Youdao, Inc.

Good day and welcome to Yodal's first quarter 2025 earnings conference call. All participants are in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Jeffrey Wong, Investor Relations Director. 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 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 Yodal's business and financial results is included in certain company filings with the U.S. Securities and Exchange Commission. The company does not undertake any obligation to update this forward-looking information except as required by law. During today's call, management will also discuss certain non-GAAP financial measures for comparison purposes only. For the definitions of non-GAAP financial measures and reconciliations of GAAP to non-GAAP financial results, please see the 2025 First Quarter Financial Results News Release issued earlier today. As a reminder, this conference is being recorded. A web coverage replay of this conference call will be available on Yodal's corporate website at .Yodal.com. Joining us today on the call from Yodal's senior management is Dr. Feng Zhou, our chief executive officer, Mr. Lei Jin, our president, Mr. Peng Zhou, our senior president, and Mr. Wayne Lee, our VP of finance. I will now turn the call over to Dr. Zhou to review some of our recent highlights and strategic 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 RMB, unless otherwise specifically stated. In the first quarter, we significantly boosted profitability while executing our AI-native strategy through product development. Outbreaking income reached a Q1 record of RMB 104.0 million, surging 247.7 percent year over year. Net revenues were RMB 1.3 billion, declining 6.7 percent, primarily due to decreased learning services revenue. Overnight cash outflow narrowed by 34.7 percent to RMB 255.5 million, reflecting stronger financial efficiency. Product R&D accelerated in Q1. We launched Confucius 01, our first open source reasoning model. We trialed with key clients, Yodal Magic Box, an AI-powered app creative suite. We also introduced Space One, our first large screen tutoring pen. These advances reinforced our AI-native strategy that is applying large language model technology to critical learning and advertisement scenarios, solving real world challenges, driving user satisfaction and business growth. Now let's look at our business lines. In the first quarter, although net revenues from learning services segment declined by 16.1 percent year over year, the rate of decline narrowed by approximately five percentage points compared to the previous quarter. Net revenues covered the segment's costs and operating expenses and yielded meaningful profits. Within the learning services segment, net revenues from digital content services were RMB 410.8 million in Q1. The product team enhanced Yodal Ling Shi's college planning solutions using our proprietary Confucius LRM. The upgraded AI college admission advisors now features six integrated components. 24 by 7 online Q&A services, comprehensive university and program databases, specialized courses and materials, professional assessment tools, and AI-powered recommendation system for school selection and predictive admission analytics. This comprehensive ecosystem has significantly improved our differentiated user experience, contributing to over 25 percent -over-year growth, growth scaling growth in Q1 and recently improved retention rates. In STEAM courses, our programming courses saw strong growth scaling growth of over 40 percent year over year, fueled primarily by strong demand for GESP, that is, great examination of software programming, preparation courses, and more efficient customer acquisition channels. Our AI-driven subscription services generated nearly RMB 70 million in Q1 sales, growing over 40 percent year over year. On the model development front, we open sourced Confucius 01 in Q1, a lightweight 14 billion parameter reasoning model that delivers competitive K-12 performance while being significantly more cost-effective and easier to deploy than larger alternatives. We also enhanced our flagship translation models through multi-model fusion and online direct preference optimization, DPO training, achieving quality improvements, cost reductions, and increased adoption. The translation model now processes over 1.5 billion tokens daily as of April, representing 100 percent growth since Q1. Additionally, we recently started self-hosting full-size DeepSeq R1 inference for our products instead of relying on third-party DeepSeq model services, improving latency and stability while reducing costs at the same time. Moving on to our applications, the upgraded Mr. P AI Tutor now features a multi-model visual system with over 92 percent accuracy for K-12 problem solving, up from 85 percent last year, and is available across both the Mr. P app and our hardware devices. We recently launched the Youdao AI podcaster system, an innovative audio synthesis platform that instantly converts text documents like PDF, Word files, and web pages into studio quality podcasts, earning a featured recommendation on the Apple App Store. We also introduced our AI-powered Academic Paper Plagiarism Detection system, which detects AI-generated content in academic writing while providing actionable suggestions to enhance originality and quality. Turning to online marketing services, Q1 net revenues rose 2.6 percent -over-year to R&B 505.4 million. Our performance-based advertising client base grew by 20 percent -over-year in Q1, reflecting the successful scaling of our client acquisition efforts. A key driver for future performance growth. In overseas advertising, we have recently secured official Google Partner Certification, complementing our existing TikTok partnership. These collaborations provide access to premium ad inventory and optimization tools, enabling more impactful international campaigns. Technology remains at the heart of our advertising strategy. Leveraging our Confucius LRM, we launched the Youdao Magic Box, an AI-powered creative suite that automatically produces high-quality ad assets, including images, videos, and dynamic templates. This innovative solution is poised to play a pivotal role in transforming content creation workflows. In addition, we have deepened the collaboration with NetEase Group through two operational initiatives. First, we strengthened our partnership with NetEase Games, driving over 50 percent -over-year growth in advertising revenue from gaming industry clients. Second, we enhanced the collaboration with NetEase Cloud Music, expanding the range of advertising scenarios available to advertisers. Growth margin from online marketing services moderated to 30.5 percent in Q1, and approximately 4 percentage points decline -over-year. This primarily reflects our strategic emphasis on client acquisition, as newer clients typically impact margins during initial onboarding. Looking ahead, we anticipate the segment's growth margin to stabilize between 25 percent to 35 percent in the medium to long term. Our smart devices segment delivered RMB 190.5 million in Q1 revenues, representing a 5.1 percent -over-year growth. In February, we introduced Youdao Space One, an AI-powered large screen tutoring pen featuring our Confucius Multi-Model LLM. This innovative device offers precise image recognition, -to-speech conversion, and voice dictation capabilities, significantly broadening application scenarios while improving the learning experience. The product's strong market reception was evident as the initial inventory sold out within 10 days, contributing to over 20 percent -over-year growth in our dictionary pen revenue during the quarter. Moving forward, we will accelerate the integration of our Confucius Large Language Model across both learning and advertising verticals, executing our AI-native strategy to elevate user experiences while driving greater growth. Having achieved our first full-year operating profit in 2024, we are now strategically positioned to maintain this positive trajectory, targeting accelerated profit growth and achieving operating cash flow break even for full year 2025. With that, I'll pass the call to Su Peng for a detailed review of our financial performance. Thank you.

