Youdao Inc - ADR Aktie

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.

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, sub statements and 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 these discussions.

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 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. For the definition of non-GAAP financial measures and reconciliations of GAAP to non-GAAP financial results, please see the 2026 4th quarter financial results news release issued earlier today.

As a reminder, this conference is being recorded. The 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 us senior management are Dr. Feng Zhou, our Chief Executive Officer; Mr. Lei Jin, our President; Mr. Peng Su, our Senior VP; and Mr. Wayne Li, our VP of Finance. I will now turn the call over to Dr. Zhou to review some of our recent highlights and strategic direction.

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. We've now 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 quarter of operating profitability 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.

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. We continue to advance the AI technologies that drive our business for us. Just this week, we released Confucius 4 for our open source learning large language model. Its most important new feature is multi-model inputs, enabling industry-leading capabilities in solving and teaching K-12 subjects that require visual understanding, such as geometry. We also released EmotiVoice 2, 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, 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. Youdao Lingshi maintained strong momentum with gross billings growing by over 20% year-over-year in Q1. For the 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 assistance. Early adoption has been encouraging with approximately 10,000 essays graded by AI to date. Our programming cost has maintained strong momentum in the first quarter with gross billings growing by over 20% year-over-year. 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 2 Bronze models 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 are continued their robust growth trajectory. In the first quarter, total sales exceeded 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 2 new AI agent products. 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 surpass 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-run 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 continue to upgrade our core applications. The AI simultaneous interpretation feature in Youdao dictionary and Youdao desktop translation saw user engagement increased by over 100% year-over-year. This growth was driven by 2 key upgrades. First, the deployment of our Confucius 3 translation in which reduces the license by approximately 50%. And second, the evolution of the features from a translation to 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 8 out of the 16 AI tracked language categories, demonstrating the strength of our AI translation systems. In the first quarter, 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 remains a core advertising vertical and continue to demonstrate resilience and steady growth. 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.

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 InfunEase, our one-stop AI platform for KOL marketing. The upgrades focused on 2 key areas: first, workflow synergies. InfunEase now enables brands to manage the full collaboration life cycle from top-tier influencers to POCs 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, InfunEase has received positive feedback from KOLs and marketers. 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, marking the second consecutive quarter of sequential improvement.

Turning to our Smart Devices segment. Net revenues were RMB 1.09.4 million in the first quarter, down 42.6% year-over-year. We continue to exercise operational discipline in the 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 ad tech 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. Looking ahead, we remain firmly committed to our AI native strategy by continually refining our vertical LLMs for learning and advertising and expanding our AI agent matrix. We are enhancing our 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'll hand the call over to Su Peng for deeper dive into our financial results. Thank you.

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 issued earlier today for further details. For the first quarter, total revenue of RMB 1.3 billion or USD 195.4 million, representing a 3.8% increase from the same period of 2025. Net revenue from our learning services for RMB 627.5 million or USD 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 USD 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 the first quarter of 2026.

Net revenue from our online marketing services were RMB 611.1 million or USD 88.6 million, representing a 20.9% increase from the same period of 2025. The year-over-year increase was mainly attributable to the increased demand for performance-based advertisements through the third parties' Internet properties, which was driven by our continued investment in AI technology. For the first quarter, our total gross profit was RMB 602.3 million or USD 87.3 million, largely flat compared with the same period of 2025. Gross margin for learning services was 60.2% for the first quarter of 2026 compared with 59.8% for the same period of 2025.

Gross margin for smart devices was 39.9% for the first quarter of 2026 compared with 52.3% for the same period of 2025. Gross margin for online marketing services was 29.6% for the first quarter of 2026 compared with 30.5% for the same period of 2025. For the fourth quarter, our total operating expense were RMB 544.8 million or USD 79 million compared with RMB 510.2 million for the same period of last year.

Looking at our expense in more detail. Sales and marketing expense for the first quarter of 2026 were RMB 382.2 million compared with RMB 357.6 million in the first quarter of 2025. Research and development expense for the first quarter of 2026 were RMB 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 of last year. For the first quarter of 2026, our net income attributable to ordinary shareholders were RMB 38.6 million or USD 5.6 million compared with RMB 76.7 million for the same period of last year. Non-GAAP net income attributable to the ordinary shareholders for the first quarter was RMB 44.9 million or USD 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 ordinary shareholders for the first quarter of 2026 were RMB 0.33 or USD 0.05, and RMB 0.32 or USD 0.05, respectively. Non-GAAP basic and diluted net income per ADS attributable to the ordinary shareholders for the first quarter was RMB 0.38 or USD 0.06 and RMB 0.37 or USD 0.05, respectively. Our net cash used in operating activity was RMB 93.1 million or USD 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 Youdao's learning services were RMB 667 million or USD 96.7 million compared with RMB 847.7 million as of December 31, 2025. At the end of the period, our cash, cash equivalents, current and noncurrent restricted cash and short-term investments totaled RMB 515.2 million or USD 74.7 million. This concludes our prepared remarks. Thank you for your attention. We would now like to open the call for your questions. Operator, please go ahead.

[Operator Instructions]

Today's first question comes from Brian Gong at Citigroup.

Congratulations on decent results. So my question is about our AI. So we have noticed that Youdao launched LobsterAI and Youdao Baoku in the fourth quarter. Could the management share the strategy regarding your AI applications?

Thank you, Brian. AI applications are clearly gaining momentum in 2026, driven by the positive growth of both AI chat and AI coding in recent months. 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.

The first dimension is models and algorithms. So it is increasingly clear that beyond the foundation models, there are significant opportunities in not pretraining but post training, fine-tuning reimbursement learning and development of vertical and specialized purpose built models. So this is where we are focused at. So our goal is to -- in the model area is to basically build specialized models that deliver unique intelligence for our users and customers. 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. So one of its most important feature is vision input. There has been, specially trained for education scenarios. So what this does is, this enables strong capabilities in solving and explaining problems that requires a vision input. For example, the geometry questions, geometry prompts. So this direct supports our K-12 learning products as mass and geometry and all these are different visualized problems are really, really important for students.

So 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 1/10 of the cost of general purpose large language model. So making it highly suitable for large-scale commercial deployments of these really, really popular kind of live translation and voice interpretation services, which has become more and more popular. So the second dimension is applications. So LobsterAI and now are both exciting new products. So comparing with our early AI products, these 2 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. So LobsterAI is a personal desktop system that can support a wide range of use cases from creative exploration to productivity in professional settings. So Youdao Baoku in contrast is more specialized that focuses on deep research and personal knowledge management.

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. So beyond these 2 new products, our existing applications also continued to perform well. So AI simultaneous interpretation of Youdao dictionary and translation maintained a strong growth in Q1. So also recently, we added voice-to-voice live translation feature. So expanding beyond the existing voice to text life translation. So sales of AI simultaneous interpretation grew by over 100% year-over-year for the second consecutive quarter in Q1. Another one of our apps is Scholar AI or [Foreign Language] . That's also an AI agent for -- it's 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. So with the rapid growth of AI capabilities, so academic integrity in this setting has become increasingly important.

So in Q1, Scholar AI achieved a pretty remarkable sales growth of over 200% year-over-year. So the third and last dimension of how we kind of use AI is making Youdao ourselves AI native. So this is equally important. In the AI area, companies need to become AI native internally, not just to launch AI products externally. So this requires continuous iteration across our workflows, systems and organizational practices. 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. So this transformation has accelerated meaningfully since the end of last year. 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 team's work, our tutors in this case. So we are also working on multiple projects to AI enable our internal IT systems for education businesses.

So finally, we recently received -- released ThinkFlow, an aggregation platform for AI inference 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. So we build 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' setting. So overall, AI is core to our strategy and our next stage of growth. So 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. So we're also creating new opportunities for sustainable revenue growth. profitability and cash flow improvements. Yes, I hope that answers your question.

And our next question today comes from Liping Zhao with CICC.

I'm curious about the retention for Youdao Lingshi. Could management share some color on the recent updates

Thank you, Brenda. I will handle the question first if anyone have one more comment. And yes, before we talk about recent retention performance, I want to emphasize from the midterm to long-term perspective about the top-level policy design has already unlocked an expensive growth runway for Youdao Lingshi. First, according to the education powerhouse construction plan, [Foreign Language] and the 2026 government work report, there is a clear mandate to accelerate the expansion of high school educational resources.

Furthermore, during the 15th 5-year plan period, is expected to add over 2 million new high school seats. That has been publicly released to the -- recently. And this capacity expansion will trigger the structural growth in high school educational demand. As a pioneer deeply rooted in these sectors, Youdao Lingshi is uniquely positioned to be a primary benefit of this policy-driven scale dividend. In the first quarter, we launched the English AI essay grading features. It immediate market a claim that an over 20% year-over-year increase from the gross billing, serving as a powerful validation of our products' efficiency and market competitiveness.

Then 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 the retention is a testament to the users' recognization of our AI interactive learning formats and high-quality services. It also solid the foundations for the growth in the Q2 and through the full year. Looking ahead, we will continue to leverage our Confucius large language model to deepen our footprint in the differentiated AI interactive learning format.

We are committed to expanding the AI application across the entire learning life cycle from diagnostics assessments and personalized learning path to knowledge expansion, QA and college entrance consultant services. Our goal is to bridge the gap between the technology and the accessibilities, bring the efficiency of the AI-driven learning to more users nationwide. I hope that answers your question.

