Q1 2026 Youdao Inc Earnings Call

May 21, 2026

Operator: Good day, welcome to Youdao's First Quarter 2026 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.

Operator: Good day, welcome to Youdao's Q1 2026 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.

Speaker #1: Good day, and welcome to Youdao's first quarter 2026 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.

Speaker #2: Thank you, Operator. Please note that the discussion today will include forward-looking statements related to the future performance of the company, which I intend to qualify for the Safe Harbor Fund liability as established by the U.S.

Jeffrey Wang: Thank you, operator. Please note that 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. Such statements are not guarantees of the future performance and are subject to certain risks and uncertainties, assumptions, and other factors. Some of these risks are beyond the company's control and could cause actual results to differ materially from those mentioned in today's press release and this discussion. A general discussion of the risk factors that could affect Youdao's business and its 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.

Speaker #2: Credit Securities Litigation Reform Act, such statements are not guarantees of the future performance and are subject to certain risks and uncertainties exceptions and other factors.

Speaker #2: 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.

Jeffrey Wang: 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 its 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.

Speaker #2: 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.

Speaker #2: The company does not undertake any obligation to update these 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.

Jeffrey Wang: 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 Q4 2026 financial results news 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. Yongwei Li, our Vice President of Finance. I will now turn the call over to Dr. Zhou to review some of our recent highlights and strategic directions.

Speaker #2: For the definitions of non-GAAP financial measures and reconciliations of GAAP to non-GAAP financial results, please see the 2026 fourth quarter financial results news release issued earlier today.

Speaker #2: 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.

Jeffrey Wang: 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. Yongwei Li, our Vice President of Finance. I will now turn the call over to Dr. Zhou to review some of our recent highlights and strategic directions.

Speaker #2: Joining us today on the call from Youdao's Senior Management, Dr. Feng Zhou, our Chief Executive Officer. Mr. Lei Jin, our President. Mr. Feng Xu, our Senior VP.

Speaker #2: And Mr. Wayne Lee, our VP of Finance. I will now turn the call over to Dr. Zhou to review some of our recent highlights and strategic directions.

Speaker #3: Thank you, Jeffrey. And thank you all for participating in today's call. Before we begin, I would like to remind everyone that all numbers are denominated in renminbi.

Feng Zhou: Thank you, Jeffrey, and thank you all for participating in today's call. Before we begin, I would like to remind everyone that all numbers are denominated in RMB, unless otherwise stated. Youdao delivered a solid start in 2026. Our net revenues were RMB 1.3 billion, up 3.8% year over year. Operating profit was RMB 57.5 million, marking our seventh consecutive quarters of operating profitability. While operating margin improved sequentially by 0.5 percentage points to 4.3%. Year over year operating profit declined to 44.7%, primarily reflecting our proactive investments in core strategic initiatives, including AI, as well as a high comparison base from the restructuring of learning services in the same period last year. Net operating cash outflow narrowed significantly by 63.6% year over year to RMB 93.1 million.

Speaker #3: Unless otherwise stated, Youdao delivered a solid start in 2026. Net revenue was RMB 1.3 billion, up 3.8% year over year. Operating profit was RMB 57.5 million, marking our seventh consecutive quarter of operating profitability.

Speaker #3: While operating margin improved sequentially by 0.5 percentage points to 4.3%, year over year, operating profit declined 44.7%, primarily reflecting our proactive investments in core strategic initiatives, including AI, as well as a high comparison base from the restructuring of learning services in the same period last year.

Feng Zhou: year-over-year operating profit declined to 44.7%, primarily reflecting our proactive investments in core strategic initiatives, including AI, as well as a high comparison base from the restructuring of learning services in the same period last year. Net operating cash outflow narrowed significantly by 63.6% year-over-year to RMB 93.1 million.

Speaker #3: Net operating cash outflow narrowed significantly by 63.6% year over year to RMB 93.1 million. Supported by successful AI product launches in Q1 and a strong pipeline ahead, we remain focused on delivering full-year improvements in profitability and cash flow in 2026.

Feng Zhou: Supported by successful AI product launches in Q1 and a strong pipeline ahead, we remain focused on delivering full-year improvements in profitability and cash flow in 2026. We continue to advance the AI technologies that drive our business growth. Just this week, we released the Confucius 4.0, our open source learning large language model. Its most important new feature is multi-model input, enabling industry-leading capabilities in solving and teaching K-12 subjects that require visual understanding, such as geometry. We also released Emotive Voice 2.0, our open source high-fidelity AI text to speech model, with advanced features including cross-lingual voice cloning. In addition, we launched Confucius Translation 4.0, our latest AI translation model, delivering industry-leading performance across 40 languages. With that, let me walk through the performance of each business line during this quarter. The revenues from the learning services segment were RMB 627.5 million, up 4.2% year over year.

Speaker #3: We continue to advance the AI technologies that drive our business growth. Just this week, we released Confucius 4, our open-source learning large language model.

Speaker #3: Its most important new feature is multimodal inputs. Enabling industry-leading capabilities in solving and teaching K-12 subjects that require visual understanding, such as geometry. We also released emoji voice 2, our open-source high-fidelity AI text-to-speech model.

Feng Zhou: We also released Emotive Voice 2.0, our open source high-fidelity AI text to speech model, with advanced features including cross-lingual voice cloning. In addition, we launched Confucius Translation 4.0, our latest AI translation model, delivering industry-leading performance across 40 languages. With that, let me walk through the performance of each business line during this quarter. The revenues from the learning services segment were RMB 627.5 million, up 4.2% year-over-year.

Speaker #3: With advanced features including cross-lingual voice cloning, in addition, we launched Confucius translation 4, our latest AI translation model, delivering industry-leading performance across 40 languages.

Speaker #3: With that, let me walk through the performance of each business line during this quarter. Net revenues from the learning services segment were IMB 627.5 million, up 4.2% year over year.

Speaker #3: Youdao Ling Shi maintained strong momentum, with gross billings growing by over 20% year over year in Q1. Product and improved innovation remained a key driver of this growth.

Feng Zhou: Youdao Lingxi maintained strong momentum with gross billings growing by over 20% year over year in Q1. Further improved innovation remained a key driver of this growth. Powered by our proprietary Confucius LLM, we launched English AI essay grading this quarter, further enhancing our differentiated AI-powered learning experience. The feature provides personalized high-quality feedback reports in approximately 1 minute, improving learning outcomes for students while increasing operational efficiency for teaching assistants. Early adoption has been encouraging, with approximately 10,000 essays graded by AI to date. Our programming courses maintained strong momentum in Q1, with gross billings growing by over 20% year over year, supported by ongoing product enhancements and the strategic expansion of our user acquisition channels.

Feng Zhou: Youdao Lingxi maintained strong momentum with gross billings growing by over 20% year-over-year in Q1. Further improved innovation remained a key driver of this growth. Powered by our proprietary Confucius LLM, we launched English AI essay grading this quarter, further enhancing our differentiated AI-powered learning experience. The feature provides personalized high-quality feedback reports in approximately 1 minute, improving learning outcomes for students while increasing operational efficiency for teaching assistants.

Speaker #3: Powered by our proprietary Confucius LLM, we launched English AI essay grading this quarter, further enhancing our differentiated AI-powered learning experience. The feature provides personalized, high-quality feedback reports in approximately one minute, improving learning outcomes for students while increasing operational efficiency for teaching assistants.