Thank you, Dr. Zhou, and hello, everyone. Today I will be presenting some financial highlights from the first quarter of 2025. We encourage you to read through our press release issued earlier today for further details. For the first quarter, total narrow revenue was RMB 1.3 billion, while U.S. dollar, 178.9 billion, representing a 6.7 percent decrease from the same period of 2024. Narrow revenue from our learning services was RMB 600, 2.4 million, U.S. dollar, 83 million, representing a 16.1 percent decrease from the same period of 2024. The -over-year decrease was mainly because we continue to take a strategic approach to customer acquisition, which place greater emphasis on high ROI, return on investments, and engagement. We believe that despite the short-term revenue decline, this strategy has enhanced the overall resilience and operational efficiency of our business. Narrow revenue from our smart devices was RMB 190.5 million, U.S. dollar, 26.3 million, up 5.1 percent from the same period of 2024, which was primarily driven by the continuing increase in sales of Udall Dictionary Pen in the first quarter of 2025. Narrow revenue from our online marketing services was RMB 505.4 million, U.S. dollar, 69.6 million, representing a 2.6 percent increase from the same period of 2024. For the first quarter, our total gross profit was RMB 614.2 million, U.S. dollar, 84.6 million, representing a 9.9 percent decrease from the same period of 2024. Gross margin for learning services was 59.8 percent for the first quarter of 2025, compared with 63.1 percent for the same period of 2024. Gross margin for smart devices was 52.3 percent for the first quarter of 2025, compared with 32.6 percent for the same period of 2024. Gross margin for online marketing services was 30.5 percent for the same period of 2024. For the first quarter, we reduced our total operating expense to RMB 510.2 million, U.S. dollar, 70.3 million, compared with RMB 651.6 million for the same period of the last year. Looking at our expense in more details, sales and marketing expense declined to RMB 357.6 million, compared with RMB 455.4 million in the first quarter of 2024. Research and development expense decreased to RMB 115.5 million, compared with RMB 146.7 million in the first quarter of 2024. Our operating income margin was 8 percent in the first quarter of 2025, compared with 2.1 percent for the same period of last year. For the first quarter of 2025, our net income attributable to ordinary shareholders was RMB 76.7 million, U.S. dollar 10.6 million, an increase of over six times from the RMB 12.4 million for the same period of last year. Non-GAP net income attributable to ordinary shareholders for the first quarter was RMB 81.7 million, U.S. dollar 11.3 million, a significant increase from RMB 20.3 million for the same period of last year. Basic and dilute net income per ADS attributable to ordinary shareholders for the first quarter of 2025 was RMB 0.65 or U.S. dollar 0.09 and RMB 0.64 or U.S. dollar 0.09 respectively. Non-GAP basic and diluting net income per ADS attributable to ordinary shareholders for the first quarter was RMB 0.69 or U.S. dollar 0.1 and RMB 0.68 or U.S. dollar 0.09 respectively. Our net income attributable to non-GAP cash using operating activities was RMB 255.5 million or U.S. dollar 35.2 million for the first quarter. Looking at our balance sheet as of March 31, 2025, our contract liabilities, which mainly consist of the different revenue generated from our land services were RMB 711.2 million or U.S. dollar 98 million compared with RMB 961 million as of December 31, 2024. At the end of the period, our cash, cash equivalents, current and un-current, is the strict cash and short-term investment totaled RMB 424.5 million or U.S. dollar 58.5 million. This concludes our prepared remarks. Thank you for your attention. We would now like to open the call to our questions. Operator, please go ahead.

