Youdao Inc (DAO) 2025 Q3 法說會逐字稿

Good day and welcome to Youdao third-quarter 2025 earnings conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Jeffrey Wang, Investor Relations Director of Youdao. Please go ahead.

Thank you, operator. Please note the discussion today will contain forward-looking statements relating to the future performance of the company, which are intended to qualify for the Safe Harbor [fund] liability as established by the US Private Securities Litigation Reform Act.

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 US 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 2025 third-quarter financial results 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's Senior Management are Dr. Feng Zhou, our Chief Executive Officer; Mr. Lei Jin, our President; Mr. Peng Su, our Senior VP; and Mr. Wayne Li, our VP of Finance.

I will now turn the call over to Dr. Zhou to reveal some of our recent highlights and strategic direction.

Thank you, Jeffrey. Thank you all for participating in today's call. Before we begin, I would like to remind everyone that all figures are based on renminbi unless otherwise stated. In the third quarter, our strategically prioritized businesses, Youdao Lingshi and online marketing services, delivered a strong momentum, supporting our long-term growth trajectory.

Net revenues reached RMB1.6 billion, up 3.6% year over year. Operating profit was RMB28.3 million, a decline of 73.7% year over year, primarily due to two factors. First, following the significant operating profit improvements in the first half of the year, we increased investments in Youdao Lingshi and our online marketing services in Q3 to accelerate medium to long-term expansion.

Second, we faced a high comparison base from the same period last year due to a one-off impact from the STEAM courses. Our restructuring of the learning services segment is now complete. For the first nine months of the year, operating profits reached RMB161.1 million, representing a substantial 149.2% year-over-year increase and highlighting the meaningful progress we have made in enhancing our profitability.

Notably, we have now achieved operating profits for five consecutive quarters, the first in our history. From a cash flow perspective, operating cash outflow for the quarter was RMB58.6 million, an improvement of 31.4% year over year.

Next, I will delve into the major developments across our businesses. Revenues from the learning services segment were RMB643.1 million, down 16.2% year over year, reflecting our disciplined and strategic approach to customer acquisition as we focus on growing the Lingshi business.

Within the learning services segment, net revenues from digital content services were RMB425.9 million during the quarter, and our achievements in digital learning have gained international recognition. Youdao was included in the 2026 GSV 150, a list that highlights the world's most transformational growth companies in digital learning and workforce skills, selected from more than 3,000 global companies.

Turning to Youdao Lingshi, one of our key strategic businesses, we made solid progress during the quarter by diversifying its customer acquisition channels. Lingshi accelerated, achieved over 40% year-over-year growth in gross billings. More recently, retention rate has exceeded 75%, up from over 70% in the fourth quarter of last year.

In addition, as part of our broader commitment to cultivate innovative talent, we collaborated with the Yau Mathematical Sciences Center at Tsinghua University. (Spoken in Chinese) providing technical support to a platform designed to identify and support mathematically gifted students. The system is currently being piloted in top-tier schools, with a national rollout planned following further refinements.

In terms of our programming courses, we introduced an AI Tutor for live programming classes in the third quarter, featuring a life-like avatar and supporting both text and voice interactions. The AI Tutor helps answer students' questions in real time, significantly enhancing the overall learning experience.

With ongoing product upgrades, gross billings for our programming courses increased by more than 30% year over year in Q3. Additionally, we continued our deep collaboration with the China Computer Federation, CCF, and are honored to have become a golden partner.

On the app side, total sales of our AI-driven subscription services reached a new record of approximately RMB100 million in the third quarter, representing over 40% year over year growth. We launched our Confucius 3 translation model, which supports real-time bi-directional translation across 38 languages and offers advanced multi-modal capabilities. Despite its compact parameter size, Confucius 3 translation delivers translation quality that surpasses some larger, general purpose models.

In August, Confucius 3 series LLM was among the first to receive the highest-level Trusted AI Education Large Language Model certification from the China Academy of Information and Communications Technology.

Regarding product development, we introduced a major upgrade to our flagship Youdao Dictionary app, Youdao Dictionary 11, delivering a truly AI-native experience that has been met with widespread user acclaim. A key highlight is the fully redesigned AI Simultaneous Interpretation feature. Powered by industry-leading noise-reduction technology and our proprietary turn-detection algorithm, it achieves top-tier voice translation accuracy with exceptionally low latency.