Speaker #3: Early adoption has been encouraging with approximately 10,000 essays graded by AI to date. Our programming courses maintain strong momentum in the first quarter with growth billions growing by over 20% year over year.

Feng Zhou: Early adoption has been encouraging, with approximately 10,000 essays graded by AI to date. Our programming courses maintained strong momentum in Q1, with gross billings growing by over 20% year-over-year, supported by ongoing product enhancements and the strategic expansion of our user acquisition channels.

Speaker #3: Supported by ongoing product enhancements and the strategic expansion of our user acquisition channels. In addition to business growth, our students continue to achieve outstanding results in top-tier competitions, winning one gold, one silver, and two bronze medals at the 43rd National Olympiad in Informatics Winter Camp.

Feng Zhou: In addition to business growth, our students continue to achieve outstanding results in top tier competitions, winning one gold, one silver, and two bronze medals at the 43rd National Olympiad in Informatics Winter Camp. In addition, one student was selected for the Chinese national team and won a gold medal at the 2026 International Winter AI Olympiad. These results underscore the depth of our teaching capabilities and the strength of our programming education ecosystem. Within learning services, our AI-driven subscription services continued their robust growth trajectory. In Q1, total sales exceed RMB 100 million, representing year-over-year growth of over 70%. We also continue to iterate our proprietary Confucius LLM with a focus on high utility learning and productivity scenarios, further enriching our AI agent mix. This quarter, we launched two new AI agent products.

Speaker #3: In addition, one student was selected for the Chinese national team and won a gold medal at the 2026 International Winter AI Olympiad. These results underscore the depth of our teaching capabilities and the strength of our programming education ecosystem.

Speaker #3: Within learning services, our AI-driven sufficient services continue their robust growth trajectory. In the first quarter, total sales exceed IMB 100 million, representing year-over-year growth of over 70%.

Feng Zhou: Within learning services, our AI-driven subscription services continued their robust growth trajectory. In Q1, total sales exceed RMB 100 million, representing year-over-year growth of over 70%. We also continue to iterate our proprietary Confucius LLM with a focus on high utility learning and productivity scenarios, further enriching our AI agent mix. This quarter, we launched two new AI agent products.

Speaker #3: We also continue to iterate our proprietary Confucius LLM, with a focus on high-utility learning and productivity scenarios, further enriching our AI agent mix. This quarter, we launched two new AI agent products.

Speaker #3: The first is Lobster AI, a personal AI desktop assistant designed for productivity and secure deployment. Lobster AI enables enterprises and individual users to deploy powerful, customized AI agents while maintaining data privacy.

Feng Zhou: The first is Lobster AI, a personal AI desktop assistant designed for productivity and secure deployment. Lobster AI enables enterprises and individual users to deploy powerful customized AI agents while maintaining data privacy. Since its open source release, it has gained strong traction among the global developer community and surpassed 5,000 stars on GitHub. The second is Youdao Baoku, an AI native knowledge base designed for complex knowledge synthesis. Powered by a dynamic reasoning architecture, Youdao Baoku can decompose complex queries, perform multi-round verification, and provide precise citations. It helps users transform large volumes of materials into structured multi-model outputs, including chart-rich presentations and mind maps, helping users improve knowledge work productivity. In addition to launching new AI native products, we continued to upgrade our core applications. The AI simultaneous interpretation feature in Youdao Dictionary and Youdao Desktop Translation saw user engagement increase by over 100% year over year.

Speaker #3: Since its open-source release, it has gained strong traction among the global developer community and surpassed 5,000 stars on GitHub. The second is Youdao Baoku, an AI-native knowledge base designed for complex knowledge synthesis.

Speaker #3: Powered by a dynamic reasoning architecture, Youdao Baoku can decompose complex queries, perform multi-run verification, and provide precise citations. It helps users transform large volumes of materials into structured multimodal outputs, including chart-rich presentations and mind maps, helping users improve knowledge work productivity.

Feng Zhou: Powered by a dynamic reasoning architecture, Youdao Baoku can decompose complex queries, perform multi-round verification, and provide precise citations. It helps users transform large volumes of materials into structured multi-model outputs, including chart-rich presentations and mind maps, helping users improve knowledge work productivity. In addition to launching new AI native products, we continued to upgrade our core applications. The AI simultaneous interpretation feature in Youdao Dictionary and Youdao Desktop Translation saw user engagement increase by over 100% year-over-year.

Speaker #3: In addition to launching new AI-native products, we continue to upgrade our core applications. The AI simultaneous interpretation feature in Youdao Dictionary and Youdao Desktop Translation saw user engagement increase by over 100% year over year.

Speaker #3: This growth was driven by two key upgrades. First, the deployment of our Confucius 3 translation LLM, which reduces latency by approximately 50%. And second, the evolution of the feature from a translation tool into a more autonomous AI agent.

Feng Zhou: This growth was driven by two key upgrades. First, the deployment of our Confucius 3.0 translation LLM, which reduces the latency by approximately 50%. Second, the evolution of the feature from a translation tool into a more autonomous AI agent, enabling more natural interactions and deeper contextual understanding. Our technical capabilities were further validated at the 14th National Interpretation Contest, where Youdao won championships in eight of the 16 AI track language categories, demonstrating the strength of our AI translation systems. In Q1, our online marketing services maintained strong momentum, generating RMB 611.1 million in net revenues, up 20.9% year-over-year. Growth was primarily driven by increased demand for performance-based advertising, supported by our continued investments in AI technology. Gaming remained a core advertising vertical and continued to demonstrate resilience and steady growth.

Speaker #3: Enabling more natural interactions and deeper contextual understanding. Our technical capabilities were further validated at the 14th National Interpretation Contest, where Youdao won championships in eight of the 16 AI-tracked language categories.

Speaker #3: Demonstrating the strength of our AI translation systems. In the first quarter, our online marketing services maintained strong momentum, generating IMB 611.1 million in net revenues.

Feng Zhou: In Q1, our online marketing services maintained strong momentum, generating RMB 611.1 million in net revenues, up 20.9% year-over-year. Growth was primarily driven by increased demand for performance-based advertising, supported by our continued investments in AI technology. Gaming remained a core advertising vertical and continued to demonstrate resilience and steady growth.

Speaker #3: Up 20.9% year over year. Growth was primarily driven by increased demand for performance-based advertising, supported by our continued investments in AI technology. Gaming remained a core advertising vertical and continued to demonstrate resilience and steady growth.

Speaker #3: At the same time, we captured emerging opportunities in fast-growing sectors, particularly AI applications and short-form dramas. By integrating advanced AI capabilities with vertical-specific marketing scenarios, we achieved over 50% year-over-year advertising revenue growth in each of these emerging sectors.

Feng Zhou: At the same time, we captured emerging opportunities in fast-growing sectors, particularly AI applications and short-form dramas. By integrating advanced AI capabilities with vertical-specific marketing scenarios, we achieved over 50% year-over-year advertising revenue growth in each of these emergent sectors. On the product front, we continue to leverage our vertical advertising LLM to enhance product and service quality. In Q1, we launched an upgraded version of Infinise, our one-stop AI platform for KOL marketing. The upgrade focused on two key areas. First, workflow synergy. Infinise now enables brands to manage the full collaboration lifecycle from top-tier influencers to KOCs through a streamlined online workflow that significantly shortens collaboration cycles. Second, AI-powered self-service. The platform automates influencer recommendations and content creation, lowering entry barriers while improving execution efficiency. Since the upgrade, Infinise has received positive feedback from KOLs and marketers.

