Youdao NYSE: DAO reported second-quarter 2026 revenue growth and a sharp increase in operating profit, as gains in learning services and improved margins offset declines in online marketing and smart-device revenue.
Net revenue for the quarter rose 3.5% year over year to RMB1.5 billion, or $216.2 million, Chief Executive Officer Dr. Feng Zhou said on the company’s earnings call. Operating profit nearly quadrupled from a year earlier to a record RMB111.5 million, marking Youdao’s eighth consecutive quarter of operating profitability.
Net income attributable to ordinary shareholders was RMB73.8 million, compared with a RMB17.8 million loss in the prior-year quarter. Non-GAAP net income attributable to ordinary shareholders rose to RMB90.6 million from RMB12.5 million a year earlier.
Operating cash flow reached RMB334.2 million, up 80.7% from the year-ago period. For the first half of 2026, Youdao reported RMB2.8 billion in revenue, up 3.6%, and operating profit of RMB169 million, up 27.3%.
Learning Services Drive Growth
Learning services revenue increased 20.9% year over year to RMB795.6 million, primarily due to the performance of Youdao Lingshi tutoring services. The segment’s gross margin increased to 65.5% from 59.8% a year earlier.
Zhou said artificial intelligence features supported user engagement and retention. The volume of AI English essay grading more than doubled sequentially during the quarter, while Youdao Lingshi’s retention rate exceeded 75%. Programming courses also maintained a retention rate above 75%, according to the company.
AI-driven subscription products generated approximately RMB100 million in second-quarter sales, rising more than 20% year over year. User engagement with Youdao’s AI simultaneous interpretation feature increased about 100% from the prior year, while HiEcho gross billings grew by more than 100%.
During the quarter, Youdao introduced Confucius 4, the latest version of its proprietary large language model. The company said the model improved multimodal voice and translation functions, visual mathematics and physics reasoning, and inference costs. An optimized translation acceleration mechanism increased inference speed by roughly 80%, Zhou said.
The company also introduced what it described as a 14-language, cross-lingual, accent-free voice-cloning technology. The technology is designed to replicate a speaker’s voice across languages while retaining emotional characteristics, and Youdao said it open-sourced the model weights and toolchains for local deployment and commercial use.
Advertising Revenue Declines as Margin Improves
Online marketing services revenue declined 7.7% year over year to RMB584.4 million. Management attributed the decrease to a strategy emphasizing higher-quality and higher-return-on-investment advertising engagements rather than lower-margin opportunities.
That approach helped lift the segment’s gross margin to 28.7%, from 25.8% in the prior-year period. Youdao added more than 100 new clients during the quarter and increased advertiser retention by approximately five percentage points sequentially, Zhou said.
Revenue from AI application advertising and short-form drama advertising grew more than 50% year over year for the second consecutive quarter. President Lei Jin said the company expects advertising gross margin to continue improving year over year in the third quarter.
Youdao plans to focus on AI-enabled advertising tools, advertiser acquisition and profitability. The company launched the second generation of its AI Ad Placement Optimizer in the second quarter and expects to introduce an overseas key-opinion-leader marketing agent in the third quarter to help Chinese companies reach international markets.
- The AI Ad Placement Optimizer is intended to improve traffic matching, targeting accuracy and operating efficiency.
- Youdao said iMagicBox is being used to reduce the cost of producing advertising creative materials.
- The company plans to target growing AI application and short-form drama sectors in China and overseas.
Smart Devices Face Demand and Cost Pressures
Smart-device revenue fell 31.5% year over year to RMB86.8 million, which management said reflected lower demand for smart learning devices. Segment gross margin was 32.8%, down from 41.5% in the prior-year quarter.
Management cited higher memory costs and reduced hardware scale as pressures on device profitability. However, the company said it expects smart-device gross margin to recover to more than 40% in the second half of 2026, aided by new product launches in the third quarter and engineering improvements designed to reduce memory reliance.
During China’s 618 Shopping Festival, Youdao Dictionary Pen ranked first in its category by sales on JD.com and Tmall for the seventh consecutive year, according to Zhou. The company also launched the Youdao Dictionary Pen X8, featuring a database of 80 million words and AI-powered photo-based tutoring across multiple subjects.
Costs, Balance Sheet and Outlook
Total gross profit rose 17.6% year over year to RMB716.9 million. Operating expenses increased to RMB605.3 million from RMB580.6 million, including higher sales and marketing expenses and research and development spending. Operating income margin improved to 7.6% from 2% a year earlier.
As of June 30, Youdao held RMB849.3 million in cash equivalents, restricted cash and short-term investments. Contract liabilities, primarily related to learning services, totaled RMB835.1 million, compared with RMB847.7 million at the end of 2025.
Management said it plans to continue its AI-native strategy, expanding vertical large-language-model applications across learning and advertising. The company expects to launch multiple new AI agent and model products in September, with particular focus on voice technologies, mathematics learning and other STEM-related applications.
About Youdao (NYSE:DAO)
Youdao, Inc NYSE: DAO, established in 2006 as a subsidiary of NetEase, is headquartered in Beijing, China. The company went public on the New York Stock Exchange in October 2019, marking a significant milestone in its development as an intelligent learning and knowledge service provider. Since its inception, Youdao has combined cloud computing, artificial intelligence and big data analytics to create an adaptive learning ecosystem designed to meet the needs of individual learners and organizations.
At the core of Youdao's offerings is its suite of digital dictionaries and translation tools, including the flagship Youdao Dictionary app and translation engine.
This instant news alert was generated by narrative science technology and financial data from MarketBeat in order to provide readers with the fastest reporting and unbiased coverage. Please send any questions or comments about this story to contact@marketbeat.com.
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