And our next question today comes from Thomas Chong at Jefferies.

Could management provide an outlook for the advertising business in Q2.

This is [indiscernible] The rapid of our advertising business in this new year is at its core, driven by our AI revolution. AI agents like AI MagicBox have revolutionized the AD creative efficiency, while the AI AD placement optimizer have significantly boosted ROI through position providing 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 p growth engine for us. In the first quarter of this year, the momentum remains unabated with 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 advertising. Our we empowered programmatic advertising and KOL marketing through our priority vertical ADRM, achieving a high efficiency [indiscernible] between people and business content. We will focus our strategic lay out on following high potential verticals. The first one is gaming. This remains our cornerstone.

By combining [indiscernible] 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 this will be the core incremental growth driver. The global explosion of RM and AI agents has created a surge in demand for position user acquisition. Our programmatic capabilities are a perfect fit for those digital products. The third is globalizing Chinese brand. There is a robust demand for the Chinese manufacturers and 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.

The fourth is social apps and finance. We will leverage our expertise in data security and content ADS placement to address the high barrier marketing needs of those sectors. In addition, I would like to highlight that the advertising business is expected to remain the primary contributor to our operating profit.

And our next question today comes from Bo Zhang at Huai Tai Securities.

This is [indiscernible] from My question is, could management elaborate on the seasonality of operating profits?

Thank you, [indiscernible] 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 second half year H2 pattern with the third quarter usually being our annual peak. This pattern is primarily attributable to the following factors by segment. In terms of advertising, H2 is bolstered 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. 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 the second half of the year 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 anomaly due to our strategic restructuring of learning services. We proactively focused on Youdao Lingshi while scaling back investment in STEM and add-up 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. This results in typically 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 Lingshi. We increased investment in marketing and R&D resources. Despite the robust revenue performance in H2, operating profit is relatively low in the second half of 2025. For 2026 this year, we expect the profit cadence 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 generated net outflow in Q1 and Q3 with a peak customer acquisition phase and inflow in Q2 and Q4, which a 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.

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.

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 Pearson Financial Communications in China or the U.S. Have a great day.

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.

Good day, and welcome to Youdao's Fourth Quarter 2025 and Full Year 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.

Thank you, operator. Please note the discussion today will contain forward-looking statements related to the future performance of the company, which are intended to qualify for the safe harbor from liability as established by the 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 purpose only. For the definitions of non-GAAP financial measures and reconciliations of GAAP to non-GAAP financial results, please see the 2025 fourth quarter and full year 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's senior management are Dr. Feng Zhou, our Chief Executive Officer; Mr. Lei Jin, our President; Mr. Peng Su, our Senior VP; and Mr. Wayne Li, our VP of Finance. I will now turn the call over to Dr. Zhou to review some of our recent highlights and strategic direction.

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. In the fourth quarter, both net revenues and cash flow showed strong improvement. Net revenues reached RMB 1.6 billion, a 16.8% year-over-year increase. This growth was primarily driven by the Learning Services segment returning to a growth trajectory, combined with the sustained strong performance of our online marketing services.

Net cash flow from operating activities for the quarter was RMB 184.2 million, up 16.4% year-over-year. Our operating profit for the fourth quarter was RMB 60.2 million, marking our sixth consecutive quarters of operating profitability, representing an increase of 113% quarter-over-quarter and a decrease of 28.5% year-over-year.

For the full year 2025, our key financial performance demonstrated positive momentum across the board. Total net revenues for the year reached RMB 5.9 billion, an increase of 5% year-over-year. Operating profit grew to RMB 221.3 million, up 48.7% year-over-year. Notably, 2025 marked the first year we achieved full year net cash flow -- net cash inflow from operating activities totaling RMB 55.2 million. This compared with a net cash outflow of RMB 67.9 million in 2024. This milestone reflects continued improvements in our competitiveness and operating efficiency and fulfills the financial objectives we set at the beginning of the year. I will now walk through the performance of each business line during the fourth quarter.

Starting with Learning Services. Fourth quarter net revenues reached RMB 727.2 million, representing a 17.7% year-over-year increase. This performance reflects a clear return to growth following the successful completion of our strategic restructuring. Within the segment, digital content services contributed RMB 436.1 million, up 12.2% year-over-year.

Youdao Lingshi continued to perform well with revenue surging over 40% year-over-year. Retention rates exceeded 75%, representing an improvement of approximately 5 percentage points. These results demonstrate meaningful progress in both scale and user satisfaction.

Technological innovation remains central to our product competitiveness. During the quarter, Youdao Lingshi was recognized by CNR as the "2025 Industry Benchmark Education Group." This recognition affirms our leadership position and reflects our continued investment in education technology. Building on the successful launch of our Chinese AI Essay grading feature, we plan to introduce an English AI Essay grading tool in the near future, powered by our proprietary large language model, Confucius and aligned with rigorous examination standards. This tool is designed to help students improve their writing proficiency and quality.

Our programming course also delivered strong results. Continuous product upgrades drove a 50% year-over-year increase in gross billings for the fourth quarter, supported by retention rates above 75%. Importantly, student achievements remain a key measure of success. In 2025, hundreds of our students achieved top results in the NOIP and the CSP-J and -S finals, validating the quality and effectiveness of our programming curriculum.

Within the Learning Services segment, AI-driven subscription services delivered particularly strong performance. Fourth quarter sales exceeded RMB 100 million, representing an over 80% year-over-year increase. For the full year 2025, total sales approached RMB 400 million, a record high with annual growth exceeding 50%. This growth reflects both the expansion of our product portfolio and sustained demand for high-quality AI-powered apps.

We're driving this momentum through 2 primary avenues. First, we are expanding into new market segments through innovative applications. In 2025, we launched Scholar AI, an integrated AI-powered plagiarism detection and writing refinement application. In the fourth quarter, its sales doubled quarter-over-quarter. We have also recently entered into an official partnership with Turnitin, the global leader in academic and research integrity, which we expect to further accelerate adoption.

Second, we continue to enhance our core applications. The AI simultaneous interpretation feature within Youdao Dictionary and Youdao Desktop Translation achieved over 100% year-over-year sales growth in the fourth quarter. These innovations were recognized with multiple industry awards, including QubitAI, "Outstanding AI Product" and "China AI Product of the Year."

Turning to online marketing services. Fourth quarter net revenues reached RMB 660.9 million, up 37.2% year-over-year. Growth was driven by increased demand from the NetEase Group as well as overseas markets, supported by our continued investments in AI technology.

This growth was broad-based across multiple verticals. In gaming, stronger collaboration with NetEase Group and expansion of third-party clients drove a 50% year-over-year increase in advertising revenue. At the same time, we are capitalizing on the AI boom. Rapid advances in large language models have fueled marketing demand for many high-growth AI apps. By positioning ourselves early as a preferred marketing partner in this trend, we achieved significant gains in client acquisition, resulting in revenue growth of over 50% for the quarter.

International performance was also strong. Overseas KOL revenues increased by more than 50% year-over-year in the fourth quarter. In 2025, we successfully executed campaigns in over 50 countries. Our global capabilities were recognized by TikTok for Business, which named Youdao Ads as its "2025 Influencer Agency Game Industry Pioneer List", TikTok for Business 2025, further reinforcing our leadership in global digital marketing.

Gross margin for the online marketing segment was 27.8% in the fourth quarter, representing a 2 percentage point sequential improvement despite a year-over-year decline. This reflects 2 deliberate strategic choices. First, we prioritized client acquisition with new clients accounting for approximately 30% of our advertisers this quarter. While margins are typically lower during onboarding, these partnerships provide a foundation for long-term value creation.

Second, we are beginning to see margin expansion from technological upgrades. The launch of our second-generation AI Ad Placement Optimizer, which integrates automated creative production has begun to improve both advertising efficiency and profitability.

In the Smart Devices segment, fourth quarter net revenues were RMB 176.5 million, down 26.6% year-over-year. We continue to focus on improving this segment's overall operational health and made significant progress in 2025.

Our flagship Youdao Dictionary Pen remained the top-selling product on JD.com and Tmall during the November 11 shopping festival for the sixth consecutive year. Meanwhile, we continue to enhance the Youdao Tutoring Pen launched earlier in 2025, adding features such as intelligent knowledge cards and upgraded AI-powered video explanations. Since launch, the system has generated over 600,000 videos. User engagement has been encouraging with active users accessing tutoring features more than 10 times per day in the fourth quarter.

In summary, 2025 has been a year of comprehensive progress driven by our AI-native strategy. From the strong performance of our advertising business enabled by the AI Ad Placement Optimizer to improve user retention and engagement across our learning services, we have demonstrated that technological innovation translates directly into user value and commercial results.

Our expanding portfolio of AI subscription and device products, including Youdao simultaneous interpretation, Scholar AI, Anydub and the AI Tutoring Pen have broadened our reach to new user segments. Financially, we maintained strong discipline, delivered meaningful profitability growth and our first ever full year of net operating cash inflow. This milestone underscores the sustainability and resilience of our business model.

Looking ahead, we remain firmly committed to our AI-native strategy with a clear focus on advancing our learning services and advertising businesses. We will continue developing high-performance vertical large language models tailored to user needs while actively capturing emerging opportunities such as AI Agents, which significantly expand the potential for application-layer innovations and data-driven value creation. Through these efforts, we aim to deliver differentiated user experiences while driving long-term sustainable growth. We're not just participating in the AI transformation. We are building the foundation for sustained intelligent growth.