Speaker #3: On the product front, we continue to leverage our vertical advertising LLM to enhance product and service quality. In Q1, we launched an upgraded version of Infiniq, our one-stop AI platform for KOL marketing.

Speaker #3: The upgrade focused on two key areas. First, workflow synergy. Infiniq now enables brands to manage the full collaboration lifecycle—from top-tier influencers to KOCs—through a streamlined online workflow that significantly shortens collaboration cycles.

Feng Zhou: The upgrade focused on two key areas. First, workflow synergy. Infinise now enables brands to manage the full collaboration lifecycle from top-tier influencers to KOCs through a streamlined online workflow that significantly shortens collaboration cycles. Second, AI-powered self-service. The platform automates influencer recommendations and content creation, lowering entry barriers while improving execution efficiency. Since the upgrade, Infinise has received positive feedback from KOLs and marketers.

Speaker #3: Second, AI-powered self-service. The platform automates influencer recommendations and content creation, lowering entry barriers while improving execution efficiency. Since the upgrade, Infiniq has received positive feedback from KOLs and marketers.

Speaker #3: To date, nearly 60,000 influencers globally have registered on the platform, providing a solid foundation for future expansion. Gross margin for online marketing services was 29.6% in the first quarter, largely stable year over year and up 1.8 percentage points sequentially.

Feng Zhou: To date, nearly 60,000 influencers globally have registered on the platform, providing a solid foundation for future expansion. Gross margin for online marketing services was 29.6% in Q1, largely stable year-over-year and up 1.8 percentage points sequentially, marking the second consecutive quarter of sequential improvement. Turning to our smart devices segment. Net revenues were RMB 109.4 million in Q1, down 42.6% year-over-year. We continue to exercise operational discipline in this segment, prioritizing SKU health, inventory management, and profitability over near-term volume growth. At the same time, our products continue to receive strong external recognition. This quarter, the Youdao Tutoring Pen was honored as the best educational hardware solution at the 2026 EdTech Awards and was the only Chinese product to receive this distinction.

Speaker #3: Marking the second consecutive quarter of sequential improvement. Turning to our Smart Devices segment, net revenues were RMB 109.4 million in the first quarter, down 42.6% year over year.

Speaker #3: We continue to exercise operational discipline in this segment, prioritizing SKU health. Inventory management and profitability over near-term volume growth. At the same time, our products continue to receive strong external recognition.

Feng Zhou: We continue to exercise operational discipline in this segment, prioritizing SKU health, inventory management, and profitability over near-term volume growth. At the same time, our products continue to receive strong external recognition. This quarter, the Youdao Tutoring Pen was honored as the best educational hardware solution at the 2026 EdTech Awards and was the only Chinese product to receive this distinction.

Speaker #3: This quarter, the Youdao tutoring pen was honored as the best at the 2026 EdTech Awards, and was the only Chinese product to receive this distinction. In addition, Youdao SpaceX was recognized as an AI benchmark by Wall Street CM, reflecting continued recognition of our AI capabilities and educational value.

Feng Zhou: In addition, Youdao Space X was recognized as an AI benchmark by Wall Street CN, reflecting continued recognition of our AI capabilities and educational value. Looking ahead, we remain firmly committed to our AI native strategy by continuously refining our vertical LLMs for learning and advertising and expanding our AI agent matrix. We are enhancing how users learn, work, and market while creating new opportunities for sustainable growth. As we continue to improve user experience, we remain focused on driving continued improvements in profitability and cash flow in 2026. With that, I will hand the call over to Peng Su for a deeper dive into our financial results. Thank you.

Speaker #3: Looking ahead, we remain firmly committed to our AI-native strategy. By continuously refining our vertical LLMs for learning and advertising, and expanding our AI agent matrix, we are enhancing how users learn, work, and market, while creating new opportunities for sustainable growth.

Speaker #3: As we continue to improve user experience, we remain focused on driving continued improvements in profitability and cash flow in 2026. With that, I'll hand the call over to Supong for a deeper dive into our financial results.

Speaker #3: Thank you.

Speaker #1: Thank you, Dr. Zhou, and hello, everyone. Today, I will be presenting some financial highlights from the first quarter of 2026. We encourage you to read through our press release from earlier today for further details.

Peng Su: Thank you, Dr. Zhou, and hello, everyone. Today I will be presenting some financial highlights from the Q1 of 2026. We encourage you to read through our press release issued earlier today for further details. For the Q1, total revenue RMB 1.3 billion or US$195.4 million, representing a 3.8% increase from the same period of 2025. Net revenue from our learning services were RMB 627.5 million or US$91 million, representing a 4.2% increase from the same period of 2025. Net revenue from our smart devices was RMB 109.4 million or US$15.9 million, representing a 42.6% decrease from the same period of 2025, primarily due to the decline in demand for smart devices in Q1 of 2026. Net revenue from our online marketing services were RMB 611.1 million or US$88.6 million, representing a 20.9% increase from the same period of 2025.

Speaker #1: For the first quarter, total revenue was RMB 1.3 billion, or US$195.4 million, representing a 3.8% increase from the same period of 2025. Net revenue from our learning services was RMB 627.5 million, or US$91 million.

Speaker #1: Representing a 4.2% increase from the same period of 2025. Net revenue from our smart devices was RMB 109.4 million, or US$15.9 million.

Peng Su: Net revenue from our smart devices was RMB 109.4 million or US$15.9 million, representing a 42.6% decrease from the same period of 2025, primarily due to the decline in demand for smart devices in Q1 of 2026. Net revenue from our online marketing services were RMB 611.1 million or US$88.6 million, representing a 20.9% increase from the same period of 2025.

Speaker #1: Representing 42.6% decrease from the same period of 2025. Primarily due to the decline in demand for smart devices, in first quarter of 2026. Net revenue from our online marketing services for IMB 611.1 million, or US dollar 88.6 million.

Speaker #1: Representing a 20.9% increase from the same period of 2025. So year over year increase was mainly attributable to the increased demands for performance-based advertisements, through the third parties internet properties.

Peng Su: Year-over-year increase was mainly attributable to the increased demands for performance-based advertisements through the third party's internet properties, which was driven by our continued investment in AI technology. For Q1, our total gross profit was RMB 602.3 million or US$87.3 million, slightly compared with the same period of 2025. Gross margin for learning services was 60.2% for Q1 of 2026, compared with 59.8% for the same period of 2025. Gross margin for smart devices was 39.9% for Q1 of 2026, compared with 52.3% for the same period of 2025. Gross margin for online marketing services was 29.6% for Q1 of 2026, compared with 30.5% for the same period of 2025. For Q1, our total operating expense were RMB 544.8 million or US$79 million, compared with RMB 510.2 million for the same period of last year.

Speaker #1: Which was driven by our continued investment in AI technology. For the first quarter, our total gross profit was RMB 602.3 million, or US$87.3 million.

Speaker #1: Largely slight compared with the same period of 2025. For smart and for learning services, it was 60.2% for the first quarter of 2026, compared with 59.8% for the same period of 2025.

Speaker #1: For smart devices, the gross margin was 39.9% for the first quarter of 2026, compared with 52.3% for the same period of 2025. For online marketing services, the gross margin was 29.6% for the first quarter of 2026, compared with 30.5% for the same period of 2025.

