Prepared remarks
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. 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 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 statements, except as required by law.
During today's call, management will also discuss certain non-GAAP financial measures for comparison purposes only. For the definition of non-GAAP financial measures and reconciliations of GAAP to non-GAAP financial results, please see the 2026 first 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 our senior management are Dr. Feng Zhou, our Chief Executive Officer; Mr. Lei Jin, our President; Mr. Peng Su, our Senior Vice President; and Mr. Wayne Li, our Vice President 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. Just this week, we released Confucius 4 for our open-source learning large language model. Its most important new feature is multi-modal 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. Product 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 one 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 business 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 two Bronze medals 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 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 two 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 surpassed 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-modal 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 increase by over 100% year-over-year. This growth was driven by two key upgrades. First, the deployment of our Confucius 3 translation model, which reduces latency and cost by approximately 50%.
Second, the evolution of the features from a translation tool 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 continues 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 two key areas: first, workflow synergies. InfunEase now enables brands to manage the full collaboration life cycle from top-tier influencers to proofs of concept 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 109.4 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 how 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 Peng Su 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 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 was 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 was 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 was 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 third-party 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 first quarter, our total operating expenses 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 expenses 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 was 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 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 ordinary shareholders for the first quarter were 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, was 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.
Questions and answers
If you would like to ask a question, please press star one on your telephone keypad. Today's first question comes from Brian Gong at Citigroup.
Congratulations on decent results. My question is about your AI. We have noticed that Youdao launched LobsterAI and Youdao Baoku in the fourth quarter. Could 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. For Youdao, our focus is on capturing this opportunity in the areas where we have strong capabilities: education, productivity and advertising. We are approaching this opportunity in AI from several dimensions. The first dimension is models and algorithms. It is increasingly clear that beyond foundation models, there are significant opportunities not just in pretraining but in post-training fine-tuning, reinforcement learning and the development of vertical and specialized purpose-built models. This is where we are focused. Our goal in the model area is to build specialized models that deliver unique intelligence for our users and customers. This has already become one of our key differentiators in education and advertising. For example, we recently released Confucius 4, our open-source educational LLM.
One of its most important features is vision input. It has been specially trained for education scenarios. This enables strong capabilities in solving and explaining problems that require visual input, for example geometry questions and geometry prompts. This directly supports our K-12 learning products such as math and geometry and other visualized problems that are very important for students. Similarly, we recently released Confucius-Translation 4, our latest translation model. It supports real-time voice translation across 40 languages and operates at less than one-tenth of the cost of general-purpose large language models, making it highly suitable for large-scale commercial deployments of popular live translation and voice interpretation services. The second dimension is applications. LobsterAI and Youdao Baoku are both exciting new products. Compared with our earlier AI products, these two are designed to be more intelligent, more agentic and more capable of handling long-running, complex, high-value tasks for our users.
LobsterAI is a personal desktop system that can support a wide range of use cases from creative exploration to productivity in professional settings. Youdao Baoku, in contrast, is more specialized and focuses on deep research and personal knowledge management. Both products have significant long-term potential. Going forward, we will continue to upgrade our AI applications to make them more intelligent, grow their user base and explore monetization opportunities. Beyond these two new products, our existing applications continue to perform well. AI simultaneous interpretation in Youdao Dictionary and Youdao Desktop Translation maintained strong growth in Q1, and we recently added voice-to-voice live translation features expanding beyond the existing voice-to-text live translation. Sales of AI simultaneous interpretation grew by over 100% year-over-year for the second consecutive quarter in Q1.
Another app is Scholar AI (Chinese name), an AI agent specifically for academic integrity. Colleges, students and researchers can use it to identify potential signs of AI-generated content in academic papers and research manuscripts. With the rapid growth of AI capabilities, academic integrity has become increasingly important. In Q1, Scholar AI achieved sales growth of over 200% year-over-year. The third and final dimension is making Youdao itself AI-native. This is equally important. Companies need to become AI-native internally, not just launch AI products externally. This requires continuous iteration across our workflows, systems and organizational practices. 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 advanced. This transformation has accelerated meaningfully since the end of last year.
