Youdao, Inc. Q2 FY2025 earnings call

• Strong execution of AI Native Strategy led to first profitable second quarter, with operating income RMB 28.8 million vs. loss of RMB 72.6 million last year. Net revenues RMB 1.4 billion, +7.2% y-o-y.
• Learning Services: Youdao Lingshi net revenues +30% y-o-y, retention rate >75%, launched AI Essay Grading and Scholar AI with over 1M users. STEAM courses saw gross billings up ~15% y-o-y.
• Online Marketing Services: Expanded client base, deepened relationships, launched AI ad placement optimizer, with gaming ad revenue +50% y-o-y.
• Smart Devices: Youdao Dictionary Pen maintained market leadership, launched new models, and will unveil a new AI-powered smart device next week.

Learning Services: Net revenues rose 2.2% y-o-y to RMB 657.8 million in Q2, with Digital Content Services at RMB 447.4 million. Youdao Lingshi saw net revenues grow ~30% y-o-y. Smart Devices: Net revenues declined 23.9% y-o-y to RMB 126.8 million, primarily due to product life cycle issues and reduced marketing spend. Youdao Dictionary Pen maintained market leadership. Online Marketing Services: Net revenues reached RMB 632.9 million, +23.8% y-o-y, driven by gaming and overseas, but gross margin was 25.8%.

• Youdao Lingshi to continue growth, expand AI Essay Grading to English and launch AI tutoring in H2.
• Smart Devices to benefit from new AI-powered device launch, focusing on Tutoring Pens.
• AI Ad Placement Optimizer to support advertising revenue growth and profitability improvement.

• Operational risks related to product life cycles of smart devices.
• Macro conditions affecting advertising demand.
• Reduced marketing spend in smart devices impacting short-term revenue.

Q: Could management provide an update on the third quarter outlook for Youdao Lingshi?

A: Youdao Lingshi grew ~30% y-o-y in Q2, retention rate >75%. Will expand AI Essay Grading to English and launch AI tutoring in H2.

Q: My question is about the smart device segment. I wonder will the smart device segment year-over-year revenue decline in this quarter, see some improvement in the second half of this year?

A: Focus on Dictionary Pen and Tutoring Pens. New Tutoring Pen product to launch next week, expected to improve segment metrics in H2.

Q: 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?

A: AI Ad Placement Optimizer covers entire ad delivery process, enables end-to-end AI decision-making, will support revenue growth and profitability improvement.

Q: 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?

A: Operating profit improved in H1, confident in achieving operating cash flow breakeven this year despite cash flow seasonality.

Q: My question is regarding advertisement. In the announcement, you also mentioned about the strong growth coming from gaming and coming from overseas market. Can you elaborate more about the growth driver behind these 2 segmentation? And how -- what is your outlook for 2026? The second one is about the buyback. We noticed that the $40 million buyback authorization almost moved up. And do we have any like new buyback scheme?

A: Gaming ad revenue +50% y-o-y, overseas revenue with Google up triple digits. Buyback plan to continue, with remaining budget to be processed in future quarters, confident in long-term investment balance.