Q2 2026 Youdao Inc Earnings Call

August 20, 2026

Operator: Good day, and welcome to Youdao's Q2 2026 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star and one on your telephone keypad. To withdraw your question, please press star and two. Please note this event is being recorded. I would now 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 second quarter 2026 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero.

Speaker #1: After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press *1 on your telephone keypad. To withdraw your question, please press *2.

Speaker #1: Please note, this event is being recorded. I would now like to end the conference. Over to Mr. Jeffrey Wang, Investor Relations Director of Youdao.

Speaker #1: Please go ahead.

Speaker #2: 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 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 U.S. Private Securities Litigation Reform Act. Such statements are not guarantees of the future performance and are subject to certain risks and uncertainties, assumptions, and other factors. Some of these risks are beyond the company's control and could cause actual results to differ materially from those mentioned in today's press release and this discussion. A general discussion of the risk factors that could affect Youdao's business and financial results is included in certain company filings with the U.S. Securities and Exchange Commission. The company does not undertake any obligation to update this forward-looking information except as required by law. During today's call, management will also discuss certain non-GAAP financial measures for comparison purposes only.

Speaker #2: Private Securities Litigation Reform Act. Such statements are not guarantees of 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 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. During today's call, management will also discuss certain non-GAAP financial measures for comparison purposes only.

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 this forward-looking information, except as required by law. During today's call, management will also discuss certain non-GAAP financial measures for comparison purposes only.

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

Jeffrey Wang: For the definitions of non-GAAP financial measures and reconciliations of GAAP to non-GAAP financial results, please see the 2026 Q2 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. Wayne Li, our VP of Finance. I will now turn the call over to Dr. Zhou to reveal some of our recent highlights and strategic direction.

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.

Speaker #2: Joining us today on the call from Youdao's senior management are Dr. Feng Zhou, our Chief Executive Officer; Mr. Lei Jin, our President; Mr. Peng Su, our Senior Vice President; and Mr. Wen Li, our Vice President of Finance.

Speaker #2: I will now turn the call over to Dr. Zhou to review some of our recent highlights and strategic direction.

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 unless otherwise stated.

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. We maintained solid momentum in Q2, delivering robust results. Net revenues for the quarter reached RMB 1.5 billion, representing a 3.5% yearly increase. In terms of profitability, we achieved a record high in Q2 with operating profit reaching RMB 111.5 million, nearly fourfold year over year. This marks our eighth consecutive quarter of operating profitability, representing a critical step towards our goal of healthy and sustainable development. Meanwhile, net cash inflow from operating activities was RMB 334.2 million, up 80.7% compared with the same period last year. These strong quarterly results also drove strong H1 performance.

Speaker #3: We maintained solid momentum in the second quarter, delivering robust results. Net revenues for the quarter reached RMB 1.5 billion, representing a 3.5% year-over-year increase.

Speaker #3: In terms of profitability, we achieved a record high in Q2, with operating profit reaching RMB 111.5 million, nearly fourfold year-over-year. This marks our eighth consecutive quarter of operating profitability, representing a critical step toward our goal of healthy and sustainable development.

Feng Zhou: This marks our eighth consecutive quarter of operating profitability, representing a critical step towards our goal of healthy and sustainable development. Meanwhile, net cash inflow from operating activities was RMB 334.2 million, up 80.7% compared with the same period last year. These strong quarterly results also drove strong H1 performance.

Speaker #3: Meanwhile, net cash inflow from operating activities was RMB 334.2 million, up 80.7% compared with the same period last year. These strong quarterly results also drove strong first-half performance.

Speaker #3: In the first half of 2026, total net revenues reached RMB 2.8 billion, up 3.6% year over year, while operating profits increased 27.3% to a record RMB 169 million. We also generated RMB 241.1 million in net operating cash flow.

Feng Zhou: In H1 2026, total net revenues reached RMB 2.8 billion, up 3.6% year over year, while operating profits increased 27.3% to a record RMB 169 million. We also generated RMB 241.1 million in net operating cash flow, compared with a net outflow of RMB 70.5 million in the same period last year, reflecting a substantial improvement in cash generation. Let me begin with an update on our progress in AI technology and Confucius, our proprietary large language model. AI remains a key driver across our business. During Q2, we continued to translate advances in our LLM capabilities into practical products and applications across our business lines. First, we rolled out Confucius Four in Q2 with significant upgrades in multi-model voice and translation capabilities. The new model delivers stronger performance in visual math and physics reasoning, particularly on complex diagrams.

Speaker #3: Compared with a net outflow of RMB 70.5 million in the same period last year, this reflects a substantial improvement in cash generation. Let me begin with an update on our progress in AI technology and Confucius, our proprietary large language model.

Speaker #3: AI remains a key driver across our business. During the second quarter, we continued to translate advances in our LLM capabilities into practical products and applications across our business lines.

Feng Zhou: During Q2, we continued to translate advances in our LLM capabilities into practical products and applications across our business lines. First, we rolled out Confucius Four in Q2 with significant upgrades in multi-model voice and translation capabilities. The new model delivers stronger performance in visual math and physics reasoning, particularly on complex diagrams.

Speaker #3: First, we rolled out Confucius 4 in the second quarter. With significant upgrades in multimodal voice and translation capabilities, the new model delivers stronger performance in visual math and physics reasoning.

Speaker #3: Particularly on complex diagrams, we also improved its reasoning architecture and training data to significantly reduce inference costs. In translation, an optimized acceleration mechanism increased inference speed by approximately 80%.

Feng Zhou: We also improved its reasoning architecture and training data to significantly reduce inference costs. In translation, an optimized acceleration mechanism increased inference speed by approximately 80%. Second, our growing portfolio of AI agents was showcased at the 2026 World Artificial Intelligence Conference. Products including LobsterAI, HiEcho, Youdao Baoku, InfunEase, and iMagicBox, together with Confucius Four, demonstrated how AI is moving beyond basic Q&A towards executing more complex tasks across learning, work, and advertising scenarios. Beyond technological advances and user adoption, our AI capabilities also continued to gain recognition and support from authoritative bodies. In Q2, the Beijing Key Laboratory of Multilingual Translation in Artificial Intelligence, co-funded by Youdao, was officially launched. Going forward, we will continue advancing end-to-end multilingual translation models and accelerate their application across learning, international conferences, and cross-border trade. I will now walk through the performance of each of our business lines during Q2.

Speaker #3: Second, our growing portfolio of AI agents was showcased at the 2026 World AI Conference. Products including Lobster AI, High Echo, Youdao Baoku, Infinis, and iMagic Box, together with Confucius 4, demonstrated how AI is moving beyond basic Q&A towards executing more complex tasks across learning, work, and advertising scenarios.

