Q3 2025 Youdao Inc Earnings Call
Operator 2: Good day, and welcome to Youdao Q3 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.
Good day, and welcome to youth out third quarter, 'twenty 25 earnings Conference call.
Today's conference is being recorded.
At this time I would like to turn the conference over to meet that Jeffrey Wang Investor Relations Director of <unk>. Please go ahead.
Yeah.
Jeffrey Wang: Thank you, operator. Please note 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 US Private Securities Litigation Reform Act of 1995. Such statements are not guarantees of the future performance and are subject to certain risks and uncertainties, misconceptions 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.
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 from liability as established.
Established by the U S. Private Securities Litigation Reform Act such statements are not guarantees of 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.
General discussion of the risk factors that could affect <unk> 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 these forward looking information, except as required as required by law.
Jeffrey Wang: During today's call, management will also discuss certain non-GAAP financial measures for comparison purposes only. For the definitions of non-GAAP financial measures and reconciliations of GAAP to non-GAAP financial results, please see the 2025 Q3 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 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 review some of our recent highlights and strategic direction.
During today's call management will also discuss certain non-GAAP financial measures for comparable comparison, because personally for the debt.
non-GAAP financial measures and recalculate it shows GAAP to non-GAAP financial results. Please see the 2025 third quarter financial results news release issued earlier today.
Remember this conference is being recorded and webcast.
Replay of this conference call will also be available on <unk> corporate website.
Our dog eat dog Dot com.
Joining us today on the call from <unk> Senior management, a doctor from Joe Our Chief Executive Officer, Mr. Lei Chen our President, let me start coming through our senior VP and Mr. Wang Li our VP of finance.
Now I'll turn the call over to Dr. Joe to reveal some of our recent highlights and strategic direction.
Feng Zhou: Thank you, Jeffrey. Thank you all for participating in today's call. Before we begin, I would like to remind everyone that all our representations are RMB unless otherwise stated. In the Q3, our strategically prioritized businesses, Youdao Lingshi and online marketing services, delivered a strong momentum supporting our long-term growth trajectory. Net revenues reached RMB 1.6 billion, up 3.6% year-over-year. Operating profit was RMB 28.3 million, a decline of 73.7% year-over-year, primarily due to two factors. First, following the significant operating profit improvements in the H1, we increased investments in Youdao Lingshi and our online marketing services in Q3 to accelerate medium to long-term expansion.
Thank you Geoffrey Thank you all for participating in today's call before we begin I would like to remind everyone that all they started I mean be it unless otherwise stated.
Third quarter are strategically prioritize the businesses Youre dialing suite and online marketing services delivered a strong momentum supporting our long term growth trajectory net revenues reached RMB, one 6 billion up three 6% a year operating profit was RMB $28 three.
A decline of 73, 7% year over year, primarily due to two factors first following the significant operating profit improvement in the first half of the year, we increased investments in New Orleans, and our online marketing services in Q3, two accelerates medium to long term expansion.
Feng Zhou: 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 9 months of the year, operating profit reached RMB 161.1 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 5 consecutive quarters, a first in our history. From a cash flow perspective, operating cash outflow for the quarter was RMB 58.6 million, an improvement of 31.4% year-over-year. Next, I will delve into the major developments across our businesses.
Second we faced a high comparison base from the same period last year due to a one off impact from the steam clauses.
Our restructuring of the learning services segment is now complete.
For the first nine months of the year operating profit reached RMB $161 1 million, representing a substantial 149, 2% year over year increase in highlighting the meaningful progress we have made in enhancing our profitability.
Notably we have now achieved operating profits for five consecutive quarters of first in our history.
From a cash flow perspective, operating cash outflow for the quarter was RMB $58 6 million an improvement of 31, 4% year over year.
Next I will delve into the major developments across our businesses.
Feng Zhou: Net revenues from the learning services segment were RMB 643.1 million, down 616.2% year-over-year, reflecting our disciplined and strategic approach to customer acquisition as we focus on growing the Lingxi business. Within the learning services segment, net revenues from digital content services were RMB 425.9 million during the quarter. 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 Lingxi, one of our key strategic businesses. We made solid progress during the quarter by diversifying its customer acquisition channels. Lingxi accelerated achieved over 40% year-over-year growth in gross billings.
Net revenues from the learning services segment were RMB $643 1 million.
616.2% year over year.
Reflecting our disciplined and strategic approach to customer acquisition as we focus on growing the business.
Within the learning services segment net revenues from digital content services were RMB $425 9 million during the quarter and our achievements in student learning have gained international recognition. Utah was included in the 2026 U S. B 150 list that high.
Writes the worlds most of the transformational growth in digital learning Workforces Skus selected from more than 3000 global companies.
Turning to you dialing should one of our key strategic businesses, we made solid progress during the quarter by diversifying its customer acquisition channels.
