Youdao posts record Q2 operating profit of RMB 111.5 million

Youdao (DAO) reported second quarter 2026 net revenues of RMB 1.5 billion, a 3.5% year-over-year increase, alongside a record operating profit of RMB 111.5 million. Chief Executive Officer Feng Zhou stated on the earnings call that this result marks the company's eighth consecutive quarter of operating profitability. Net cash inflow from operating activities reached RMB 334.2 million, up 80.7% from the same period last year.

The company's learning services segment drove the top-line growth, with net revenues rising 20.9% year-over-year to RMB 795.6 million. This performance was primarily attributed to the strong uptake of Youdao Lingshi, where AI-powered features such as essay grading and quiz recommendations contributed to a user retention rate exceeding 75%. Conversely, smart devices revenue declined 31.5% year-over-year to RMB 86.8 million due to reduced demand for hardware, while online marketing services revenue fell 7.7% to RMB 584.4 million as the company prioritized higher-margin engagements.

Feng Zhou highlighted the rollout of Confucius 4, the company's proprietary large language model, which features upgraded multimodal and voice capabilities. The new model improved inference speed by approximately 80% in translation tasks and enhanced reasoning for visual math and physics problems. Youdao also launched a cross-lingual voice cloning technology supporting 14 languages, for which the company open-sourced the model weights to facilitate commercial use.

VP of Finance Yongwei Li detailed the margin expansion, noting that total gross profit increased 17.6% year-over-year to RMB 716.9 million. The operating income margin reached 7.6% in the second quarter, compared with 2% in the prior year period. Net income attributable to ordinary shareholders was RMB 73.8 million, a reversal from a net loss of RMB 17.8 million in the same quarter last year.

Looking ahead, President Lei Jin stated that online marketing gross margin is expected to continue improving in the third quarter. The company plans to launch an overseas KOL marketing agent and focus on fast-growing sectors such as AI applications and short-form dramas. Li added that smart device gross margins are anticipated to recover to over 40% in the second half of the year as new product launches mitigate the impact of rising memory costs.