Speaker #3: Beyond technological advances in user adoption, our AI capabilities also continued to gain recognition and support from authoritative bodies. In Q2, the Beijing Key Laboratory of Artificial Intelligence for Multilingual Translation, co-funded by Youdao, was officially launched.

Feng Zhou: Beyond technological advances and user adoption, our AI capabilities also continued to gain recognition and support from authoritative bodies. In Q2, the Beijing Key Laboratory of Multilingual Translation in Artificial Intelligence, co-funded by Youdao, was officially launched. Going forward, we will continue advancing end-to-end multilingual translation models and accelerate their application across learning, international conferences, and cross-border trade. I will now walk through the performance of each of our business lines during Q2.

Speaker #3: Going forward, we will continue advancing end-to-end multilingual translation models and accelerate their application across learning, international conferences, and cross-border trade. I will now walk through the performance of each of our business lines during the second quarter.

Speaker #3: Net revenues from learning services were RMB 795.6 million, up 20.9% year-over-year, primarily driven by the strong performance of Youdao Lingshi, one of our strategic focus areas.

Feng Zhou: Net revenues from learning services were RMB 795.6 million, up 20.9% year over year, primarily driven by the strong performance of Youdao Lingshi, one of our strategic focused areas. AI continued to play an increasingly important role across our learning ecosystem. Following the strong reception of our AI English essay grading feature launched in Q1, grading volume more than doubled sequentially in Q2. Together with AI-powered Quiz recommendation and college admission advisory services, these differentiated AI capabilities helped enhance the user experience and contributed to a retention rate of over 75% for Youdao Lingshi in Q2. For our programming courses, continued product upgrades and channel expansion helped to broaden the user base, while improvements in the learning experience supported a retention rate of over 75% in Q2.

Speaker #3: AI continued to play an increasingly important role across our learning ecosystem. Following the strong reception of our AI English essay grading feature, launched in the first quarter, grading volume more than doubled sequentially in Q2.

Speaker #3: Together with AI-powered CRIS recommendation and college admission advisory services, these differentiated AI capabilities helped enhance the user experience and contributed to a retention rate of over 75% for Youdao Lingshi in the second quarter.

Feng Zhou: Together with AI-powered Quiz recommendation and college admission advisory services, these differentiated AI capabilities helped enhance the user experience and contributed to a retention rate of over 75% for Youdao Lingshi in Q2. For our programming courses, continued product upgrades and channel expansion helped to broaden the user base, while improvements in the learning experience supported a retention rate of over 75% in Q2.

Speaker #3: For our programming courses, continued product upgrades and channel expansion helped broaden the user base, while improvements in the learning experience supported a retention rate of over 75% in the second quarter.

Speaker #3: Within learning services, our AI-driven subscription products generated approximately RMB 100 million in sales during the second quarter, up more than 20% year-over-year. Our AI simultaneous interpretation feature also maintained strong momentum, with user engagement increasing by approximately 100% year-over-year.

Feng Zhou: Within learning services, our AI-driven subscription products generated approximately RMB 100 million in sales during Q2, up more than 20% year over year. Our AI Simultaneous Interpretation feature also maintained strong momentum, with user engagement by approximately 100% year over year. We also launched what we believe is the world's first 14-language, cross-lingual, accent-free voice cloning technology, enabling rapid voice replication across languages while preserving the speaker's emotional characteristics. To support broad adoption, we open-sourced the model weights and tool chains for local deployment and commercial use, significantly lowering the barrier to multilingual content production. Meanwhile, HiEcho continued to perform strongly, with Q2 gross billings increasing by more than 100% year over year. The product also received positive feedback from both domestic and international users at WAIC. Turning to online marketing services, net revenues were RMB 584.4 million in Q2, down 7.7% year over year.

Speaker #3: We also launched what we believe is the world's first 14-language, cross-lingual, accent-free voice cloning technology, enabling rapid voice replication across languages while preserving the speaker's emotional characteristics.

Speaker #3: To support broad adoption, we open-sourced the model weights and toolchains for local deployment and commercial use. This significantly lowers the barrier to multilingual content production.

Feng Zhou: To support broad adoption, we open-sourced the model weights and tool chains for local deployment and commercial use, significantly lowering the barrier to multilingual content production. Meanwhile, HiEcho continued to perform strongly, with Q2 gross billings increasing by more than 100% year over year. The product also received positive feedback from both domestic and international users at WAIC. Turning to online marketing services, net revenues were RMB 584.4 million in Q2, down 7.7% year over year.

Speaker #3: Meanwhile, High Echo continued to perform strongly. With second quarter gross billings increasing by more than 100% year-over-year, the product also received positive feedback from both domestic and international users at WAIC.

Speaker #3: Turning to online marketing services, net revenues were RMB 584.4 million in the second quarter, down 7.7% year-over-year. The decline reflects our deliberate focus on higher-quality, higher-margin opportunities as we continue to prioritize the long-term health and profitability of the business. As a result, gross margin improved to 28.7%, up approximately 3 percentage points year-over-year.

Feng Zhou: The decline reflects our deliberate focus on higher quality, higher margin opportunities as we continue to prioritize the long-term health and profitability of the business. As a result, gross margin improved to 28.7%, up approximately 3 percentage points year-over-year. At the same time, we continue to make progress in client acquisition and retention, adding more than 100 new clients during the quarter and increasing advertiser retention by approximately 5 percentage points sequentially. Our AI application and short-form drama advertising businesses also maintain strong momentum, with revenues growing more than 50% year-over-year for the second consecutive quarter. On the product side, we recently launched the second generation of our AI ad placement optimizer, further improving advertising efficiency and quality. Unified account management provides centralized access across accounts, simplifying campaign operations. Automated push notifications delivers real-time data updates to help users respond more quickly.

Speaker #3: At the same time, we continued to make progress in client acquisition and retention, adding more than 100 new clients during the quarter and increasing advertiser retention by approximately 5 percentage points sequentially.

Speaker #3: Our AI application and short-form drama advertising businesses also maintained strong momentum, with revenues growing more than 50% year-over-year for the second consecutive quarter. On the product side, we recently launched the second generation of our AI app placement optimizer, further improving advertising efficiency and quality.

Feng Zhou: Our AI application and short-form drama advertising businesses also maintain strong momentum, with revenues growing more than 50% year-over-year for the second consecutive quarter. On the product side, we recently launched the second generation of our AI ad placement optimizer, further improving advertising efficiency and quality. Unified account management provides centralized access across accounts, simplifying campaign operations. Automated push notifications delivers real-time data updates to help users respond more quickly.