Accelerated achieved over 40% year over year growth in gross billings.
Feng Zhou: More recently, retention rate has exceeded 75%, up from over 70% in the Q4 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. 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 Q3, featuring a lifelike 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.
Recently retention rate has exceeded 75% up from over 70% in the fourth quarter of last year.
In addition, as part of a broader commitment to cultivate innovative talents. We collaborated with the Yao Mathematical Science Center at Shanghai University Joe.
Children's home associate cause you don't see it well.
Providing technical support to a platform designed to identify and support mathematically gifted students.
Hmm 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 life programming classes in the third quarter, featuring a lifelike avatar and the supporting both the text and voice interactions.
AI tutor helps answer students questions in real time significantly enhancing the overall learning experience with ongoing product upgrades gross billings for our program and courses increased by more than 30% year over year in Q3.
Feng Zhou: 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 RMB 100 million in Q3, representing over 40% year-over-year growth. We launched our Confucius 3 translation model, which supports real-time bidirectional translation across 38 languages and offers advanced multi-model capabilities. Despite its compact parameter size, Confucius 3 translation delivers translation quality that surpasses some larger general-purpose models. In August, our 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.
Additionally, we continued our deep collaboration with the China Computer Federation Ccs.
Ought to have become a go to partner.
On the upside total sales of our AI driven subscription services reached a new record of approximately RMB 100 million.
The third quarter, representing over 40% year over year growth we.
We launched our Confucius three translation model, which supports real time Friday erection, though translation across 38 languages and offers advanced multimodal capabilities.
Despite its compact parameter of sides Confucius three translation delivers translation quality that surpasses some larger general purpose models.
In August our Fisher three serious out of them was among the first to receive the highest level trusted education large language motto certification from the China Academy of information and Communications technology.
Feng Zhou: 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 received a 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 Q3. 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.
Regarding product development, we introduced a major upgrade to our flagship Utah Dictionary.
Dictionary 11th.
Delivering a truly a native experience that has been met with widespread use a claim.
A key highlight is the fully readout redesigned simultaneous interpretation feature.
Powered by industry, leading noise reduction technology, and our proprietary turned it action are with.
It achieved top tier voice translation accuracy with exceptionally low lots, Tennessee.
The feature also received.
One click summarization of translated content and automatically generates.
Mine maps are significantly improving user efficiency across both learning and the 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 our new audio and video transportation product, Utah anytime.
Feng Zhou: In the third quarter, in 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 generates natural, fluent, and emotionally rich dub. 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, concept, contextually aligned, and precisely suited the creator's intended purpose. Turning to our Online Marketing Services segment, growth accelerated in Q3. Net revenues reached RMB 739.7 million, a new record and an increase of 51.1% 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.
In the third quarter.
To automate multilingual production of content, such as T V shows marketing videos and more.
It Leverages, our proprietary adapted voice cloning technology, so let us speakers vocal characteristics and generates a natural fluent and emotionally rich stuff.
This system delivers optimal translation results by Holistically, considering key factors, including voice speaker identity, and even video soon transitions to produce stopping that is more accurate concept contextually aligned and precisely suited the creators intended purpose.
Turning to our online marketing services segment growth accelerated in the third quarter.
Net revenues reached RMB $739 7 million, a new record and an increase of 51, one year over year.
The strong performance was primarily driven by increased demand from the lets eastgroup and overseas markets, which was driven by our continued investments in AI technology.
Feng Zhou: 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 continued 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-over-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 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.
Gross margin for the segment was 25, 4% in Q3 motivated roughly 10 percentage points year over year, but largely stable sequentially.
So many 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 each grew by over 50% year over 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 $21 4 million live streaming exposures.
Looking ahead, we plan to further deepen our collaboration with them that is group and other game clients to unlock additional synergies.
Feng Zhou: 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 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 Optimizer. It is an end-to-end AI-powered agentic solution covering demand analysis, strategy formulation, data analytics, and iterative 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.
Our overseas advertising business also delivered strong momentum with revenues growing by more than 100% here for you.
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 our Chinese companies.
Expanding their global cash flows.
With continuing to drive improved advertising performance by our apps ads placement.
Placement Optimizer is an end to end AI powered <unk> solution covering demand analysis strategy formation formulation.
The analytics and innovative optimization.
In addition, I am thrilled to share that we will launch.
<unk> placement optimized version two by the end of this year. Please stay tuned.
Moving to our smart devices segment net revenues were RMB $245 8 million during the quarter down 20 to 22, 1% year over year.
Feng Zhou: Net revenues were RMB 245.8 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 segment's operational health. As a result, we saw year-over-year improvement in the segment's fundamentals during Q3. 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 Artificial Intelligence Conference, receiving strong exposure to new audiences and coverage from multiple media outlets.