Peng Su: Gross margin for smart devices was 39.9% for Q1 of 2026, compared with 52.3% for the same period of 2025. Gross margin for online marketing services was 29.6% for Q1 of 2026, compared with 30.5% for the same period of 2025. For Q1, our total operating expense were RMB 544.8 million or US$79 million, compared with RMB 510.2 million for the same period of last year.

Speaker #1: For the first quarter, total operating expense was RMB 544.8 million, or US$79 million, compared with RMB 510.2 million for the same period last year.

Speaker #1: Looking at our expenses in more detail, sales and marketing expense for the first quarter of 2026 was RMB 382.2 million, compared with RMB 357.6 million in the first quarter of 2025.

Peng Su: Looking at our expense in more detail, sales and marketing expense for Q1 2026 were RMB 382.2 million, compared with RMB 357.6 million in Q1 2025. Research and development expense for Q1 2026 were RMB 115.4 million, remaining stable with the same period of 2025. Our operating income margin was 4.3% in Q1 2026, compared with 8% for the same period of last year. For Q1 2026, our net income attributable to the ordinary shareholders was RMB 38.6 million, or $5.6 million, compared with RMB 76.7 million for the same period of last year. Non-GAAP net income attributable to the ordinary shareholder for Q1 was RMB 44.9 million, or $6.5 million, compared with RMB 81.7 million for the same period of last year.

Speaker #1: Research and development expense for the first quarter of 2026 for IMB was $115.4 million, remaining stable with the same period of 2025. Our operating income margin was 4.3% in the first quarter of 2026, compared with 8% for the same period last year.

Speaker #1: For the first quarter of 2026, our net income attributable to the ordinary shareholders was RMB 38.6 million, or US$5.6 million, compared with RMB 76.7 million for the same period of last year.

Speaker #1: Non-GAAP net income attributable to the ordinary shareholder for the first quarter was RMB 44.9 million, or US$6.5 million, compared with RMB 81.7 million for the same period of last year.

Peng Su: Non-GAAP net income attributable to the ordinary shareholder for Q1 was RMB 44.9 million, or $6.5 million, compared with RMB 81.7 million for the same period of last year. Basic and diluted net income per ADS attributable to the ordinary shareholder for Q1 2026 were RMB 0.33 or $0.05, and RMB 0.32 or $0.05 respectively. Non-GAAP basic and diluted net income per ADS attributable to the ordinary shareholder for Q1 was RMB 0.38 or $0.06, and RMB 0.37 or $0.05 respectively. Our net cash used in operating activity was RMB 93.1 million or $13.5 million for Q1.

Speaker #1: Basic and diluted net income per EDS attributable to the ordinary shareholder for the first quarter of 2026 were RMB 0.33, or US dollar 0.05, and RMB 0.32, or US dollar 0.05, respectively.

Peng Su: Basic and diluted net income per ADS attributable to the ordinary shareholder for Q1 2026 were RMB 0.33 or $0.05, and RMB 0.32 or $0.05 respectively. Non-GAAP basic and diluted net income per ADS attributable to the ordinary shareholder for Q1 was RMB 0.38 or $0.06, and RMB 0.37 or $0.05 respectively. Our net cash used in operating activity was RMB 93.1 million or $13.5 million for Q1. Looking at our balance sheet as of 31 March 2026, our contract liability, which mainly consists of deferred revenue generated from our learning services, were RMB 667 million or $96.7 million, compared with RMB 847.7 million as of 31 December 2025. At the end of the period, our cash equivalents, current and non-current restricted cash, and short-term investment totaled RMB 515.2 million or $74.7 million. This conclude our prepared remarks. Thank you for your attention.

Speaker #1: Non-GAAP basic and diluted net income per EADS attributable to the ordinary shareholder for the first quarter was RMB 0.38, or US$0.06, and RMB 0.37, or US$0.05, respectively.

Speaker #1: For net cash used in operating activities, it was RMB 93.1 million, or US dollar 13.5 million for the first quarter. Looking at our balance sheet, as of March 31, 2026, our contract liability, which mainly consists of deferred revenue generated from our learning services, was RMB 667 million, or US dollar 96.7 million, compared with RMB 847.7 million as of December 31, 2025.

Peng Su: Looking at our balance sheet as of 31 March 2026, our contract liability, which mainly consists of deferred revenue generated from our learning services, were RMB 667 million or $96.7 million, compared with RMB 847.7 million as of 31 December 2025. At the end of the period, our cash equivalents, current and non-current restricted cash, and short-term investment totaled RMB 515.2 million or $74.7 million. This conclude our prepared remarks. Thank you for your attention. We would now like to open the call for your questions. Operator, please go ahead.

Speaker #1: At the end of the period, our cash, cash equivalents, current and non-current restricted cash, and short-term investments totaled RMB 515.2 million, or US$74.7 million.

Speaker #1: This concludes our prepared remarks. Thank you for your attention. We would now like to open the call to your questions. Operator, please go ahead.

Peng Su: We would now like to open the call for your questions. Operator, please go ahead.

Speaker #2: Thank you. We will now begin the question-and-answer session. To ask a question, you may press star then one on your telephone keypad.

Operator: Thank you. We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If your question has already been addressed and you'd like to remove yourself from queue, please press star then 2. Once again, that's star then 1 if you have a question. Today's first question comes from Brian Gong at Citigroup. Please go ahead.

Speaker #2: If your question has already been addressed and you'd like to remove yourself from the queue, please press star, then two. Once again, that's star, then one if you have a question.

Speaker #2: Today's first question comes from Brian Gong at Citigroup. Please go ahead.

Speaker #3: Yes. Thanks, management, for taking my question. And congratulations on decent results. So my question is about our AI. So we have noticed that Youdao launched Lobster AI and Youdao Barcode in the first quarter.

Brian Gong: Yes. Thanks, management, for taking this question, and congratulations on decent results. My question is about our AI. We have noticed that Youdao launched Lobster AI and Youdao Baoku in Q1. Could management share the strategy regarding your AI applications? Thank you.

Speaker #3: Could the management share the strategy regarding our AI applications? Thank you.

Speaker #4: Th-thank you, Brian. AI applications are clearly gaining momentum in 2026, driven by the explosive growth of both AI chat and AI coding in recent, recent months.

Peng Su: Thank you, Brian. AI applications are clearly gaining momentum in 2026, driven by the explosive growth of both AI chat and AI coding in recent months. For Youdao, our focus is on capturing this opportunity in the areas that we have strong capabilities in education, productivity, and advertising. We are approaching this opportunity in AI from several dimensions. The first dimension is models and algorithms. It is increasingly clear that beyond the foundation models, there are significant opportunities in not pre-training, but post-training, fine-tuning, reinforcement learning, and development of vertical and specialized purpose-built models. This is where we are focused at. Our goal in the model area is to basically build specialized models that deliver unique intelligence for our users and customers. This has already become one of our key differentiators in education and also in advertising.

Feng Zhou: Thank you, Brian. AI applications are clearly gaining momentum in 2026, driven by the explosive growth of both AI chat and AI coding in recent months. For Youdao, our focus is on capturing this opportunity in the areas that we have strong capabilities in education, productivity, and advertising. We are approaching this opportunity in AI from several dimensions. The first dimension is models and algorithms.

Speaker #4: So for Youdao, our focus is on capturing this opportunity in the areas that we have strong capabilities in: education, productivity, and advertising. So we are approaching this opportunity in AI from several dimensions.

Speaker #4: The first dimension is models and algorithms. So, it is increasingly clear that, beyond the foundation of models, there are significant opportunities in not pre-training, but post-training, fine-tuning, reinforcement learning, and development of vertical and specialized purpose-built models.