With that, I will turn the call over to Su Peng for a more detailed discussion of our financial results. Thank you.

Thank you, Dr. Zhou, and hello, everyone. Today, I will be presenting some financial highlights from the fourth quarter and the full year of 2025. We encourage you to read through our press release issued earlier today for further details.

For the fourth quarter, total net revenue were RMB 1.6 billion or USD 223.7 million, representing a 16.8% increase from the same period of 2024.

Net revenue from our learning services were RMB 727.2 million or USD 104 million, representing a 17.7% increase from the same period of 2024. This year-over-year increase was primarily driven by the strong sales performance of AI-driven subscription services compared with the same period of 2024.

Net revenue from our smart devices were RMB 176.5 million or USD 25.2 million, down 26.6% from the same period of 2024, primarily due to the decline in demand of smart learning devices in the fourth quarter of 2025.

Net revenue from our online marketing services were RMB 660.9 million or USD 94.5 million, representing a 37.2% increase from RMB 481.7 million for the same period of 2024. This year-over-year increase was mainly attributable to the increased demand from the NetEase Group and overseas markets, which was driven by our continued investment in AI technology.

For the fourth quarter, our total gross profit was RMB 705.4 million or USD 100.9 million, representing a 10.1% increase from the fourth quarter of 2024. Gross margin for learning services was 62.5% for the fourth quarter of 2025 compared with 60% for the same period of 2024.

Gross margin for smart devices was 38.1% for the fourth quarter of 2025 compared with 43.9% for the same period of 2024.

Gross margin for online marketing services was 27.8% for the fourth quarter of 2025 compared with 34.2% for the same period of 2024.

For the fourth quarter, our total operating expense was RMB 645.2 million or USD 92.3 million compared with RMB 556.6 million for the same period of last year.

Looking at our expense in more detail. Sales and marketing expense for the fourth quarter of 2025 were RMB 437.1 million compared with RMB 381.8 million in the fourth quarter of 2024.

Research and development expense for the fourth quarter of 2024 were RMB 142.6 million compared with RMB 120.7 million in the fourth quarter of 2024.

Our operating income margin was 3.8% in the fourth quarter of 2025 compared with 6.3% for the same period of last year.

For the fourth quarter of 2025, our net income attributable to ordinary shareholders was RMB 48.2 million or USD 6.9 million compared to RMB 83 million for the same period of last year. Non-GAAP net income attributable to ordinary shareholders for the fourth quarter was RMB 58.7 million or USD 8.4 million compared with RMB 99.8 million for the same period of last year.

Basic and diluted net income per ADS attributable to ordinary shareholders for the fourth quarter of 2025 were RMB 0.41 or USD 0.06 and RMB 0.4 or USD 0.06, respectively. Non-GAAP basic and diluted net income per ADS attributable to ordinary shareholders for the fourth quarter were RMB 0.5 or USD 0.07 and RMB 0.49 or USD 0.07, respectively.

Our net cash provided by operating activities were RMB 184.2 million or USD 26.3 million for the fourth quarter.

Turning to our full year results. Our total revenue for 2025 increased by 5% to RMB 5.9 billion or USD 845 million.

Net revenue from our learning services for 2025, down by 4.2% year-over-year to RMB 2.6 billion or USD 376.2 million.

Net revenue from our smart devices for 2025, down by 18.2% year-over-year to RMB 739.6 million or USD 105.8 million.

Net revenue from our online marketing services for 2025 were up 28.5% year-over-year to RMB 2.5 billion or USD 363 million.

Total gross profit for 2025 were RMB 2.6 billion or USD 374.2 million compared with RMB 2.7 billion in 2024.

Total operating expense for the 2025 decreased to RMB 2.4 billion or USD 342.6 million compared with RMB 2.6 billion in 2024.

Net income attributable to ordinary shareholders for the 2025 were RMB 107.3 million or USD 15.4 million and basic and diluted net income per ADS attributable to ordinary shareholders for 2025 were RMB 0.91 or USD 0.13 and RMB 0.9 or USD 0.13, respectively.

For 2025, net cash provided by operating activity was RMB 55.2 million or USD 7.9 million compared with net cash used in the operating activity of RMB 67.9 million, 2024.

Looking at our balance sheet as of December 31, 2025, our contract liability, which mainly consists of the deferred revenue generated from our learning services were RMB 847.7 million or USD 121.2 million compared with RMB 961 million as of December 31, 2024. At the end of the period, our cash, cash equivalents, current and noncurrent restricted cash and short-term investments totaled RMB 743.2 million or USD 106.3 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.

[Operator Instructions] Our first question comes from Brian Gong with Citi.

Congratulations on decent results. So can management share your thoughts on 2026 outlook and across different business lines? Yes.

Yes, I will take the question. So our overall goal for 2026 is to continue serving our users and customers with more innovative and competitive products while growing the business at a sustainable and healthy manner as always. So a key foundation supporting these objectives is our AI-native strategy while -- which enhances our ability to innovate and compete effectively across our learning services and advertising businesses.

So let me provide additional details across our business lines. So first on the online marketing services. In 2025, online marketing revenue grew by 29% to RMB 2.5 billion. So in 2026, we plan to continue to focus on key growth areas by deploying more innovative solutions to capture favorable industry tailwinds. So we are seeing strong momentum in marketing demands across sectors such as AI applications, gaming and also areas like short-form drama content.

To capture these opportunities, we will continue to leverage advanced AI capabilities, including our AI Ad Placement Optimizer, which we will release our version 2 shortly and iMagic Box alongside programmatic advertisement and [ KOR ] marketing solutions. So these initiatives, we believe, will help us further improve targeting precision and conversion efficiency for our customers.

So our goal remains clear to deliver higher ROI for advertisers while providing a superior content experience for our users.

Second, for learning services, we completed the restructuring of our online courses business by the end of 2025, as you already know. And we expect the Learning Services segment to return to around double-digit year-over-year growth in 2026. So encouragingly, the segment already achieved 18% year-over-year growth in the fourth quarter. So that's very good to see. So in terms of more details, Youdao Lingshi remains the centerpiece of our learning ecosystem. So in 2026, we will continue to leverage the stronger and stronger capabilities of our language model, Confucius, to drive product innovation and service enhancements in Youdao, using AI to unlock new opportunities to user acquisition and engagement.

So the second pillar of our learning services is AI-driven subscription services, which have been growing very rapidly. So total sales reached approximately RMB 400 million, representing an increase of over 50% year-over-year in 2025.

So the launches of new products, Youdao Anydub, Youdao [indiscernible] and Scholar AI [indiscernible]. These new products were well received, so driving a record high revenue in this segment.

So looking ahead, we believe 2026 will be a very important year for AI agents, which are more advanced AI systems capable of actually completing complex tasks and delivering more value to users.

So we believe this industry trend plays to Youdao's strength as we have a long track record of successfully developing user-centric applications.

So we plan to continue introducing new AI applications and agents to expand our services and portfolios this year, enhancing user engagement and strengthening our business models, which we expect will support sustained revenue growth.

Thirdly, on smart devices. For this segment, our priority is to continue improving the overall health of the business. This year, we remain focused on 2 core products, the dictionary Pen and the tutoring Pen, deepening our presence in STEM learning scenarios to address user's critical pain points.

In summary, we see very meaningful opportunities across both the learning services and advertising segments, and we are well positioned to capture them. Our experienced teams and strong execution capabilities in applying AI technologies, they will enable us to continuously enhance our products and services.

We will continue leveraging all our strengths in 2026 to better serve our users and customers while driving sustainable long-term growth. Yes.

Your next question comes from the line of Brenda Xiao with CICC.

Congrats on achieving another solid quarter. I just have a quick follow-up on the Youdao Lingshi business because last year, Youdao Lingshi made positive progress. And what's the plan and outlook for 2026? Can the management give us more details?

This is Su Peng. I will handle the questions. And yes, heading into the 2026, we are -- first, we are very confident about the future growth of Youdao Lingshi business. because of the outcome of the insurance customers in 2025 and also the upgrade features of Youdao Lingshi's AI functions and which pushed the retention rate to over 75%, just like Dr. Zhou shared with this information with you and in the previous comments.

And I think for the 2026, our strategy is in 2 ways, product refinement and efficient customer acquisition. The first, the AI is core building differentiated competitive edge, we believe. We remain to commit our unique AI interactive class service model. We will continue to expand and polish our AI features, ensuring that the technology truly serve the learning outcomes.

Leveraging the power of our large language model Confucius, we are making the teaching process more precise and scientific, we believe.

And let's start with a little bit more details. The first is the precision diagnose and planning in our services. We will improve the accuracy of diagnosing the knowledge gaps to the generate scientific and personalized learning paths, essentially teaching students according to their attitude.

Second, solving the core pain points. We are addressing the critical needs in the college entrance and prepare process with the practical features like the AI-based college admissions advisers and AI Essay grading, comprehensively elevating the users' experience and loyalty.

And the next is about the dual approach we are exploring a more efficient path for the customer acquisition.

First is definitely we need to highlight the organic traffic owned by Youdao. We will further activate the traffic value within our own ecosystem by deeply integrating with our apps like the Youdao Dictionary and Mr. P AI tutors as well as our smart devices like the Youdao Tutoring Pen. We can improve the acquisition perception while efficiently lowering the cost, leveraging the conversion from our existing broad user base.