Speaker #3: Unified account management provides centralized access across accounts, simplifying campaign operations. Automated push notifications deliver real-time data updates to help users respond more quickly. Intelligent alerts provide 24/7 anomaly detection with second-level response times, helping reduce wasted ad spend and operational losses.

Feng Zhou: Intelligent alerts provides 24/7 anomaly detection with second-level response times, helping reduce wasted ad spend and operational losses. Together, these upgrades further enhance advertiser value and strengthen the long-term health of our ad marketing ecosystem. Moving to smart devices, improving profitability remains our primary objective. Net revenues were RMB86.8 million in the second quarter, down 31.5% year-over-year. While the overall operational health of the business continued to improve, our market position remains strong. During the 618 Shopping Festival, Youdao Dictionary Pen ranked the number 1 in sales in its category on both JD.com and Tmall for the seventh consecutive year. Our Youdao Tutoring Pen also receives recognition from several government authorities for its application of AI in education, including the Ministry of Education, the Cyberspace Administration of China, and the Ministry of Industry and Information Technology.

Speaker #3: Together, these upgrades further enhance advertiser value and strengthen the long-term health of our marketing ecosystem. Moving to smart devices, improving profitability remains our primary objective.

Speaker #3: Net revenues were RMB 806.8 million in the second quarter, down 31.5% year-over-year. While the overall health of the business continued to improve, our market position remains strong.

Feng Zhou: While the overall operational health of the business continued to improve, our market position remains strong. During the 618 Shopping Festival, Youdao Dictionary Pen ranked the number 1 in sales in its category on both JD.com and Tmall for the seventh consecutive year. Our Youdao Tutoring Pen also receives recognition from several government authorities for its application of AI in education, including the Ministry of Education, the Cyberspace Administration of China, and the Ministry of Industry and Information Technology.

Speaker #3: During the 6.18 shopping festival, Youdao Dictionary Pen ranked number one in sales in its category on both JD.com and Tmall for the seventh consecutive year.

Speaker #3: Our Youdao Tutoring Peng also received recognition from several government authorities for its application of AI in education, including the Ministry of Education, the Cyberspace Administration of China, and the Ministry of Industry and Information Technology.

Speaker #3: We also recently launched the Youdao Dictionary Peng X8, featuring an expanded database of 80 million authoritative words and AI-powered, photo-based tutoring across multiple subjects.

Feng Zhou: We also recently launched the Youdao Dictionary Pen X8, featuring an expanded database of 80 million authoritative words and AI-powered photo-based tutoring across multiple subjects. Initial market response has been positive. Looking ahead, we will continue to execute our AI-native strategy, leveraging our technical capabilities to deepen the application of vertical LLMs across learning and advertising. We will also continue expanding our portfolio of AI agents to enhance user experience and satisfaction, supporting further improvements in our key financial metrics in the H2 of the year. With that, I will hand the call over to Peng Su for a deeper dive into our financial results. Thank you.

Speaker #3: Initial market response has been positive. Looking ahead, we will continue to execute our AI-native strategy, leveraging our technical capabilities to deepen the application of vertical LLMs across learning and advertising.

Speaker #3: We will also continue expanding our portfolio of AI agents to enhance user experience and satisfaction, supporting further improvements in our key financial metrics in the second half of the year.

Speaker #3: With that, I'll hand the call over to Peng Su for a deeper dive into our financial results. Thank you.

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

Peng Su: Thank you, Dr. Zhou, and hello, everyone. Today I will be presenting some financial highlights from the Q2 of 2026. We encourage you to read through our press release issued earlier today for further details. For the Q2, total net revenue RMB1.5 billion, or US$216.2 million, representing a 3.5% increase from the same period of 2025. Net revenue from our learning services were RMB795.6 million, or US$117.3 million, representing a 20.9% increase from the same period of 2025. The year-over-year increase was primarily driven by the strong momentum of tutoring services compared with the same period of 2025. Net revenue from our smart devices were RMB86.8 million, or US$12.8 million, representing a 31.5% decrease from the same period of 2025, primarily due to the decline in demand for smart learning devices.

Speaker #1: For the second quarter, we reported net revenue of RMB 1.5 billion, or US$216.2 million, representing a 3.5% increase from the same period of 2025.

Speaker #1: Net revenue from our learning services was RMB 795.6 million, or $117.3 million, representing a 20.9% increase from the same period of 2025.

Peng Su: Net revenue from our learning services were RMB795.6 million, or US$117.3 million, representing a 20.9% increase from the same period of 2025. The year-over-year increase was primarily driven by the strong momentum of tutoring services compared with the same period of 2025. Net revenue from our smart devices were RMB86.8 million, or US$12.8 million, representing a 31.5% decrease from the same period of 2025, primarily due to the decline in demand for smart learning devices.

Speaker #1: The year-over-year increase was primarily driven by the strong momentum of tutoring services compared with the same period of 2025. Net revenue from our smart devices was RMB 86.8 million, or US$12.8 million, representing a 31.5% decrease from the same period of 2025.

Speaker #1: Primarily due to the decline in demand for smart devices and smart learning devices, net revenue from our online marketing services was RMB 584.4 million, or US$86.1 million, representing a 7.7% decrease from the same period of 2025.

Peng Su: Net revenue from our online marketing services was RMB584.4 million, or $86.1 million, representing a 7.7% decrease from the same period of 2025. The year-over-year decrease reflects the results of our disciplined strategic approach to engage acceptance, which places a greater emphasis on high ROI, return on investment engagements. Youdao believes this strategy has enhanced the overall operational efficiency of its business. For the second quarter, our total gross profits were RMB716.9 million, or $105.7 million, representing a 17.6% increase from the same period of 2025. Gross margin for learning services was 65.5% for the second quarter of 2026, compared with 59.8% for the same period of 2025. Gross margin for smart devices was 32.8% for the second quarter of 2026, compared with 41.5% for the same period of 2025.

Speaker #1: The year-over-year decrease reflects Youdao's disciplined strategic approach to engagement, which places greater emphasis on high ROI—return on investment—engagement. Youdao believes this strategy has enhanced the overall operational efficiency of its business.

Speaker #1: For the second quarter, our total gross profit was RMB 716.9 million, or US$105.7 million, representing a 17.6% increase from the same period of 2025.

Speaker #1: Gross margin for learning services was 65.5% for the second quarter of 2026, compared with 59.8% for the same period in 2025. Gross margin for smart devices was 32.8% for the second quarter of 2026, compared with 41.5% for the same period in 2025.

