Youdao (NYSE:DAO) reported a modest increase in first-quarter 2026 revenue while maintaining operating profitability for a seventh consecutive quarter, as management said the company continued to invest in artificial intelligence products and infrastructure.
CEO Feng Zhou said net revenue for the quarter was RMB 1.3 billion, up 3.8% from a year earlier. Operating profit was RMB 57.5 million, with operating margin improving sequentially by 0.5 percentage points to 4.3%. Zhou said operating profit declined 44.7% year over year, primarily due to investments in strategic initiatives including AI, as well as a high comparison base from the restructuring of learning services in the prior-year period.
Net operating cash outflow narrowed 63.6% year over year to RMB 93.1 million, Zhou said. “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,” he said.
AI Products Remain Central to Strategy
Zhou highlighted several AI model and product launches during the quarter and shortly afterward. The company released Confucius4, an open-source learning large language model with multimodal input capabilities, which Zhou said is designed to help solve and teach K-12 subjects requiring visual understanding, such as geometry. Youdao also released EmotiVoice 2, an open-source high-fidelity AI text-to-speech model, and Confucius Translation 4, an AI translation model supporting 40 languages.
In response to an analyst question from Citigroup’s Brian Gong, Zhou said Youdao is focused on AI opportunities in education, productivity and advertising. He said the company sees significant opportunities beyond foundational models, including post-training, fine-tuning, reinforcement learning and vertical models.
Zhou also discussed two new AI agent products launched in the quarter: LobsterAI, a personal AI desktop assistant, and Youdao Baoku, an AI-native knowledge base for complex knowledge synthesis. LobsterAI has surpassed 5,000 stars on GitHub since its open-source release, according to Zhou. He said Youdao Baoku can decompose complex queries, perform multi-round verification and generate structured outputs such as presentations and mind maps.
Zhou added that AI simultaneous interpretation features in Youdao Dictionary and Youdao Desktop Translation saw user engagement rise more than 100% year over year, helped by lower latency from Confucius3 translation models and a shift toward more autonomous AI-agent functionality.
Learning Services Revenue Rises
Learning services revenue rose 4.2% year over year to RMB 627.5 million. Zhou said Youdao Lingshi maintained strong momentum, with gross billings growing more than 20% year over year in the quarter. Programming courses also recorded gross billings growth of more than 20%.
The company launched an English AI Essay Grading feature powered by its Confucius LLM. Zhou said the feature provides personalized feedback reports in about one minute and has graded approximately 10,000 essays to date.
Peng Su, Youdao’s senior vice president, said in the question-and-answer session that Youdao Lingshi’s retention rate exceeded 75% and continued to improve year over year. He said the company plans to expand AI applications across the learning lifecycle, including diagnostics, personalized learning paths, Q&A and college entrance consulting services.
AI-driven subscription services within learning services also grew strongly, with first-quarter sales exceeding RMB 100 million, representing growth of more than 70% year over year, Zhou said.
Advertising Growth Offsets Smart Device Decline
Online marketing services revenue increased 20.9% year over year to RMB 611.1 million. Zhou said growth was primarily driven by demand for performance-based advertising and continued investment in AI technology. Gaming remained a core advertising vertical, while AI applications and short-form dramas each recorded advertising revenue growth of more than 50% year over year, he said.
Youdao also upgraded InfunEase, its one-stop AI platform for KOL marketing. Zhou said the platform now supports a broader collaboration workflow and automates influencer recommendations and content creation. Nearly 60,000 influencers globally have registered on the platform, he said.
Lei Jin, Youdao’s president, said advertising has become a key growth engine, with advertising net revenue rising from RMB 1.3 billion in 2023 to RMB 2.5 billion in 2025. He said the company is focusing on gaming, AI applications, globalizing Chinese brands, social ads and finance. Jin added that the advertising business is expected to remain the primary contributor to operating profit.
Smart devices revenue declined 42.6% year over year to RMB 109.4 million. Zhou said the company is prioritizing SKU health, inventory management and profitability over near-term volume growth in the segment. He noted that the Youdao Tutoring Pen was honored as the best educational hardware solution at the 2026 EdTech Awards.
Financial Results and Seasonality
Su said total revenue for the quarter was RMB 1.3 billion, or $195.4 million. Net income attributable to ordinary shareholders was RMB 38.6 million, or $5.6 million, compared with RMB 76.7 million a year earlier. Non-GAAP net income attributable to ordinary shareholders was RMB 44.9 million, or $6.5 million, compared with RMB 81.7 million in the prior-year period.
Basic and diluted net income per ADS attributable to ordinary shareholders were RMB 0.33 and RMB 0.32, respectively. Non-GAAP basic and diluted net income per ADS were RMB 0.38 and RMB 0.37, respectively.
As of March 31, 2026, contract liabilities, mainly deferred revenue from learning services, were RMB 667 million, compared with RMB 847.7 million as of Dec. 31, 2025. Cash, restricted cash and short-term investments totaled RMB 515.2 million.
Wayne Li, vice president of finance, said Youdao’s business historically shows seasonality, with revenue typically stronger in the second half of the year and the third quarter often the annual peak. He said the company expects the profit trend in 2026 to return to historical norms, with the second half outperforming the first half, assuming 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,” Li said.
About Youdao (NYSE:DAO)
Youdao, Inc (NYSE: DAO), established in 2006 as a subsidiary of NetEase, is headquartered in Beijing, China. The company went public on the New York Stock Exchange in October 2019, marking a significant milestone in its development as an intelligent learning and knowledge service provider. Since its inception, Youdao has combined cloud computing, artificial intelligence and big data analytics to create an adaptive learning ecosystem designed to meet the needs of individual learners and organizations.
At the core of Youdao's offerings is its suite of digital dictionaries and translation tools, including the flagship Youdao Dictionary app and translation engine.
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