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, specifically our tutors. We are also working on multiple projects to AI-enable our internal IT systems for the education businesses. Finally, we recently released ThinkFlow, an aggregation platform for AI inference services. It is an AI infrastructure product based on capabilities we first developed and used internally. This reflects our broader approach: build capabilities for our own operations, validate them in real business scenarios, and then extend them into products and services where they make sense for other companies. Overall, AI is core to our strategy and our next stage of growth. By advancing specialized models, releasing AI-native applications and transforming our work internally with AI, we are strengthening our competitive position in education, productivity and advertising, and creating new opportunities for sustainable revenue growth, profitability and cash flow improvements. I hope that answers your question.
And our next question today comes from Liping Zhao with CICC.
I'm curious about retention for Youdao Lingshi. Could management share some color on the recent updates?
Thank you, Liping. I will handle the question. First, from a mid-term to long-term perspective, top-level policy design has already unlocked an expansive growth runway for Youdao Lingshi. According to the education powerhouse construction plan and the 2026 government work report, there is a clear mandate to accelerate the expansion of high school educational resources. Furthermore, during the 15th Five-Year Plan period, it is expected to add over 2 million new high school seats, which has been publicly released recently. That capacity expansion will trigger structural growth in high school educational demand. As a pioneer deeply rooted in these sectors, Youdao Lingshi is uniquely positioned to be a primary beneficiary of this policy-driven scale dividend. In the first quarter, we launched the English AI essay grading feature. It immediately drove an over 20% year-over-year increase in gross billings, serving as a powerful validation of our product's efficiency and market competitiveness.
Now let us discuss recent retention performance. We have seen very strong momentum with the retention rate exceeding 75%, continuing its upward year-over-year trajectory. This high level of retention is a testament to users' recognition of our AI-interactive learning formats and high-quality services. It also solidifies the foundations for growth in Q2 and through the full year. Looking ahead, we will continue to leverage our Confucius large language model to deepen our footprint in differentiated AI-interactive learning formats. We are committed to expanding AI applications across the entire learning life cycle from diagnostics and assessments to personalized learning paths, knowledge expansion, Q&A and college entrance consulting services. Our goal is to bridge the gap between technology and accessibility and bring the efficiency of 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 Lei Jin. The rapid growth of our advertising business in this new year is at its core driven by our AI revolution. AI agents like AI MagicBox have revolutionized ad creative efficiency, while the AI ad placement optimizer has significantly boosted ROI through precision targeting 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 a growth engine for us. In the first quarter of this year, the momentum remains unabated with net revenue reaching RMB 611.1 million, a 20.9% year-over-year increase. Looking ahead, we are confident in the long-term development prospects of advertising. We have empowered programmatic advertising and KOL marketing through our priority vertical ADRM, achieving high alignment between people and business content.
We will focus our strategic layout on the following high-potential verticals. First is gaming, which remains our cornerstone. By combining deep gaming DNA with Youdao's cutting-edge technology, we continue to consolidate our presence in both domestic and overseas gaming marketing. Second is AI applications. We anticipate this will be the core incremental growth driver. The global explosion of AI products and AI agents has created a surge in demand for performance user acquisition, and our programmatic capabilities are a perfect fit for those digital products. Third is globalizing Chinese brands. There is robust demand for Chinese manufacturers and brands going global. For instance, the new energy vehicle industry is shifting from product-centric marketing to a 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.
Fourth is social apps and finance. We will leverage our expertise in data security and content ad 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 Huatai Securities.
This is Bo Zhang from Huatai Securities. My question is, could management elaborate on the seasonality of operating profits?
Thank you, Bo, for your question regarding seasonality. Youdao's financial metrics have historically exhibited pronounced seasonality. To provide a clear picture, I will address our business seasonality through three dimensions: revenue, operating profit and cash flow. First, seasonality of revenue. Our top-line performance typically follows a stronger second half year 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 holiday season, which drives both domestic and overseas marketing demand. With respect to learning services, the summer and winter breaks represent the intensive periods for service delivery and Q3 is usually the peak season. As for smart devices, sales typically peak at the start of a new academic year, especially in Q3.
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 an anomaly due to our strategic restructuring of learning services. We proactively focused on Youdao Lingshi while scaling back investment in STEM and add-on 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 resulted in unusually 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 was relatively lower in the second half of 2025. For 2026, we expect the profit cadence to return to historical norms with H2 outperforming H1. Given the factors above, we place greater emphasis on operating profit growth over the longer term, which better reflects the overall financial health of our business. Third, seasonality of cash flow. Our operating cash flow typically generated net outflow in Q1 and Q3 during peak customer acquisition phases and inflow in Q2 and Q4 during major retention cycles. 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 a 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.