Youdao : First Quarter 2025 Earnings Conference Call (Transcript)

Published: 2025-05-15 07:05:10 ET DAO

Published on 05/15/2025 at 07:05

Speaker dial-in numbers:

China: 4001-201203

Toll free (US): 1-866-250-8117

Conference ID: Youdao, Inc.

Good day, and welcome to the Youdao 2025 first 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 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 future performance and are subject to certain risks and uncertainties, assumptions and other factors. Some of these risks are beyond the Company's control and could cause actual results to differ materially from those mentioned in today's press release and this discussion.

A general discussion of the risk factors that could affect Youdao's business and financial results is included in certain Company filings with the U.S. Securities and Exchange Commission. The Company does not undertake any obligation to update this forward-looking information, except as required by law.

During today's call, management will also discuss certain non-GAAP financial measures, for comparison purposes only. 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 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 based on Renminbi, unless otherwise specifically stated.

In the first quarter, we significantly boosted profitability while executing our AI-native strategy through product development. Operating income reached a Q1 record of RMB104.0 million, surging 247.7% year-over-year. Net revenues were RMB1.3 billion, declining 6.7% primarily due to decreased learning services revenues. Operating cash outflow narrowed by 34.7% to RMB255.5 million, reflecting stronger financial efficiency.

Product R&D accelerated in Q1. We launched Confucius-o1, our first open-source reasoning model. We trialed with key clients Youdao MagicBox - an AI-powered ad creative suite. We also introduced SpaceOne - our first large-screen tutoring pen. These advances reinforce our AI-native strategy - applying LLM 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 the learning services segment declined by 16.1% year-over-year in Q1, the rate of decline narrowed by approximately 5 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 RMB410.8 million in Q1. The product team enhanced Youdao Lingshi's college planning solutions using our proprietary Confucius LLM. The upgraded AI College Admission Advisers (AI 升学规划师) platform now features six integrated components: 24x7 online Q&A services, comprehensive university and program databases, specialized preparatory courses and materials, professional assessment tools, an 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% year-over-year gross billing growth in Q1 and recently improved retention rates.

In STEAM courses, our programming courses saw strong gross billing growth of over 40% year-over-year, fueled primarily by strong demand for GESP (Grade Examination of Software Programming) prep courses and more efficient customer acquisition channels.

Our AI-driven subscription services generated nearly RMB70 million in Q1 sales, growing over 40% year-over-year. On the model development front, we open-sourced Confucius-o1 in Q1 -a lightweight 14B parameter reasoning model that delivers competitive K12 area performance while being significantly more cost-effective and easier to deploy than larger alternatives. We also enhanced our flagship translation model 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%+ growth since Q1. Additionally, we recently started self-hosting full-size DeepSeek R1 inference for our products, instead of relying on third-party DeepSeek model services, improving latency and stability while reducing costs at the same time.

Turning to online marketing services. Q1 net revenues rose 2.6% year-over-year to RMB505.4 million. Our performance-based advertising client base grew by 20% year-over-year in Q1, reflecting the successful scaling of our client acquisition efforts - a key driver for future performance ad 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 LLM, we launched Youdao MagicBox, 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% year-over-year growth in advertising revenue from gaming industry clients. Second, we enhanced collaboration with NetEase Cloud Music, expanding the range of advertising scenarios available to advertisers.

Gross margin from online marketing services moderated to 30.5% in Q1, an approximately 4-percentage-point decline year-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 gross margin will stabilize between 25% to 35% in the medium-to-long term.

Our smart devices segment delivered RMB190.5 million in Q1 revenues, representing 5.1% year-over-year growth. In February, we introduced Youdao SpaceOne - an AI-powered large

screen tutoring pen featuring our Confucius multi-modal LLM. This innovative device offers precise image recognition, photo-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% year-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 breakeven for full-year 2025.

With that, I'll now 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 net revenues were RMB1.3 billion, or US$178.9 million, representing a 6.7% decrease from the same period of 2024.

Net revenues from our learning services were RMB602.4 million, or US$83.0 million, representing a 16.1% decrease from the same period of 2024. The year-over-year decrease was mainly because we continued to take a disciplined, strategic approach to customer acquisition, which places greater emphasis on high-ROI (return on investment) engagements. We believe despite the short-term revenue decline, this strategy has enhanced the overall resilience and operational efficiency of our business.

Net revenues from our smart devices were RMB190.5 million, or US$26.3 million, up 5.1% from the same period of 2024, which was primarily driven by the continued increase in sales of Youdao Dictionary Pen in the first quarter of 2025.

Net revenues from our online marketing services were RMB505.4 million, or US$69.6 million, representing a 2.6% increase from the same period of 2024.

For the first quarter, our total gross profit was RMB614.2 million, or US$84.6 million, representing a 9.9% decrease from the same period of 2024.

Gross margin for learning services was 59.8% for the first quarter of 2025, compared with 63.1% for the same period of 2024.

Gross margin for smart devices was 52.3% for the first quarter of 2025, compared with 32.6% for the same period of 2024.

Gross margin for online marketing services was 30.5% for the first quarter of 2025, compared with 34.3% for the same period of 2024.

For the first quarter, we reduced our total operating expenses to RMB510.2 million, or US$70.3 million, compared with RMB651.6 million for the same period of last year.

Looking at our expenses in more detail:

Sales and marketing expenses declined to RMB357.6 million, compared with RMB455.4 million in the first quarter of 2024.

Research and development expenses were decreased to RMB115.5 million, compared with RMB146.7 million in the first quarter of 2024.

Our operating income margin was 8.0% in the first quarter of 2025, compared with 2.1% for the same period of last year.

For the first quarter of 2025, our net income attributable to ordinary shareholders was RMB76.7 million, or US$10.6 million, an increase of over sixfold from RMB12.4 million for the same period of last year. Non-GAAP net income attributable to ordinary shareholders for the first quarter was RMB81.7 million, or US$11.3 million, quadrupled from RMB20.3 million for the same period of last year.

Basic and diluted net income per ADS attributable to ordinary shareholders for the first quarter of 2025 were RMB0.65, or US$0.09 and RMB0.64, or US$0.09, respectively. Non-GAAP basic and diluted net income per ADS attributable to ordinary shareholders for the first quarter was RMB0.69, or US$0.10 and RMB0.68, or US$0.09, respectively.

Our net cash used in operating activities was RMB255.5 million, or US$35.2 million, for the first quarter.

Looking at our balance sheet, as of March 31, 2025, our contract liabilities, which mainly consist of deferred revenue generated from our learning services, were RMB711.2 million, or US$98.0 million, compared with RMB961.0 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 investments totaled RMB424.5 million, or US$58.5 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.

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

Disclaimer

Youdao Inc. published this content on May 15, 2025, and is solely responsible for the information contained herein. Distributed via Public Technologies (PUBT), unedited and unaltered, on May 15, 2025 at 11:04 UTC.