This reflects our strategic decision to exercise greater discipline in marketing expenditures.
Focusing on strengthening the segment's operational house as a result, we saw year over year improvement in the segment's fundamentals during the third quarter.
But otherwise we launched a new tutor and pin you down space X.
Which offers precise scanning for lung form and multi graphic problems.
They are empowered to video explanations for academic problems and then AI based a mistake ledger.
These features the empower students to learn in review subjects more effectively and efficiently.
Additionally, Pan and tutoring pants were also featured at the World Cup.
Congress, receiving strong exposure to new audiences and coverage from multiple media.
Feng Zhou: 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 models, 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 breakeven for the first time. With that, I will hand over to Peng Su for a deeper dive into our financial results. Thank you.
Looking ahead, we will continue executing on our strategy with a focus on deepening the application of an innovation innovating with our large language moderate Confucius.
Across both our lending 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.
<unk> robust year over year operating profit growth and reaching annual operational cash flow breakeven for the first time with that I'll hand over to Paul for a deeper dive into our financial results. Thank you.
Yeah.
[noise] central doctoral and Hello, everyone today, I will be presenting some financial highlights from the quarter or 25, we encourage you to read through our press release issued earlier today for further details.
Peng Su: Thank you, Dr. Fu, and hello, everyone. Today, I will be presenting some financial highlights from Q3 2025. We encourage you to read through our press release issued earlier today for further details. For the third quarter, total net revenue RMB 1.6 billion, or $228.8 million, representing a 3.6% increase from the same period of 2024. The year-over-year decrease was primarily attributable to our decisions to take a disciplined strategic approach to customer acquisitions, which place a greater emphasis to high ROI, return on investment engagements.
But the third quarter total net revenue of RMB, one 6 billion or U S. Dollar to address the ethylene admitted representing a three 6% increase from the same people are at all times I think for now.
Net revenue for all of them and their services were RMB 643.1 minute or U S. Dollar Mexican Asbury a minute, representing a 16, 2% decrease in front us imperial tonnes and therefore.
So over the year over year decrease was primarily attributable to the organizations to take a disciplined strategy approach to customer acquisition, we should place operator that precise to a high ROI return on all you've asked much engagements.
Peng Su: We 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 RMB 245.8 million, or $34.5 million, representing a 22.1% decrease from the same period of 2024. Our net revenue from our online marketing services were RMB 739.7 million, or $403.9 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 continued investment in AI technology.
We believe this strategy has enhanced the overall resilience and operational efficiency of our business. Despite the full time to go out and do what the car.
Net revenue for all of our smart devices were RMB $245 8 million or U S. Dollar 34, 5 million, representing a 22, 1% decrease from the same here I'll also touch plenty for now.
Net revenue from our online marketing services were RMB 739 points on minute or U S. Dollar had respiratory elaborate representing a 55, 1% increase from the same here I will try to in the pool.
The year over year increase was primarily driven by the increased demand from the scoop and the overseas markets.
It was driven by our continuing investment in AD technology.
Peng Su: For Q3, our total gross profit was RMB 687.9 million or $96.6 million, representing a 12.9% decrease from the same period of 2004. Gross margin for learning services was 58.5% for the quarter of 2005, compared with 62.1% for the same period of 2004. Gross margin for smart devices was 50.3% for quarter of 2005, compared with 42.8% for the same period of 2004. Gross margin for online marketing services was 25.4% for Q3 2005, compared with 36.3% for the same period of 2004.
So quota our total gross profit was RMB 687.9 billion or U S. Dollar that is $6 6 million, representing a 12, 9% decrease from the same here at all towards that anymore.
Of course, Martin for learning services was 58, 5% puts the courthouse on 95 compared with 62 play my part time simply Rottable played a very important of.
Gross margin for smart devices was 53% in the fourth quarter I'll tell you that by.
Compared with 42, 8% for a superior alternative.
We're smarter for online marketing services was 25, 4% and of course, the third quarter I'll put it in five compared with 36, 3% will disappear.
94.
Peng Su: For Q3, we reduced our total operating expense to RMB 659.6 million, or $92.7 million, compared with RMB 682.2 million for the same period of last year. Looking at our expense in more detail, sales and marketing expense declined to RMB 487.7 million, compared with RMB 519.6 million in the Q3 of 2004. Research and developing expense were RMB 127.8 million, compared with RMB 119.6 million in this quarter of 2004. Our operating income margin was 1.7% in Q3 of 2025, compared with 6.8% for the same period of last year.
Well the third quarter, we reduced our total operating expense to RMB 659.6 minute or U S. Dollar $92 7 million compared with RMB 682 clients, who made it for some period of last year.
Looking at all of our expenses in more detail sales and marketing expense declined to RMB $487 7 million compared with RMB $519 6 million at third quarter on slide 24.
