Youdao's Q2 2025 Earnings Call: Contradictions Emerge on Operating Cash Flow, Youdao Lingshi Growth, and Smart Device Strategy

Date of Call: August 14, 2025

Financials Results

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

Guidance:

• Maintain AI-native strategy and continue product upgrades for Confucius LLM and agents
• Youdao Lingshi to expand AI Essay Grading to English and launch AI tutoring in H2 to sustain user growth
• Expect online marketing gross margin to stabilize in 25%–35% range medium-to-long term
• New Tutoring Pen and an AI-powered smart device to be launched; expect device metrics to improve in H2
• Aim to achieve operating cash flow breakeven for full year 2025
• AI Ad Placement Optimizer to drive advertising revenue growth and improve profitability

Business Commentary:

* Operating Profit and Revenue Growth: - Youdao reported an operating income of RMB 28.8 million for Q2 2025, compared to an operating loss of RMB 72.6 million in the same period last year. - The company's net revenues reached RMB 1.4 billion, an increase of 7.2% year-over-year. This growth was driven by the strong execution of its AI Native Strategy and cost optimization measures.

• AI Driven Subscription Services Growth:
• Total sales of AI-driven subscription services rose approximately 30% year-over-year to nearly RMB 80 million in Q2, setting a record high.
• This growth was attributed to the successful integration of the Confucius 3 large language model and new education and translation services.

• Advertising Revenue and Expansion:
• Net revenues from the Online Marketing Services segment reached RMB 632.9 million, up 23.8% year-over-year.

• Growth was driven by increased demand from the gaming industry and overseas markets, supported by the deployment of AI-powered advertising technologies.

• Learning Services and Product Innovations:

• Net revenues from learning services rose 2.2% year-over-year to RMB 657.8 million in Q2.

• The growth was primarily driven by the strong performance of Youdao Lingshi and the integration of AI-powered features like AI Essay Grading.

• Smart Devices Segment Challenges:

• Net revenues from the Smart Devices segment declined 23.9% year-over-year to RMB 126.8 million.
• The decline was due to the end of product life cycles and reduced marketing expenditure, but a new AI-powered smart device is expected to be unveiled soon to regain momentum.
  

  Sentiment Analysis:

  Overall Tone: Positive

  • "first profitable second quarter"; "net revenues reached RMB 1.4 billion, an increase of 7.2% year-over-year"; "operating income was RMB 28.8 million compared with an operating loss of RMB 72.6 million in the same period last year"; "we are confident in achieving the target of operating cash flow breakeven this year."

Q&A:

• Question from Yi Jing Wei (Citi): Could management provide an update on the third quarter outlook for Youdao Lingshi?
  Response: Lingshi grew ~30% in Q2 with >75% retention; management plans to expand AI Essay Grading to English and launch AI tutoring (powered by Confucius 3) in H2, expects continued user acquisition and momentum.

• Question from Jing Qiang (China International): Will the smart device segment's year-over-year revenue decline see some improvement in the second half of this year?
  Response: Focus is on improving business health via Dictionary Pens and a new Tutoring Pen launching next week; expect hardware-learning integration and cross-selling to drive segment improvement in H2 and long term.

• Question from Thomas Chong (Jefferies): What are the specific applications of AI Ad Placement Optimizer in advertising and the potential impact on future financial metrics?
  Response: Optimizer is an end-to-end AI solution across demand analysis, targeting, delivery, diagnostics and attribution; early deployments showed positive feedback and management expects it to boost advertisers' ROI, expand advertiser base, drive ad revenue growth and improve margins.

• 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 — company remains confident in achieving operating cash flow breakeven for 2025, citing improved profitability, H1 cash improvement versus prior year, seasonality and business-mix timing effects.

• Question from Linda Huang (Macquarie): Can you elaborate on the growth drivers behind gaming and overseas advertising and provide outlook for 2026? Also, any update on the share buyback near the $40M authorization?
  Response: Gaming drove >50% YoY ad growth serving top publishers (e.g., NetEase); overseas grew via TikTok and Google partnerships (Google revenue triple-digit); expect ad growth to accelerate into Q3; buyback program has remaining authorization (c. several million) and future repurchases depend on market and investment priorities.

Contradiction Point 1

Operating Cash Flow Breakeven Targets

It involves financial forecasts regarding operating cash flow breakeven, which are critical indicators for investor expectations regarding the company's financial health and stability.