The feature also offers one-click summarization of translated content and automatically generates mind maps, significantly improving user efficiency across both learning and work scenarios. These enhancements have been well received, driving over 200% year-over-year growth in sales of the AI Simultaneous Interpretation feature during the third quarter. To date, more than 20 million users have engaged with this capability.

We have launched a new AI audio and video translation product. Youdao Anydub in the third quarter, to automate multilingual production of content such as TV shows, marketing videos, and more. It leverages our proprietary Adaptive Voice Cloning technology to learn a speaker's vocal characteristics and generate a natural, fluent, and emotionally rich dubbing.

The system delivers optimal translation results by holistically considering key factors including voice, speaker identity, and even video scene transitions to produce dubbing that is more accurate, contextually aligned, and precisely suited to the creator's intended purpose.

Turning to our online marketing services segment, growth accelerated in the third quarter. Net revenues reached RMB739.7 million, a new record and an increase of RMB51.1 year over year. The strong performance was primarily driven by increased demand from the NetEase group and overseas markets, which was driven by our continued investments in AI technology.

Gross margin for the segment was 25.4% in Q3, moderated roughly 10 percentage points year over year, but largely stable sequentially, remaining within our long-term target range of 25% to 35%. We continue to rapidly expand our new client base during the quarter to support future growth. Advertising revenues from the gaming industry, mainly contributed from NetEase, grew by over 50% year by year.

We assisted NetEase Games with a growing number of programmatic advertising and influencer marketing campaigns. For example, in promoting the blockbuster title Where Winds Meet, we executed a comprehensive integrated marketing strategy that generated over 500 million video views and more than 21.4 million live streaming exposures. Looking ahead, we plan to further deepen our collaboration with the NetEase Group and other game clients to unlock additional synergies.

Our overseas advertising business also delivered strong momentum with revenues growing by more than 100% year over year. We are pleased that our BYD WonderLife Global Influencers Co-Creation campaign received the Brands & Creators Award at the YouTube Works Awards China. Looking ahead, we plan to further deepen our collaboration with Google and with global advertisers to better support Chinese companies in expanding their global presence.

We continue to drive improved advertising performance by our AI Ad Placement Optimizer. It is an end-to-end AI-powered agentic solution covering demand analysis, strategy formulation, data analytics, and innovative optimization. In addition, I am thrilled to share that we will launch AI Ad Placement Optimizer version 2 by the end of this year. Please stay tuned.

Moving to our smart devices segment, net revenues were RMB245.8 million during the quarter, down 22.1% year over year. This reflects our strategic decision to exercise greater discipline in marketing expenditures, focusing on strengthening the settlement's operational health. As a result, we saw year-over-year improvement in the segment's fundamentals during the third quarter.

Product wise, we launched a new tutoring pen, Youdao Space X, which offers precise scanning for long form and multi-graphic problems, AI-powered video explanations for academic problems, and an AI-based mistake ledger. These features empower students to learn and review subjects more effectively and efficiently. Our dictionary pen and tutoring pens were also featured at the World AI Conference, receiving strong exposure to new audiences and coverage from multiple media outlets.

Looking ahead, we will continue executing on our AI Native strategy, with a focus on deepening the application of and innovating with our large language model, Confucius, across both our learning and advertising businesses to consistently create value for our customers.

Financially, we will maintain disciplined operations and remain confident in achieving the full-year targets set at the beginning of the year, including robust year-over-year operating profits growth and reaching annual operational cash flow break even for the first time.

With that, I will hand over to Su Peng for a deeper dive into our financial results. Thank you.

Thank you, Dr. Feng, and hello everyone. Today, I will be presenting some financial highlights from the third quarter of 2025. We encourage you to read through our press release issued earlier today for further details.

For the third quarter, total net revenue, RMB1.6 billion or USD228.8 million, representing a 3.6% increase from the same period of 2024. Net revenue for our learning services were RMB643.1 million or USD90.3 million, representing a 16.2% decrease from the same period of 2024. So the year-over-year decrease was primarily attributable to our decisions to take a disciplined strategic approach to customer acquisitions, which place a greater emphasize to a higher ROI, return on investment, engagements.

They believe this strategy has enhanced the overall resilience and operational efficiency of our business despite the short-term revenue decline. Net revenue from our smart devices were RMB245.8 million or USD34.5 million, representing a 22.1% decrease from the same period of 2024.

