DAO — Youdao, Inc.

Youdao Q1 2026 Earnings Call Summary

1. Key Financial Results and Metrics:

• Net Revenues: RMB 1.3 billion (USD 195.4 million), up 3.8% year-over-year.
• Operating Profit: RMB 57.5 million, marking the seventh consecutive quarter of profitability, though down 44.7% year-over-year due to increased investments in strategic initiatives.
• Operating Margin: 4.3%, improved sequentially by 0.5 percentage points.
• Net Income: RMB 38.6 million (USD 5.6 million), down from RMB 76.7 million year-over-year.
• Non-GAAP Net Income: RMB 44.9 million (USD 6.5 million), also down from RMB 81.7 million year-over-year.
• Cash Flow: Net cash used in operating activities was RMB 93.1 million, a significant narrowing of 63.6% year-over-year.

2. Strategic Updates and Business Highlights:

• Learning Services Revenue: RMB 627.5 million, up 4.2% year-over-year, with strong growth in Youdao Lingshi and AI-driven subscription services exceeding RMB 100 million in sales (70% growth).
• AI Product Launches: Released several AI models including Confucius 4 for educational applications and EmotiVoice 2 for text-to-speech, enhancing capabilities in K-12 education.
• Online Marketing Services: Revenue of RMB 611.1 million, up 20.9% year-over-year, driven by performance-based advertising and AI technology investments.
• Smart Devices Revenue: RMB 109.4 million, down 42.6% year-over-year, reflecting a strategic focus on profitability over volume.

3. Forward Guidance and Outlook:

• Management remains optimistic about improving profitability and cash flow for the full year 2026, with a focus on AI-driven growth across learning, productivity, and advertising sectors.
• Anticipated continued growth in online marketing services, particularly in gaming and AI applications, which are expected to be key revenue drivers.

4. Bad News, Challenges, or Points of Concern:

• Declining Smart Devices Revenue: A significant drop in revenue from smart devices raises concerns about demand and market competitiveness.
• Operating Profit Decline: Despite ongoing profitability, the substantial year-over-year decline in operating profit highlights the impact of increased investment in strategic initiatives.
• Cash Flow Management: While cash outflow has narrowed, the company still reported a net cash outflow in Q1, indicating ongoing challenges in cash management.

5. Notable Q&A Insights:

• AI Strategy: Management emphasized the importance of specialized AI models and applications, noting that LobsterAI and Youdao Baoku are designed to enhance user productivity and knowledge management.
• Retention Rates: Youdao Lingshi reported a retention rate exceeding 75%, indicating strong user engagement and satisfaction.
• Advertising Outlook: The advertising business is expected to remain a primary contributor to operating profit, with strategic focus on high-potential verticals like gaming and AI applications.
• Seasonality: Management acknowledged the historical seasonality in revenue and operating profit, with expectations for H2 2026 to outperform H1, aligning with typical business patterns.

Overall, Youdao's Q1 2026 results reflect a mixed performance with growth in certain segments driven by strategic AI investments, while facing challenges in smart devices and overall profitability metrics.