Research and development expenses were RMB 127, 8 million compared with RMB 119.6 made any cortisol tied to it anymore.
Our operating income margin was one seven per facts in the third quarter up to 25 compared with six 8% for the same period of last year.
Peng Su: For Q3 2025, our net income attributable to ordinary shareholders was RMB 0.1 million or USD near to zero, compared with RMB 86.3 million for the same period of last year. Non-GAAP net income attributable to the ordinary shareholder for Q3 was RMB 9.2 million, or USD 1.3 million, compared with RMB 88.7 million for the same period of last year. Basic and dilute net income per ADS attributable to ordinary shareholder for 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 RMB 0.08, or USD 0.01.
Well, the so called health funds out of five on net income attributable to ordinary shareholders was RMB zero-coupon validated all U S dollar to zero.
I'm here with RMB $86 3 million for the same here out of last year non-GAAP net income attributable to ordinary shareholder was for the quarter was RMB five 2 million or U S dollar, but places where it made it compared with RMB 88 points I've made and put us in periods of last year.
Basic and diluted net income per Etfs attributable to ordinary shareholder was the quarter I'll start with Western Europe, non-GAAP basic and diluted net income per ads attributable.
Attributable to the ordinary shareholder for the third quarter was RMB 0.0, H well that started with a European tier one.
Peng Su: Our net cash used in the operating activity was RMB 58.6 million or $8.2 million for the Q3. Looking at our balance sheet as of 30 September 2025, our current liabilities, which mainly consist of the deferred revenue generated from our loan services, were RMB 751.1 million or $105.5 million, compared with RMB 661 million as of 31 December 2024. At the end of the period, our cash equivalents, current and restricted cash and short-term investment, total RMB 557.7 million or $78.3 million. This conclude our prepared remarks. Thank you for your attention. We will now like to open the call to your questions. Operator, please go ahead.
Our net cash Youll see in the operating activities was RMB 58, 6%, sorry, 58 planes six minute or U S. Dollar eight two made it for the soap water looking at our balance sheet as of September 30th kind of at a five or a comfort of liabilities, which mainly consist of 30 per revenue generated from our services.
One of the 751, Cleveland well U S. Dollar 405.5 made it comparable.
B 661 made it absolutely December 31 74.
I think I know what the period, our cash cash equivalents current and current strict cash and short term investment totaled RMB $557.7 million or U S dollar and 78 points of it made it.
This concludes our prepared remarks central to our attention we would like to open the call to your questions. Operator. Please go ahead.
Yeah.
Operator 2: Thank you. This is the conference call operator. We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on their touchtone telephone. To remove yourself from the question queue, please press star and two. Please pick up the receiver when asking questions. Anyone who has a question may press star and one at this time. First question is from Brian Gong, Citi.
This is the chorus call conference operator, we will now begin the question and answer session.
Anyone who wishes to ask a question press star and one on the touch tone telephone.
Moving on from the question queue. Please press star two.
Please pick up the receiver when asking questions.
Anyone with a question May press Star one at this time.
Yeah.
Next question is from Brian Gong C T.
Brian Gong: Thanks, management, for taking the question. A very clear question for our strategies ahead. Our online marketing services are growing rapidly, kind of showing a different trend versus learning services. From strategy perspective, will online market services become more important than learning services in the future? Thank you.
Section that extended for taking the question a very good question our strategy Okay.
So oh, all amongst always says Aqua you rapidly cut off show you a different change of workspace services.
Jay constructing our market services become more important.
Mhm services in the future.
Thank you.
Okay.
Peng Su: Hi, Brian Gong. 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. Let me explain that for you. The strong expansion of our marketing services over the past 3 years has been mostly driven by first, our advanced AdTech 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 RMB 200 million in a single quarter in Q4 2022, it has reached a record high of over RMB 700 million this quarter, representing a year-over-year increase of more than 50%.
Hi, Brian.
So.
Right now we are experiencing a higher growth for adds compare with diving services in the long term, we actually see great opportunities on the votes 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 AD tech capabilities than our customers trained to transition from.
Traditional ads to our performance ads and finally opportunity of overseas assets.
Since the advertising revenue first exceeded RMB 200 million in a single quarter in Q4 2022.
Has reached a record high of over RMB.
700 million in this quarter, so representing a year over year increase of more than 50%.
Peng Su: 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. We launched our Youdao Magic Box ads 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
So as we've discussed several times on this call. We believe our advertising business is doing the early days.
The application of generative AI and agent <unk>.
Online advertising is only just beginning.
We see a 22 five as the first year.
Oh, Ben generative fan agent typically I will be put to work on pads.
Yeah.
So we launched our.
Magic box apps creative platform in Q1 and our.
Yeah placement optimizer and at automate automation agent in Q2.
These oh, yeah drove improvements.