The new AI-driven channels, we are exploring the franchise customer acquisition channels powered by our AI features using our technology and advantage to pop up a new growth space and inject volatility into our business.

In 2026, driven by the tech innovation and guided by our users' value, we expect to push the insurance business to a new height. We believe we will keep growing and keep investment in that business. I hope that answers your question.

Our next question comes from Linda Huang with Macquarie.

So I just want to know that how does the management think about the outlook in 2026? So that's my question.

This is Lei Jin. In 2025, our advertising business achieved several key milestones, including the launch of Youdao iMagic Box and our AI Ad Placement Optimizer, alongside our official partnership with [indiscernible]. Those initiatives drove our online marketing revenues to a record RMB 2.1 billion, a robust 28.5% increase year-over-year.

Looking ahead to 2026, we aim to drive high-quality growth by deepening our core resources and pushing our technological boundaries. First, we will double down on our international KOL business.

We are capitalizing on wave of the Chinese enterprises going global, positioning ourselves as their strategic accelerator -- this remains our core stronghold. We have built a highly competitive global traffic ecosystem with 2 key pillars.

First, our resource mode. We now reach over 30 million influencers and bidders globally with more than 1,000 top-tier influencers under exclusive contracts. This creates a significant barrier to entry.

Second, our service track record. We have successfully helped over 1,000 companies go global, covering more than 50 countries. Our coverage is diverse as traditional stronghold like gaming, e-commerce, automotive and consumer electronics. We are also capturing emerging opportunities like short-form drama.

In 2026, we will scale this further, using our resource advantage to serve more Chinese companies seeking global growth. Second, we are actively exploring overseas programmatic advertising to drive teched long-term growth. If the QR business is about human connection, programmatic advertising is an efficiency revolution based on technology.

We will leverage our proprietary vertical [ AD ] model, combined with our experience and broad client base from domestic programmatic ADS to explore this market abroad.

Empowered by our [ RM ], we are committed to achieve more precise traffic distribution and higher ROI.

Our goal is to translate those technical capabilities into actual business increments, aiming to build a second growth curve for our overseas advertising business in the medium to long term.

In summary, through the dual engines of our international KOL business and programmatic AD exploration, we expect to take our overseas advertising to the next level in 2026.

Your next question comes from Bo Zhan with Huatai Securities.

I'm [indiscernible] from Hua. My question is Youdao achieved a full year positive net operating cash flow for the first year in 2025. Is the goal for 2026 to achieve a net inflow for the total cash flow.

This is Wayne. I will take your question. As you know, the company's total cash flow is composed of 3 pillars: operating, investing and financing activities. Among this, operating cash flow stands as the most critical indicator of business healthy and long-term sustainably. Therefore, I would first like to address our performance and strategic objectives regarding operating cash flow.

Enhancing profitability and secure positive operating cash flow were our core target for 2025. As mentioned by Dr. Zhou, we have successfully delivered on both of these goals last year.

Looking ahead to 2026, our objective is to achieve faster growth in operating profit and propel our operating cash flow to a more meaningful and substantial level.

Our confidence in this trajectory is rooted in 3 key drivers.

First, AI-driven empowerment. The widespread integration of AI is profoundly transforming our product form and services models. In 2025, we successfully validated AI's immense potential for enhancing quality and efficiency across our business line.

Second, the momentum of our core business units powered by [indiscernible] advertising and AI-driven subscription services are expected to maintain their strong momentum. This is expected to drive acceleration in the year-over-year growth of our total revenue and improvement in operating profit.

Third, the continuous upgrade of refined management by optimizing credit management for our B2B operations and other key processes. We have significantly bolstered our financial resilience and risk mitigation capability.

Regarding the goal of achieving a positive total cash flow, we maintain a balanced and rational stance. We will not blindly tighten expenditures [ import ]simply to reach a positive figure on paper. Instead, we will seek the optimal equilibrium between strategic investment opportunities and the cost discipline. Should strategic investment targets emerge in the market, we will move decisively to capture them.

Furthermore, when cash reserves are sufficient, we will optimize our capital structure by investing in wealth management products or repaying principal on loans from our parent company. While these actions are recorded as investing or financing cash outflow, which may affect the total cash flow figure in the short term.

However, they serves to increase interest income or reduce financing interest costs in the long run. Above all, we will prioritize the continuous improvement of our operating cash flow as it is the most valuable cash flow metric. Building upon this, we will also steadily advance the healthy development of our total cash flow to generate long-term value for our shareholders.

Your next question comes from Xiangfei Shen with Nomura.

Can you hear me now?

Yes, we can hear you now.

Dr. Zhou and Su, congratulations on a very solid quarter. I recall Dr. Zhou mentioned in the opening remarks, 2026 is a year of AI agent. So my question is, in what areas of Youdao business will you plan to deploy the AI agent and how significant the potential impact will be?

Good to speak. So yes, so we think AI agents is an area of particular interest to us. One of the key reason is that -- so compared with the chat products, we [ refer ]the first-generation AI products. So AI agents, they operate longer. They have access to more customer and user data, and they can make deeper and more meaningful decisions regarding how to serve the customer or user better.

So basically, they are more intelligent AI product that can create real value. So -- so we look at all our business to see if we have opportunity to apply this technology. So there are several we are already -- we have mentioned and we are working on. So one is the -- regarding our advertising business. So we already have the AI Ad Placement Optimizer product.

So basically, there are a lot of opportunities to apply agents in ads because ads is an area where a lot of experience and a lot of data is needed to achieve good results. So before the people operating the ad systems, they contribute a lot of the value in having good results, ad results.

Now we can have these agents to try different combinations to try more combinations and actually transfer more knowledge and experience between ad campaigns of the same customer or even across customer and segments to achieve better results.

So this is -- this, I believe, is an area where a lot of value can be created because -- simply because the sheer volume and scale of advertising. So that's one area.

So the other area, of course, is learning and productivity applications. So one example I can give is the AI simultaneous interpretation app. So it is -- so we think it is an agent application because compared with translation 5 years ago, it's very different. So it combines the voice technology together with large language model-driven translation technology. And it automatically summarizes the conversation and in the future, we will be able to take -- help users take further actions after -- either it's an online meeting or it's an online course that the user is experiencing.

So basically, we think there are a lot of possibilities and combining these user scenarios with a subscription-based business model. So users are -- nowadays, the young users are very willing to pay for services on a monthly or quarterly basis over subscription.

So we think if you look at the numbers, we already have RMB 400 million -- about RMB 400 million in subscription sales in 2025, we believe we still -- it's at the beginning. Yes, it's still very early. So we have a lot of room to grow this sales -- and one last thing.

So today, we launched a new AI agent product, basically a little bit like open claw. So basically, 7 days 24-hour AI agent that runs on your computer and help you achieve tasks. So it's called Youdao Lobster AI. So yes, if you guys are interested I hope that answers your question.

And that concludes the question-and-answer session. I would like to turn the conference over back to management for any additional closing comments.

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 U.S. Have a nice day.

Good day and welcome to Youdao Third Quarter 2025 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Jeffrey Wang, Investor Relations Director of Youdao. Please go ahead.

Thank you, operator. Please note the discussion today will contain forward-looking statements 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 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. For the definitions of non-GAAP financial measures and reconciliations of GAAP to non-GAAP financial results, please see the 2025 third quarter financial results release issued earlier today.

As a reminder, this conference is being recorded. A 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's senior management are Dr. Feng Zhou, our Chief Executive Officer; Mr. Lei Jin, our President; Mr. Peng Su, our Senior VP; and Mr. Wayne Li, our VP of Finance.

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

Thank you, Jeffrey. Thank you all for participating in today's call. Before we begin, I would like to remind everyone that all numbers are based on renminbi, unless otherwise stated. In the third quarter, our strategically prioritized businesses Youdao Lingshi and online marketing services delivered a strong momentum, supporting our long-term growth trajectory.

Net revenues reached RMB 1.6 billion, up 3.6% year-over-year. Operating profit was RMB 28.3 million, a decline of 73.7% year-over-year, primarily due to 2 factors. First, following the significant operating profit improvement in the first half of the year, we increased investments in Youdao Lingshi our online marketing services in Q3 to accelerate medium to long-term expansion.

Second, we faced a high comparison base from the same period last year due to a one-off impact from the STEAM courses. Our restructuring of the Learning Services segment is now complete. For the first 9 months of the year, Operating profit reached RMB 161.1 million, representing a substantial 149.2% year-over-year increase and highlighting the meaningful progress we have made in enhancing our profitability.

Notably, we have now achieved operating profit for 5 consecutive quarters, first in our history. From a cash flow perspective, operating cash outflow for the quarter was RMB 58.6 million, an improvement of 31.4% year-over-year.

Next, I will delve into the major developments across our businesses. Revenues from the Learning Services segment were RMB 643.1 million, down 16.2% year-over-year. Reflecting our disciplined and strategic approach to customer acquisition as we focus on growing the Lingshi business.

Within the Learning Services segment, net revenues from digital content services were RMB 425.9 million during the quarter. And our achievements in digital learning have gained international recognition Youdao was included in the 2026 GSV 150, a list that highlights the world's most transformational growth companies in digital learning and workforce skills, selected from more than 3,000 global companies.

Turning to Youdao Lingshi, one of our key strategic businesses. We made solid progress during the quarter by diversifying its customer acquisition channels. Lingshi accelerated achieved over 40% year-over-year growth in gross billings.