We will now begin the question and answer session. To ask a question, you may press the button on your telephone keypad. If you are using a speakerphone, please pick up the handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press the button. Your first question comes from Brian Gungwood City.

Thanks, Matthew, for taking the question. A very good question on AI. I noticed our AI worker integrated deep-seats ahead of our peers in the first quarter. So from a medium to longer perspective, how does medicine view the differentiation between your thoughts, large language model confusions, and other large language models in educational scenarios? Thank you. Hi,

Brian. So let me take the question. From day one of the large language model development back in early 2023, we've emphasized the importance of embracing open technologies. So this year, the release of DeepSeek R1 provided the perfect opportunity for us to exercise that strategy. So that is why we are the first in the tech industry to integrate it into our LLM stack and Mr. P, AI tutor, in Q1, giving users options for models to solve K-12 pumps. So at the same time, our proprietary model Confucius has been evolving since 2023. In January, we released a major leap with Confucius R1, actually before the DeepSeek R1 release. So Confucius R1 was the first open source educational reasoning model capable of -by-step exposition while being far more GPU efficient than general purpose models. So this next generation Confucius is now also deeply integrated across our learning services. So AI driven subscriptions and also smart devices, solidifying our leadership in deploying large language models for education in China. So let me highlight three key advantages of combining open and proprietary technologies for you. The first we believe is this new approach enhances user experiences. Confucius delivers faster responses while DeepSeek R1 often provides more comprehensive answers. We've observed that users very naturally adopt Confucius for quick checks and DeepSeek for in-depth explanations. So currently, actual usage is split roughly evenly. Second, we believe open technologies accelerate our teams and technology growth. Just as Google Android leverages the Linux kernel, we benefit from the broader ecosystem while contributing back. This dynamic environment pushes our teams to iterate faster, keep us at the forefront of innovation. Thirdly, Confucius excels in education specific scenarios. So thanks to continuous refinements, it outperforms general purpose models in a few very important areas. First is translation quality. Confucius leads the industry in translation accuracy, a core capability for our platforms while operating at a fraction of the cost of general purpose models. As noted earlier, we've completed our year-long transition from NMT to LAM translation, now processing over 1.5 billion tokens every day. The second strength of Confucius is that it has a 92% accuracy in K-12 problem solving. So that is a 7.0 -over-year improvement over last year, significantly surpassing stand-alone DeepSeek performance in these scenarios. So we're also optimizing our use of DeepSeek by migrating DeepSeek R1 inference to our fully internal deployment. We've achieved .9% availability, lower latency, and also greater cost efficiency with further optimization still ongoing. So our progress has agained a lot of recognition. Actually, the Time magazine recently ranked the Yodow as the world's number two ad tech company among over 7,000 firms, underscoring our leadership in LAM deployment and operational excellence. So moving forward, we'll deepen our focus on educational verticals, enhancing Mr. Pei's accuracy while also expanding Confucius into more areas, including lesson planning, grading, and assessments. So exciting products and model updates are coming this summer, and we look forward to sharing them soon. Thank you.

Thank you.

Your next question comes from Liping Zhao with CICC.

Good evening, Dr. Zhao, Mr. Su, and Ms. Lee. My question is about your learning service. So I noticed that the net revenue from learning service segments remind -over-year decline during the first quarter. When does you project the segment's revenue to return to growth? Thank you.

