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Youdao(DAO) - 2025 Q2 - Quarterly Results

Second Quarter 2025 Financial and Business Highlights Youdao achieved its first profitable second quarter in 2025, driven by a 7.2% increase in net revenues to RMB1.4 billion and strong AI Native Strategy execution, despite a gross margin decline Management Commentary The CEO emphasized the first profitable second quarter, driven by the AI Native Strategy, new AI product features, and significant growth in AI-driven subscription services - Achieved the first-ever profitable second quarter, driven by the successful execution of the AI Native Strategy3 - Released the latest Large Language Model (LLM) Confucius 3 and open-sourced Confucius 3-Math3 - Launched new AI-powered features: AI Essay Grading in Youdao Lingshi, which led to a record-high retention rate, and an AI Ad Placement Optimizer for marketing services3 - Total sales of AI-driven subscription services grew by approximately 30% year-over-year3 - Future focus remains on advancing the AI Native Strategy by optimizing LLMs for specific scenarios and accelerating technological innovation in learning and advertising5 Key Financial Highlights Youdao reported Q2 2025 net revenues of RMB1.4 billion (+7.2% YoY), achieving an operating income of RMB28.8 million, despite a gross margin decline to 43.0% Q2 2025 Key Financial Metrics (vs. Q2 2024) | Metric | Q2 2025 | Q2 2024 | YoY Change | | :--- | :--- | :--- | :--- | | Total Net Revenues | RMB 1.4 billion | RMB 1.3 billion | +7.2% | | - Learning Services | RMB 657.8 million | RMB 643.8 million | +2.2% | | - Smart Devices | RMB 126.8 million | RMB 166.7 million | -23.9% | | - Online Marketing Services | RMB 632.9 million | RMB 511.2 million | +23.8% | | Gross Margin | 43.0% | 48.2% | -5.2 p.p. | | Income/(Loss) from Operations | RMB 28.8 million | (RMB 72.6 million) | Turnaround to profit | | Basic Net Loss per ADS | RMB 0.15 | RMB 0.85 | N/A | | Non-GAAP Basic Net Income per ADS | RMB 0.11 | (RMB 0.82) | Turnaround to profit | Second Quarter 2025 Detailed Financial Results This section provides a detailed breakdown of Youdao's Q2 2025 financial performance, covering revenue streams, gross margins, operating expenses, profitability, and balance sheet items Net Revenues Total net revenues increased 7.2% YoY to RMB1.4 billion, driven by strong growth in online marketing services, while smart devices revenue declined - Total net revenues grew 7.2% YoY to RMB 1.4 billion6 - Net revenues from learning services increased by 2.2% YoY to RMB 657.8 million6 - Net revenues from smart devices decreased by 23.9% YoY to RMB 126.8 million, attributed to declining consumer electronics demand7 - Net revenues from online marketing services grew significantly by 23.8% YoY to RMB 632.9 million, thanks to increased demand from the gaming industry and overseas markets, supported by AI technology investments8 Gross Profit and Gross Margin Overall gross profit decreased 4.3% YoY to RMB609.4 million, with gross margin falling to 43.0%, primarily due to lower online marketing services margin Gross Margin by Segment (Q2 2025 vs. Q2 2024) | Segment | Q2 2025 Gross Margin | Q2 2024 Gross Margin | Change | | :--- | :--- | :--- | :--- | | Overall | 43.0% | 48.2% | -5.2 p.p. | | Learning Services | 59.8% | 59.8% | Flat | | Smart Devices | 41.5% | 30.3% | +11.2 p.p. | | Online Marketing Services | 25.8% | 39.1% | -13.3 p.p. | - The improvement in smart devices' gross margin was driven by the newly launched Youdao Dictionary Pen10 - The decrease in online marketing services' gross margin was a result of strategic expansion to a new client base, with margins expected to improve as collaborations mature11 Operating Expenses Total operating expenses significantly decreased to RMB580.6 million, primarily due to reductions in sales and marketing and R&D expenses, despite an increase in G&A Operating Expenses Breakdown (Q2 2025 vs. Q2 2024) | Expense Category | Q2 2025 (RMB million) | Q2 2024 (RMB million) | YoY Change | | :--- | :--- | :--- | :--- | | Sales and Marketing | 401.8 | 515.7 | -22.1% | | Research and Development | 128.3 | 153.0 | -16.1% | | General and Administrative | 50.4 | 40.6 | +24.1% | | Total Operating Expenses | 580.6 | 709.3 | -18.1% | - The decrease in R&D expenses was mainly due to a reduction in employee headcount, leading to payroll savings13 Profitability and Earnings Per Share Youdao achieved an operating income of RMB28.8 million and a non-GAAP net income of RMB12.5 million in Q2 2025, marking a significant turnaround to profitability - Income from operations was RMB 28.8 million, compared to a loss from operations of RMB 72.6 million in Q2 202415 - Net loss attributable to ordinary shareholders was RMB 17.8 million, a substantial improvement from a net loss of RMB 99.5 