More recently, retention rate has exceeded 75%, up from over 70% in the fourth quarter of last year. In addition, as part of our broader commitment to cultivate innovative talent, we collaborated with the Yau Mathematical Sciences Center at Tsinghua University, [Foreign Language] providing technical support to a platform designed to identify and support mathematically gifted students. The system is currently being piloted in top-tier schools, with a national rollout planned following further refinements.

In terms of our programming courses, we introduced an AI tutor for live programming classes in the third quarter, featuring a life-like avatar and supporting both text and voice interactions. The AI tutor helps answer students' questions in real time, significantly enhancing the overall learning experience. With ongoing product upgrades, gross billings for our programming courses increased by more than 30% year-over-year in Q3.

Additionally, we continued our deep collaboration with the China Computer Federation, CCF and are honored to have become a golden partner.

On the apps side, total sales of our AI-driven subscription services reached a new record of approximately RMB 100 million in the third quarter representing over 40% year-over-year growth. We launched our Confucius 3 translation model, which supports real-time bidirectional translation across 38 languages and offers advanced multi-model capabilities. Despite its compact parameter size, Confucius 3 translation delivers translation quality that surpasses some larger general purpose models.

In August, our Confucius 3 series LLM was among the first to receive the highest level Trusted AI Education Large Language Model certification from the China Academy of Information and Communications technology.

Regarding product development, we introduced a major upgrade to our flagship Youdao Dictionary app, Youdao Dictionary 11, delivering a truly AI native experience that has been met with widespread user acclaim. A key highlight is the fully redesigned AI simultaneous interpretation feature, powered by industry-leading noise reduction technology and our proprietary turn detection algorithm. It achieves top-tier voice translation accuracy with exceptionally low latency. The feature also received a one-click summarization of translated content and automatically generates mind maps, significantly improving user efficiency across both learning and work scenarios. These enhancements have been well received, driving over 200% year-over-year growth in sales of the AI simultaneous interpretation feature during the third quarter.

To date, more than 20 million users have engaged with this capability.

We have launched a new AI audio and video translation product, Youdao Anydub. In the third quarter, to automate multi-lingual production of content such as TV shows, marketing videos and more. It leverages our proprietary adaptive voice cloning technology to learn a speaker's local characteristics and generate natural fluent and emotionally rich dubbing. The system delivers optimal translation results by holistically considering key factors, including voice, speaker identity and even video scene transitions. To produce dubbing that is more accurate, contextually aligned and precisely suited the creators intended purpose.

Turning to our online marketing services segment. Growth accelerated in the third quarter. Net revenues reached RMB 739.7 million, a new record and an increase of 51.1% year-over-year. The strong performance was primarily driven by increased demand from the NetEase Group and overseas markets, which was driven by our continued investments in AI technology.

Gross margin for the segment was 25.4% in Q3, moderated roughly 10 percentage points year-over-year, but largely stable sequentially. Remaining within our long-term target range of 25% to 35%. We continue to rapidly expand our new client base during the quarter to support future growth. Advertising revenues from the gaming industry mainly contributed from NetEase grew by over 50% year-over-year. We assisted NetEase games with a growing number of programmatic advertising and influencer marketing campaigns.

For example, in promoting the blockbuster title Where Winds Meet. We executed a comprehensive integrated marketing strategy that generated over 500 million video views and more than 21.4 million live streaming exposures.

Looking ahead, we plan to further deepen our collaboration with the NetEase Group and other game clients to unlock additional synergies.

Our overseas advertising business also delivered strong momentum with revenues growing by more than 100% year-over-year. We are pleased that our BYD WonderLife Global Influencers Co-Creation campaign received the Brands & Creators award at the YouTube Works Awards China.

Looking ahead, we plan to further deepen our collaboration with Google and with global advertisers to better support Chinese companies in expanding their global presence. We continue to drive improved advertising performance by our AI Ad Placement Optimizer. It is an end-to-end AI-powered agentic solution covering demand analysis, strategy formulation, data analytics and innovative optimization.

In addition, I am thrilled to share that we will launch AI Ad Placement Optimizer Version 2 by the end of this year. Please stay tuned.

Moving to our Smart Devices segment. Net revenues were RMB 245.8 million during the quarter, down 22.1% year-over-year. This reflects our strategic decision to exercise greater discipline in marketing expenditures. Focusing on strengthening the segment's operational health, as a result, we saw year-over-year improvement in the segment fundamentals during the third quarter.

Product-wise, we launched a new tutoring pen, Youdao Space X which offers precise scanning for long-form and multi-graphic prompts. AI-powered video explanations for academic problems and an AI-based mistake ledger. These features empower students to learn and review subjects more effectively and efficiently. Our dictionary pen and tutoring pens were also featured at the World AI conference receiving strong exposure to new audiences and coverage from multiple media outlets.

Looking ahead, we will continue executing on our AI strategy. With a focus on deepening the application of and innovating with our large language model Confucius. Across both our learning and advertising businesses to consistently create value for our customers. Financially, we will maintain the suppling operations and remain confident in achieving the full year targets set at the beginning of the year, including robust year-over-year operating profit growth and reaching annual operational cash flow breakeven for the first time.

With that, I will hand over to Su Peng for a deeper dive into our financial results. Thank you.

Thank you, Dr. Zhou, and hello, everyone. Today, I will be presenting some financial highlights from the third quarter of 2025. We encourage you to read through our press release issued earlier today for further details.

For third quarter total net revenue of RMB 1.6 billion or USD 228.8 million, representing a 3.6% increase from the same period of 2024. Net revenue from our learning services were RMB 643.1 million or USD 90.3 million, representing a 16.2% decrease from the same period of 2024. So the year-over-year decrease was primarily attributable to our decision to take a disciplined, strategic approach to customer acquisitions, which places a greater emphasis to a high ROI, return on investment engagements. We believe this strategy has enhanced the overall resilience and operational efficiency of our business despite the short-term revenue decline.

Net revenue from our smart devices were RMB 245.8 million or USD 34.5 million, representing a 22.1% decrease from the same period of 2024. Our net revenue from our online marketing services were RMB 739.7 million, or USD 103.9 million, representing a 51.1% increase from the same period of 2024. The year-over-year increase was primarily driven by the increased demand from the NetEase Group and overseas markets, which was driven by our continued investment in AI technology.

For the third quarter, our total gross profit was RMB 687.9 million or USD 96.6 million, representing a 12.9% decrease from the same period of 2024. Gross margin for learning services was 58.5% versus the quarter of 2025 compared with 62.1% for the same period of 2024. Gross margin for smart devices was 50.3% for the third quarter of 2025 compared with 42.8% for the same period of 2024.

Gross margin for online marketing services was 25.4% for the third quarter 2025 compared with 36.3% for the same period of 2024. For the third quarter, we reduced our total operating expense to RMB 659.6 million or USD 92.7 million compared with RMB 682.2 million for the same period of the last year.

Looking at our expenses in more detail. Sales and marketing expense declined to RMB 487.7 million, compared with RMB 519.6 million in the third quarter of 2024.

Research and developing expense were RMB 127.8 million compared with RMB 119.6 million in the quarter of 2024. Our operating income margin was 1.7% in the third quarter of 2025 compared with 6.8% for the same period of last year.

For the third quarter of 2025, our net income attributable to ordinary shareholders was RMB 0.1 million or USD near to 0 compared with RMB 86.3 million for the same period of last year. Non-GAAP net income attributable to the ordinary shareholders for the third quarter was RMB 9.2 million or USD 1.3 million compared with RMB 88.7 million for the same period of last year. Basic and diluted net income per ADS attributable to ordinary shareholders for the third quarter of 2025 was near 0. Non-GAAP basic net income per ADS attributable to the ordinary shareholders for the third quarter was RMB 0.08 or USD 0.01.

Our net cash used in the operating activity was RMB 58.6 million or USD 8.2 million for the third quarter. Looking at our balance sheet as of September 30, 2025 our contract liabilities, which mainly consists of the deferred revenue generated from our learning services were RMB 751.1 million or USD 105.5 million compared with [RMB 961 million] as of December 31, 2024. At the end of the period, our cash, cash equivalents, current and non-current restricted cash and short-term investment totaled RMB 557.7 million or USD 78.3 million. This concludes our prepared remarks. Thank you for your attention. We will now like to open to your questions. Operator, please go ahead.

[Operator Instructions] First question is from Brian Gong, Citi.

A very quick question for our strategies ahead. So our online marketing services are growing rapidly kind of showing a different trend versus learning services. From a strategic perspective, the online market services become more important than learning services in the future?

Brian, so right now, we are experiencing higher growth for ads compared with learning services. In the long term, we actually see great opportunities on both areas. So let me explain that for you. So the strong expansion of our marketing services over the past 3 years have been mostly driven by First, our advanced ad tech and AI capabilities, then customers trained to transition from traditional ads to performance ads and finally, opportunity of overseas ads.

Since the advertising revenue first exceeded RMB 200 million in the single quarter in Q4 2022. It has reached a record high of over RMB $700 million this quarter, so representing a year-over-year increase of more than 50%. So as we've discussed several times on this call, we believe our advertising business is still in the early days.

The application of generative AI and agentic AI in online advertising is only just beginning. We see 2025 as the first when generative and agentic AI will be put to work on ads at scale. So we launched our Youdao Magic Box ad creative platform in Q1 and our AI Ad Placement Optimizer and add automation agents in Q2. These AI-driven improvements in delivering the ads have strengthened the customer satisfaction already, which in turn encourages advertisers to allocate larger budgets to our platform accelerating our growth from customer expansion perspective.