Improvements in delivering the ads.
We have strengthened our customer satisfaction already which in turn encourages advertise it allocates larger budgets to our platform.
Accelerating our growth from them.
Or expansion perspective.
We continue to see substantial opportunities across.
Feng Zhou: Online games, e-commerce, overseas online games, overseas electronics, and through our deepening collaboration with partners such as Google and TikTok. With all these reasons, we believe these will all drive strong app revenue growth for the coming years, hopefully. 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. AI is a decade-long growth trajectory and capturing it require us to build and scale truly AI native services and application, and that's what we've been doing.
Online games E Commerce overseas online games overseas electronics, and our sort of our deepening collaboration with partners, such as Google and tick Tock.
So with.
With all these reasons we believe.
A diesel or a.
Drive strong revenue.
Of course for for the for the coming couple of 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 a quite significant changes over the past two years largely because we are.
Actually I believe there is tremendous long term potential in to see AI driven online services.
So there is a decade long growth trajectory.
Capture them right to require us to build and scale truly native services and applications and that's what we've been doing.
Feng Zhou: On AI-driven subscription services. This part we began sharing our progress since last year, and the trajectory is very promising. Total sales of AI-driven subscription services amounted to approximately RMB 50 million in Q1 of last year, if you remember. It took us only six quarters to double that figure, reaching approximately RMB 100 million this quarter. We are actively developing new features, applications, and agents to support future expansion. A lot of agents are running inside our companies to improve our business efficiency. 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 Lingxi business.
So on the.
Driven subscription services. So so this parks, we began sharing our progress since last year.
And the trajectory is a very promising so total sales of AI driven subscription services amounted to approximately RMB 50 million in the first quarter of last year, if you remember.
So it took us only six quarters to double that figure, reaching approximately RMB $100 million this quarter.
So we are actively developing new features applications.
Agents to support future.
Expansion a lot of agents are running inside our company is to improve our business efficiency.
So so we see ample product optimization opportunities ahead, and expect that growth to continue.
In the digital content segment.
The learning content. So we have a fully completed.
Restructuring and have sharpened our focus on building a business in.
Feng Zhou: In Q3, Lingshi delivered over 40% year-over-year growth in gross billings, and demonstrated strong user stickiness and retention rate exceeded 75%. 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. 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.
Q3, youre dialing should deliver over 40% year over year close in.
Our gross billings and demonstrated strong user stickiness and retention rate exceeded 75%.
So, adding all that top in the near term, we expect actually we expect our net revenues from the entire learning services segments to return to year over year growth.
So in summary, we remain firmly committed to driving growth across both our lending and advertising businesses.
By continuing to serve our customers better and also leveraging AI technologies better yep. Thank you.
Brian Gong: Thank you.
Okay.
Operator 2: Next question is from Linda Huang, Macquarie.
Next question is from Linda Huang Macquarie here.
Linda Huang: Hello, can you hear me? Hello?
Now can you hear me.
Hello.
Feng Zhou: Yes. Yes, we can hear you.
Yes, yes, we can hear.
Linda Huang: Yes. Yeah. Thank you very much for this opportunity. My question regarding for the online advertisement, because it seems the Q2 this year, we noticed that the gross margin below 20. I think below 30%, maybe around like 25%. I just want to know that does the management have any plan or like a timeline we can return back to the above 30%? What will we need to do to make sure that our margin can recover? That's for online marketing. Thank you.
Yes, yeah. So thank you very much for this opportunity for.
So my question is regarding for the online advertisement because it seems the second quota share.
It's about the gross margin.
One I think.
And maybe along with a 25%.
I just want to know that.
The manager have any plan.
And we can come back to maybe about 30%.
Well, we need to do to make sure that our margin cannot be copper. So that's for my marketing. Thank you.
Feng Zhou: I'll answer this briefly before Lei Jin provides more details. We always operate with a long-term view and aim to increase the value we create for advertisers. We think that's most important. In Q3, we saw strong opportunities to grow the customer base. We chose to engage and onboard more customers. That is reflected in the revenue growth. You can see very quick revenue growth. On the flip side of that, 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. That is actually also true, I believe, for the learning side of the business, I just want to mention in Q3.
I'll answer this briefly before generally provides more details how we always operated with a long term view and aim to.
Increase the value we create for advertisers we think that's most important and so in Q3, we saw strong opportunities to grow the customer base. So so we chose to engage and onboard more customers and that is reflected in the revenue growth you can see very very.
Our revenue growth on the flip side of that are 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 importance customers. So.
That is actually also true I believe for the learning side of the business I just wanted to mention in Q3. So we are.
Feng Zhou: We invested in hiring more personnel for expanding our Lingxi across business in Q3 for also for future growth. We believe this kind of investment are very good investments, and we have a solid and profitable unit economics. We ensure we have that. We think investments like these are going to translate to growth and profitability in the coming quarters.
