Youdao, Inc. Q3 FY2025 earnings call

Management Statement and Operational Highlights

• Youdao Lingshi and online marketing services had strong momentum in Q3, supporting long-term growth. Net revenues reached RMB 1.6 billion, up 3.6% y-o-y. Operating profit was RMB 28.3 million, down 73.7% y-o-y due to increased investments and high comparison base.
• Restructuring of Learning Services segment is complete. Operating profit for first 9 months was RMB 161.1 million, up 149.2% y-o-y, achieving operating profit for 5 consecutive quarters.
• Youdao Lingshi diversified customer acquisition channels, with gross billings up over 40% y-o-y and retention rate over 75%. Collaborated with Tsinghua University and CCF, launched AI tutor for programming, Confucius 3 translation model.
• Upgraded Youdao Dictionary app with AI simultaneous interpretation feature, driving over 200% y-o-y growth in sales of that feature. Launched Youdao Anydub for multi-lingual content dubbing.
• Online marketing services net revenues reached RMB 739.7 million, up 51.1% y-o-y, driven by NetEase Group and overseas markets. Gross margin 25.4%, within target range.

Segment Performance

• Learning Services: Revenues were RMB 643.1 million, down 16.2% year-over-year. Digital content services within this segment were RMB 425.9 million during the quarter. Youdao was included in the 2026 GSV 150. Youdao Lingshi, a key strategic business, saw gross billings accelerate over 40% year-over-year, with retention rate exceeding 75%. AI-driven subscription services sales reached approximately RMB 100 million in Q3, up over 40% year-over-year.
• Online Marketing Services: Net revenues were RMB 739.7 million, a new record, up 51.1% year-over-year. Driven by increased demand from NetEase Group and overseas markets. Gross margin was 25.4% in Q3, within the long-term target range of 25% to 35%.
• Smart Devices: Net revenues were RMB 245.8 million, down 22.1% year-over-year, reflecting strategic discipline in marketing expenditures but showing year-over-year improvement in fundamentals. Launched new tutoring pen with AI features.

Guidance

• Expect net revenues from the entire learning services segment to return to year-over-year growth.
• Aim to achieve full year operating cash flow breakeven.
• Continue to invest in core businesses (Youdao Lingshi, AI apps, online marketing services) leveraging AI technologies to drive growth.

Risks

• No specific risks explicitly discussed in the provided transcript.

Question and Answer

• Q: From Brian Gong, Citi: Regarding strategies ahead, whether online marketing services will become more important than learning services in the future? A: Feng Zhou: Remain committed to driving growth across both learning and advertising businesses. Learning services have long-term potential in AI-driven online services, with AI-driven subscription services growing. Online marketing services have strong growth, but both businesses will be developed leveraging AI.
• Q: From Linda Huang, Macquarie: Concern about online ad gross margin below 30% and plan to return to above 30%. A: Feng Zhou: Operate with long-term view, invested in customer acquisition, aim to increase value for advertisers. Lei Jin to provide details on initiatives like broadening Magic Box creative production platform, optimizing DMP and programmatic delivery system, integrating AI-driven creative production with ad delivery.
• Q: From Brenda Zhao, CICC: Potential for rebound in operating profit in Q4. A: Peng Su: First half operating profit improved significantly. Q3 invested in Youdao Lingshi and advertising customer acquisition. Youdao Lingshi had strong gross billings growth and retention, online marketing services had over 50% revenue growth. Fourth quarter expected to have strong performance with focus on core businesses and AI strategy.
• Q: From Bo Zhan, Huatai: Concern about full year operating cash flow breakeven. A: Wayne Li: First 9 months operating cash flow improved 40% y-o-y. Seasonal factors affect cash flow, Q4 typically strong. Youdao Lingshi has strong retention, AI-driven subscription services growing. Confident in achieving full year operating cash flow breakeven target.