We continue to see substantial opportunities across online games, e-commerce, overseas, online games, overseas electronics and through our deepening collaboration with partners such as Google and TikTok. So with all these reasons, we believe these will all drive strong revenue growth for the coming years, hopefully.

So on the other side, we also see very good growth opportunities in our learning services business. This part of our business, as you probably know, has undergone quite significant changes over the past 2 years, largely because we actually believe there is tremendous long-term potential in to see AI-driven online services. So AI is a decade-long growth trajectory and capturing it require us to build and scale truly AI native services and application, and that's what we've been doing. So on AI-driven subscription services, so this part, we began sharing our progress since last year, and the trajectory is very promising.

So total sales of AI-driven subscription services amounted to approximately RMB 50 million in the first quarter of last year, if you remember. So it took us only 6 quarters to double that figure, reaching approximately RMB 100 million this quarter. So we are actively developing new features, applications and agents to support future expansion. A lot of agents are running inside our companies to improve our business efficiency. So we see ample product optimization opportunities ahead and expect the growth to continue.

In the Digital Content segment, the learning content. We have fully completed the restructuring and have sharpened our focus on the Lingshi business. In Q3, Youdao Lingshi delivered over 40% year-over-year growth in gross billings and demonstrated strong user stickiness and retention rate exceeds 75%. So adding all that up, in the near term, we expect -- actually, we expect net revenues from the entire learning services segment to return to year-over-year growth.

So in summary, we remain firmly committed to driving growth across both our learning and advertising businesses. By continuing to serve our customers better and also leveraging AI technologies better. Yes.

Next question is from Linda Huang, Macquarie.

Can you hear me?

Yes. Yes. We can hear you.

So my question is regarding for the online advertisement, because since the second quarter this year, we noticed that the gross margin below -- I think, below 30%, maybe around like 25%. So I just want to know that, does the manager have any plan or like a time line, we can return back to the above 30%? And what will we need to do to make sure that the margin can recover? So that's for online marketing.

I'll answer this briefly before Jin Lei provides more details. We always operated with a long-term view and aim to increase the value we create for advertisers. We think that's most important. So in Q3, we saw strong opportunities to grow the customer base. So we chose to engage and onboard more customers, and that is reflected in the revenue growth. You can see very, very quick revenue growth.

On the flip side of that, we are -- so we basically gave up some short-term gross margin as new customers are less profitable, and sometimes even we operate at a loss for a particular important customers. So that is actually also true, I believe, for the learning side of the business, I just wanted to mention in Q3.

So we invested in hiring more personnel for expanding audience through across business in Q3 also for future growth. So we believe this kind of investments are very good investments, and we have a solid and profitable unit economics. We ensure we have that. And we think investments like these are going to translate to growth and profitability in the coming quarters.

This is Jin Lei. Regarding the gross margin of our online marketing services business, the major parts are adopting the performance-based advertising pricing model and the gross method of revenue recognition, which necessitate balance between delivering value to our clients and sustain our own healthy long-term development.

Against this backdrop, we consider gross margin within the range from 25% to 35% to be a reasonable target. Our current objective is to drive an improvement in gross margin, which we aim to achieve through several key initiatives. But we plan to broaden the application of the Magic Box creative production platform throughout the [AD] creation process.

Compared to menu creation production, Magic Box reduced production cost by approximately 70%, while improving production efficiency. By leveraging our end-to-end data chain to identify and analyze high-performing creatives, we can scale the application, better serve our clients and enhance overall delivery efficiency.

Second, we will continue to optimize and upgrade our data management platform, DMP and the programmatic delivery system. This includes expanding data dimensions and mining underlying data characteristics to improve audience and traffic insights. Those enhancements will enable more systematic and process the identification of targeted audiences leading to higher advertising delivery efficient effectiveness.

Third, we will capitalize our robust AI capabilities to further integrate the AI-driven creative production with the advertising delivery process by closely linking those functions with the data capabilities of our DMP, we aim to establish an automatic closed-loop system that boosts overall operational efficiency of our online marketing services.

Next question is from Brenda Zhao, CICC.

My question is also related to the profit margin because we see the operating profit experienced a year-over-year decline in the third quarter, what is the potential for rebound to year-over-year growth in fourth quarter?

Thank you, Brenda. This is upon. I will handle the question first. And I think at the beginning of this year, we set the 2 full year financial goals. The first is to achieve the rapid year-over-year improvement in operating profit. And secondly, to achieve the breakeven in full year operating cash flow.

And if you see the performance of the Youdao in the half of this year, especially in the operating profit in this year, in the first half of 2025, I mean, it's much better than that in the last year, same time, improving from the RMB 40 million loss to the RMB 130 million gain. So I think that provides more flexibility for us to make more investments in the second quarter of the 2025.

We stepped in the investment in the Youdao Lingshi in advertising the customer acquisition. We are maintaining the profitability. And also, we start to spend marketing dollars to acquire potential clients for the advertisement business.

And from the third quarter as the Dr. Zhou mentioned before in our earnings call and Youdao Lingshi deliver over 40% year-over-year GMV growth and increased retention rate to the 75% -- over the 75%. And also, and we achieved about revenue of the advertisement growth over 50% in the Q3 in the 2025 and also the new clients account for over 30% of the total clients. So I think that will create a great momentum and fundamentals for our business in the Q4 and next year.

And for our fourth quarter's priorities. And the same time, I just tried to explain in more details regarding the one-off impacts of our we call the learning service business and in the Dr. Zhou mentioned before. And in the last year, STEAM courses still account for the meaningful percentage of our revenue from our learning services. And at same time since summer, we shrink a lot significantly for the investment and in the -- for the STEAM Courses for the customer acquisitions. But still deliver significant revenues in the Q3. That definitely have impact of our profitability in the last year. That means the kind of the high base in that we mentioned before.

So I think that is one-off impact only for this year. So our fourth quarter's priority is to secure the rapid operating profit improvement from the full year perspective online at the start of the year. In the meantime, we will continue to invest in our core business, Youdao Lingshi AI apps and as well as the online marketing services as we access the macro environment and our growth opportunities. Through this focused approach, we aim to deliver greater values to expanding user base.

Our medium- to long-term focus is on executing on AI native strategy, excelling the deployment of our large language model computers in learning and advertising scenarios. Central to these efforts is enhancing our sustained profitability. We are also constantly evaluating the quality of our user services.

Since its launching 3 years ago, our AI interactive services of Youdao Lingshi has integrated AI across the multi scenarios, including the users' learning assessments, personalized learning path recommendation, QA sessions, assignment granting and as well as the college application consulting. This has enhanced the learning efficiency and outcome for users, gathering best positive feedback as the highest gross margin business within our Learning Services segment and following the recent restructuring of this segments, Youdao Lingshi expect to account for the growth growing share of segment revenue. This in turn expect to continue to improve the profitability of the learning services segment in the long run.

Regarding the online marketing services, as noted previously, AI contributed to enhanced the delivery and operational efficiency in area, including the ad creative production, data mining, programmatic delivery and also attribution analysis. These advancements deliver in midterm and long-term profitability improvement of the segments. I think I hope that answers your question?

That's very helpful.

Next question is from Bo Zhan, Huatai.

My question is, given the cumulative net operating cash outflow recorded in the first 3 quarters, should we expect any change to the full year breakeven target?

Thank you for the questions. This is Wayne. Our team has great importance on the performance of our operating cash flow. And we already got remarkable improvements in optimizing our operating cash flow performance in recent years. For 2025, we set a target to achieve full years cash flow breakeven, and we remain very confident to achieve this target.

At the same time, I would like to emphasize that reaching the breakeven point is only a near-term milestone. Our long-term objectives definitely is to deliver even healthy performance in operating cash flow through profitability enhancement, disciplined credit management and optimize working capital practice.

As you mentioned, for the first 9 months this year, cumulative net operating cash flow amounted to RMB 129 million. However, it reflects over [40%] significant improvement on a year-over-year basis. In addition, our quarter cash flow performance helped obvious seasonal features, which are driven by certain seasonal factors.

For example, Q1 is typically annual bonus payment period due to the Lunar New Year. And Q3 is traditionally peak user acquisition period. During which operating cash flow typically registered net outflow due to the marketing investment. In contrast, Q2 and Q4 are retention-driven seasons and generally demonstrated stronger cash flow performance. So we expect the fourth quarter usually generates a good operating cash inflow.

To provide context, as you know, we achieve an operating cash inflow of RMB 158 million in Q4 last year. As previously highlighted, our restructuring in learning services have been completed.

Youdao Lingshi particularly has demand robust retention momentum in Q4. Maintaining a retention rate above 75%. Additionally, another prepaid service, our AI-driven subscription services, Q3 sales from this business has accelerated growth to over 40% year-over-year, which also positively support our cash flow position.

On the other hand, the expansion of our advertising business potentially brings certain collection dynamics, which potentially slow down the cash inflow from our customers.

For example, online marketing services typically provide a certain [collection] to our premium clients. Through results from the 3 quarters, we are satisfied for the performance of our cash collections and the [collection] well managed. Taking into account the distinct seasonality of our operations, the significant year-over-year cash flow improvement in the first 3 quarters and the potential strong retention performance of from Youdao Lingshi in Q4, we maintain the confidence in achieving our full year operating cash flow breakeven target. Thank you.

