Youdao's 2024 Earnings: A Profitable Turnaround Amid Revenue Stumbles

Youdao (NYSE: DAO), the education and AI subsidiary of NetEase, delivered a mixed performance in its Full Year 2024 earnings report. While the company’s earnings per share (EPS) surged to CN¥0.70, marking a dramatic turnaround from a CN¥4.53 net loss in 2023 and exceeding analyst expectations by 195%, its total revenue of CN¥5.63 billion fell 1.9% short of consensus estimates. This bifurcated outcome underscores Youdao’s strategic focus on profitability over top-line growth—and highlights both its progress and lingering challenges.

The EPS Surprise: A Shift to Profitability

Youdao’s EPS beat was the star of the report, driven by aggressive cost-cutting and operational efficiency. Sales and marketing expenses dropped to CN¥1.87 billion (a 17.5% reduction year-over-year), while R&D and general administrative costs fell by 27.4% and 15.7%, respectively. These cuts enabled Youdao to achieve its first-ever full-year net profit of CN¥82.2 million, reversing a CN¥549.9 million loss in 2023.

The EPS result also reflected strategic shifts in revenue allocation. While traditional learning services revenue declined 12.7% as the company prioritized high-margin courses, AI-driven segments like online marketing services (a 48.3% revenue jump) and smart devices (Q4 growth of 8.1%) fueled profitability. For example, Youdao’s AI-powered dictionary pens (like the Dictionary Pen X7) and ad revenue from gaming clients proved critical to margin expansion.

Revenue Miss: A Cautionary Note

Despite the EPS triumph, Youdao’s total revenue missed expectations by 1.9%, signaling execution challenges in certain segments. The Learning Services division—a cornerstone of its business—slumped as the company deprioritized volume for quality. Meanwhile, Q4 2024 revenue dropped 9.5% year-over-year, raising concerns about demand sustainability.

Analysts had forecast CN¥5.74 billion in 2024 revenue (calculated from the 1.9% miss), but Youdao’s focus on profitability over growth left a gap. The disconnect suggests investors may need to recalibrate expectations: Youdao appears less interested in chasing top-line expansion and more intent on proving it can sustain profitability.

Strategic Priorities: AI and Global Expansion

Youdao’s "AI Native" strategy is central to its future. The launch of the Confucius-o1 reasoning model and integration of DeepSeek R1 into its dictionary pens aim to solidify its position in AI education. Additionally, partnerships like its Google collaboration in advertising highlight ambitions to tap global markets.

The company also emphasized operational discipline, with plans to maintain low expenses even as revenue grows. Management forecasts 11% annual revenue growth over the next two years, slightly outpacing the 10% growth rate projected for the U.S. Consumer Services industry.

Risks and Concerns

While Youdao’s turnaround is notable, risks linger. Intense competition in AI education and smart devices could pressure margins. Additionally, its reliance on NetEase Group for financial support—evident in CN¥878 million in short-term loans—raises questions about long-term independence.

The stock’s 14% week-over-week jump post-earnings reflects investor optimism, but shares remain below their 52-week high of $11.82. Persistent macroeconomic headwinds and regulatory uncertainty in China’s tech sector also pose threats.

Conclusion: A Profitable Pioneer, but Not Without Hurdles

Youdao’s 2024 results paint a clear picture: the company is prioritizing profitability over revenue growth, and it’s working. The CN¥0.70 EPS, a 195% beat, and first annual net profit are milestones that validate its strategy. However, the 1.9% revenue miss and Q4 decline underscore execution risks in scaling AI initiatives and managing traditional segments.

Investors should weigh these factors carefully. On one hand, Youdao’s AI-driven margins and global expansion efforts position it as a leader in tech-enabled education. On the other, its reliance on parent company support and competitive pressures suggest caution.

Key data points to monitor:
- 2025 Revenue Growth: Achieving the 11% annual target will test its ability to balance cost control and top-line momentum.
- AI Subscription Revenue: The segment’s 130% YoY growth in 2024 must continue to offset declines in legacy services.
- Operating Cash Flow: While profitability improved, annual operating cash flow remained negative at CN¥67.9 million—turning this positive would be a major validation.

For now, Youdao’s earnings reflect a bold pivot toward profitability, but sustained success will depend on executing its AI and global strategies while navigating industry headwinds. The stock’s post-earnings rally hints at investor optimism, but the path to long-term dominance remains fraught with challenges.