Our net revenue from our online marketing services were RMB739.7 million or USD103.9 million, representing a 51.1% increase from the same period of 2024. The year-over-year increase was primarily driven by the increased demand from the NetEase Group and the overseas markets, which was driven by our continuing investment in AI technology.

For the third quarter, our total gross profit was RMB687.9 million or USD96.6 million, representing a 12.9% decrease from the same period of 2024. Gross margin for learning services was 58.5% for the third quarter of 2025 compared with the 62.1% for the same period of 2024.

Gross margin for smart devices was 50.3% for the third quarter of 2025 compared with 42.8% for the same period of 2024. Gross margin for online marketing services was 25.4% for the third quarter of 2025 compared with 36.3% for the same period of 2024. For the third quarter, we reduced our total operating expense to RMB659.6 million for USD92.7 million compared with RMB682.2 million for the same period of last year.

Looking at our expense in more detail, sales and marketing expense declined to RMB487.7 million compared with RMB519.6 million in the third quarter of 2024. Research and development expenses were RMB127.8 million compared with RMB119.6 million in the third quarter of 2024. Our operating income margin was 1.7% in the third quarter of 2025 compared with 6.8% for the same period of last year. For the third quarter of 2025, our net income attributable to ordinary shareholders was RMB0.1 million or USD [near to zero] compared with RMB86.3 million for the same period of last year.

Non-GAAP net income attributable to the ordinary shareholder for the third quarter was RMB9.2 million or USD1.3 million compared with RMB88.7 million for the same period of last year. Basic and diluted net income for ADS attributable to ordinary shareholder for the third quarter of 2025 was near zero. Non-GAAP basic and diluted net income per ADS attributable to the ordinary shareholder for the third quarter was RMB0.08, USD0.01. Our net cash used in the operating activity was RMB58.6 million or USD8.2 million for the third quarter.

Looking at our balance sheets as of September 30, 2025, our contract liabilities, which mainly consist of the deferred revenue generated from our learning services, were RMB751.1 million or USD105.5 million compared with RMB661 million as of December 31, 2024.

At the end of the period, our cash equivalent, current and non-current restricted cash and short-term investments totaled RMB557.7 million or USD78.3 million.

This concludes our prepared remarks. Thank you for your attention. We would now like to open the call to your questions. Operator, please go ahead.

(Operator Instructions) Brian Gong, Citi.

A very quick question for our strategies ahead. So our online marketing services are growing rapidly, kind of showing a different trend versus learning services. From strategy perspective, the online market services become more important than learning services in the future. Thank you.

Hi, Brian. So right now, we are experiencing a higher growth for ads compared with learning services. In the long-term, we actually see great opportunities on both areas. So let me explain that for you. So the strong expansion of our marketing services over the past three years have been mostly driven by, first, our advanced tech and AI capabilities, then customers trained to transition from traditional ads to performance ads, and finally, opportunity of overseas ads. Since the advertising revenue first exceeded RMB200 million in the single quarter in Q4 2022, it has reached a record high of over RMB700 million this quarter, so representing a year-over-year increase of more than 50%.

So as we've discussed several times on this call, we believe our advertising business is still in the early days. The application of generative AI and agentic AI in online advertising is only just beginning. We see 2025 as the first year, when generative and agentic AI will be put to work on ads at scale. So we launched our Magic Box ad creative platform in Q1 and our AI Ad Placement Optimizer and ad automation agent in Q2.

These AI driven improvements in delivering the ads have strengthened the customer satisfaction already, which in turn encourages advertisers to allocate larger budgets to our platform, accelerating our growth from a customer expansion perspective. We continue to see substantial opportunities across online games, e-commerce, overseas online games, overseas electronics, and through our deepening collaboration with partners such as Google and TikTok. So with all these reasons, we believe these will all drive strong revenue growth for the coming years, hopefully.

So on the other side, we also see a very good growth opportunities in our learning services business. This part of our business, as you probably know, has undergone quite significant changes over the past two years, largely because we actually believe there is tremendous long-term potential to see AI-driven online services. So AI is a decade-long growth trajectory and capturing it to require us to build and scale truly AI native services and application, and that's what we've been doing.

So on the AI driven subscription services, so this part we began sharing our progress since last year, and the trajectory is very promising. So total sales of AI-driven subscription services amounted to approximately RMB50 million in the first quarter of last year, if you remember. So it took us only six quarters to double that figure, reaching approximately RMB100 million this quarter.

So we are actively developing new features, applications, and agents to support future growth expansion. A lot of agents are running inside our companies to improve our business efficiency, so we see ample product optimization opportunities ahead and expect the growth to continue.