Peng Su: Gross margin for learning services was 65.5% for the second quarter of 2026, compared with 59.8% for the same period of 2025. Gross margin for smart devices was 32.8% for the second quarter of 2026, compared with 41.5% for the same period of 2025. Gross margin for online marketing services was 28.7% for the same quarter of 2026, compared with 25.8% for the same period of 2025. For the second quarter, our total operating expense was RMB605.3 million, or $89.2 million, compared with RMB580.6 million for the same period of last year.

Speaker #1: Gross margin for online marketing services was 28.7% for the second quarter of 2026, compared with 25.8% for the same period of 2025. For the second quarter, our total operating expenses were RMB 605.3 million, or US$89.2 million, compared with RMB 580.6 million for the same period last year.

Peng Su: Gross margin for online marketing services was 28.7% for the same quarter of 2026, compared with 25.8% for the same period of 2025. For the second quarter, our total operating expense was RMB605.3 million, or $89.2 million, compared with RMB580.6 million for the same period of last year. Looking at our expense in more detail, sales and marketing expense for the second quarter of 2026 was RMB424.1 million, compared with RMB401.8 million in the second quarter of 2025. Research and development expense for the second quarter of 2026 was RMB142 million, compared with RMB128.3 million in the second quarter of 2025. Our operating income margin was 7.6% in the second quarter of 2026, compared with 2% for the same period of last year.

Speaker #1: Looking at our expenses in more detail, sales and marketing expenses for the second quarter of 2026 were RMB 424.1 million, compared with RMB 401.8 million in the second quarter of 2025.

Peng Su: Looking at our expense in more detail, sales and marketing expense for the second quarter of 2026 was RMB424.1 million, compared with RMB401.8 million in the second quarter of 2025. Research and development expense for the second quarter of 2026 was RMB142 million, compared with RMB128.3 million in the second quarter of 2025. Our operating income margin was 7.6% in the second quarter of 2026, compared with 2% for the same period of last year.

Speaker #1: Research and development expense for the second quarter of 2026 was RMB 142 million, compared with RMB 128.3 million in the second quarter of 2025.

Speaker #1: Our operating income margin was 7.6% in the second quarter of 2026, compared with 2% for the same period of last year. For the second quarter of 2026, our net income equivalent to the ordinary shareholder was RMB 73.8 million, or US dollar 10.9 million, compared with net loss equivalent to the Youdao's 's ordinary shareholders of the 17.8 million for the same period of last year.

Peng Su: For the second quarter of 2026, our net income attributable to the ordinary shareholder was RMB73.8 million, or $10.9 million, compared with net loss attributable to the ordinary shareholders of RMB17.8 million for the same period of last year. Non-GAAP net income attributable to the ordinary shareholder for the second quarter was RMB9.6 million, or $13.4 million, compared with RMB12.5 million in the same period of last year. Basic and diluted net income per ADS attributable to the ordinary shareholder for the second quarter of 2026 was RMB0.62 or $0.09, and RMB0.61 or $0.09 respectively. Non-GAAP basic and diluted net income per ADS attributable to the ordinary shareholders for the second quarter was RMB0.76 or $0.11, and RMB0.75 or $0.11 respectively. Our net cash provided by operating activity was RMB334.2 million or $49.3 million for the second quarter.

Speaker #1: Non-GAAP net income attributable to ordinary shareholders for the second quarter was RMB 90.6 million, or US$13.4 million, compared with RMB 12.5 million in the same period last year.

Speaker #1: Basic and dilute net income per ADS equivalent to the ordinary shareholder for the second quarter of 2026 were RMB 0.62, or US dollar 0.09, and RMB 0.61, or US dollar 0.09, respectively.

Peng Su: Basic and diluted net income per ADS attributable to the ordinary shareholder for the second quarter of 2026 was RMB0.62 or $0.09, and RMB0.61 or $0.09 respectively. Non-GAAP basic and diluted net income per ADS attributable to the ordinary shareholders for the second quarter was RMB0.76 or $0.11, and RMB0.75 or $0.11 respectively. Our net cash provided by operating activity was RMB334.2 million or $49.3 million for the second quarter.

Speaker #1: Non-GAAP basic and diluted net income per ADS equivalent to the ordinary shareholders for the second quarter was RMB 0.76, or US dollar 0.11, and RMB 0.75, or US dollar 0.11, respectively.

Speaker #1: Our net cash provided by operating activity was RMB 334.2 million, or US dollar 49.7 million, for the second quarter. Looking at our balance sheet as of the June 30, 2026, our contract liability, which mainly consists of the total revenue generated from our learning services, were RMB 835.1 million, or US dollar 123.1 million, compared with RMB 847.7 million as of the December 31, 2025.

Peng Su: Looking at our balance sheet as of 30 June 2026, our contract liability, which mainly consists of the total revenue generated from our learning services, was RMB835.1 million or $123.1 million, compared with RMB847.7 million as of 31 December 2025. At the end of the period, our cash equivalents, current and non-current restricted cash, and short-term investments totaled RMB849.3 million or $125.2 million. This concludes our prepared remarks. Thank you for your attention. We would now like to open the call to your questions. Operator, please go ahead.

Speaker #1: At the end of the period, our cash, cash equivalents, current and non-current restricted cash, and short-term investments totaled RMB 849.3 million, or US$125.2 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.

Speaker #2: We will now begin the question-and-answer session. Last quick reminder: you may press *N1* on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the key.

Operator: We will now begin the question and answer session. To ask a question, you may press star and one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the key. To withdraw your question, please press star and two. At this time, we will pause momentarily to assemble our roster. Our first question comes from Brian Gong with Citi. Please go ahead.

Speaker #2: Please submit your question. Please press *star* then 2. At this time, we will pause momentarily to assemble our roster. Our first question comes from Brian Gong with Citi.

Speaker #2: Please go ahead.

Speaker #3: Good evening, management. Thanks for taking my question. I want to ask about the ongoing integration of the computers with large language models that build positive momentum across our business and financial performance.

Brian Gong: Good evening, management. Thanks for taking the question. I want to ask about the ongoing integration of the Confucius large language model capability, the costing long-term across our business and financial performance. I would like to ask management what is the costings of this model, and are there new product launches in the pipeline targeting this capability? Thank you.

Speaker #3: So, I would like to ask management: What is the core strength of this model, and are there new product launches in the pipeline targeting this capability?

Speaker #3: Thank you.

Speaker #4: Hello, Brian. Yes, I will take the question. For large language models, we focus on areas where we see strong user demand, significant potential for value creation, and also differentiated strengths for Youdao.