Has the operating cash flow breakeven target for this year been revised following the Q2 year-over-year decline in operating cash flow? - Bo Zhan (Huatai Securities)

2025Q2: Operating cash flow breakeven target remains unchanged. Profitability improvements and reduced expenses are expected to drive cash flow enhancements. The operating cash flow is anticipated to strengthen in the second half of the year. - Yongwei Li(VP of Finance & Senior Financial Controller)

Is there a possibility of reporting profitability in Q2 this year? - Bo Zhang (Huatai Securities)

2025Q1: We have met our commitments and believe we can achieve operating cash flow breakeven and a non-GAAP net income on a full year basis this year. - Wayne Li(Vice President, Finance)

Contradiction Point 2

Youdao Lingshi Growth and Strategy

It involves strategic plans and growth expectations for Youdao Lingshi, which are crucial for understanding the company's focus on key revenue drivers and product direction.

Can management provide an update on the third quarter outlook for Youdao Lingshi? - Yi Jing Wei (Citi)

2025Q2: Youdao Lingshi continued to grow year-over-year with revenue increasing by roughly 30%. The retention rate exceeded about 75%, indicating high user satisfaction. Plans include expanding AI Essay Grading to cover English essays and launching AI tutoring powered by Confucius 3.0. The company is confident in maintaining momentum for Youdao Lingshi in the second half of the year. - Peng Su(Vice President, Strategies & Capital Markets)

When does management expect the learning services segment revenue to return to growth? - Liping Zhao (CICC)

2025Q1: Youdao Lingshi has delivered a steady performance. The product has been evolving with an increasing number of features and a significantly better user experience. And we have seen a significantly growing user base and revenue this quarter. The product continues to gain traction in the market and is expected to contribute more to our revenue growth in the future. - Feng Zhou(CEO & Director)

Contradiction Point 3

Smart Device Segment Strategy and Outlook

The change in strategy and expectations for the smart device segment's performance indicate a shift in the company's focus and priorities, which could impact investor perceptions.

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

2025Q2: The full-year focus for the smart devices segment is to improve business health. The segment is expected to show improvement in the second half, driven by new product launches and strategic focus on Dictionary Pens and Tutoring Pens. - Feng Zhou(CEO & Director)

How will the integration of Youdao's Confucius model with DeepSeek impact business operations? - Bo Zhang(Huatai Securities)

2024Q4: In Smart Devices, Youdao plans to maintain market leadership in the dictionary pen category and introduce new products. - Feng Zhou(CEO & Director)

Contradiction Point 4

AI Ad Placement Optimizer Impact on Advertising Revenue

The differing descriptions of the AI Ad Placement Optimizer's impact on advertising revenue and profitability suggest a shift in the company's understanding of the tool's effectiveness.

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

2025Q2: AI Ad Placement Optimizer enhances end-to-end AI decision-making, covering demand analysis, strategy formulation, data analytics, and attribution optimization. It improves advertisers' ROI and expands the advertiser base, supporting both advertising revenue growth and profitability improvement. - Lei Jin(President)

What opportunities will the online marketing business have in 2025? Will there be expansion into overseas markets? - Brenda Zhao(CICC)

2024Q4: Youdao's advertising strategy for 2025 focuses on three interconnected growth drivers: intensifying collaboration with NetEase Group, global expansion, and AI innovation. - Jin Lei(President)

Contradiction Point 5

Advertising Revenue Growth and Strategy

It highlights differing stances on the growth strategy for the advertising business, including the focus areas and challenges, which impact revenue projections and market positioning.

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

2025Q2: The growth potential lies in domestic sectors like online entertainment and AI tools, as well as the international market through partnerships with global tech companies. However, there are short-term challenges like high bases and macroeconomic uncertainty, but the profitability is expected to remain solid. - Lei Jin(President)

Given the strong growth in the online marketing service and the high base from Q4 last year, where should we expect future growth potential in the advertising business? - Brenda Zhao (CICC)

2024Q3: The advertising business has grown for 8 consecutive quarters, driven by AI advancements and improved execution. Growth potential lies in domestic sectors like online entertainment and AI tools, as well as the international market through partnerships with global tech companies. However, there are short-term challenges like high bases and macroeconomic uncertainty, but the profitability is expected to remain solid. - Lei Jin(President)