In the digital content segment, the learning content, we have fully completed the restructuring and have sharpened our focus on the Lingshi business. In Q3, Youdao Lingshi delivered over 40% year-over-year growth in gross billings and demonstrated strong user stickiness and retention rate exceeds 75%.

So adding all that up, in the near term, we expect -- actually we expect net revenues from the entire learning services segment to return to year-over-year growth. So in summary, we remain firmly committed to driving growth across both our learning and advertising businesses by continuing to serve our customers better and also leveraging AI technologies better. Yeah, thank you. Thank you.

Linda Huang, Macquarie.

So my question is regarding for the online advertisement because it seems that second quarter this year, we noticed that the gross margin below -- I think below 30%, maybe around I guess 25%. So I just want to know, does the manager have any plan or like a timeline on we can return back to the above 30%? And what will we need to do to make sure that the margin can recover? So that's for online marketing. Thank you.

I'll answer this briefly before Jin Lei provides more details. We always operated with a long-term view and aim to increase the value we create for advertisers. We think that's most important. So in Q3, we saw strong opportunities to grow the customer base, so we chose to engage and onboard more customers and that is reflected in the revenue growth. You can see very, very quick revenue growth.

On the flip side of that, we are -- so we basically gave up some short-term gross margin as new customers are less profitable, and sometimes even we operate at a loss for particular important customers. So that is actually also true I believe for the learning side of the business. I just want to mention in Q3.

So we invested in hiring more personnel for expanding Lingshi across business in Q3 also for future growth. So we believe this kind of investment are very good investment and we have a solid and profitable unit economics we ensure we have that, and we think investments like these are going to translate to growth and profitability in the coming quarters.

Hi, this is Lei Jin. Regarding the gross margin of our online marketing services business, the major parts are adopting the performance-based advertising pricing model and the gross method revenue recognition. We anticipate a balance between delivering value to our clients and sustain our own healthy long-term development. Against this backdrop, we consider gross margin within the range from 25% to 35% to be a reasonable target.

Our current objective is to drive an improvement in gross margin, which we aim to achieve through several key initiatives. First, we plan to [broaden] the application of the Magic Box creative production platform throughout the [AD] creation process.

Compared to [manual creation] production, Magic Box reduced production costs by approximately 70% while improving production efficiency. By leveraging our end-to-end data chain to identify and analyze the high-performing creatives, we can scale the application, better serve our clients, and enhance overall delivery efficiency.

Second, we will continue to optimize and upgrade our data management platform, DMP, and the programmatic delivery system. This includes extending data dimensions and mining underlying data characteristics to improve audience and the traffic insights. Those enhancements will enable more systematic and process identification of the target audience, leading to a higher advertising delivery efficient effectiveness.

Third, we will capitalize our robust AI capabilities to further integrate the AI-driven creative production with the advertising delivery process. By closely linking those functions with the data capabilities of our DMP, we aim to establish an automatic closed-loop system that boosts the overall operational efficiency of our online services. Thank you.

Brenda Zhao, CICC.

My question is also related to the profit margin. Because we see the operating profit experience a year-over-year decline in the third quarter, what is the potential for rebound to year-over-year growth in fourth quarter? Thank you.

Thank you, Brenda. This is Su Peng. I will handle the question first. And I think at the beginning of this year, we set the two full years financial goals. First it's to achieve the rapid year-over-year improvement in operating profit; and secondly, to achieve the break even in full-year operating cash flow.

And if you see the performance of the Youdao in the first half of this year, especially in the operating profit, it's operating profit in the first half of 2025, I mean, it's much better than that in the last year, same time, improving from the RMB40 million loss to the RMB130 million gain. So I think that's provide more flexibility for us to make more investments in the second quarter of 2025.

With that in the investment in the Youdao Lingshi in advertising the customer acquisition, we are maintaining the profitability. And also, we start to spend [USD1] to acquire the potential clients for the advertisement business from the third quarter as [Zhou Feng] mentioned before in our earnings call. And Youdao Lingshi delivered over 40% year-over-year [GDP] growth and increased retention rate to the 75% -- over the 75%.

And also, we achieved about the revenue of the advertisements growth over 50% in the Q3 in the 2025. And also the new clients account for over 30% of the total clients. So I think that that will create a great momentum and the fundamentals for our business in the Q4 and the next year.