Feng Zhou: It is increasingly clear that beyond the foundation models, there are significant opportunities in not pre-training, but post-training, fine-tuning, reinforcement learning, and development of vertical and specialized purpose-built models. This is where we are focused at. Our goal in the model area is to basically build specialized models that deliver unique intelligence for our users and customers. This has already become one of our key differentiators in education and also in advertising.

Speaker #4: So this is where we are focused at. So, our goal in the model area is to basically build specialized models that deliver unique intelligence for our users and customers.

Speaker #4: And this has already become one of our key differentiators in education and also in advertising. For example, we recently released the Confucius 4, our open-source education RRM.

Peng Su: We recently released the Confucius 4, our open-source education LLM. One of its most important feature is vision input that has been specially trained for education scenarios. What this does is this enables strong capabilities in solving and explaining K-12 problems that requires a vision input. The geometry questions, geometry problems. This direct supports our K-12 learning products as math and geometry and all these different visualized problems are really important for students. Similarly, we recently released the Confucius Translation 4, our latest translation model. It supports real-time voice translation across 40 languages and operates at less than one-tenth of the cost of general-purpose large language model, making it highly suitable for large scale commercial deployment of these really popular kind of live translation and voice interpretation services, which has become more and more popular. The second dimension is applications.

Feng Zhou: We recently released the Confucius 4, our open-source education LLM. One of its most important feature is vision input that has been specially trained for education scenarios. What this does is this enables strong capabilities in solving and explaining K-12 problems that requires a vision input. The geometry questions, geometry problems. This direct supports our K-12 learning products as math and geometry and all these different visualized problems are really important for students.

Speaker #4: So, one of its most important features is vision input. There has been, especially, training for education scenarios. So, what this does is enable strong capabilities in solving and explaining K-12 problems that require a vision input.

Speaker #4: For example, the geometry, geometry questions, geometry problems. So, this directly supports our K-12 learning products, as you know. Math and geometry and all these different, visualized problems are really, really important for students.

Speaker #4: So, similarly, when we recently released the Confucius translation for our latest translation model, it supports our real-time voice translation across 40 languages, and operates at less than one-tenth of the cost of a general-purpose large language model.

Feng Zhou: Similarly, we recently released the Confucius Translation 4, our latest translation model. It supports real-time voice translation across 40 languages and operates at less than one-tenth of the cost of general-purpose large language model, making it highly suitable for large scale commercial deployment of these really popular kind of live translation and voice interpretation services, which has become more and more popular. The second dimension is applications. Lobster AI and Youdao Baoku are both exciting new products.

Speaker #4: So, making it highly suitable for large-scale commercial deployment of these really, really popular kinds of live translation and voice interpretation services, which have become more and more popular.

Speaker #4: So the second dimension is applications. So, Lobster AI and Youdao Barcode are both exciting new products. Compared with our early AI products, these two are a little bit special.

Peng Su: Lobster AI and Youdao Baoku are both exciting new products.

Feng Zhou: Comparing with our early AI products, these two are a little bit special. They are designed to be more intelligent, more agentic, and more capable of handling long-running, complex, high-value tasks for our users. Lobster AI is a personal AI desktop assistant that can support a wide range of use cases, from creative exploration to productivity in professional settings. Youdao Baoku, in contrast, is a more specialized tool that focuses on deep research and personal knowledge management. Both products have significant long-term potential. Going forward, we will continue to upgrade our AI applications to make them more intelligent, grow their user base, and explore monetization opportunities. Beyond these two new products, our existing applications also continue to perform well. AI simultaneous interpretation of Youdao Dictionary and translation maintained strong growth in Q1.

Speaker #4: They are designed to be more intelligent, more agentic, and more capable of handling long-running, complex, high-value tasks for our users. So, Lobster AI is a personal AI desktop assistant that can support a wide range of use cases.

Speaker #4: From creative exploration to productivity in professional settings. So, Youdao Barcode, in contrast, is a more specialized tool that focuses on deep research and personal knowledge management.

Speaker #4: So both products have significant long-term potential. So, going forward, we will continue to upgrade our AI applications to make them more intelligent, grow their user base, and explore monetization opportunities.

Feng Zhou: Both products have significant long-term potential. Going forward, we will continue to upgrade our AI applications to make them more intelligent, grow their user base, and explore monetization opportunities. Beyond these two new products, our existing applications also continue to perform well. AI simultaneous interpretation of Youdao Dictionary and translation maintained strong growth in Q1.

Speaker #4: So, beyond these two new products, our existing AI applications also continue to perform well. So, AI, simultaneous interpretation of Youdao Dictionary, and translation maintain the strong growth in Q1.

Speaker #4: So, also recently, we added voice-to-voice live translation feature, so expanding beyond the existing voice-to-text live translation. So, so, so sales of AI simultaneous interpretation grew by over 100% year over year for the second consecutive quarter in Q1.

Feng Zhou: Also recently, we added the voice-to-voice live translation feature, expanding beyond the existing voice-to-text live translation. Sales of AI simultaneous interpretation grew by over 100% year over year for the second consecutive quarter in Q1. Another one of our app is Scholar AI or Xueshu Cha. That's also an AI agent. It's specifically for academic integrity. Colleges, students, and researchers can use it to identify potential signs of AI-generated content in academic papers and research manuscripts. With the rapid growth of AI capabilities, academic integrity in this setting has become increasingly important. In Q1, Scholar AI achieved a pretty remarkable sales growth of over 200% year over year. The third and last dimension of how we use AI is making Youdao ourselves AI native. This is equally important.

Speaker #4: Another one of our apps is Scholar AI, or 学术茶. That's also an AI agent, specifically for academic integrity. So colleges, students, and researchers can use it to identify potential signs of AI-generated content in academic papers and research manuscripts.

Feng Zhou: Colleges, students, and researchers can use it to identify potential signs of AI-generated content in academic papers and research manuscripts. With the rapid growth of AI capabilities, academic integrity in this setting has become increasingly important. In Q1, Scholar AI achieved a pretty remarkable sales growth of over 200% year-over-year. The third and last dimension of how we use AI is making Youdao ourselves AI native. This is equally important.

Speaker #4: So, with the rapid growth of AI capabilities, academic integrity in the setting is important. So, in Q1, Scholar AI achieved a pretty remarkable sales growth of over 200% year-over-year.

Speaker #4: So, the third and last dimension of how we kind of use AI is making Youdao, ourselves, AI-native. So, this is equally important.

Speaker #4: In the AI area, companies need to become AI native internally, not just launch AI products externally. So this requires a continuous iteration across our workflows, systems, and organizational practices.

Feng Zhou: In the AI area, companies need to become AI native internally, not just launch AI products externally. This requires continuous iteration across our workflows, systems, and organizational practices. For example, deploying AI coding internally has recently become a priority for us. We believe it can significantly improve our engineering productivity as models have really advanced. This transformation has accelerated meaningfully since the end of last year. In our education teams, the AI essay grading feature we discussed in our prepared remarks is another example of how we are transforming our team's work, our tutors in this case. We are also working on multiple projects to AI-enable our internal IT systems for education businesses. Finally, we recently released ThinkFlow, an aggregation platform for AI inference services. It is an AI infrastructure product based on capabilities we first developed and used internally.

Speaker #4: So, for example, deploying AI coding internally has recently become a priority for us. We believe it can significantly improve our engineering productivity. As models have really advanced, this transformation has accelerated meaningfully since the end of last year.