Thank you, Brenda. This is Su Feng. I will handle the question first. And I think our adjustment for the learning service segment initiated last year remains ongoing right now. And we have intensified our focus on service with robust demands and significant growth potentials, such as the Yodow link true, wealth, getting back, non-essential offering. And as we mentioned in the last two quarters, it will be accomplished in this year. And although the net revenue from the learning service segments do decline from -over-year basis in Q1, the rate of decline narrowed by roughly 5% compared to the previous quarters. This improvement was primarily driven by the resilient performance of the Yodow link true business. The first is about the Chinese paid college entrance exam at the Y3 service market has been demonstrated significant growth potentials in recent years, driven by the involving college and school selection rules under the new policies and sometimes the families urgent needs to bridge the information gaps. In Q1, we launched an upgraded AI college admission advisors powered by our large-language models, offering the user professional, efficient, and telemented one-stop services. This service gained immediate user recognizations and driving the Yodow link true Q1's growth by over 25% -over-year. And looking forward, we expect a sustained rapid growth for our AI college admission advisors. Our computers modeling continuous advancements will further refine the recommendation accuracy. We are pricing at least less than 10% of the traditional advisory fee and make quality guidance accessible to more families. And at the same time, we just noticed about the recent education construction plan online has been released, which emphasizes cultivating the top-tier innovative talents and including the outstanding talent program for exceptional high school students. We will definitely actively monitor the policy development and leverage our premium resources and product expertise to capitalize on these emerging opportunities. And in summary, we anticipate the completing our segments restructuring in the second half of this year, with revenue civilizations expected thereafter. For our flagship Yodow link true services, we project both revenue and profit to achieve -over-year growth in this year. Thank you, Brenda.

Thank

you. Your next question comes from Thomas Chung with Jefferies.

Hi, good evening. Thanks, management, for taking my question. My question is about online marketing services. As we see, revenue for online marketing services has remained at around 500 million for six consecutive quarters. When does management anticipate re-acceleration in revenue growth? Thank you.

Hi, this is Lei Jun. Assuming the stable market conditions and execution of our business plan, we expect online marketing services revenue will show stronger growth momentum in the second half of this year compared to the first half, driven by three key factors. First, accelerated overseas advertising expansion. After obtaining Google's official partnership status in Q1 and completing certification, we are now implementing collaborative initiatives that should contribute meaningful to H2 revenue. Additionally, our TikTok advertising revenue maintains strong growth in Q1, a trend we expect to continue through the year end. Second, updated AI-powered advertising solutions. Our Q1 launch of Youdao Magic Box, an AI-driven one-click ADE-created tool, marked the first step to our enhanced capabilities. We are currently developing our AI advertising optimizer. With the beta version launching in Q2 and a full release planned for H2. This system will automatically generate compared to other devices, including targeting scenarios and budget allocation, aligned with the advertiser objectives while continuously optimizing through real-time LRM insights and adaptive recommendation models. Third, deepened collaboration with NetEase Group. In Q1, we leveraged our algorithmic and data analytics expertise to enhance the efficiency of NetEase gaming promotions. In particular, for global promotions, our OOC influencer network now encompasses 15 billion creators across 75 countries, reaching over 2 billion users directly. NetEase is out of our tight tighting band with us, through Saturday in Q1. With this positive trajectory, we are excited to continue. Regarding tariff impacts, now the uncertainty duties may present the challenges for acquiring overseas e-commerce clients. This segment currently represents a minimum portion of total AD revenue, making the overall effect largely stable. We should note that H2 performance remains subject to macroeconomic conditions in domestic and international markets, which could introduce operational vulnerabilities. Thank you.

Your next question comes from those on with HuTai Securities.

Hello, thanks for taking my question. This is Zhang Guo from HuTai. My question is, last year was the first full year of mobility. Among the four quarters, only the second quarter reported an operating loss. Is there a possibility of a probability in the second quarter? Thank you

Zhang Guo. This is Wen Li. I will take your question. Our financial performance throughout 2024 and Q1 2005, bounced to a significant 10 and 10 probability improvement. This program validates the success of our strategic initiatives across three critical areas. First, Shenzhen focuses on high-margin digital content, advertising and AI-powered subscriptions. Second, comprehensive AI native transformation boosting operational efficiency. The last one is, the simplified cost optimization. By concentrating resources on online marketing services and other key initiatives, we've successfully contained the losses from non-core operations. Our AI integration has revolutionized multiple business functions, from cost operations to AD production and R&D, delivering higher efficiency and profitability levels compared to our historical performance. Historically, Q2 has remained unprofitable mainly due to two seasonality reasons. First, Q2 is traditionally the weakness quarter for revenue generation from learning services and smart devices. Second, substantial sales and marketing campaign for summer enrollment, which typically began in June. For Q2 this year, we will maintain our strategic priorities like language model department and cost development, while further optimizing our cost structure in line with our full year profitability goals. Our ongoing investments in core offerings like the darling may temporarily wait two seconds. These programs are designed to strengthen

competitive positions

and drive full fiscal profitability. Summary. Factors can reduce Q2's operation losses year over year, while acknowledging potential macroeconomic uncertainty that may affect the results. We wish it is helpful. Thank you.

Thank you.

This concludes our question and answer session. I would like to turn the conference back over to Jeffrey Long for any closing remarks.

Thank you once again for joining us today. If you have any further questions, please feel free to contact us now at UDAL 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.