Youdao (DAO) investor relations material

Executive summary

• Net revenues reached RMB 1.35 billion in Q1 2026, up 3.8% year-over-year, marking the seventh consecutive quarter of operating profitability.

• Operating profit was RMB 57.5 million, with a sequential improvement in operating margin to 4.3%.

• AI-driven product launches and upgrades, including Confucius4 LLM, EmotiVoice 2, and Confucius Translation 4, supported business growth and innovation.

• Strategic focus on AI-driven learning, marketing, and smart devices, with expanded AI Agent matrix and proprietary LLM capabilities.

Financial highlights

• Total revenue was RMB 1.35 billion, a 3.8% increase year-over-year; learning services revenue grew 4.2% to RMB 627.5 million.

• Online marketing services revenue rose 20.9% year-over-year to RMB 611.1 million; smart devices revenue declined 42.6% to RMB 109.4 million.

• Gross margin was 44.7%, down from 47.3% year-over-year, mainly due to lower smart device margins.

• Net income attributable to ordinary shareholders was RMB 38.6 million, down from RMB 76.7 million year-over-year; non-GAAP net income was RMB 44.9 million.

• Net cash used in operating activities was RMB 93.1 million; contract liabilities (deferred revenue) stood at RMB 667 million as of March 31, 2026.

Outlook and guidance

• Management expects continued improvements in profitability and cash flow for full-year 2026, driven by AI product innovation and operational discipline.

• Advertising is projected to remain the primary contributor to operating profit, with focus on gaming, AI applications, globalizing Chinese brands, and finance sectors.

• Profit trend for 2026 expected to return to historical norms, with stronger H2 performance.

• Emphasizes generative AI applications to accelerate operating income growth and expand AI-driven subscriptions and advertising.