Peng Su: Hello, Brian. I will take the question. For large language models, we focus on areas where we see strong user demand, significant potential for value creation, and also differentiated strength for Youdao. In addition to translation, which has long been one of our core strengths, I would like to highlight two areas today: advanced voice and audio and mathematics learning. In both areas, we believe Youdao has significant strengths. For voice, we have seen strong user adoption for several years already. The success of our products HiEcho and Youdao Simultaneous Interpretation demonstrated clear demand for high quality, low latency voice interactions in both learning and communications. In Q2, user engagements with simultaneous interpretation increased by approximately 100% year over year. HiEcho's gross billings also grew by more than 100%. One recent development I want to highlight is Confucius4-TTS.

Feng Zhou: Hello, Brian. I will take the question. For large language models, we focus on areas where we see strong user demand, significant potential for value creation, and also differentiated strength for Youdao. In addition to translation, which has long been one of our core strengths, I would like to highlight two areas today: advanced voice and audio and mathematics learning. In both areas, we believe Youdao has significant strengths.

Speaker #4: In addition to translation, which has long been one of our core strengths, I'd like to highlight two areas today: advanced voice and audio, and mathematics learning.

Speaker #4: So in both areas, we believe Youdao has significant strength. For voice, we have seen strong user adoption for several years already. The success of our products, Hi Echo and Youdao Simultaneous Interpretation, has demonstrated clear demand for high-quality, low-latency voice interactions in both learning and communications.

Feng Zhou: For voice, we have seen strong user adoption for several years already. The success of our products HiEcho and Youdao Simultaneous Interpretation demonstrated clear demand for high quality, low latency voice interactions in both learning and communications. In Q2, user engagements with simultaneous interpretation increased by approximately 100% year over year. HiEcho's gross billings also grew by more than 100%. One recent development I want to highlight is Confucius4-TTS.

Speaker #4: In Q2, user engagements with simultaneous interpretation increased by approximately 100% year over year. So, while Hi Echo's gross billings also grew by more than 100%, one recent development I want to highlight is Confucius 4 TTS.

Speaker #4: As we discussed in our prepared remarks, this modern text-to-speech model supports cross-lingual, accent-free voice cloning across 14 languages, while preserving speaker identity and emotional expressions.

Peng Su: As we discussed in our prepared remarks, this modern text-to-speech model supports cross-lingual accent-free voice cloning across 14 languages while preserving speaker identity and emotional expressions. We see broad potential applications in areas such as cross-lingual learning, multilingual content creation, dubbing, and international communications for this model. We plan to launch more voice-related models and products in the coming months. The second area I want to highlight is mathematics. Mathematics is another very important focus for us. AI-driven math learning is highly demanded by users, and it is also an area where we have strong technology and learning expertise. Math is, we all know, a challenging subject for many learners, and it is foundational to almost all STEM disciplines. At the same time, students' needs in math learning are highly personalized and often

Feng Zhou: As we discussed in our prepared remarks, this modern text-to-speech model supports cross-lingual accent-free voice cloning across 14 languages while preserving speaker identity and emotional expressions. We see broad potential applications in areas such as cross-lingual learning, multilingual content creation, dubbing, and international communications for this model. We plan to launch more voice-related models and products in the coming months.

Speaker #4: So we see broad potential applications in areas such as cross-lingual learning, multilingual content creation, dubbing, and international communications. For this model, we plan to launch more voice-related models and products in the coming months.

Speaker #4: So, the second area I want to highlight is mathematics. Mathematics is another very important focus for us. AI-driven mass learning is highly demanded by users, and it's also an area where we have strong technology and learning expertise.

Feng Zhou: The second area I want to highlight is mathematics. Mathematics is another very important focus for us. AI-driven math learning is highly demanded by users, and it is also an area where we have strong technology and learning expertise. Math is, we all know, a challenging subject for many learners, and it is foundational to almost all STEM disciplines. At the same time, students' needs in math learning are highly personalized and often

Speaker #4: Math is, as we all know, a challenging subject for many learners, and it's foundational to almost all our STEM disciplines. At the same time, students' needs in math learning are highly personalized, and often revolve around very specific problems and knowledge gaps.

Feng Zhou: Resolve around very specific problems and knowledge gaps. This makes math learning a significant opportunity for AI to provide personalized explanation, to provide diagnosis, practice, and tutoring at scale. Confucius Four significantly improved modeling and reasoning for visual math and physics problems, particularly those involving complex diagrams. Going forward, we plan to introduce additional model capabilities and also AI agents for math learning, with similar opportunities across other STEM subjects. I am also pleased to share that we plan to launch multiple new AI agent and model products in September, next month. We will continue expanding our models and agent capabilities around these key areas. We look forward to share more very soon. Thank you.

Speaker #4: So this makes math learning a significant opportunity for AI to provide personalized explanations, as well as to provide diagnosis, practice, and tutoring at scale. Yeah, so Confucius 4 significantly improved multilingual reasoning for visual math and physics problems.

Speaker #4: Particularly those involving complex diagrams. Going forward, we plan to introduce additional model capabilities, as well as AI agents for math learning, with opportunities across other STEM subjects.

Feng Zhou: Going forward, we plan to introduce additional model capabilities and also AI agents for math learning, with similar opportunities across other STEM subjects. I am also pleased to share that we plan to launch multiple new AI agent and model products in September, next month. We will continue expanding our models and agent capabilities around these key areas. We look forward to share more very soon. Thank you.

Speaker #4: I'm also pleased to share that we plan to launch multiple new AI agent and model products in September, next month. We will continue expanding our models and agent capabilities around these key areas, so we look forward to sharing more very soon.

Speaker #4: Yeah, thank you.

Speaker #3: Thank you.

Peng Su: Thank you.

Brian Gong: Thank you.

Speaker #2: Our next question comes from Jing Wan with CICC. Please go ahead.

Operator: Our next question comes from Jing Wan with CICC. Please go ahead.

Jing Wan: Good evening, management. Thank you for taking my question. My question is also about AI, but it is more about AI features of Lingshi AI essay grading. We all know that Lingshi AI essay grading feature has earned widespread user recognition. Do you plan to further expand its AI-powered features in Lingshi in the future? Thanks.

Speaker #5: Good evening, management. Thank you for taking my question. My question is also about AI, but it's more about the AI features of Lingshu AI IC grading.

Speaker #5: We all know that Lingshu's AI IC grading feature has earned widespread user recognition. Do you plan to further expand its AI-powered features in Lingshu in the future?

Speaker #5: Thanks.

Speaker #3: Thank you. This is Feng Zhou. I will handle the question first. Yeah, and for the Lingshu, we will see the AI creating value for Lingshu in important ways.

