Youdao, Inc. (DAO) Earnings

Management highlights

- Core AI Product and Technology Launches * Released Confucius 4, an open-source learning large language model (LLM) with multi-model inputs that enables industry-leading K-12 problem solving and instruction for subjects requiring visual understanding, such as geometry * Released EmotiVoice 2, an open-source high-fidelity AI text-to-speech model with cross-lingual voice cloning capabilities * Released Confucius Translation 4, a new AI translation model with industry-leading performance across 40 languages, operating at less than 1/10 the cost of general-purpose LLMs for large-scale commercial deployment * Launched two new AI agents: Lobster AI, a privacy-focused customizable personal AI desktop assistant that surpassed 5,000 GitHub stars after open-source release; and Yudao Baopu, an AI-native knowledge base for complex knowledge synthesis that produces structured multi-model outputs * Upgraded the AI simultaneous interpretation feature in Youdao dictionary and translation products, cutting latency by 50% via Confucius 3, expanding to voice-to-voice translation and driving 100%+ year-over-year user engagement growth - Learning Services Operational Highlights * Launched AI-powered English essay grading for Youdao Lingshi, which delivers personalized feedback in ~1 minute to improve student outcomes and teaching assistant efficiency; early adoption has been positive with ~10,000 essays graded to date * Youdao Lingshi gross billing grew over 20% YoY in Q1, with retention rates exceeding 75% and continuing an upward year-over-year trajectory * Youdao programming education students achieved strong competitive results, including one gold medal at the 2026 International Winter AI Olympiad, demonstrating the depth of the company's teaching ecosystem - Online Marketing Services Operational Highlights * Growth was driven by strong demand for performance-based advertising, particularly in core vertical gaming and fast-growing emerging sectors including AI applications and short-form dramas, which each delivered over 50% YoY revenue growth * Launched an upgraded version of Infinise, the company's one-stop AI KOL marketing platform, adding streamlined end-to-end collaboration workflows and AI-powered influencer recommendations and automated content creation; nearly 60,000 global influencers have registered on the platform to date - Financial Overall Performance * Operating profit was RMB 57.5 million, with an operating margin of 4.3% (up 0.5 p.p. sequentially but down 44.7% YoY, primarily due to proactive strategic investments in AI and a high comparison base from 2025 learning services restructuring) * Net operating cash outflow narrowed 60% YoY to RMB 93.1 million * Net income attributable to ordinary shareholders was RMB 38.6 million, and Non-GAAP net income was RMB 44.9 million

Guidance

- UDAO reaffirmed its full-year 2026 commitment to delivering improvements in profitability and operating cash flow, supported by strong Q1 AI product momentum and a robust product pipeline - For 2026, management expects profit seasonality to return to historical norms, with the second half of the year outperforming the first half, consistent with the company's typical stronger H2 revenue pattern - The advertising business is expected to continue growing, with gaming as a stable cornerstone, AI applications as the core incremental growth driver, and new opportunities from globalizing Chinese brands and high-barrier sectors including social apps and finance - Management expects long-term structural growth for Youdao Lingshi, driven by policy-mandated expansion of high school educational resources that will add over 2 million new high school seats during the 15th five-year plan period

Segment performance

UDAO reported total net revenues of RMB 1.3 billion, up 3.8% year-over-year for Q1 2026, broken into three segments: 1. Learning Services: Net revenue of RMB 627.5 million (+4.2% YoY), accounting for ~48.3% of total company revenue. Segment gross margin was 60.2%, up 0.4 percentage points year-over-year. Key sub-segments: Youdao Lingshi grew over 20% YoY, programming courses grew over 20% YoY, and AI-driven subscription sales exceeded RMB 100 million, growing over 70% YoY. 2. Online Marketing Services: Net revenue of RMB 611.1 million (+20.9% YoY), accounting for ~47.0% of total company revenue. Segment gross margin was 29.6%, down 0.9 percentage points year-over-year but up 1.8 percentage points sequentially, marking the second consecutive quarter of sequential improvement. 3. Smart Devices: Net revenue of RMB 109.4 million (-42.6% YoY), accounting for ~8.4% of total company revenue. Segment gross margin was 39.9%, down 12.4 percentage points year-over-year, as the company prioritizes SKU health, inventory management and profitability over near-term volume growth.

Risks & headwinds

- Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from expectations, with many factors impacting performance outside of the company's control; general risk factors are detailed in the company's SEC filings - The company's financial results have pronounced seasonality that can lead to quarterly performance variation that does not reflect full-year underlying performance - Smart device segment revenue is facing near-term demand declines, with gross margin down significantly year-over-year as the company reorients the segment to prioritize profitability over volume

Analyst Q&A

• Q: What is UDAO's overall strategy for its expanding portfolio of AI applications? /

  A: Management focuses AI development on three core areas where UDAO has existing competitive advantages: education, productivity, and advertising. First, the company prioritizes developing specialized vertical fine-tuned LLMs rather than general-purpose foundational models, which deliver unique user value and serve as a key differentiator in core segments. Second, UDAO is launching more agentic AI products capable of handling complex long-running tasks, including Lobster AI, Yudao Baopu, and Scholar AI, which grew 200% YoY in Q1, and will continue to grow user bases and explore monetization. Third, UDAO is transforming internal operations to become AI-native, building and validating capabilities for internal use before launching them as external products, such as its internal AI inference platform ThinkFlow.

• Q: What updates can management share on Youdao Lingshi retention and growth outlook? /

  A: Management noted long-term policy tailwinds for Youdao Lingshi, as public plans call for over 2 million new high school seats during the 15th five-year plan, creating structural demand growth that UDAO is well-positioned to capture. In Q1 2026, the new AI English essay grading feature drove over 20% YoY gross billing growth, and retention rates currently exceed 75% on an upward YoY trajectory, reflecting strong user satisfaction with UDAO's AI-powered interactive learning format. Going forward, UDAO will expand AI applications across the entire student learning lifecycle to bring AI-driven learning efficiency to more users nationwide.

• Q: What is the outlook and strategic focus for UDAO's advertising business? /

  A: AI-driven improvements to ad creative efficiency and placement ROI have propelled advertising growth from 25% to 43% of total UDAO revenue between 2013 and 2025, with 20.9% YoY growth continuing in Q1 2026. Management remains confident in long-term growth, and will focus strategic expansion on four high-potential verticals: core stable gaming, fast-growing AI application user acquisition, global marketing for Chinese brands (such as new energy vehicles), and high-barrier social app and finance marketing. Management emphasized that advertising remains the primary contributor to UDAO's operating profit.

• Q: Can management elaborate on UDAO's seasonality pattern for operating profit? /

  A: UDAO has historically had pronounced seasonality, with revenue, operating profit all typically higher in the second half of the year, peaking in Q3, driven by seasonal peaks in advertising demand (summer gaming and Q4 holiday marketing), learning services delivery (summer/winter breaks), and smart device back-to-school sales. 2025 was an anomaly, with high H1 operating profit from post-restructuring cost cuts and low H2 profit from increased AI strategic investment. For 2026, profit cadence is expected to return to historical norms with H2 outperforming H1, and management focuses on longer-term operating profit growth to reflect underlying business health.