<unk> invested in our hiring more personnel for expanding aren't even sure of.
Of course, our business in Q3.
So also for future future grants so.
We believe this kind of investment are very good investments and we have a.
Solid and profitable units economists, we ensure we have that and.
We think our investments like these are going to translate to growth and profitability in the coming quarters.
Yeah.
Lei Jin: 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 growth method revenue recognition, which necessitate a balance between delivering value to our clients and maintaining 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 iMagicBox creative production platform throughout the AD creation process. Compared to manual creation production, iMagicBox reduce production costs by approximately 17%, while improving production efficiency.
Hi, this is <unk>.
Regarding the cost burden of Oh online marketing services business.
The major part of adult humans are performance based advertising pricing model and they'll go off the method of revenue recognition.
And definitely the balance between delivering value to our clients and are paying our own healthy long term development.
Against this backdrop.
The coffee there are tough mother, and Grainger from 25% with for this type of event to be repeatable.
Our current goal I'm definitely leads to drive an improvement in gross margin and eventually into Oh achievable through several key initiatives.
But they plan to broaden.
The occasional alba the magic box quit having products and platform.
The a D accretion per se.
Compared to 90 accretion production I mentioned above.
Our production costs.
Approximately 70% improvement.
Improved production efficiency.
Lei Jin: By leveraging our end-to-end data chain to identify and analyze 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 expanding data dimensions and mining underlying data characteristics to improve audience and traffic insights. Those enhancements will enable more systematic and precise identification of targeted audiences, leading to a higher advertising delivery effectiveness. Third, we will capitalize our robust AI capabilities to further integrate 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.
Everything on our end to end data attuned to identify.
It is a high performing creative.
Scales, epilepsies and better serve our clients and a hospital would give our efficiency.
Second we will continue to optimize and advocate Iowa.
And from B M P and programmatic.
I never get them.
This equals sending.
Data dimension and nine new underlying data correct erratic too.
To improve audience on the topic of insights.
There was no hoffman severely enable more Mexico, and Oh, Okay, I didn't say accused of targeting the audiences.
Leading to a higher advertising and delivery effectiveness.
Third maybe ill capitalize our robust AI collaborators to further integrate AI driven creative production of its advertising delivery process that closely.
Function will be studied how conservative here, it's all about the MTA.
We aim to establish automated close loop system that was the overall operation though.
So it is.
Okay.
Operator 2: Thank you very much. Next question is from Brenda Zhao, CICC.
Thank you very much.
Next question is from Brenda sow TICC.
Brenda Zhao: Good evening, Zhou Dan, Su Zhong. Thanks for taking my question. My question is also related to the profit margin. Because we see the operating profit experienced a year-over-year decline in Q3. What is the potential for a rebound to year-over-year growth in Q4? Thank you.
Hi, good evening until dawn in Suzhou and thanks for taking my question. My question is also related to the profit margin them, because we see deal operating profit experienced a year over year decline mortgage.
What is the potential for with bonds Q.
Well the first call day. Thank you.
Peng Su: Thank you, Brenda Zhao. This is Peng Su. I will handle this question first. I think at the beginning of this year, we set the 2 full years financial goals. The first is to achieve the rapid year-over-year improvement in operating profit. Secondly, to achieve the breakeven in full year operating cash flow. If you see the performance of Youdao in the H1 of this year, especially in the operating profit in the H1 of 2025, I mean, it's much better than that in the last year, at the same time. Improving from the RMB 40 million loss to the RMB 130 million gain.
Thank you Brian that is a so Paul I have a handful of question first and I think that's a big enough D C or research the tool for years financial goals.
Firstly is to achieve rapid year over year improvement in operating profit.
Secondly to achieve the breakeven full year operating cash flow.
And if you see the pro forma and salt, though you with all the.
But first off this year.
Especially in the operating profit is in this in the that's all made a profit in the D C or in the first half of it.
Alternative I mean.
It's much harder than that in the last year since hypersound sometimes.
Proving Franco.
40 million RMB loss to the laundry and it certainly didn't get and again, so I think that that's that provide more flexibility for us to make more investment in the second quarter of the 29 five.
Peng Su: I think that's provide more flexibility for us to make more investments in Q2 2025. With that in the investment in the Youdao ensure in advertising the customer acquisition, while maintaining the profitability. Also we start to spend marketing dollars to acquire the potential clients for the advertisement business. From Q3, as Dr. Zhou mentioned before in our earnings call, Youdao ensure deliver over 40% year-over-year GMV growth and increase the retention rate to 75%. Also we achieved about the revenue of the advertisement growth over 50% in Q3 2025. Also the new clients account for over 30% of the total clients.
We stopped in the investment team to go without even sure in advertising customer acquisition bill maintaining the profitability.