Speaker #4: So, in our education teams, the AI essay grading feature we discussed in our prepared remarks is another example of how we are transforming our teams' work—our tutors in this case.

Feng Zhou: In our education teams, the AI essay grading feature we discussed in our prepared remarks is another example of how we are transforming our team's work, our tutors in this case. We are also working on multiple projects to AI-enable our internal IT systems for education businesses. Finally, we recently released ThinkFlow, an aggregation platform for AI inference services. It is an AI infrastructure product based on capabilities we first developed and used internally.

Speaker #4: So, we are also working on multiple projects to AI-enable our internal IT systems for education businesses. So finally, we recently released Thinkflow.

Speaker #4: And aggregation services. So, it is an AI infrastructure product based on capabilities we first developed and used internally. So, this I think is a good example that reflects our broader approach.

Feng Zhou: This, I think is a good example that reflects our broader approach. We build AI capabilities for our own operations, validate them in real business scenarios, and then extend them into products and services where they make sense in other people, other companies' settings. Overall, AI is core to our strategy and our next stage of growth. By advancing specialized models, release AI native applications, and also transform our work internally with AI, we are strengthening our competitive position in education, productivity, and in advertising. While also creating new opportunities for sustainable revenue growth, profitability, and cash flow improvements. Yeah, I hope that answers your question. Thank you.

Speaker #4: So, we built AI capabilities for our own operations, validated them in real business scenarios, and then extend them into products and services where they make sense in other companies' settings.

Speaker #4: So overall, AI is core to our strategy and our next stage of growth. So by advancing specialized models, releasing AI-native applications, and also transforming our work internally with AI.

Feng Zhou: By advancing specialized models, release AI native applications, and also transform our work internally with AI, we are strengthening our competitive position in education, productivity, and in advertising. While also creating new opportunities for sustainable revenue growth, profitability, and cash flow improvements. Yeah, I hope that answers your question. Thank you.

Speaker #4: We are strengthening our competitive position in education, productivity, and in advertising. So, we're also creating new opportunities for sustainable revenue growth, profitability, and cash flow improvements.

Speaker #4: Yeah, I hope that answers your question. Thank you.

Speaker #1: Thanks. That's very clear. Thank you very much.

Brian Gong: Thanks. That's very clear. Thank you very much.

Speaker #3: Thank you. And our next question today comes from Luping Zhao with CICC. Please go ahead.

Operator: Thank you. Our next question today comes from Liping Zhao with CICC. Please go ahead.

Brenda Zhao: Good evening, Dr. Zhou and Su Zhong. Thanks for taking my questions. I'm curious about the retention for Youdao Lingxi. Could management share some colors on the recent updates? Thank you.

Liping Zhao: Good evening, Dr. Zhou and Su Zhong. Thanks for taking my questions. I'm curious about the retention for Youdao Lingxi. Could management share some colors on the recent updates? Thank you.

Speaker #4: Good evening, Dr. Zhao and Suzhou. Thanks for taking my questions. I'm curious about the retention for Youdao Lingshi. Could management share some color on the recent updates?

Speaker #4: Thank you.

Speaker #1: Thank you, Brandon. I will handle the question first. If anyone else has one more comment. And, yeah, before we talk about recent retention, performance, I want to emphasize, from the mid-term to long-term perspective, about the top-level policy design that has already unlocked an expansive growth runway for Youdao Lingshi, first.

Peng Su: Thank you, Brenda. I will handle the question first if anyone has more comments. Yeah, before we talk about recent retention performance, I want to emphasize from the midterm to long term the perspective about the top level policy design has already unlocked an expansive growth runway for the Youdao Lingshi. First, according to the Education Powerhouse Construction Plan and the 2026 government work report, there is a clear mandate to accelerate the expansion of high school educational resources. Furthermore, during the 15th Five-Year Plan period, it's expected to add over 2 million new high school seats. That has been publicly released recently. This capacity expansion will trigger the structural growth in high school educational demands. As a pioneer deeply rooted in these sectors, Youdao Lingshi is uniquely positioned to be a primary benefit of this policy-driven skill dividend.

Speaker #1: You know, according to the Education Powerhouse Construction Plan, 教育强国建设规划纲要, and the 2026 Government Work Report, there is a clear mandate to accelerate the expansion of high school education resources.

Speaker #1: Furthermore, during the 15th five-year plan, period, it's, s, it's expected to add over 2 million new high school seats. That's the that will be has been public released to the, recently.

Peng Su: Furthermore, during the 15th Five-Year Plan period, it's expected to add over 2 million new high school seats. That has been publicly released recently. This capacity expansion will trigger the structural growth in high school educational demands. As a pioneer deeply rooted in these sectors, Youdao Lingshi is uniquely positioned to be a primary benefit of this policy-driven skill dividend.

Speaker #1: And this capacity expansion will trigger the structural growth in high school educational demands. As a pioneer, and deeply rooted in these sectors, Youdao Lingshi is uniquely positioned to be a primary beneficiary of this policy-driven skill dividend.

Speaker #1: In the first quarter, we launched the English AI essay grading features. It immediately marks a claim of an over 20% year-over-year increase from the growth rating.

Peng Su: In Q1, we launched the English AI essay grading feature. It received immediate market acclaim that an over 20% year-over-year increase from the course grading, serving as a powerful validation of our product's efficiency and market competitiveness. Let us talk about the recent retention activities. We have seen a very strong momentum, with the retention rate exceeding 75%, continuing its upward year-over-year trajectory. This high level of retention is a testament to the users' recognitions of our AI interactive learning formats and high-quality services. It also solidifies the foundations for the growth in the Q2 and through the full years. Looking ahead, we will continue to leverage our Confucius LLM to deepen our footprint in the differentiated AI interactive learning format.

Speaker #1: Serving as a powerful validation of our product's efficiency and market competitiveness. Then, let us talk about the recent retention activities. We have seen very strong momentum.

Speaker #1: With the retention rate exceeding 75%, continuing its upward year-over-year trajectory. This high level of retention is a testament to the user's recognition of our AI interactive learning formats and high-quality services.

Peng Su: This high level of retention is a testament to the users' recognitions of our AI interactive learning formats and high-quality services. It also solidifies the foundations for the growth in the Q2 and through the full years. Looking ahead, we will continue to leverage our Confucius LLM to deepen our footprint in the differentiated AI interactive learning format.

Speaker #1: It's also solidly s the foundations for the growth in the Q2 and through the fully the full years. looking ahead, we will continue to continue to leverage our Confucius large language model to deepen our footprint in the differentiated AI interactive learning format.

Speaker #1: We are committed to expanding the AI application across the entire learning lifecycle. From diagnostic assessments to personalized learning paths, to knowledge expansion, QA, and college entrance consultant services.

Peng Su: We are committed to expanding the AI application across the entire learning lifecycle, from diagnostics assessments and the personalized learning paths, to the knowledge expansion, QA, and the college entrance consultant services. Our goal is to bridge the gap between the technology and accessibilities, bring the efficiency of the AI-driven learning to more users nationwide. I hope that answered your question. Thank you, Brenda.

Speaker #1: Our goal is to bridge the gap between technology and accessibility, bringing the efficiency of AI-driven learning to more users nationwide. I hope that answers your question.

Speaker #1: Thank you, Brandon.

Brenda Zhao: Thanks, Zhou Feng. That's helpful.