And all for our first quarter's priorities, and at the same time, I just try to explain in more details regarding on the we impacts of our -- we call the learning service business and (inaudible) mentioned before. And in the last year, STEAM courses still account for the meaningful percentage of our revenue for our learning services. And at sometimes in summer, we shrink a lot significantly for the investments.

And for the STEAM courses and for the customer acquisitions but still deliver significant revenues in the Q3. That's definitely have the impact of our profitabilities in the last year. That means the kind of highway in the -- we mentioned before. So I think that's the -- it's a [valve] impact only for this year.

So our fourth quarter's priority is to secure the rapid operating profit improvement from the full-year perspective online as the start of the year. In the meantime, we will continue to invest in our core business [without ensure] AI apps and as well as the online marketing services. As we access the macro environments and help our growth opportunities Through this focus approach, we aim to deliver the greater values to an expanding user space.

Our medium to long-term focus is on executing AI Native strategy, excelling the deployment of our large language model computers in learning and advertising scenarios. Central to these efforts is enhancing our sustained profitability. We constantly evaluate the quality of our user services.

Since its launch three years ago, our AI interactive services of Youdao Lingshi has integrated AI across the multi scenarios, including the users' learning assessments, personalized the learning of the [path] recommendations, QA sessions, assignment grading, and as well as the college application (inaudible).

This has enhanced the learning efficiency and the outcome for users, gathering (inaudible) positive feedback. That's the highest gross margin business within our learning services segments. And following the recent restructuring of these segments, Youdao Lingshi is expected to account for the growing share of segment revenue. This in turn is expect to continue to improve the portability of the learning services segment in the long run.

Regarding the online marketing services, as noted previously, AI contributed to enhance the delivery and operational efficiency [in the area], including the ad creative production, data mining, programmatic delivery, and also attribution analysis. These advancements deliver in mid-term and long-term the profitability improvement of these segments.

I hope that answers your question. Thank you.

Bo Zhan, Huatai.

My question is, given the cumulative net operating cash outflow recorded in the first three quarters, should we expect any change to the four-year breaking even target? Thank you.

Thank you for your question. This is Wang. Our team attach great importance on the performance of our operating cash flow. And we already got a remarkable improvement in optimizing our operating cash flow in recent years. For 2025, we set a target to achieve four years cash flow break even.

And we remain very confident to achieve this target. At the same time, I would like to emphasize that reaching this breakeven point is only a near-term milestone. Our long-term objectives definitely is to deliver even healthy performance in our cash flow through and the profitability enhancement to simplify the credit management and optimize working capital practice. As you mentioned, for the first nine months this year, cumulative net operating cash flow amounted to RMB129 million. However, it reflects over 40% of significant improvements on a year-over-year basis.

In addition, our quarter cash flow performance have [obvious] seasonal features which are driven by certain seasonal factors. For example, Q1 is typically annual bonus payment period due to the Lunar New Year. And the Q3 is traditionally peak user acquisition period, during which operating cash flow typically [breaks] a net outflow due to the marketing investment.

In contrast, Q2 and Q4 are retention-driven seasons and generally demonstrate stronger cash flow performance. So we expect the fourth quarter usually generates a good operating cash inflow. To provide a context, as you know, we achieved an operating cash inflow of RMB158 million in Q4 last year. As previously highlighted, our [restriction] in learning service have been complete.

Youdao Lingshi in particularly has demanded robust and retention momentum in Q4, maintaining a retention rate about 75%. Additionally, another prepaid service, our AI-driven subscription services, Q3 sales from these business has accelerated growth to over 40% year over year, which also positively support our cash flow position.

On the other hand, the expansion of our advertising business potentially brings certain [collection] dynamics which potentially slow down the cash inflow from our customers. For example, online marketing services typically provide a certain question to our premium clients.

Several results from the three quarters. We are satisfied for the performance of cash collections and the (inaudible) well managed. Taking into account the distinct seasonality of our operations, the significant year-over-year cash flow improvements in the first three quarters, and the potential strong retention performance from Youdao Lingshi in Q4, we maintain the confidence in achieving our full-year operating cash flow breakeven target.

That concludes our question-and-answer session. I would like to turn the conference back over to management for any additional or closing remarks.

Thank you once again for joining us today. If you have any further questions, please feel free to contact us at Youdao directly or reach out to [PSN Financial Communications] in China or the US. Have a nice day.

Ladies and gentlemen, thank you for joining. The conference is now over. You may disconnect your telephones.