Feng Zhou: Thank you. This is Feng Zhou, I will handle the question first. For Youdao Lingshi, we see AI creating values for Youdao Lingshi in two important ways, by improving the learning experience and also expanding what we can offer to the users, and by improving the scalability and operational efficiency of our services. Over the past four years, powered by our continuing investments on our large language model, Confucius, Youdao Lingshi has focused on resolving the core pain points across the learning and the college application scenarios. Through continuous product refinements and exploration of latest use case, we have built a comprehensive AI interactive courses and a service matrix. This platform empowers students to enhance their learning quality and efficiency, winning broad acclaim from our users. At the core learning features level, Youdao Lingshi has cracked the granular and personalized intelligence learning solutions.

Peng Su: Thank you. This is Feng Zhou, I will handle the question first. For Youdao Lingshi, we see AI creating values for Youdao Lingshi in two important ways, by improving the learning experience and also expanding what we can offer to the users, and by improving the scalability and operational efficiency of our services. Over the past four years, powered by our continuing investments on our large language model, Confucius, Youdao Lingshi has focused on resolving the core pain points across the learning and the college application scenarios.

Speaker #3: By improving the learning experience and also expanding what we can offer to the users, and by improving the scalability and operational efficiency of our services.

Speaker #3: Over the past four years, powered by our continuing investment in our large language model, Confucius, Youdao Lingshu has focused on resolving the core pain points across the learning and college application scenarios.

Speaker #3: Through continuous product improvements and exploration of the latest use cases, we have built comprehensive AI interactive courses and a service matrix. This platform empowers students to enhance their learning quality and efficiency, winning broad acclaim from our users.

Peng Su: Through continuous product refinements and exploration of latest use case, we have built a comprehensive AI interactive courses and a service matrix. This platform empowers students to enhance their learning quality and efficiency, winning broad acclaim from our users. At the core learning features level, Youdao Lingshi has cracked the granular and personalized intelligence learning solutions.

Speaker #3: At the core learning features level, Youdao Lingshu has crafted granular and personalized intelligent learning solutions. The first is about personalized learning path recommendations.

Peng Su: The first is about the personalized learning path recommendations. Centered around specific knowledge points, this function pinpoints a student's weak areas to generate a tailor-made learning plan. By targeting the shortfall directly and eliminating redundant practice, it boosts the learning efficiency a lot. Second is about the AI quiz recommendations. Leveraging individual learning profile within the Youdao Lingshi intelligence learning system, this feature dynamically recommendation adaptive exercise, helps students master core concepts through the application and the variations. The third is the AI essay grading for Chinese and English based on the explicit evaluation rubrics. This feature diagnoses writing flaws with high precision and provide targeted optimization suggestions, helping students to polish their writing skill efficiently. The last is the AI-based college admission advisors.

Speaker #3: Centered around specific knowledge points, this function pinpoints a student's weak areas to generate a tailor-made learning plan by targeting shortfalls directly and eliminating redundant practice.

Speaker #3: It boosts learning efficiency a lot. Second is about the AI quiz recommendations. Leveraging individual learning profiles, we think the Youdao Lingshu Intelligent Learning System features dynamic recommendations and adaptive exercises, helping students master core concepts through application and variation.

Peng Su: Leveraging individual learning profile within the Youdao Lingshi intelligence learning system, this feature dynamically recommendation adaptive exercise, helps students master core concepts through the application and the variations. The third is the AI essay grading for Chinese and English based on the explicit evaluation rubrics. This feature diagnoses writing flaws with high precision and provide targeted optimization suggestions, helping students to polish their writing skill efficiently. The last is the AI-based college admission advisors.

Speaker #3: And the third is the AI FA grading for Chinese and English. Based on explicit evaluation rubrics, these features diagnose writing flaws with high precision and provide targeted optimization suggestions, helping students to polish their writing skills efficiently.

Speaker #3: And the last is the AI-based college admission advisors. Extending beyond academic learning, Youdao Lingshu leverages a massive user base and extensive industry data to offer professional AI-based college application advisory services.

Peng Su: Extending beyond academic learning, Youdao Lingshi leverages its massive user space and extensive industry data to offer the professional AI-based college application advisory service. By assessing users' performance, strengths, interests, and risk preference, it intelligently generates multiple well-balanced application strategies to guide candidates in their decision-making process. Our retention metrics serve as a strong proof of our service capabilities. In Q2 of this year, Youdao Lingshi achieved a retention rate exceeding 75%, maintaining the industry leading level, and demonstrating high user satisfaction with our AI interactive courses. For us, AI is not simple addition features for Youdao Lingshi. It becomes important drivers of both users' value and business efficiency, helping us to improve the quality, scalability, and the long-term economics of our business. I hope I answered your questions. Thank you.

Speaker #3: By synthesizing users' performance, strengths, interests, and risk preferences, it intelligently generates multiple well-balanced application strategies to guide candidates in their decision-making process. Our retention metrics serve as strong proof of our service capabilities.

Speaker #3: In the second quarter of this year, Youdao Lingshu achieved a retention rate exceeding 75%, maintaining an industry-leading level and demonstrating high user satisfaction with our AI interactive courses.

Peng Su: In Q2 of this year, Youdao Lingshi achieved a retention rate exceeding 75%, maintaining the industry leading level, and demonstrating high user satisfaction with our AI interactive courses. For us, AI is not simple addition features for Youdao Lingshi. It becomes important drivers of both users' value and business efficiency, helping us to improve the quality, scalability, and the long-term economics of our business. I hope I answered your questions. Thank you.

Speaker #3: So for us, AI is not simply an additional feature for Lingshu. It has become an important driver of both user value and business efficiency, helping us to improve quality, scalability, and the long-term economics of our business.

Speaker #3: I hope to answer your questions. Thank you.

Speaker #5: Thanks. That's very clear.

Jing Wan: Thanks. That's very clear.

Speaker #2: The next question comes from Thomas Chong with Jeffrey. Please go ahead.

Operator: The next question comes from Thomas Chong with Jefferies. Please go ahead.

Speaker #6: Hi. Good evening. Thank you, management, for taking my question. Could management share the outlook for online marketing services in the third quarter? Thank you.

Thomas Chong: Hi. Good evening. Thanks management for taking my question. Could management share the outlook for online marketing services in Q1? Thank you.

Speaker #3: Hi, this is Jing Lei. Thank you for your questions. In the second quarter, our advertising business became more profitable, with gross margin improving by about 3 percentage points.

Lei Jin: Hi, this is Lei Jin. Thank you for your questions. In Q2, our advertising business became more profitable, with the gross margin improving by about 3 percentage points. We expect gross margin to continue improving year-over-year in Q3. Our online marketing revenue grew from about RMB100 million in Q1 2022 to about RMB600 million per quarter in H1 of this year.

