Detailed narrative
Overall Financial Performance
Youdao reported solid Q2 FY26 results with net revenues of RMB 1.5 billion (USD 216.2 million), a 3.5% year-over-year increase. Operating profit reached a record RMB 111.5 million, nearly fourfold year-over-year, marking the eighth consecutive quarter of operating profitability. Net cash inflow from operating activities was RMB 334.2 million, up 80.7% year-over-year. For the first half of 2026, total net revenues were RMB 2.8 billion, up 3.6% year-over-year, with operating profit increasing 27.3% to RMB 169 million and net operating cash flow reaching RMB 241.1 million, a substantial improvement from a net outflow in the prior year.
AI Technology and LLM Advances
The company rolled out Confucius4, its proprietary large language model, with significant upgrades in multimodel voice and translation capabilities, improving visual math and physics reasoning and reducing inference costs by approximately 80% for translation. Its growing portfolio of AI agents, including LobsterAI, Hi Echo, Youdao Baoku, InfunEase, and iMagicBox, was showcased at the 2026 World AI Conference, demonstrating AI's role in executing complex tasks across learning, work, and advertising scenarios. The Beijing Key Laboratory of artificial intelligence for multilingual translation, co-founded by Youdao, was officially launched in Q2.
Learning Services Growth and AI Integration
Net revenues from learning services increased 20.9% year-over-year to RMB 795.6 million (USD 117.3 million), primarily driven by the strong performance of Youdao Lingshi. AI-powered features like English essay grading saw volume more than double sequentially, contributing to a retention rate of over 75%. AI-driven subscription products generated approximately RMB 100 million in sales during Q2, up more than 20% year-over-year. The company also launched what it believes is the world's first 14-language cross-lingual accent-free voice cloning technology, Confucius4-TTS, and open-sourced its model weights and toolchains for broad adoption.
Online Marketing Services Strategic Shift
Net revenues for online marketing services decreased 7.7% year-over-year to RMB 584.4 million (USD 86.1 million). This decline was attributed to a deliberate focus on higher-quality, higher-margin opportunities, resulting in a gross margin improvement to 28.7%, up approximately 3 percentage points year-over-year. The company added more than 100 new clients during the quarter and increased advertiser retention by approximately 5 percentage points sequentially. AI application and short-form drama advertising businesses maintained strong momentum, with revenues growing more than 50% year-over-year for the second consecutive quarter.
Smart Devices Performance and Product Launch
Net revenues for smart devices decreased 31.5% year-over-year to RMB 86.8 million (USD 12.8 million), primarily due to reduced demand for smart learning devices. Despite this, the Youdao Dictionary Pen ranked #1 in sales in its category on both JD.com and Tmall during the June 18 shopping festival for the seventh consecutive year. The company recently launched the Youdao Dictionary Pen XH, featuring an expanded database of 80 million operative words and AI-powered photo-based tutoring across multiple subjects, receiving positive initial market response.
Profitability and Margin Outlook
Total gross profit increased 17.6% year-over-year to RMB 716.9 million. Gross margin for learning services improved to 65.5% from 59.8% in Q2 2025, and for online marketing services to 28.7% from 25.8% in Q2 2025. Smart devices gross margin declined to 32.8% from 41.5% due to rising memory costs. Management expects smart devices gross margin to recover to over 40% in H2 2026 and anticipates stronger overall gross margin performance and operating profit breakthroughs in the second half of the year due to continued AI integration and efficiency optimization.