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 Yao. Please go ahead.

Thank you, operator. Please note the discussion today will contain--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, in substances 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 web replay of this conference call will also be available on Yudao's corporate website at ir.yudao.com. Joining us today on the call from Yudao's Senior Management are Dr. Feng Zhou, our Chief Executive Officer, Mr. Lei Jing, 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 members are based on renminB 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% per 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 Yuudao 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 SEA 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 the 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. The 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 Lisu 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. Yoda 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 Yoda Ling Shi, one of our key strategic businesses, we made solid progress during the quarter by diversifying its customer acquisition channels. Ling Shi 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.

The system delivers optimal translation results by holistically considering key factors including voice, speaker identity, and even video syn 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% 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 that lease, 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 Wins Meet, we executed a comprehensive integrated marketing strategy that generated over 500 million video views and more than RMB21.4 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 by year. We are pleased that our BYD Wonder Life Global Influencers co-creation campaign received the Brands and 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 at 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 app placement optimizer version 2 by the end of this year. Please stay tuned.

Moving to our smart devices segment, our net revenues were RMB245.8 million during the quarter, down 22.1% year by 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 settlement's fundamentals during the third quarter.

Otherwise, we launched a new tutoring, Yao SpaceX, 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 medias.

Looking ahead, we will continue executing on our AI native strategy, with a focus on deepening the application of and innovation innovating with our large language model with 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 quarter of 2025. We encourage you to read through our press release issued earlier today for further details.

For three quarter, total net revenue, RMB1.6 billion or $228.8 million, representing a 3.6% increase from the same period of 2024. Net revenue for our learning services RMB643.1 million or $90.3 million, representing a 16.2% decrease from the same period of 2024.

So, over 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 or RMB245.8 million or $34.5 million, representing a 22.1% decrease from the same period of 2024.

Our net revenue from our online marketing services or RMB739.7 million or $103.9 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.

The third quarter, our total gross profit was RMB687.9 million or $96.6 million, representing a 12.9% decrease from the same period of 2024. Gross margin for learning services was 58.5% for the quarter of 2025 compared with the 62.1% for the same period of 2024.

Gross margin for smart devices was 50.3% for the quarter of 2025 compared with 42.8% for the same period of 2024. The smarter 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 $92.7 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 developing expenses for RMB27.8 million compared with RMB119.6 million in the 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 quarter was RMB9.2 million or $1.3 million compared with RMB88.7 million for the same period of last year. Basic and dilute the net income for ADS attributable to ordinary shareholder was the quarter of 2025 was near zero.

Non-GAAP basic and dilute net income per ADS attributable to the ordinary shareholder for the quarter was RMB0.08, $0.01. Our net cash used in the operating activity was RMB58.6 million or $8.2 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 loan services, RMB751.1 million or $105.5 million compared with RMB661 million as of December 31, 2024.

At the end of the period, our cash equivalent, current and on current restrict cash and a short-term investment total RMB557.7 million or $78.3 million. This conclude our prepared remarks. Thank you for your attention. We will not like to open all to your questions. Operator, please go ahead.

Thank you.(Operator Instructions)

Brian Gong, CitI.

Thanks, management for taking the question. A very quick question for our strategies ahead. So, our online marketing services are growing rapidly, kind of showing a different trend of 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 to 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 1st 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, 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 in, 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 Lishi 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

Hello, can you hear me?

Hello? Yes, we can hear you.

Yes. Yeah, so, thank you very much for this opportunity. So my question is regarding for the online advertisement because it since the second quarter, this year, we noticed that the gross margin, below 1, I think below 30%, maybe around like 25%. So I I want to know that does the manager have any plan or like a timeline, 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 on board more customers and that is reflected in the revenue growth. You can see 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 for the learning side of the business. I just want to mention in Q3. So we invested in hiring more personnel for expanding audience across business in Q3, for also for future future growth.

So, we be, we believe this kind of investment are 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 ate 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 market, which we aim to, achieve through several key initiatives. First, we plan to burden the application of, the Magic Box creative production platform throughout the AD creation process.

Compared to manualation production, Mabox 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, BMP 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 audiences. Leading to a higher advertising delivery efficient and 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 will, 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.

Thank you very much. Brenda Zhao, CICC.

Good evening, Zhouan Suzhong. Thanks for taking my question. My question is also related to the, profit margin, because we see the operating profit experience a year over year decline in the 3rd quarter. What is the potential for rebound to, year over year growth in fourth quarter? Thank you.

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

And if you see the performance of the Yoga in the first half of this year, especially in the operating profit, it's in this, in the, it's operating profit in the, in this year, in the first half of 2005, I mean, it's much better than that in the last year, same time, at times, 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 allure in advertising the customer acquisition, we are maintaining the profitability.

And also, we start to spend $1 to acquire the potential clients for the advertisement business and from the third quarter as the doctor mentioned before in our earningscore and you already should deliver over 40% year over year GDP growth and the main and increase the retention rate to the 75%, over the 75%. And also, and 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 in the, the doctor 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 in the, in for the same 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 well the impact only for the this year.

So our first, 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 the, through this focus approach, we aim to deliver the greater values to an expanding user space. Our medium to long-term focus is on the 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 the, our user services. Since its launching three years ago, our AI interactive services of Yoshi 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 cons settings.

This has enhanced the learning efficiency and the outcome for users, gathering repri positive feedback. As the highest of course smarting business within our learning services segments and following the recent restructuring of these segments, is expected to account for the growth, 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 affordability improvement of these segments. I think, I hope that answers your question. Thank you.

That's very helpful. Thank you.

Bo ZHAN, Huatai.

Mm hello, hey, thanks for taking my question. 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 break even point is only a near term milestone. Our long-term objectives. Definitely is to deliver even healthy performance in 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 to 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 we achieved an operating cash inflow of RMB158 million in Q4 last year. As previously highlighted, our restriction in learning service have been complete.

[Yo darling Shi] 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's 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 cur are 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 of from Yodaoshi in Q4. We maintain the confidence in achieving our full year operating cash flow with even target.

Thank you.

Thank you. That's all for.

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 Yudao 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.