Speaker #3: We expect gross margin to continue improving year over year in the third quarter. Our online marketing revenue grew from about RMB 100 million in the first quarter of 2022 to about RMB 600 million per quarter in the first half of this year.

Lei Jin: Our online marketing revenue grew from about RMB100 million in Q1 2022 to about RMB600 million per quarter in H1 of this year. This growth was driven by our continued investment in AI and data capabilities, which have helped us expand into new business opportunities. Whenever we capture key opportunities, revenue experiences rapid acceleration in the subsequent quarters. In Q3, we will focus on the three areas. The first one, strengthening our AI plus advertising capabilities. We are integrating AI into all parts of our advertising businesses through our priority vertical RRM. One is KOL marketing. After upgrading InfunEase in Q1, we plan to launch an overseas KOL marketing agent in Q3 to help Chinese companies reach global markets more efficiently. The other is programmatic advertising.

Speaker #3: This growth was driven by our continued investment in AI and data capabilities, which has helped us expand into new business opportunities. Whenever we capture key opportunities, revenue experiences rapid acceleration in the subsequent quarters.

Lei Jin: This growth was driven by our continued investment in AI and data capabilities, which have helped us expand into new business opportunities. Whenever we capture key opportunities, revenue experiences rapid acceleration in the subsequent quarters. In Q3, we will focus on the three areas. The first one, strengthening our AI plus advertising capabilities. We are integrating AI into all parts of our advertising businesses through our priority vertical RRM. One is KOL marketing.

Speaker #3: In the third quarter, we will focus on three areas. The first one is strengthening our AI plus advertising capabilities. We are integrating AI into all parts of our advertising business through our priority vertical LLM.

Speaker #3: By its KOL marketing, after upgrading Infinites in the first quarter, we plan to launch an overseas KOL marketing agent in the third quarter to help Chinese companies reach global markets more efficiently.

Lei Jin: After upgrading InfunEase in Q1, we plan to launch an overseas KOL marketing agent in Q3 to help Chinese companies reach global markets more efficiently. The other is programmatic advertising. Launched in Q2, our second-generation AI ad placement optimizer improved traffic matching and helped increase targeting accuracy and operating efficiency. The second, expanding our advertiser base. With the support of our team and AI capabilities, we added more than 100 new advertisers in Q2.

Speaker #3: The other is programming advertising. Launching in the second quarter, our second-generation AI ad placement optimizer improves traffic matching and helps increase targeting accuracy and operating efficiency.

Lei Jin: Launched in Q2, our second-generation AI ad placement optimizer improved traffic matching and helped increase targeting accuracy and operating efficiency. The second, expanding our advertiser base. With the support of our team and AI capabilities, we added more than 100 new advertisers in Q2. In Q3, we will focus on fast-growing sectors such as AI applications and short-form dramas, both in China and overseas. The third, improving profitability. We will continue to improve gross margins through two initiatives: using Youdao iMagicBox to reduce the cost of producing advertising creatives, and using the AI ad placement optimizer to identify more cost-effective traffic. In summary, over the medium to long term, we will continue to apply AI to programmatic advertising and KOL marketing. This will help improve advertiser ROI while supporting our growth in both revenue and profitability.

Speaker #3: The second, expanding our advertiser base. With the support of our team and AI capabilities, we added more than 100 new advertisers in the second quarter. In the third quarter, we will focus on fast-growing sectors such as AI applications and short-form dramas.

Lei Jin: In Q3, we will focus on fast-growing sectors such as AI applications and short-form dramas, both in China and overseas. The third, improving profitability. We will continue to improve gross margins through two initiatives: using Youdao iMagicBox to reduce the cost of producing advertising creatives, and using the AI ad placement optimizer to identify more cost-effective traffic. In summary, over the medium to long term, we will continue to apply AI to programmatic advertising and KOL marketing.

Speaker #3: Both in China and overseas. Third, improving profitability. We will continue to improve gross margins through two initiatives: using Youdao AI Magic Box to reduce the cost of producing advertising creatives, and using the AI Ad Placement Optimizer to identify more cost-effective traffic.

Speaker #3: In summary, over the medium to long term, we will continue to apply AI to programmatic advertising and KOL marketing. This will help improve advertisers' ROI while supporting our growth in both revenue and profitability.

Lei Jin: This will help improve advertiser ROI while supporting our growth in both revenue and profitability. In the short term, we will continue to prioritize profitable and sustainable growth over rapid expansion. We will also keep upgrading our advertising and KOL marketing tools to support future growth.

Speaker #3: In the short term, we will continue to prioritize profitable and sustainable growth over rapid expansion. We will also keep upgrading our advertising and KOL marketing tools to support future growth.

Lei Jin: In the short term, we will continue to prioritize profitable and sustainable growth over rapid expansion. We will also keep upgrading our advertising and KOL marketing tools to support future growth. Thank you.

Speaker #3: Thank you.

Thomas Chong: Thank you.

Speaker #2: Our last question comes from the line of Bo Chan with Hugh Tai Securities. Please go ahead.

Operator: Our last question comes from the line of Bo Chan with Haitong Securities. Please go ahead.

Speaker #6: Hi. Thanks for taking my question. This is Chan Bo from Hua Tai. Could management share the outlook for gross margin in the third quarter?

Bo Chan: Go ahead. Thanks for taking my question. This is Chan Bo from Hutai. Could Management share the outlook for gross margin in Q3, please? Thank you.

[Analyst] (Hutai Securities): Go ahead. Thanks for taking my question. This is Chan Bo from Hutai. Could Management share the outlook for gross margin in Q3, please? Thank you.

Speaker #6: Thank you.

Yongwei Li: Thank you, Chan Bo. This is Wayne Li. I will take your question. As reflected in our financial results, we delivered impressive performance in gross margin level, reaching 47% in the H1 of this year, representing a year-over-year improvement of around 2 percentage points. Especially gross margin for online marketing services and learning services expanded by 1 percentage point and 3 percentage points year-over-year respectively. I will give more details on the reason why for the improvements on the profitability and its outlook by segment. First, in terms of online marketing services, the margin expansion in our advertising business stems from the decisive execution of our AI-native strategy and profitability priority discipline. As for AI-native strategy, the agents such as the AI ad placement optimizer and iMagicBox have significantly boosted productivity across ad planning, user profiling, and creative asset production.

Wayne Li: Thank you, Chan Bo. This is Wayne Li. I will take your question. As reflected in our financial results, we delivered impressive performance in gross margin level, reaching 47% in the H1 of this year, representing a year-over-year improvement of around 2 percentage points. Especially gross margin for online marketing services and learning services expanded by 1 percentage point and 3 percentage points year-over-year respectively.

Speaker #3: Thank you, Chan Bo. This is Wen Lin. I will take your question. As reflected in our financial results, we delivered an impressive performance at the gross margin level.