That concludes our question-and-answer session. I would like to turn the conference back over to management for any additional or closing remarks.

Thank you once again for joining us today. If you have any further questions, please feel free to contact us at Youdao directly or reach out to Piacente Financial Communications in China or the U.S. Have a nice day.

Ladies and gentlemen thank you for joining. The conference is now over. You may disconnect your telephones.

Good day, and welcome to the Youdao 2025 Second Quarter 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 Yoda. Thank you, and over to you.

Thank you, operator. Please note the discussion today will contain forward-looking statements related to the future performance of the company, which are intended to qualify for the [indiscernible] 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 these forward-looking information, except as required by law. During today's call, management will also discuss certain non-GAAP financial measures for comparison purposefully for the definitions of non-GAAP financial measures and reconciliations of GAAP to non-GAAP financial results, please see the 2025 second quarter 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 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. Zhour to review some of our recent highlights and strategic direction.

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 based on renminbi, unless otherwise specifically stated. Strong execution of our AI native strategy drove robust financial results in the second quarter, highlighted by our first profitable second quarter. Operating income was RMB 28.8 million compared with an operating loss of RMB 72.6 million in the same period last year.

Net revenues reached RMB 1.4 billion, an increase of 7.2% year-over-year. Operating cash inflow was RMB 185 million, down 26.1% year-over-year, primarily due to the strategic scaling back of certain steam and adult courses which reduced the gross billings.

Next, let's review our progress by business lines. Net revenues from Learning Services rose 2.2% year-over-year to RMB 657.8 million in Q2, driven primarily by the strong performance of Youdao Lingshi. Within the Learning Services segment, net revenues from digital content services reached RMB 447.4 million. As a strategically focused initiative, Youdao Lingshi achieved exceptional results with net revenues growing approximately 30% year-over-year.

On the product front, our large language model, confuses, continue to power innovation. In Q2, we introduced the AI Essay grading feature design in line with exam grading centers to provide comprehensive personalized evaluation and generates tailored feedback reports. The feature received widespread acclaim upon launch, driving Q2 retention rate above 75%, a historical high. We also leveraged LLM Confucius 3-Math capabilities to create personalized learning plans, further enhancing learning efficiency and outcomes.

For our steam process, we broadened enrollment channels driving a year-over-year increase of roughly 15% in gross billings for programming courses. User satisfaction continues to rise with Q2 retention rates hitting a record high of over 75%. Additionally, we signed 12 gold medalists from the National Olympiad in informatics to strengthen our top-tier teaching and R&D team, laying a strong foundation for future student services.

On upside, total sales of AI-driven subscription services rose approximately 30% year-over-year to nearly RMB 80 million in Q2, setting a record high. During the quarter, we released the Confucius 3-Math12, our latest education LOM powering our education and translation services. An open source Confucius 3-Math, China's first reasoning model dedicated to mate education. Combining large-scale reinforcement learning with algorithmic innovations, Confucius 3-Math delivers state of accuracy with exceptional cost efficiency, 15x the influence performance of Deep Seek R1, adjust USD 0.15 per million tokens, well below typical LLM costs, enabling the low-cost deployment of professional grade mass AI applications.

One notable milestone is Scholar AI, [indiscernible] launched in May which has already attracted over 1 million accumulated users, designed to support students and scholars in research paper writing, it offers AI-powered [indiscernible] detection, proof reading and other tools to improve academic work. Powered by Confucius 3-Math, we also upgraded our Mr. Pi AI tutor to achieve over 95% accuracy for K-12 mass promotion tutoring. Mr. Pi AI received the Gold Me Award, the highest owner granted to developers on the Xiaomi App Store. Additionally, Youdao Dictonary was named China's top 50 most valuable AGI innovators in 2025.

Moving to our online marketing services segment. Q2 net revenues reached a record RMB 632.9 million, up 23.8% year-over-year, driven by strong demand from the gaming industry and Chinese clients expanding overseas. Gross margin was 25.8%, down 13 percentage points from a year ago, primarily due to the initial onboarding of new clients. We continue to expect this segment's gross margin to stabilize in the 25% to 35% range over the medium to long term.

Gaming was a highlight this quarter. We deepened the collaboration with Nedis games and other gaming advertisers on both domestic and overseas campaigns, driving gaming ad revenue growth of more than 50% year-over-year, a trend we expect to sustain under stable macroeconomic conditions.

On the product front, we continue to invest in Gen AI-powered advertising technologies. We launched the AI ad placement Optimizer in Q2. and end-to-end AI-driven genic solution covering demand analysis, strategy formation, data analytics and iterative optimizations. We also significantly upgraded our antifraud system to enable real-time diagnosis and automated monitoring of ad delivery, including traffic requests, clicks and conversions, improving service quality and strengthening our risk control framework.

These advances built on iMagic Box, our AI creative generation product introduced in Q1. Our team continues to move quickly in the GenAI-powered ad technology space, delivering fully integrated services from creative production and placement to post campaign analytics. We believe we are still in the early stages of a new cycle in which GenAI will create substantial value for advertisers and through our long-term growth.

We see significant growth potential in the advertising business in gaming, e-commerce, overseas markets and GenAI applications. and remain focused on capturing these opportunities to build a strong foundation for sustained growth.

Next, in our Smart Devices segment. Business Health improved in Q2 while net revenues declined 23.9% year-over-year to RMB 126.8 million, primarily attributable to 2 factors. First, certain high-end dictionary pay models approach the end of their product life cycles during the quarter. Second, we reduced the marketing expenditure in hardware to prioritize business health at this stage. Within this segment, we focused on Youdao Dictionary Pen, which maintained its market leadership, securing the #1 spot in sales on JD.com and Tmall, during the 618 shopping festival for the sixth consecutive year.

We also expanded our midrange coverage with the launch of Youdao Dictionary Pen S7 Pro and A7 in Q2. Looking ahead, I remain confident in the long-term potential of AI-powered devices. I'm excited to share that we will be unveiling a new AI-powered smart device next week. Please stay tuned.

Before I conclude, let me quickly recap a strong first half. We significantly enhanced our large language model portfolio, Confucius 3 and open sourcing Confucius 3-1 and Confucius 3-Math. Our learning services hit new heights with Lingshi retention rate and the launch of successful new AI apps like Scholar AI.

[Audio Gap] shareholders for the second quarter of RMB 25

0.15 or USD 0.02. Non-GAAP basic and diluted net income per ADS attributable to the ordinary shareholder for the same quarter. was RMB 0.11 or USD 0.02 and RMB 0.1 and USD 0.01, respectively.

Our net cash provided by the operating activities was RMB 185 million or USD 25.8 million for the same quarter. Looking at our balance sheet as of June 30, 2025, our contract liabilities, which mainly consists of deferred revenue generated from our online learning services were RMB 856.7 million or USD 119.6 million compared with RMB 961 million as of December 31, 2024. At the end of the period, our cash [Audio Gap] cash equivalents, current and noncurrent restricted cash and short-term investment totaled RMB 670 million or USD 86.1 million. This concludes our prepared remarks. Thank you for your attention. We will now like to open the call to your questions. Operator, please go ahead.

[Operator Instructions]

Our first question comes from the line of Vicky Wei from Citi. .

Can management provide an update on the third quarter outlook for Youdao Lingshi?

Thanks for the question. This is Feng Zhou. I will handle the question first. And in Q2, do keep growing year-over-year, with revenue increasing by roughly 30%. The retirement rate exceeded about 75%, reaching a record high. It indicates that the user satisfaction for the overall also reached a record headway. It has a solid foundation for the subsequent department, we believe.

[indiscernible], we think, is a key initiative of the application education scenarios by our large language model, Confucius. In the second half of this year, we will continue to leverage the robust capability of the Confucius to further enhance the products and services quality and expand our user space.

Regarding on the product updates, 2 major development are planned for the second half of this year. First is the AI Essay Grading features roll out in the Q2 this year, which provides users with a professional Chinese Essay feedback. Its specialized targets and the timely greeting has received best write positive feedback from our users.

In the second half of this year, we will expand AI Essay Grading to cover the English asset as well. enabling the users to more efficiently improve their English writing skill. Second, we will launch the AI tutoring powered by Confucius as well, it offers a more timely and tailor-made and process assistance to these users, helping them to resolve the questions and improve the learning efficiency and outcome.

In terms of the user acquisition since our AI interactive process format was introduced in 2022, users' learning outcome has been shown sustained and rapid improvements. all improve reputations among the users continue to strengthen, which will help us to serve more users in the future. Additionally, we are actively expanding the acquisition channels and have achieved the positive results in the exploring localized user acquisition strategy.

In summary, we think we feel very comfortable about the products of Youdao. And we will definitely keep investing for the technology as well as update about the quality of all the products. And we are confident that the [indiscernible] maintain the momentum in the second half of this year and in the future. I hope that answers your question. Thank you.

Our next question comes from the line of [indiscernible] from China International.

My question is about the Smart Device segment. I want to review the Smart Wise segment year-over-year revenue decline in this quarter, see some improvement in the second half of this year?

Yes, I'll take this question. So for the full year of 2020 focus or our objective for the Smart Devices segment is to further improve business health -- so although the revenue declined in Q2, but encouragingly, in both Q1 and Q2, the health of our hardware business improved compared with the same periods last year.