And also we start to spend the marketing dollars.
Acquire.
Potential clients without adequate asthma business and he is from the third quarter of Fastballs automation before you know where our earnings call and thank you Darling for deliver over 40% on a year over year <unk> growth and maintained.
And Chris the retention rate, which was a 75% or 75% and also.
We achieved a volatile revenue upside what has much growth or a 50% interest in the tier three and the 25 and also to new clients.
Our comparable us of over 30% of the total clients.
Peng Su: I think that's will create a great firm momentum and firm fundamentals for our business in the Q4 and next year. All for our Q4's priorities. At the same time, I just try to explain in more details regarding on the value impacts of our, we call the learning service business and in the doctor mentioned before. In the last year, STEAM courses still account for the meaningful percentage of our revenue for our learning services. At same time, in the summer, we shrink a lot, significantly, for the investment and for the STEAM courses and for the customer acquisitions, but still deliver significant revenues in the Q3.
I think that that's real create oh, great momentum and strong fundamentals.
Yes in the Q4 and next year.
And all of our fourth quarter its priorities and at the same time. So I just tried to explain in more details regarding all the about the impacts of our our quota.
So looking at the rest of us and in the inside the pent up demand.
I mentioned it before.
And in the lofty steam per se, it's let's see what commvault, a meaningful percentage I'll call a revenue problem for them.
Sometimes in the summer when shrink a lot significantly towards our investments and are in the in the for the Sydney causes for the customer acquisition, but it still deliver significant.
Significantly revenues in Q3, that's definitely not the impact of our profitability since the last deal. That's me and stuff can also highlight though is that we mentioned before so I think that I spoke about the impact on me.
Peng Su: That's definitely have the impact of our profitability in the last year. That means the kind of the high base in the, in the, in the, in the we mentioned before. I think that's it's the value, the impact only for the this year. Our first Q4'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, Youdao ensure AI apps, and as well as the online marketing services. As we assess the macro environment and our growth opportunities. Through this focus approach, we aim to deliver the greater values to an expanding user space.
See you.
So all of our first fourth quarter its priorities to secure the rapid operating profit improved but Franco a four year perspective a lot.
So let's start off the year in the meantime, we will continue to invest in our core business. It was already sure yeah apps and that's why I used the online marketing services.
As we access the.
Macroeconomic and should help our gross opportunities.
Through the through this focused approach, we aim to deliver greater value to an expanding user space.
Peng Su: Our medium to long term focus is on the executing AI native strategy, accelerating the deployment of our large language model computers in learning and advertising scenarios. Central to this effort is enhancing our sustained profitability. We also constantly evaluate the quality of our user services. Since its launch 3 years ago, our AI interactive services of Youdao Lingshi has integrated AI across the multi-scenarios, including the user's learning assessments, personalized learning paths recommendations, Q&A sessions, assignment grading, and as well as the college application consults. This has enhanced the learning efficiency and outcome for users, gathering widespread positive feedback. As the highest gross margin business within our learning services segments, and following the recent restructuring of these segments, Youdao Lingshi is expect to account for the growing share of segment revenue.
Our medium to long term for Chrystia songs of executing our <unk> strategy exciting because the deployment itself to our.
Luxury modal computer learning.
And our meals.
Central to this effort is enhancing over a sustained profitability.
We're also constantly evaluating.
Alrighty off the use of services.
Since its launch inspirational goal our yeah Interactive survey that's helped me without insurer has integrated AI.
Across the Maltese scenarios, including the users' learning assessments personalized a learning the past recommendations QE sessions assignment greedy and ask all stuck so call it application settings.
This is has enhanced the learning efficiency and I'll come for users garnering breath right positive feedback.
That's the highest gross margin business to be seen how Orlando services segments and the following the recent restructuring of your segments. It was already.
Back to our comfort with our growth growing share of segment revenue.
Peng Su: This in turn is expected to continue to improve the profitability of the learning services segment in the long run. Regarding the online marketing services, as noted previously, AI contributed to enhance the delivery and the operational efficiency in areas, including ad creative production, data mining, programmatic delivery, and also attribution analysis. These advancements deliver in midterm and long term the profitability improvement of these segments. I think, I hope that answers your question. Thank you.
Tourists, but expect to continue to improve that.
Profitability of the rental services segment in the long run.
Regarding the online marketing services as noted previously.
To be able to enhance the delivery and the operational efficiency area, including the AD creative production data mining programmatic delivery and also attribution analysis.
This advancement.
Labor and mid term long term the possibility of improvement of the segments.
I think I hope that answers your question.
<unk>.
Brenda Zhao: That's very helpful. Thank you.
That's very helpful. Thank you.
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Operator 2: Next question is from Bo Zhan, Huatai Securities Co., Ltd.
Next question is from Bob some okay.