million in Q2 202417 - Non-GAAP net income attributable to ordinary shareholders was RMB 12.5 million, reversing a non-GAAP net loss of RMB 96.0 million in the same period last year17 Earnings Per ADS (Q2 2025 vs. Q2 2024) | Metric | Q2 2025 (RMB) | Q2 2024 (RMB) | | :--- | :--- | :--- | | Basic Net Loss per ADS | (0.15) | (0.85) | | Non-GAAP Basic Net Income per ADS | 0.11 | (0.82) | Balance Sheet, Liquidity, and Share Repurchase As of June 30, 2025, Youdao reported RMB617.0 million in cash and equivalents, RMB185.0 million in operating cash flow, and continued share repurchases, supported by NetEase Group loans - As of June 30, 2025, cash, cash equivalents, restricted cash, and short-term investments totaled RMB 617.0 million19 - Net cash provided by operating activities was RMB 185.0 million for Q2 202519 - The company has received financial support from NetEase Group, including RMB 878.0 million in short-term loans and US$130.7 million in long-term loans19 - Under its share repurchase program, the company has repurchased a total of approximately 7.5 million ADSs for US$33.8 million as of June 30, 202521 Conference Call and Other Information This section provides details for the Q2 2025 earnings conference call and important disclosures regarding non-GAAP financial measures and forward-looking statements Conference Call Information Youdao's management will host a teleconference on August 14, 2025, at 6:00 a.m. ET to discuss financial results, with dial-in and webcast details provided Conference Call Dial-in Details | Region | Number | Conference ID | | :--- | :--- | :--- | | United States (toll free) | +1-888-346-8982 | 7085699 | | International | +1-412-902-4272 | 7085699 | | Mainland China (toll free) | 400-120-1203 | 7085699 | | Hong Kong (toll free) | 800-905-945 | 7085699 | Disclosures This section outlines the company's use of non-GAAP financial measures, the RMB to USD exchange rate, and a safe harbor statement for forward-looking information - The company uses non-GAAP financial measures, such as non-GAAP net income, to assess operating performance, excluding items like share-based compensation and impairment of long-term investments2627 - Financial figures are translated from RMB to USD at a rate of RMB7.1636 to US$1.00 for convenience31 - The press release contains forward-looking statements made under the "safe harbor" provisions of the U.S. Private Securities Litigation Reform Act of 199532 Unaudited Financial Statements This section presents Youdao's unaudited condensed consolidated financial statements, including balance sheets, statements of operations, segment-level details, and GAAP to non-GAAP reconciliations Unaudited Condensed Consolidated Balance Sheets As of June 30, 2025, the balance sheet shows total assets of RMB1.84 billion and total liabilities of RMB3.85 billion, with significant cash and NetEase Group loans Selected Balance Sheet Items (as of June 30, 2025) | Account | Amount (RMB thousands) | | :--- | :--- | | Cash and cash equivalents | 536,228 | | Total current assets | 1,573,283 | | Total assets | 1,841,076 | | Contract liabilities | 856,684 | | Total current liabilities | 2,881,563 | | Total liabilities | 3,851,363 | | Total shareholders' deficit | (2,010,287) | Unaudited Condensed Consolidated Statements of Operations For Q2 2025, Youdao reported total net revenues of RMB1.42 billion, gross profit of RMB609.4 million, operating income of RMB28.8 million, and a net loss of RMB17.8 million Statement of Operations Summary (Three Months Ended June 30, 2025) | Line Item | Amount (RMB thousands) | | :--- | :--- | | Total net revenues | 1,417,541 | | Gross profit | 609,360 | | Total operating expenses | (580,561) | | Income from operations | 28,799 | | Net loss attributable to ordinary shareholders | (17,763) | | Basic net loss per ADS (RMB) | (0.15) | Unaudited Additional Information This section provides detailed segment-level breakdowns of net revenues, cost of revenues, and gross margins for the past three quarters Gross Margin by Segment (Q2 2025) | Segment | Gross Margin | | :--- | :--- | | Learning services | 59.8% | | Smart devices | 41.5% | | Online marketing services | 25.8% | | Total gross margin | 43.0% | Unaudited Reconciliation of GAAP and Non-GAAP Results This section reconciles GAAP net loss to non-GAAP net income for Q2 2025, primarily by adjusting for share-based compensation and impairment of long-term investments GAAP to Non-GAAP Reconciliation (Q2 2025, RMB thousands) | Line Item | Amount | | :--- | :--- | | Net loss attributable to ordinary shareholders (GAAP) | (17,763) | | Add: Share-based compensation | 6,585 | | Add: Impairment of long-term investments | 25,730 | | Less: Gain from fair value change of long-term investment | (1,765) | | Non-GAAP net income attributable to ordinary shareholders | 12,515 |