan from China International. Please go ahead.

Speaker 4

Hello, management, me team. Thanks for taking my question. My question is about the Smart Device segment. I wonder will the Smart Device segment year over year revenue decline this quarter see some improvement in the second half of this year? Thanks.

Speaker 2

Yes, I'll take this question. So for the full year of 2021, our 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 periods last year. So from product strategy and also growth standpoint, so we will continue to focus on dictionary pens and also our new category this year, tutoring pens. We think both these categories represent a lot of opportunities for growth in the future.

Speaker 2

So the Dictionary Pay market, we are both the pioneer and also the clear market leader ranking number one. So, in sales for five consecutive years. So, the pen, that's a new category we introduced earlier this year. So, what's interesting about tutoring pens 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-twelve learning. So and in particularly for middle school and high school students.

Speaker 2

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 product. So we expect its enhanced user experience to drive improvements in the segments metrics in the second half of this year. So I'd also like to share two points regarding the long term development of our device business.

Speaker 2

First, is I remain optimistic about the medium to long term prospects of AI powered hardware. According to RUNTO, Ren Tukeji, China's AI hardware market, excluding smartphones cars is projected to exceed RMB1 trillion for the first time in 2025 and is expected to maintain a compound annual growth rate of 18% for the next five 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 RMB34 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.

Speaker 2

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 team 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 the hardware and our learning services integration to unlock opportunities. So this approach also helps reduce our overall sales and marketing expenses and improving operational efficiency.

Speaker 2

So if you look at our overall sales and marketing to revenue ratio in Q2, it was 28%. It's already done roughly 11 percentage points year over year. So we see further room for improvements and partly so when we work on the integration of hardware and our learning services. Yes. Thank you.

Speaker 4

Got it. Thanks.

Operator

Thank you. Our next question comes from the line of Thomas Chong from Jefferies. Please go ahead. Really sorry to interrupt, Mr. Thomas Chong.

Operator

Really sorry to interrupt. We are not able to hear you clearly. If you are using any external headset, may we request to use the speaker mode, please? Sorry, the handset mode.

Speaker 3

Hi, good evening. Thanks management for taking my 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? Thank you.

Speaker 5

Hi, this is Zhenle. Thank you for your questions. The application scenario of AI AD placement optimizer covers the entire advertising delivery process. Prior to ad delivery, AI ADA placement optimizer can conduct intelligent 20 fourseven Q and A with customers by analyzing multiple delivery data through our DMP. It automatically explores targeted audience and traffic streams, while intelligently generating sufficient audience targeting strategies.

Speaker 5

Post AD delivery, leveraging campaign data and our language model Confucius. AI AD placement optimizer intelligently generates delivery diagnostics and attribution analysis reports. Those outputs drive iterative optimization for subsequent audience targeting and strategy deployment, making advertising simpler and smarter. AI AD placement optimizer enables end to end AI decision making throughout the advertising workflow. Demand analysis, strategy formulation, intelligent delivery, data analytics and attribution, and optimization iteration.

Speaker 5

The data processing capacity significantly exceeded human capabilities, operating 20 fourseven with faster iteration cycles. The solution launched at the end of Q2 and had been deployed to several advertisers in programmatic advertising campaigns, receiving positive feedback. Furthermore, integrated with Magic Box that launched earlier this year, we delivered a comprehensive AI powered support across the full advertising lifecycle, 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.

Speaker 5

Concurrently, further adoption will expand our advertiser base. Those factors collectively accelerated our advertising revenue growth. Secondly, the solution identified cost efficient, high quality traffic, while maximizing data utilization from our DMP, thereby strengthening the profitability from our online marketing services segment. Thank you.

Operator

Thank you. Our next question comes from the line of Bose An from Huatai Securities. Please go ahead.

Speaker 4

Thanks for the management. This is Zhan Duo 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? Thank you.

Speaker 6

Thank you, Zhenbo, for your question. This is Wein. I will take your questions. As you have noticed, we generated operating cash flow of RMB185 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.

Speaker 6

This is primarily related to the following factors. First, our profitability have been improving, indicating sustained long term cash flow enhancement. From a profitability perspective, we achieved operating profit of around million in the first half of this year, a significant improvement in financial health compared to a loss of RMB42.6 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.

Speaker 6

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 RMB140.8 800,000.0 in the 2024, we saved approximately RMB 17,000,000 in the first half of this year, representing an improvement of around 50%. Thirdly, our operating cash flow exhibits seasonality. Q1 is typically the weakest quarter within a year due to the payment for last year's annual bonus. Excluding additional investments in our key initiatives such as AI technology and The cash flow performance in the second half of this year is expected to be stronger than the first half.

Speaker 6

Fourthly, the relatively slower pace of cash flow improvements 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 improvements 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 advertisers a credit period, which typically bring one or two 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.

Speaker 6

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. Thank you.

Speaker 4

Thank you.

Operator

Thank you. Our next question comes from the line of Linda from Macquarie. Please go ahead.

Speaker 4

Hi, management. I have two questions. The first one is regarding for asset advisory. In the announcement, you also mentioned about the strong growth coming from earnings and coming from overseas market. Can you elaborate more about the growth driver behind two segmentation and how what is your outlook for 2026?

Speaker 4

The second is for the buyback. We noticed that the RMB40 million buyback of variation, it almost evolved. And do you have any like new buyback fees? Thank you.

Speaker 1

Hi, Linda. There's it seems there's some connecting issue. Would you please kindly repeat your questions again? Thank you.

Speaker 4

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 RMB33.8 billion And so do we have any new scheme, because it's close to all 40,000,000 yen of our arrangement? Thank you.

Speaker 2

Sure. I'll take the question first.

Speaker 4

So

Speaker 2

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 served the top game providers in China, both in domestic market and also overseas. And NetEase games and along with several other game providers are both growing quickly as our client.

Speaker 2

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, 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.

Speaker 2

So one update I can provide regarding Google is that revenue with Google has increased triple digit percentage wise.

Operator

Yes,

Speaker 2

so overseas also contributes to our growth significantly. Yes. So that's for overseas. Regarding the buyback,

Speaker 4

do you have anything?

Speaker 3

Hi, Linda. This is Su Keng. I think I will handle the second question first. And for the share buyback, yes, we do announce about 30,000,000 share buyback plans about several quarters ago. And right now, we still you can based on my filings, know there still have several million still left.

Speaker 3

And 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, feel very confident about that we can definitely receive the full year operating profit in this year. So that means we have more capability on our financial sheet to process a new plan maybe in the next few quarters. That depends on the market as well as depends on investment in technology especially. We think that we'll spend more money and that will be more meaningful investment in the long run.

Speaker 3

So we definitely will take care of our clearly of our CEO balance sheet and to looking for the best strategies to balance the investment as well as the share buyback plan in the next in the future. I think I hope to answer your second question. And the first question, I'll just add some more colors, a little bit more colors in the for the Doctor. Zhu's comments. And because we in our announcement, press announcement, we mentioned about the growth of the advertising in Q2 is because of the growth of the business in the gaming industry and overseas market.

Speaker 3

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 quarters. So for the trend of second half of this year, we expect we can just accelerate about 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 or the colors of the advertisement business for the audition. Thank you.

Speaker 4

Thank you very much.

Operator

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

Speaker 1

Yes. Thank you once again for joining us today. If you have any further questions, please feel free to contact us at Yu Dao 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.

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