Liping Zhao: Thanks, Zhou Feng. That's helpful.

Speaker #4: Thanks, Suzhou. That's helpful.

Speaker #3: Thank you. And our next question today comes from Thomas Chong at Jefferies. Please go ahead.

Operator: Thank you. Our next question today comes from Thomas Chong at Jefferies. Please go ahead.

Thomas Chong: Hi, good evening. Thanks, management, for taking my questions. Could management provide an outlook for the advertising business in Q2? Thank you.

Speaker #5: Hi. Good evening. Thanks, management, for taking my questions. Could management provide an outlook for the advertising business in Q2? Thank you.

[Company Representative] (Youdao): Hi, this is Zhengle. The rapid ascent of our advertising business in recent years is at its core driven by our AI evolution. AI agents like AI Magic Box have revolutionized the ad creative efficiency, while the AI ad placement optimizer has significantly boosted ROI through precision profiling and real-time bidding strategies. This has propelled our ad net revenue from RMB 1.3 billion in 2023 to RMB 2.5 billion in 2025. Consequently, advertising has jumped from 25% to 43% of our total revenue, becoming a pivotal growth engine for us. In Q1 of this year, the momentum remains unabated. This net revenue reached RMB 611.1 million, a 20.9% year-over-year increase. Looking ahead, we have confidence in the long-term development prospects of ad advertising. We are empowered programmatic advertising and KOL marketing through our priority vertical ad LLM, achieving a high efficiency matchups between people and the business content.

Lei Jin: Hi, this is Zhengle. The rapid ascent of our advertising business in recent years is at its core driven by our AI evolution. AI agents like AI Magic Box have revolutionized the ad creative efficiency, while the AI ad placement optimizer has significantly boosted ROI through precision profiling and real-time bidding strategies. This has propelled our ad net revenue from RMB 1.3 billion in 2023 to RMB 2.5 billion in 2025.

Speaker #1: Hi, this is Jinlei. The rapid ascent of the advertising business in recent years is, at its core, driven by our AI evolution. AI agents like AI Magic Box have revolutionized ad creative efficiency.

Speaker #1: While the AI ad placement optimizer has significantly boosted ROI through precision profiling and real-time bidding strategies, this has propelled our ad net revenue from RMB 1.3 billion in 2023 to RMB 2.5 billion in 2025.

Speaker #1: Consequently, advertising has jumped from 25% to 43% of our total revenue, becoming the parental growth engine for us. In the first quarter of this year, the momentum remains unabated.

Lei Jin: Consequently, advertising has jumped from 25% to 43% of our total revenue, becoming a pivotal growth engine for us. In Q1 of this year, the momentum remains unabated. This net revenue reached RMB 611.1 million, a 20.9% year-over-year increase. Looking ahead, we have confidence in the long-term development prospects of ad advertising. We are empowered programmatic advertising and KOL marketing through our priority vertical ad LLM, achieving a high efficiency matchups between people and the business content.

Speaker #1: This net revenue reached RMB 600 and $11.1 million, a 20.9% year-over-year increase. Looking ahead, we have confidence in the long-term development perspective of AD advertising.

Speaker #1: We are empowered in programmatic advertising and KOL marketing through our priority vertical AD LLM, achieving a high-efficiency nexus between people and business content.

Speaker #1: We will focus our strategic layout on the following high-potential verticals. The first one is gaming. This is our main cornerstone. By combining native, deep gaming DNA with Youdao's cutting-edge technology, we continue to consolidate our presence in both domestic and overseas gaming marketing.

[Company Representative] (Youdao): We will focus our strategic layout on following high potential verticals. The first one is gaming. This remains our cornerstone. By combining NetEase deep gaming DNA with Youdao's cutting-edge technology, we continue to consolidate our presence in both domestic and overseas gaming marketing. The second is the AI application. We anticipate that this will be the core incremental growth driver. The global explosion of LLM and AI agent has created a surge in demand for precision user acquisition. Our programmatic capabilities are a perfect fit for those digital products. The third is globalizing Chinese brands. There is a robust demand for the Chinese manufacturers and the brands going global. For instance, the new energy vehicle industry is shifting from product-centric marketing to the brand plus ecosystem strategy. We intend to capture this global brand opportunity by leveraging our KOL marketing paired with the massive reach of programmatic ads.

Lei Jin: We will focus our strategic layout on following high potential verticals. The first one is gaming. This remains our cornerstone. By combining NetEase deep gaming DNA with Youdao's cutting-edge technology, we continue to consolidate our presence in both domestic and overseas gaming marketing. The second is the AI application. We anticipate that this will be the core incremental growth driver. The global explosion of LLM and AI agent has created a surge in demand for precision user acquisition.

Speaker #1: The second is AI applications. We anticipate this will be the core incremental growth driver. The global explosion of LLM and AI agents has created a surge in demand for precision user acquisition.

Lei Jin: Our programmatic capabilities are a perfect fit for those digital products. The third is globalizing Chinese brands. There is a robust demand for the Chinese manufacturers and the brands going global. For instance, the new energy vehicle industry is shifting from product-centric marketing to the brand plus ecosystem strategy.

Speaker #1: Our programmatic capability is a perfect fit for those digital products. The second, the third is globalizing Chinese brands. There is a robust demand for Chinese manufacturers and brands going global.

Speaker #1: For instance, the new energy vehicle industry is shifting from product-centric marketing to the brand-plus ecosystem strategy. We intend to capture this global brand opportunity by leveraging our KOL marketing, paired with the massive reach of pro-pragmatic A-ADS.

Lei Jin: We intend to capture this global brand opportunity by leveraging our KOL marketing paired with the massive reach of programmatic ads. The fourth is social apps and FinTech. We will leverage our expertise in data security and compliant ad placement to address the high barrier Marketing needs of those sectors. I would like to highlight that the advertising business is yet to remain the primary contributor to our operating profit. Thank you.

Speaker #1: The fourth is social apps and finance. We will leverage our expertise in data security and content ad placement to address the high-barrier marketing needs of those sectors.

[Company Representative] (Youdao): The fourth is social apps and FinTech. We will leverage our expertise in data security and compliant ad placement to address the high barrier

Yongwei Li: Marketing needs of those sectors. I would like to highlight that the advertising business is yet to remain the primary contributor to our operating profit. Thank you.

Speaker #1: In addition, I would like to highlight that the advertising business is—and has to remain—the primary contributor to our profit and operating profit. Thank you.

Speaker #5: Thank you.

Thomas Chong: Thank you.

Speaker #3: Thank you. And our next question today comes from Bozan at Huatai Securities. Please go ahead.

Operator: Thank you. Our next question today comes from Zhenbo at Huatai Securities. Please go ahead.

Zhenbo: Thanks for taking my question. This is Zhen Bo from Huatai. My question is, could management elaborate on the seasonality of operating profit? Thanks.

[Analyst] (Huatai Securities): Thanks for taking my question. This is Zhen Bo from Huatai. My question is, could management elaborate on the seasonality of operating profit? Thanks.

Speaker #6: Thanks for taking my question. This is Zhanbo from Huaytai. My question is, could management elaborate on the seasonality of operating profit sense?

Speaker #1: Thank you, Zhanbo. Fair question regarding seasonality. Youdao's financial metrics have historically exhibited pronounced seasonality. To provide a clear picture, I will address our business seasonality through three dimensions.

