Youdao, Inc. American Depositary Shares, each representing one Class A Ordinary Share 2026 Q2 Earnings Call

Please go ahead. Thank you, operator.

Please note that the discussion today will contain forward-looking statements related to the future performance of the company, which are intended to qualify for the safe harbor from liability as established by the U.S. Private Securities Litigation Reform Act of 1995. Such statements are not guarantees of the future performance and are subject to certain risks and uncertainties, assumptions and other factors. Some of these risks are beyond the company's control and could cause actual results to differ materially from those mentioned in today's press release and this discussion. A general discussion of the risk factors that could affect Youdao's business and financial results is included in certain company filings with the U.S. Securities and Exchange Commission. The company does not undertake any obligation to update this forward-looking information except as required by law. During today's call, management will also discuss certain non-GAAP financial measures for comparison purpose only.

For the definitions of non-GAAP financial measures and reconciliations of GAAP to non-GAAP financial results, please see the 2026 second quarter financial results news release issued earlier today. As a reminder, this conference is being recorded. A webcast replay of this conference call will also be available on Youdao's corporate website at ir.youdao.com. Joining us today on the call from Youdao senior management are Dr. Feng Zhou, our Chief Executive Officer, Mr. Lei Jin, our President, Mr. Peng Su, our Senior VP, and Mr. Yongwei Li, our VP of Finance. I will now turn the call over to Dr. Zhou to review some of our recent highlights and strategic direction.

Thank you, Jeffrey, and thank you all for participating in today's call. Before we begin, I would like to remind everyone that all numbers are denominated in RMB unless otherwise stated. We maintained solid momentum in the second quarter, delivering robust results. Net revenues for the quarter reached RMB 1.5 billion, representing a 3.5% year-over-year increase. In terms of profitability, we achieved a record high in Q2, with operating profit reaching RMB 111.5 million, nearly fourfold year-over-year. This marks our eighth consecutive quarter of operating profitability, representing a critical step towards our goal of healthy and sustainable development. Meanwhile, net cash inflow from operating activities was RMB 334.2 million, up 80.7% compared with the same period last year. These strong quarterly results also drove strong first half performance.

In the first half of 2026, total net revenues reached RMB 2.8 billion, up 3.6% year-over-year, while operating profits increased 27.3% to a record RMB 169 million. We also generated RMB 241.1 million in net operating cash flow, compared with a net outflow of RMB 70.5 million in the same period last year, reflecting a substantial improvement in cash generation. Let me begin with an update on our progress in AI technology and Confucius, our proprietary large language model. AI remains a key driver across our business. During the second quarter, we continued to translate advances in our LM capabilities into practical products and applications across our business lines. First, we rolled out Confucius 4 in the second quarter, with significant upgrades in multimodal voice and translation capabilities. The new model delivers stronger performance in visual math and physics reasoning, particularly on complex diagrams.

We also improved its reasoning architecture and training data to significantly reduce inference costs. In translation, an optimized acceleration mechanism increased inference speed by approximately 80%. Second, our growing portfolio of AI agents was showcased at the 2026 World Artificial Intelligence Conference. Products including LobsterAI, HiEcho, Youdao Baoku, InfunEase, and iMagicBox, together with Confucius 4, demonstrated how AI is moving beyond basic Q&A towards executing more complex tasks across learning, work, and advertising scenarios. Beyond technological advances in user adoption, our AI capabilities also continued to gain recognition and support from authoritative bodies. In Q2, the Beijing Key Laboratory of Artificial Intelligence for Multilingual Translation, co-funded by Youdao, was officially launched. Going forward, we will continue advancing end-to-end multilingual translation models and accelerate their application across learning, international conferences, and cross-border trade. I will now walk through the performance of each of our business lines during the second quarter.

