Youdao's Q2 2025: Contradictions Emerge on Lingshi Revenue and Growth Strategy, Operating Cash Flow, Advertising Drivers, and Smart Devices Strategy

Date of Call: August 14, 2025

Financials Results

• Revenue: RMB 1.4 billion (USD 197.9 million), up 7.2% year-over-year
• EPS: RMB 0.15 loss per ADS (basic and diluted) in Q2 2025; compared with net loss of RMB 99.5 million in Q2 2024. Non-GAAP net income per ADS: basic RMB 0.11, diluted RMB 0.10.
• Gross Margin: Total gross profit RMB 609.4 million (~43.5% gross margin), down 4.3% YOY; learning services 59.8% vs 60.0% prior year; smart devices 41.5% vs 30.3% prior year; online marketing 25.8% vs 39.1% prior year.
• Operating Margin: Operating income margin 2.0% in Q2 2025 compared with an operating loss margin of 5.5% in Q2 2024; operating income RMB 28.8 million vs operating loss RMB 72.6 million prior year.

Guidance:

• Targeting operating cash flow breakeven for full year 2025.
• Expect online marketing services gross margin to stabilize in the 25%–35% range over the medium to long term.
• Continue AI investments (Confucius LLMs, GenAI ad tech) and launch a new AI-powered Tutoring Pen next week.
• Anticipate continued advertising growth driven by gaming and overseas markets; AI Ad Placement Optimizer to boost advertiser ROI and profitability.
• Share buyback program has remaining capacity and future repurchases possible depending on balance sheet and investment needs.

Business Commentary:

* Profitable Second Quarter and AI Native Strategy: - Youdao reported its first profitable second quarter, with operating income of RMB 28.8 million compared to an operating loss of RMB 72.6 million in the same period last year. - This positive result was driven by strong execution of the AI Native Strategy, which focuses on AI integration across learning and advertising services.

• Learning Services Revenue and User Satisfaction:
• Net revenues from learning services rose by 2.2% year-over-year to RMB 657.8 million in Q2.

• The growth was primarily due to the strong performance of Youdao Lingshi, which achieved approximately 30% year-over-year revenue growth, and a record retention rate of 75%, indicating high user satisfaction.

• Advertising Services Revenue and Gaming Industry Growth:

• Net revenues from online marketing services reached RMB 632.9 million, up 23.8% year-over-year.

• This increase was driven by strong demand from the gaming industry, with gaming ad revenue growing by more than 50% year-over-year, and expansion into the overseas market through partnerships with TikTok and Google.

• Smart Devices Segment and Product Strategy:

• Net revenues from the smart devices segment declined by 23.9% year-over-year to RMB 126.8 million.
• The decline was attributed to the end of certain high-end Dictionary Pen models' product life cycles and reduced marketing expenditure. However, the company maintains confidence in the long-term potential of AI-powered devices, with a new smart device set to launch in the coming week.

  Sentiment Analysis:

  Overall Tone: Positive

  • Management called this the "first profitable second quarter" with operating income RMB 28.8M vs operating loss RMB 72.6M a year ago; net revenues +7.2% YOY to RMB 1.4B; Youdao Lingshi revenue +~30% YOY with retention >75%; online marketing revenue +23.8% YOY (though gross margin compressed).

Q&A:

• Question from Yi Jing Wei (Citi): Could management provide an update on the third quarter outlook for Youdao Lingshi?
  Response: Youdao Lingshi grew ~30% YOY with >75% retention; management will expand AI Essay Grading to English and launch Confucius‑3 powered AI tutoring to sustain user growth and retention.

• Question from Jing Qiang (China International): Will the smart device segment's year-over-year revenue decline improve in the second half of this year?
  Response: Focus is on improving hardware business health by prioritizing Dictionary Pens and new Tutoring Pens (new Tutoring Pen launching next week) to drive recovery and enable cross‑sell with learning services.

• Question from Thomas Chong (Jefferies LLC): What are the specific applications of the AI Ad Placement Optimizer and its potential impact on future financial metrics?
  Response: AI Ad Placement Optimizer provides end‑to‑end, 24/7 ad delivery optimization (audience discovery, diagnostics, attribution) and is expected to raise advertisers' ROI, expand budgets and customers, and improve online marketing profitability.

• Question from Bo Zhan (Huatai Securities): 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?
  Response: No revision; management remains confident in achieving full‑year operating cash flow breakeven, citing improved profitability, seasonality, business‑mix shifts and controlled credit policy.

