DAO

• Overall Financial Performance

  • UDAO delivered solid Q2 2026 results, with total net revenue of RMB 1.5 billion, up 3.5% year-over-year. Operating profit hit a record high of RMB 111.5 million, nearly four times the year-ago level, marking the 8th consecutive quarter of operating profitability.
  • Net cash inflow from operating activities was RMB 334.2 million, up 80.7% year-over-year; the first half 2026 operating net cash flow was RMB 241.1 million, reversing a RMB 70.5 million net outflow in the year-ago period.
  • Net income attributable to ordinary shareholders was RMB 73.8 million (USD 10.9 million), compared to a net loss of USD 17.8 million in Q2 2025.

• AI Technology Development

  • UDAO launched Confucius 4, its updated proprietary large language model, with major upgrades to multi-modal, voice, and translation capabilities, and improved performance in visual math and physics reasoning for complex diagrams. Inference costs were significantly reduced, and translation inference speed increased by ~80%.
  • A portfolio of AI agents including Lobster AI, Hi-Echo, Youdao, Baoku, Infonese, and iMagicBox were showcased at the 2026 World AI Conference, demonstrating AI capabilities for complex tasks across learning, work, and advertising scenarios.
  • The Beijing Key Laboratory of Artificial Intelligence for Multilingual Translation, co-funded by UDAO, was officially launched in Q2. UDAO also open-sourced its 14-language cross-lingual accent-free voice cloning technology, lowering barriers for multilingual content production.
  • User engagement with the AI simultaneous interpretation feature grew 100% year-over-year, and Hi-Echo revenue increased more than 100% year-over-year.

• Product and Business Updates

  • For learning services, AI features including essay grading (grading volume more than doubled sequentially quarter-over-quarter), quiz recommendation, and college admission advisory drove a 75%+ retention rate for Youdao Lingshi, and 75%+ retention for programming courses.
  • For online marketing services, the second-generation AI ad placement optimizer was launched, adding unified account management, real-time data alerts, and 24/7 anomaly detection to reduce wasted ad spend and improve operational efficiency. Advertiser retention increased 5 percentage points sequentially quarter-over-quarter.
  • For smart devices, the new Youdao Dictionary Pen X8 was launched with an expanded 80-million-word database and AI-powered cross-subject photo tutoring, receiving positive initial market response. The Youdao Tutoring Pen received official recognition from China's Ministry of Education and other regulatory bodies.

• UDAO will continue executing its AI-native strategy, deepening the application of vertical large language models across learning and advertising, and expanding its AI agent portfolio to improve user experience and key financial metrics in H2 2026.
• Online marketing services gross margin is expected to continue improving year-over-year in Q3 2026. UDAO will prioritize profitable, sustainable growth over rapid expansion in the short term, and continue focusing on high-margin opportunities.
• Gross margin for smart devices is expected to recover to over 40% in H2 2026, narrowing the year-over-year decline, driven by engineering improvements to reduce memory reliance and new product launches.
• Further gross margin expansion is expected across learning services in 2026, as AI-driven operational scalability becomes more pronounced, and management is confident in delivering strong gross margin performance and meaningful operating profit breakthroughs in H2 2026.
• Multiple new AI voice-related models, AI agent products, and math learning-focused capabilities are scheduled to launch in September 2026. A new overseas KOL marketing AI agent is planned for launch in Q3 2026.

1. Learning Services: Net revenue of RMB 795.6 million (USD 117.3 million), representing a 20.9% year-over-year increase. Revenue contribution to total Q2 net revenue is ~53%, gross margin was 65.5% (up 5.7 percentage points year-over-year). AI-powered subscription products generated ~RMB 100 million in revenue, up over 20% year-over-year, with a 75%+ user retention rate for the core Youdao Lingshi offering.
2. Online Marketing Services: Net revenue of RMB 584.4 million (USD 86.1 million), down 7.7% year-over-year. Revenue contribution to total Q2 net revenue is ~39%, gross margin improved 2.9 percentage points year-over-year to 28.7%. AI application and short-form drama advertising revenue grew over 50% year-over-year for the second consecutive quarter, with more than 100 new clients added in the quarter.
3. Smart Devices: Net revenue of RMB 86.8 million (USD 12.8 million), down 31.5% year-over-year. Revenue contribution to total Q2 net revenue is ~6%, gross margin was 32.8% (down 8.7 percentage points year-over-year, impacted by rising memory chip costs industry-wide). The Youdao Dictionary Pen held the top sales position in its category on JD.com and Tmall for the 7th consecutive year during the 618 shopping festival.

• Forward-looking performance is subject to risks and uncertainties that could cause actual results to differ materially from management projections, many of which are outside of UDAO's control, as outlined in UDAO's SEC filings.
• The smart devices segment faces ongoing industry-wide near-term cost pressure from elevated memory chip prices, which has compressed gross margins in 2026.

Q: What are UDAO's core strengths in large language models, and what new LLM-based product launches are planned? / A: UDAO focuses LLM development on high-demand, high-value areas where it holds differentiated strengths. Beyond its longstanding core strength in translation, 100% year-over-year growth in simultaneous interpretation user engagement confirms strong demand for its low-latency voice interaction capabilities. The new Confucius 4 TTS voice cloning model supports 14-language cross-lingual cloning that preserves speaker emotion, with applications across learning, content creation, dubbing, and global communications. UDAO plans to launch multiple new voice products and AI agents for math learning, focused on personalized STEM tutoring, in September 2026.

Q: Will UDAO expand AI features for the Youdao Lingshi learning offering, given the success of AI essay grading? / A: AI is integrated across all core Lingshi features to improve user experience and operational scalability, not just added as a discrete feature. Current AI-powered offerings include personalized learning path recommendations, adaptive AI quiz suggestions, AI grading for both Chinese and English writing, and AI college admissions advisory. These capabilities have driven Lingshi's Q2 2026 retention rate above 75%, an industry-leading level that demonstrates high user satisfaction, and AI will remain the core driver of long-term value and business efficiency for the learning service line.

Q: What is the outlook for UDAO's online marketing services business? / A: Q2 2026 gross margin for online marketing improved 3 percentage points year-over-year, and further year-over-year improvement is expected in Q3. In Q3, UDAO will focus on three priorities: strengthening AI advertising capabilities, including launching a new overseas KOL marketing AI agent; expanding the advertiser base, with a focus on fast-growing AI application and short-form drama sectors; and improving profitability via AI tools that lower creative production costs and identify more cost-effective traffic. Medium-term, UDAO will continue integrating AI into programmatic and vertical marketing to boost advertiser ROI while supporting sustainable growth.

Q: What is the outlook for UDAO's gross margin in the second half of 2026? / A: H1 2026 consolidated gross margin was 47%, up 2 percentage points year-over-year, with expansion in both online marketing and learning services. Learning services margin will continue expanding in 2026 as AI-driven scale benefits become more pronounced. Smart device margin was compressed by rising memory costs in H1, but engineering improvements and new Q3 product launches will push margin back above 40% in H2, narrowing the year-over-year decline. UDAO expects continued overall gross margin improvement and meaningful operating profit progress in H2 2026.