Yongwei Li: Thank you, Zhen Bo, for your question regarding seasonality. Youdao's financial metrics has historically exhibited pronounced seasonality. To provide a clear picture, I will address our business seasonality through 3 dimensions: revenue, operating profit, and cash flow. First, seasonality of revenue. Our top-line performance typically follows a stronger the H2 pattern, with the Q3 usually being our annual peak. This pattern is primarily attributable to the following factors by segment. In terms of advertising, H2 is boosted by the Q3 peak for gaming and entertainment marketing during the summer vacation, followed by Q4 Christmas holiday season, which drives both domestic and overseas marketing demand. In respect of learning services, the summer and winter break represents the intensive period for the service delivery, and Q3 is usually the peak season.

Wayne Li: Thank you, Zhen Bo, for your question regarding seasonality. Youdao's financial metrics has historically exhibited pronounced seasonality. To provide a clear picture, I will address our business seasonality through 3 dimensions: revenue, operating profit, and cash flow. First, seasonality of revenue. Our top-line performance typically follows a stronger the H2 pattern, with the Q3 usually being our annual peak.

Speaker #1: Revenue, operating profit, and cash flow. First, seasonality of revenue. Our top-line performance typically follows a stronger second half-year, or H2, pattern, with the third quarter—usually Q3—being our annual peak. This pattern is primarily attributable to the following factors by segment.

Wayne Li: This pattern is primarily attributable to the following factors by segment. In terms of advertising, H2 is boosted by the Q3 peak for gaming and entertainment marketing during the summer vacation, followed by Q4 Christmas holiday season, which drives both domestic and overseas marketing demand. In respect of learning services, the summer and winter break represents the intensive period for the service delivery, and Q3 is usually the peak season.

Speaker #1: In terms of advertising, H2 is bolstered by the Q3 peak for gaming and pan-entertainment marketing, during the summer vacation, followed by the Q4 Christmas holiday season, which drives both domestic and overseas marketing demand.

Speaker #1: In respect of learning services, the summer and winter break represents the intensive period for service delivery. And Q3 is usually the peak season.

Yongwei Li: As for smart devices, sales typically peak during the start of a new academic year, especially in Q3. The second, seasonality of operating profit. Typically, higher revenue levels in H2 drive higher operating profit. Meanwhile, quarterly operating profit is also affected by a range of other factors, including business restructuring or strategic investment in key areas. Taking 2025 as an example. 2025 was an anomaly due to our strategic restructuring of learning services. We proactively focused on Youdao Lingxi while scaling back investment in theme and adult courses. The revenue in H1 was largely a lagging effect from H2 2024 customer acquisitions, while sales, marketing, and R&D investments for H1 2025 were slashed significantly. This results in a typically high operating profit in H1 2025.

Wayne Li: As for smart devices, sales typically peak during the start of a new academic year, especially in Q3. The second, seasonality of operating profit. Typically, higher revenue levels in H2 drive higher operating profit. Meanwhile, quarterly operating profit is also affected by a range of other factors, including business restructuring or strategic investment in key areas. Taking 2025 as an example. 2025 was an anomaly due to our strategic restructuring of learning services.

Speaker #1: As for smart devices, sales for the new academic year, especially in Q3. Second, seasonality of operating profit. Typically, higher revenue levels in the second half of the year drive higher operating profit.

Speaker #1: Meanwhile, quarterly operating profit is also affected by a range of other factors, including business restriction or strategic investment in key areas. Taking 2025 as an example, 2025 was an anomaly due to our strategic restriction of learning services.

Speaker #1: We proactively focused on Youdao Lin Shi, while scaling back investment in theme and adult courses. The revenue in H1 was largely a lagging effect from H2 2024 customer acquisitions, while sales, marketing, and R&D expenses for H1 2025 were slashed significantly.

Wayne Li: We proactively focused on Youdao Lingxi while scaling back investment in theme and adult courses. The revenue in H1 was largely a lagging effect from H2 2024 customer acquisitions, while sales, marketing, and R&D investments for H1 2025 were slashed significantly. This results in a typically high operating profit in H1 2025.

Speaker #1: This resulted in an untypically high operating profit in the first half of last year. Alongside the accelerated application of core AI technology and steady improvements in health metrics of Youdao Lin Shi, we increased investment in marketing and R&D resources.

Yongwei Li: Alongside the accelerated application of core AI technology and steady improvements in health metrics of Youdao Lingxi, we increased investment in marketing and R&D resources. Despite the robust revenue performance in H2, operating profit is relatively low in H2 2025. For 2026, this year, we expect the profit patterns to return to historical norms, with H2 outperforming H1. Given the factors above, we place greater emphasis on the operating profit growth over longer term, which better reflects the overall financial health of our business. Third, seasonality of cash flow. Our operating cash flow generates these net outflows in Q1 and Q3, which are peak customer acquisition phase, and inflow in Q2 and Q4, which are major retention cycle. In Q1 this year, our cash flow position continued to improve rapidly, with the net operating cash outflow narrowed by 54% year over year.

Wayne Li: Alongside the accelerated application of core AI technology and steady improvements in health metrics of Youdao Lingxi, we increased investment in marketing and R&D resources. Despite the robust revenue performance in H2, operating profit is relatively low in H2 2025. For 2026, this year, we expect the profit patterns to return to historical norms, with H2 outperforming H1. Given the factors above, we place greater emphasis on the operating profit growth over longer term, which better reflects the overall financial health of our business.

Speaker #1: Despite the robust revenue performance in H2, operating profit is relatively low in the second half of 2025. For 2026, we expect the profit pattern to return to historical norms.

Speaker #1: With H2 outperforming H1, given the factors above, we place greater emphasis on operating profit growth over the longer term, which better reflects the overall financial health of our business.

Wayne Li: Third, seasonality of cash flow. Our operating cash flow generates these net outflows in Q1 and Q3, which are peak customer acquisition phase, and inflow in Q2 and Q4, which are major retention cycle. In Q1 this year, our cash flow position continued to improve rapidly, with the net operating cash outflow narrowed by 54% year-over-year. In summary, on the premise of stable macroeconomic environment, we are making good progress on delivering a rapid improvement in both operating profit and operating cash flow for the full year 2026. Thank you.

Speaker #1: Third, seasonality of cash flow. Our operating cash flow generates these net outflows in Q1 and Q3, which is the peak customer acquisition phase. And inflows in Q2 and Q4, which is the major retention cycle.

Speaker #1: In Q1 this year, our cash flow position continued to improve rapidly, with the net operating cash outflow narrowed by 64% year-over-year. In summary, on the premise of a stable macroeconomic environment, we are making good progress on delivering a rapid improvement in both operating profit and operating cash flow for the full year 2023.

Yongwei Li: In summary, on the premise of stable macroeconomic environment, we are making good progress on delivering a rapid improvement in both operating profit and operating cash flow for the full year 2026. Thank you.

Speaker #1: Thank you.

Zhenbo: Thank you.

[Analyst] (Huatai Securities): Thank you.

Speaker #5: Thank you.

Speaker #3: Thank you. And that concludes the question-and-answer session. I'd like to turn the conference back over to management for any additional or closing comments.

Operator: Thank you. That concludes the question and answer session. I’d like to turn the conference back over to management for any additional or closing comments.

Speaker #1: Yeah. 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 Pearson Financial Communications in China or the US.

Yongwei Li: Yes. 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 great day.

Jeffrey Wang: Yes. 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 great day.

Speaker #1: Have a great day.

Speaker #3: Thank you. That concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.

Operator: Thank you. That concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.