Speaker #3: Reaching 47% in the first half of this year, we're presenting a year-over-year improvement of around 2 percentage points. Specifically, gross margin for online marketing services and learning services expanded by 1 percentage point and 3 percentage points year over year, respectively.

Speaker #3: I will give more details on the reason why for the improvements in profitability and its outlook by segment. First, in terms of online marketing services, the margin expansion in our advertising business stems from the deficit expulsion of our AI-native strategy.

Wayne Li: I will give more details on the reason why for the improvements on the profitability and its outlook by segment. First, in terms of online marketing services, the margin expansion in our advertising business stems from the decisive execution of our AI-native strategy and profitability priority discipline. As for AI-native strategy, the agents such as the AI ad placement optimizer and iMagicBox have significantly boosted productivity across ad planning, user profiling, and creative asset production.

Speaker #3: And profitability, priority, discipline. As for our AI-native strategy, agents such as the AI ad placement optimizer and the AI Magic Box have significantly boosted productive gross ad planning, user profiling, and creative asset production.

Speaker #3: As for our profitability priority approach, we proactively went after certain ad opportunities with relatively low ROI, focusing our resources instead on campaigns that deliver higher value to users.

Lei Jin: As for profitability priority approach, we proactively prevent certain ad opportunities with relatively low ROI, focusing our resources instead on campaigns that deliver higher value to users. Second, learning services. The improvements in learning services gross margin was primarily driven by AI-enhanced learning efficiency and scaling benefits. On the AI empowerment side, features such as AI essay grading for Chinese and English, and AI quiz recommendation have been widely adopted. These tools effectively elevated the efficiency of our teaching assistants, which in turn boosted both student retention rate and gross margin.

Wayne Li: As for profitability priority approach, we proactively prevent certain ad opportunities with relatively low ROI, focusing our resources instead on campaigns that deliver higher value to users. Second, learning services. The improvements in learning services gross margin was primarily driven by AI-enhanced learning efficiency and scaling benefits. On the AI empowerment side, features such as AI essay grading for Chinese and English, and AI quiz recommendation have been widely adopted.

Speaker #3: Second, learning services. The improvements in learning services gross margin were primarily driven by AI-enhanced learning efficiency and scaling benefits. On the AI empowerment side, features such as AI asset grading for Chinese and English, and AI quiz recommendation, have been widely adopted.

Speaker #3: These tools effectively elevated the efficiency of our teaching assistants, which in turn boosted both student retention rate and gross margin. On the economics of scale side, as cost per revenue has steadily declined since the second half of 2025.

Wayne Li: These tools effectively elevated the efficiency of our teaching assistants, which in turn boosted both student retention rate and gross margin. On the economics of scale side, as cost revenue has steadily climbed since the H2 of 2025, we expect the economic of scale in learning services to become even more pronounced throughout 2026, which drives further gross margin expansion. Third, as aspect of smart devices.

Yongwei Li: On the economics of scale side, as cost revenue has steadily climbed since the H2 of 2025, we expect the economic of scale in learning services to become even more pronounced throughout 2026, which drives further gross margin expansion. Third, as aspect of smart devices. Similar to the broader consumer electronic industry, our smart devices segment has faced the cost pressure from the rising memory cost, alongside a reduction in hardware economic of scale. Consequently, the gross margin for smart devices stood at around 37% in the H1 of this year, down roughly 11 percentage points year-over-year. Although memory costs are likely to maintain elevated in the near term, architecture and engineering improvements designed to reduce memory reliance will meaningful mitigate margin compression.

Speaker #3: We expect the economics of scale in learning services to become even more pronounced throughout 2026, which drives further gross margin expansion. Third, as expected of smart devices, similar to the broader consumer electronics industry, our smart devices segment has faced cost pressure from rising memory costs.

Wayne Li: Similar to the broader consumer electronic industry, our smart devices segment has faced the cost pressure from the rising memory cost, alongside a reduction in hardware economic of scale. Consequently, the gross margin for smart devices stood at around 37% in the H1 of this year, down roughly 11 percentage points year-over-year. Although memory costs are likely to maintain elevated in the near term, architecture and engineering improvements designed to reduce memory reliance will meaningful mitigate margin compression.

Speaker #3: Alongside a reduction in hardware economics of scale. Consequently, the gross margin for smart devices stood at around 37% in the first half of this year, down roughly 11 percentage points year over year.

Speaker #3: Also, memory costs are likely to remain elevated in the near term. Architecture and engineering improvements designed to reduce memory reliance will meaningfully mitigate margin compression.

Yongwei Li: With new product launch planned for the Q3, we anticipate the gross margin of smart devices to recover to over 40% in the H2 of the year, narrowing the year-over-year decline. Looking ahead, we will further deepen the AI-native strategy and broaden LLM integration across all product lines, while maintain rigorous cost and operation efficiency optimization. This strategy will maintain central throughout 2026, giving us confidence in delivering general growth margin performance and achieving meaningful breakthroughs at the operating profit level in H2 of 2026. Hope the information mentioned is helpful. Thank you.

Wayne Li: With new product launch planned for the Q3, we anticipate the gross margin of smart devices to recover to over 40% in the H2 of the year, narrowing the year-over-year decline. Looking ahead, we will further deepen the AI-native strategy and broaden LLM integration across all product lines, while maintain rigorous cost and operation efficiency optimization. This strategy will maintain central throughout 2026, giving us confidence in delivering general growth margin performance and achieving meaningful breakthroughs at the operating profit level in H2 of 2026. Hope the information mentioned is helpful. Thank you.

Speaker #3: With new product launches planned for the third quarter, we anticipate that the gross margin of smart devices will recover to over 40% in the second half of the year.

Speaker #3: Narrowing the year-over-year decline. Looking ahead, we will further deepen the AI-native strategy and broaden LLM integration across all product lines, while maintaining rigorous cost and operational efficiency optimization.

Speaker #3: This strategy will remain central throughout 2026, giving us confidence in delivering stronger gross margin performance and achieving meaningful breakthroughs at the operating profit level in the second half of 2026.

Speaker #3: Hope the information mentioned is helpful. Thank you.

Speaker #2: This is your gentleman. This concludes our question and answer session. I would like to turn the conference back over to the management for any closing remarks.

Operator: Ladies and gentlemen, this concludes our question and answer session. I would like to turn the conference back over to the management for any closing remarks.

Speaker #3: 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 U.S.

Yongwei Li: 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: 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 #3: Have a great day.

Operator: Ladies and gentlemen, the conference has now concluded. Thank you for attending today's presentation. You may now disconnect. Goodbye.