• Question from Linda Huang (Macquarie Research): Can you elaborate on gaming and overseas advertising growth drivers and outlook for 2026; and do you have any new buyback scheme after the ~$33.8M used of the $40M program?
  Response: Gaming (client wins like NetEase) grew >50% YOY and overseas (TikTok/Google partnerships, Google revenue triple‑digit growth) materially contributed to ad growth; share buyback still has remaining capacity and future repurchases depend on cash position and investment priorities.

Contradiction Point 1

Youdao Lingshi Revenue and Growth

It involves differing perspectives on the revenue and growth trajectory of Youdao Lingshi, which is a key service segment for the company.

Can management provide an update for Q3? - Yi Jing Wei (Citigroup Inc.)

2025Q2: Youdao Lingshi's revenue increased approximately 30% year-over-year, with a 75% retention rate. Two major product updates are planned: AI Essay Grading for English and AI tutoring powered by Confucius 3.0. - Peng Su(SVP)

When do you expect the learning service segment's revenue to return to growth? - Liping Zhao (CICC)

2025Q1: Youdao's focus on services with robust demand and growth potential like Youdao Lingshi is ongoing. The AI college admission advisers have shown potential, with gross billing growth of over 25% year-over-year. The company expects revenue stabilization for the learning services segment in the second half of the year, with both revenue and profit projected to achieve year-over-year growth for Youdao Lingshi services. - Peng Su(VP, Strategy & Capital Markets)

Contradiction Point 2

Operating Cash Flow Breakeven Target

It involves the company's commitment and expectations regarding achieving operating cash flow breakeven, which is a crucial financial objective.

Has the Q2 operating cash flow decline led to a revision of this year's breakeven target for operating cash flow? - Bo Zhan (Huatai Securities Co., Ltd.)

2025Q2: Despite a decrease in operating cash flow, the target for operating cash flow breakeven is maintained. Improved profitability in H1, with a 133 million operating profit. - Yongwei Li(VP, Finance & Senior Financial Controller)

Is profitability possible in Q2 this year? - Bo Zhang (Huatai Securities)

2025Q1: As a result, our efforts to improve profitability and cash flow management have led to a record full-year operating cash flow breakeven target, maintaining over 80% gross margin and well over 20% operating margin. - Wayne Li(SVP, Finance)

Contradiction Point 3

Advertising Revenue Growth drivers

It reveals differing perspectives on the primary growth drivers for the advertising business, potentially impacting investor expectations and strategic planning.

What are the growth drivers for advertising in gaming and overseas markets, and what is the 2026 outlook? - Linda Huang (Macquarie Research)

2025Q2: Gaming revenue increased 50% year-over-year, driven by both brand-oriented and performance-oriented advertising. Overseas partnerships with TikTok and Google are successful, with Google revenue increasing triple digits. - Feng Zhou(CEO)

What are the specific applications of the AI ad placement optimizer in advertising and its potential impact on future financial metrics? - Thomas Chong (Jefferies)

2024Q3: Our growth is primarily driven by AI advancements and improved team execution. Growth potential lies in domestic sectors like online entertainment, AI tools, and automotive; and internationally through partnerships with global tech companies. - Lei Jin(CMO)

Contradiction Point 4

Smart Devices Business Strategy

It highlights differing approaches to the smart devices business, including product focus and strategic direction, which could impact business performance and investor confidence.

Will the smart device segment's revenue decline YoY this quarter and improve in the second half of this year? - Jing Qiang (Unidentified Company)

2025Q2: Tutoring Pens present significant growth potential, especially for middle and high school students. A new Tutoring Pen product launch is expected to drive improvements in the second half. - Feng Zhou(CEO)

Is growth in the smart devices sector sustainable? - Thomas Chong (Jefferies)

2024Q3: Our product pipeline expects new launches in Q4 and Q1, with a focus on cost-effectiveness for mid-range products and differentiation for high-end products. - Feng Zhou(CEO)

Contradiction Point 5

Youdao Lingshi Growth Strategy

It indicates differing strategies for the Youdao Lingshi business, which could affect investment decisions and market positioning.

Can management update the Q3 outlook for Youdao Lingshi? - Yi Jing Wei (Citigroup Inc.)

2025Q2: Youdao Lingshi's revenue increased approximately 30% year-over-year, with a 75% retention rate. Two major product updates are planned: AI Essay Grading for English and AI tutoring powered by Confucius 3.0. - Peng Su(SVP)

What strategies are being considered to increase investments in cost-related business? Will the company increase investments in the learning service sector? - Brian Gong (Citigroup)

2024Q3: Youdao Lingshi is a strategic priority, and while there are short-term headwinds, we remain optimistic about medium and long-term growth. - Peng Su(SVP)