Bo Zhan: Hello, hello. Thanks. Thanks for taking my question. My question is, given the cumulative net operating cash outflow recorded in the first 3 quarters, should we expect any change to the full year break-even target? Thank you.
I don't know.
Thanks for taking my question.
My question is given the come in as a nice operating cash outflow in the first three quarters. So there is back and no change to the full year break even target. Thank you.
Wayne Li: Thank you again, Bo, for your question. This is Wayne. Our team attach great importance on the performance of our operating cash flow, and we already got remarkable improvements in optimizing our operating cash flow performance in recent years. For 2025, we set a target to achieve full year's cash flow break even, and we remain very confident to achieve this target. At the same time, we'd 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 operating cash flow through sustained profitability enhancement, disciplined credit management, and optimized working capital practice. As you mentioned, for the first nine months this year, cumulative net operating cash flow amounted to CNY 129 million. However, it reflects over 40% significant improvements on a year-over-year basis.
Thank you.
Sure.
This is a win.
Our team.
Hum.
Our operating cash flow.
And we already got a notable improvement.
Optimizing our operating cash flow.
Okay.
Okay.
For 2025.
Target to achieve full year's cash flow breakeven.
And we remain very confident to achieve this target.
And at the same time, we'd like to emphasize that reaching the breakeven point is only a near term milestone our long term objectives.
Italy is to deliver even healthy performance in operating cash flow through.
And the profitability enhancement is in.
Client credit credit management, and optimize working capital practice.
As you mentioned.
For the first nine months of this year accumulative net operating cash flow amounted to 129 million. However.
However, it took over.
40%, a significant improvement on a year over year basis.
Peng Su: 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 registers net outflow due to the marketing investment. In contrast, Q2 and Q4 are retention-driven seasons and generally demonstrate stronger cash flow performance. We expect Q4 usually generates a good operating cash inflow. To provide context, as you know, we achieved a operating cash inflow of RMB 158 million in Q4 last year. As previously highlighted, our restructuring in learning services have been completed. Youdao Lingshi in particularly has demonstrated robust retention momentum in Q4, maintaining a retention rate above 75%.
In addition, our quote to cash flow performance.
We entered the season of features which are driving device system. So you didn't know sepsis.
For example, Q1 is typically annual bonus payment period due to the lunar new year.
And the Q3 is traditionally peak user acquisition period.
You didn't reach operating cash flow typically purchased a net outflow due to the.
Our marketing investment.
In contrast, Q2 end of Q4, our retention driving seasons and generate demand streets jungler cash broke up on that so we expect the fourth quarter usually generates.
Good operating cash inflow.
To provide context as you know.
We achieved operating cash inflow of RMB 158 million in Q4 last year.
As previously highlighted.
Stimpson E learning somebody to help being complete.
You'll darling shoot in particularly has to Mt.
Well both of them retention momentum in Q4.
<unk>.
Retention rate above 75%.
Peng Su: Additionally, another paid service, our AI-driven subscription services, Q3 sales from this 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 credit to our premium clients. Through results from the 3 quarters, we are satisfied for the performance of cash collections and the credit well managed. Taking into account the distinct seasonality of our operations, the significant year-over-year cash flow improvements in the first 3 quarters.
Additionally, another piece of is our AI driven subscription services Q3s. The sales from these business it hasn't accelerated growth to over 40% year over year.
We also positively support our cash flow position.
On the other hand, the expansion of our times.
<unk> business potentially bring certain collection time mimics, which could potentially slow down is it cash inflow from our customer.
For example, online marketing and services typically provides a certain clifton two hour premium clients.
Sure It was down from the third quarter.
Despite.
For the government's our cash collections and.
Craton are well managed.
Taking into accounts as it does tend to seasonality of our operations significantly year over year cash flow improvements in the first three quarters and the potential strong retention performance.
Wayne Li: The potential strong retention performance from Youdao in Q4. We maintain the confidence in achieving our full year operating cash flow breakeven target. Thank you.
From a dollar.
In Q4.
We maintained the confidence in achieving our full year operating cash flow breakeven target.
Thank you.
Bo Zhan: Thank you. That is helpful.
Okay. That's helpful.
Oh.
Yeah.
Operator 2: That concludes our question and answer session. I would like to turn the conference back over to management for any additional or closing remarks.
That concludes our question and answer session I would like to turn the conference back over to management for any additional or closing remarks.
Jeffrey Wang: 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 Piacente Financial Communications in China or the US. Have a nice day.
Thank you once again for joining us today, if you have any further questions. Please feel free to contact us.
Directly or reach out to Pearson financial communications in China or does that have a nice day.
Operator 2: Ladies and gentlemen, thank you for joining. The conference is now over. You may disconnect your telephones.
Ladies and gentlemen, thank you for joining the conference is now over you may disconnect your telephones.
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