Youdao (DAON) Q2 2026 Earnings Report

The earnings call conveyed a predominantly positive operational and financial trajectory: revenue and gross profit grew, the company delivered a clear net income turnaround, operating profit and cash flow strengthened materially, and AI product advances (Confucius 4, Confucius4-TTS, AI agents) drove meaningful user engagement and learning revenue growth. Key negatives included a steep decline and margin pressure in the smart devices segment and a year-over-year revenue decline in online marketing (offset partially by margin improvement). Overall, the positive improvements in profitability, cash generation, AI-driven learning growth and product momentum outweigh the device- and ad-revenue headwinds.

Management guided that they expect continued margin and profitability improvement in H2 2026 driven by deeper AI/LLM integration and new AI agents (multiple model/agent launches planned in September), noting Q2 results to frame the outlook: total net revenue of RMB 1.5 billion (+3.5% YoY; RMB 2.8 billion H1, +3.6% YoY), Q2 operating profit of RMB 111.5 million (nearly 4x YoY) and operating margin of 7.6% (vs 2% a year ago), net income attributable of RMB 73.8 million (non‑GAAP RMB 90.6 million), Q2 net cash from operations RMB 334.2 million (+80.7% YoY; H1 operating cash flow RMB 241.1 million vs a RMB 70.5 million outflow a year ago); segment metrics they expect to improve include online‑marketing (Q2 revenue RMB 584.4 million, -7.7% YoY; Q2 margin 28.7%, +~3 pp YoY with Q3 margin expected to continue improving), learning services (Q2 revenue RMB 795.6 million, +20.9% YoY; Q2 gross margin 65.5% vs 59.8% a year ago; Lingshi retention >75%; AI subscriptions ~RMB100 million in Q2, +>20% YoY; essay grading and simultaneous interpretation usage +100% YoY), and smart devices (Q2 revenue RMB 86.8 million, -31.5% YoY; Q2 margin 32.8% and H1 ~37%, with management targeting >40% margin in H2), while continuing to add customers (100+ new advertisers in Q2) and prioritize higher‑ROI, higher‑margin opportunities to drive further operating‑profit gains.