So from product strategy and also growth standpoint, so we will continue to focus on Dictionary Pens and also our new category this year, Tutoring Pens. We think both these categories represent a lot of opportunities for growth in the future. So the Dictionary Pen market, we are both pioneer and also the clear market leader, ranking #1. So in sales for 5 consecutive years.

So the Tutoring Pen, that's a new category we introduced earlier this year. So what's interesting about Tutoring Pen is that because of the use of our large language model Confucius. So it is able to address key pain points in mass and other subjects, basically all subjects in K-12 learning. So and in particularly for middle school and high school students. So I think that's a very important segment of market and the product what we see is that it already resonates strongly with both students and parents. So we think this is a market with significant growth potential.

And next week, as I just said, we will launch a new tiering, new product. That's I can say, it's a new tutoring product -- so we expect its enhanced user experience to drive improvements in the segment's metrics in the second half of this year. So I'd also like to share -- 2 points regarding the long-term development of our device business. First, is I remain optimistic about the medium to long-term prospects of AI-powered hardware.

According to [indiscernible], China's AI hardware market, excluding smartphones and cars is projected to exceed RMB 1 billion for the first time in 2025 and is expected to maintain a compound annual growth rate of 18% for the next 5 years. Of course, that contains a lot of categories. But for educational smart device specifically, the report predicts the market size to be expected to be RMB 34 billion in 2025. So that's a sizable market, and it's expected to grow further. So leveraging our strong AI capabilities, we will continue to broaden the application scenarios of our smart hardware and work to improve users, learning and work efficiency and outcomes. So that's one.

The second point I want to make is that we see a great potential for deepening the synergy between hardware and our learning services. So for example, our tutoring pen can accurately identify users' learning profile such as whether it's an elementary, middle or high school or all his learning -- actual learning needs, specific needs. So with that level of precision, we can expand the hardware and our learning services integration to unlock more cross-selling opportunities. So this approach also helps reduce our overall sales and marketing expenses and improving operational efficiency.

So if you look at our overall sales and marketing to revenue ratio in Q2, it was 28% it's already done roughly 11 percentage points year-over-year. So we see further room for improvements and partly -- so when we work on the integration of hardware and our learning services.

Our next question comes from the line of Thomas Chong from Jefferies.

My question is about pricing. .

Really started to interrupt Mr. Thomas Chong. Really sorry to interrupt. [Operator Instructions]

Good evening. Thanks management for taking my question. My question is about pricing. What are the specific applications of AI and placement optimize pricing as well as the potential impact on future financial metrics?

This is [indiscernible]. Thank you for your question. the explication scenario of AIADA placement optimizer covers the entire advertising delivery plus. [indiscernible] delivery, AIADA placement optimizer can conduct intelligent 24/7 Q&A with customers. By analyzing [indiscernible] delivery data through our DMG. It automatically reaches to targeted audience and traffic streams, while intelligently generating decision audience targeting strategies.

Post ADA delivery leveraging comping data and our aged language model confuses. AIADA placement optimizer inherently generates delivery, agnostics and attribution analysis reports. Those iterate optimization for subsequent audience targeting and the strategy deployment making advertising simpler and smarter. AIADA placement optimizer enable end-to-end AI is making throughout the advertising workflow. Demand analysis, rate formation, intelligent delivery, data analytics and attribution and optimization iteration.

The data processing capacitates to significantly exceed the human capabilities, operating 24/7 with faster iteration cycles. The solution [indiscernible] end of Q2 has been deployed to serve advertisers in programmatic advertising campaigns receiving positive feedback. Furthermore, integrated with Magic Box that's launched earlier this year, we delivered a comprehensive AI-powered support across the fourth advertising life cycle, from creative development and material production to deliver attribution and optimization iteration, leveraging our AI capabilities.

Medium to long term, AIADA placement optimizer will support both advertising revenue growth and profitability improvement for us. Firstly, it will enhance advertisers' return on investment, driving increasing allocation from existing clients on our platform. Concurrently, further adoption will expand our advertiser base. Those factors collectively excited our advertising revenue growth. Secondly, the solution identified cost-efficient, high-quality traffic, while maximizing data utilization from our DMP, thereby strengthening the profitability from our online marketing services segment.

Our next question comes from the line of Bo Zhan from Huatai Securities.

This is a Bo Zhan. Given the year of our decline in operating cash inflow during Q2, do we have any revision on the target for achieving operating cash flow breakeven this year?

Thank you, Bo Zhan for your question. This is [indiscernible]. I will take your questions. As you have noticed, we generated operating cash flow of RMB 185 million in Q2. Although this represents a decrease compared to the same period of last year, it does not alter our annual target of achieving operating cash flow for even. This is primarily related to the foreign factors. .

First, our profitability have been improving, indicating sustained long-term cash flow enhancement from a probability perspective, we achieved an operating profit of around RMB 133 million in the first half of this year, a significant improvement in financial health compared to a loss of RMB 0.6 million in the same period of last year. This profit improvement steps from our continuous enhancement of our product and service capabilities through AI technology and a reduction in operating expenses, which will inevitably lead to cash flow improvement over the long term.

In the second half of this year, we will continue leveraging our AI advantages to enhance operational efficiency and optimize cost and expenses, we are confident in achieving accelerated operating profit growth for the full year of 2025. Second, our operating cash flow demonstrate improvement from the year-over-year base basis in the first half of this year compared to an operating cash outflow of RMB 140.8 million in the first half of 2024, received approximately RMB 17 million in the first half of this year, representing an improvement of around 50%.

Certainly, our operating cash flow exhibit seasonality. Q1 is typically the weakness quarter within a year due to the payment for last year's annual bonus, excluding additional investments in our key initiatives such as AI technology and Youdao Lingshi, the cash flow performance in the second half of this year expected to be stronger than this first half. The relatively slower pace of cash flow improvements compared with the operating profit growth is mainly linked to the change in our business mix.

Previously, our faster-growing segment was learning services, which operates on the prepayment model, which typically results in cash flow improvement preceding profit improvement in our income statement. In the recent quarters, the Learning Services segment is in the proactive transition, while the faster-growing segment is our online marketing services advertising business usually involves granting advertiser criteria.

We typically bring 1 or 2 quarters lag when comparing the profit results with the cash flow performance. while developing the business, we always strictly control our credit policy in order to improve our cash flow position. In summary, -- despite the uncertainty of competition and macro conditions, we are confident in achieving the target of operating cash flow breakeven this year.

Our next question comes from the line of Linda from Macquarie.

2 questions. The first one is regarding for EBITDA. In the announcement, you also mentioned about the strong growth coming from an [indiscernible] coming from overseas market. Can you elaborate more about the growth driver behind the [indiscernible] and what is your outlook for 2026. The second is for the buyback, we noticed that the $40 million buyback of region, the almost move up? And do you have any revenue buybacks to you?

There is some connecting issue. Would you please kindly repeat your questions again? .

Okay. The first one is about enterprise side. So I just want to know that whether you can give us some detail regarding for gaming and overseas market and is the outlook for 2022. The second 1 is about the share buyback because we used RMB 33.8 billion -- and so do we have any new scheme because it's close to our 3 million of our arrangement?

Sure. I'll take the question first. So the -- so you're asking about the gaming advertisement and overseas. So gaming is doing really well in Q2. So if -- so we talked about the gaming -- revenue from gaming actually increased 50% year-over-year. And we -- so we serve -- so the top game providers in China, both in the domestic market and also overseas. And [indiscernible] games and along with several other game providers are both growing quickly as our client.

And for games, we do both -- we do both brand-oriented kind of KOL marketing and also also the more performance-oriented advertising. So both are growing nicely. So that's a very quick update on games. And overseas market, we are -- as you know, we signed partnerships with ticked out last year. And with Google this year, and both partnerships are going on well. And -- we are also working.

So one update I can provide regarding Google is that revenue -- revenue with Google has increased triple digits percentage-wise. So -- so overseas also contributes to our growth significantly. So that's for overseas. Regarding the buyback, do you have anything?

[indiscernible] I will handle second question first. And for the share buyback, yes, we do announce about a $40 million share buyback plans about several quarters ago. And right [indiscernible]. And we'll process the rest of our budget for the share buyback in the next few quarters. And secondly, that my colleague mentioned about in the call, and we feel very confident about the return definitely received the painful year operating profit in this year. So that means we have more capability on our financial balance sheet to process a new plan maybe in the next few quarters. That depends on the market as well as dependent on investment in technology, especially, we think that will be spending more money and that will be more meaningful investment in the long run.

So we definitely will take care of our clarity of our balance sheet and to looking for the best strategies to balance the investment as well as the share buyback plan in the next -- in the future. I think I hope to answer you second question.

And for the first question, I'll just add some more color -- a little bit more color in the -- for the doctor's comments. And -- because we in our announcement -- press announcement, we mentioned about the growth of the advertising in Q2 is because of the growth of the business in the gaming industry and overseas market. From the -- as you have -- if you see the trend of the gaming market, the peak season roughly is in the second quarter and third quarter, and especially in the third quarter. So for the trend of the second half of this year, we expect we can just accelerate our growth for the advertisement.

So I think that will be -- it is domestically for the gaming as well as the market and overseas. So I think that is the trend -- we share a little bit of trend all the colors of the advertising business for Youdao.

This concludes our question-and-answer session. I would like to turn the conference back over to the management for closing comments.

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 Pearson Financial Communications in China or the U.S. Have a nice day.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.