Net revenues from learning services were RMB 795.6 million, up 20.9% year-over-year, primarily driven by the strong performance of Youdao Lingshi, one of our strategic focused areas. AI continued to play an increasingly important role across our learning ecosystem. Following the strong reception of our AI English essay grading feature launched in the first quarter, grading volume more than doubled sequentially in Q2. Together with AI-powered course recommendation and AI college admission advisors, these differentiated AI capabilities helped enhance the user experience and contributed to a retention rate of over 75% for Youdao Lingshi in the second quarter. For our programming courses, continued product upgrades and channel expansion helped to broaden the user base, while improvements in the learning experience supported a retention rate of over 75% in the second quarter.

Within learning services, our AI-driven subscription products generated approximately RMB 100 million in sales during the second quarter, up more than 20% year-over-year. Our AI simultaneous interpretation feature also maintained strong momentum, with user engagement increasing by approximately 100% year-over-year. We also launched what we believe is the world's first 14-language, cross-lingual, accent-free voice cloning technology, enabling rapid voice replication across languages while preserving the speaker's emotional characteristics. To support broad adoption, we open-sourced the model weights and toolchains for local deployment and commercial use, significantly lowering the barrier to multilingual content production. Meanwhile, HiEcho continued to perform strongly, with second-quarter gross billings increasing by more than 100% year-over-year. The product also received positive feedback from both domestic and international users at WAIC. Turning to online marketing services, net revenues were RMB 584.4 million in the second quarter, down 7.7% year-over-year.

The decline reflects our deliberate focus on higher quality, higher margin opportunities as we continue to prioritize the long-term health and profitability of the business. As a result, gross margin improved to 28.7%, up approximately three percentage points year-over-year. At the same time, we continue to make progress in client acquisition and retention, adding more than 100 new clients during the quarter and increasing advertiser retention by approximately five percentage points sequentially. Our AI application and short-form drama advertising businesses also maintained strong momentum, with revenues growing more than 50% year-over-year for the second consecutive quarter. On the product side, we recently launched the second generation of our AI Ad Placement Optimizer, further improving advertising efficiency and quality. Unified account management provides centralized access across accounts, simplifying campaign operations. Automated push notifications delivers real-time data updates to help users respond more quickly.

Intelligent alerts provides 24/7 anomaly detection with second-level response times, helping reduce wasted ad spend and operational losses. Together, these upgrades further enhance advertiser value and strengthen the long-term health of our ad marketing ecosystem. Moving to smart devices, improving profitability remains our primary objective. Net revenues were RMB 86.8 million in the second quarter, down 31.5% year-over-year, while the overall operational health of the business continued to improve. Our market position remains strong. During the 618 Shopping Festival, Youdao Dictionary Pen ranked number one in sales in its category on both JD.com and Tmall for the seventh consecutive year. Our Youdao Tutoring Pen also received recognition from several government authorities for its application of AI in education, including the Ministry of Education, the Cyberspace Administration of China, and the Ministry of Industry and Information Technology.

We also recently launched the Youdao Dictionary Pen X8, featuring an expanded database of 80 million authoritative words and AI-powered photo-based tutoring across multiple subjects. Initial market response has been positive. Looking ahead, we will continue to execute our AI-native strategy. Leveraging our technical capabilities to deepen the application of vertical LLMs across learning and advertising. We will also continue expanding our portfolio of AI agents to enhance user experience and satisfaction, supporting further improvements in our key financial metrics in the second half of the year. With that, I will hand over the call to Peng Su for a deeper dive into our financial results.

Thank you. Thank you, Dr. Zhou, and hello, everyone.

Today I will be presenting some financial highlights from the second quarter of 2026. We encourage you to read through our press release issued earlier today for further details. For the same quarter, total net revenue RMB 1.5 billion, or US$216.2 million, representing a 3.5% increase from the same period of 2025. Net revenue from our learning services were RMB 795.6 million, or US$117.3 million, representing a 20.9% increase from the same period of 2025. The year-over-year increase was primarily driven by the strong momentum of tutoring services compared with the same period of 2025. Net revenue from our smart devices were RMB 86.8 million, or US$12.8 million, representing a 31.5% decrease from the same period of 2025, primarily due to the decline in demand for smart learning devices.