Teleconferência de Resultados do 2T26 da Youdao (DAO): Lucro Operacional Recorde e Crescimento do Aprendizado Impulsionado por IA

Principais Destaques

• A Youdao divulgou receita líquida de RMB 1,5 bilhão no segundo trimestre de 2026, alta de 3,5% em relação ao mesmo período do ano anterior, enquanto o lucro operacional atingiu o recorde trimestral de RMB 111,5 milhões, quase quatro vezes o nível registrado no ano anterior.
• A empresa registrou seu oitavo trimestre consecutivo de lucratividade operacional. A margem operacional subiu para 7,6%, ante 2,0% no ano anterior.
• A receita de serviços de aprendizagem aumentou 20,9%, atingindo RMB 795,6 milhões, impulsionada pelo Youdao Lingshi e por produtos baseados em IA. A taxa de retenção do Lingshi ultrapassou 75%.
• A receita de serviços de marketing online recuou 7,7%, para RMB 584,4 milhões, uma vez que a Youdao priorizou contratos de maior retorno. A margem bruta avançou aproximadamente 3 pontos percentuais, para 28,7%.
• O caixa líquido gerado pelas atividades operacionais aumentou 80,7%, para RMB 334,2 milhões. O fluxo de caixa operacional do primeiro semestre melhorou para RMB 241,1 milhões, ante uma saída de caixa de RMB 70,5 milhões no mesmo período do ano anterior.
• A administração projeta que a margem bruta de marketing online continue subindo na comparação anual no 3T, e que a margem bruta de dispositivos inteligentes se recupere para acima de 40% no segundo semestre de 2026.

Principais Resultados Financeiros

No primeiro semestre de 2026, a receita líquida subiu 3,6%, para RMB 2,8 bilhões. O lucro operacional cresceu 27,3%, atingindo o recorde de RMB 169 milhões, enquanto o fluxo de caixa operacional alcançou RMB 241,1 milhões.

Em 30 de junho de 2026, o saldo de caixa, equivalentes de caixa, caixa restrito e investimentos de curto prazo somava RMB 849,3 milhões. Os passivos de contratos totalizaram RMB 835,1 milhões, em comparação com RMB 847,7 milhões no final de 2025.

Desempenho Comercial e Operacional

Serviços de Aprendizagem e Produtos de IA

Os serviços de aprendizagem foram o principal motor de crescimento. A margem bruta do segmento no 2T subiu para 65,5%, ante 59,8% no ano anterior, refletindo ganhos de eficiência operacional impulsionados por IA e benefícios de escala.

O volume do recurso de Correção de Redação em Inglês por IA do Youdao Lingshi mais que dobrou em relação ao trimestre anterior. As recomendações de questionários baseadas em IA e os serviços de consultoria de admissão universitária também apoiaram a taxa de retenção do produto, que superou 75%. Os cursos de programação também registraram retenção acima de 75%.

Os produtos de assinatura baseados em IA geraram aproximadamente RMB 100 milhões em vendas no 2T, uma alta superior a 20% em relação ao ano anterior. O faturamento bruto do Hi Echo aumentou mais de 100%, enquanto o engajamento com a Interpretação Simultânea por IA cresceu cerca de 100%.

A Youdao lançou o Confucius 4 com aprimoramentos em recursos multimodais, de voz e de tradução. A administração informou que a velocidade de inferência de tradução melhorou cerca de 80%, enquanto o modelo apresentou raciocínio mais robusto para problemas visuais de matemática e física com diagramas complexos.

Serviços de marketing online

A receita de marketing online caiu, pois a Youdao recusou oportunidades de menor retorno e concentrou recursos em contratos de maior qualidade. Essa estratégia elevou a margem bruta de 25,8% para 28,7%.

A empresa adicionou mais de 100 anunciantes durante o trimestre, enquanto a retenção de anunciantes melhorou aproximadamente 5 pontos percentuais na comparação sequencial. A receita proveniente de anúncios de aplicativos de IA e de produções dramáticas de formato curto cresceu mais de 50% em relação ao ano anterior pelo segundo trimestre consecutivo.

A Youdao também lançou a segunda geração do seu Otimizador de Veiculação de Anúncios por IA, acompanhado de gerenciamento centralizado de contas, atualizações automatizadas de dados e alertas inteligentes de anomalias.

Dispositivos inteligentes

A receita de dispositivos inteligentes recuou 31,5%, e a margem bruta do segmento diminuiu de 41,5% para 32,8%. A administração atribuiu a pressão à menor demanda, ao aumento nos custos de memória e à redução das economias de escala em hardware.

A Caneta Dicionário Youdao ficou em primeiro lugar nas vendas da categoria na JD.com e na Tmall durante o Festival de Compras 618 pelo sétimo ano consecutivo. A empresa também lançou a Caneta Dicionário Youdao X8, que inclui um banco de dados de 80 milhões de palavras e tutoria baseada em fotos com inteligência artificial.

Projeções da Administração

• A administração espera que a margem bruta de marketing online continue a subir no 3T na comparação anual, priorizando o crescimento lucrativo e sustentável em detrimento de uma expansão rápida.
• A Youdao planeja lançar no 3T um agente de marketing com KOLs no exterior para ajudar empresas chinesas a alcançar mercados internacionais com maior eficiência.
• A empresa planeja lançar múltiplos agentes de IA e produtos baseados em modelos em setembro, com foco em aplicações de aprendizagem de voz, matemática e outras áreas de STEM.
• Apesar dos elevados custos de memória, a administração projeta que a margem bruta de dispositivos inteligentes se recupere para acima de 40% no segundo semestre de 2026, respaldada por mudanças de arquitetura e engenharia e novos produtos planejados para o 3T.
• A administração manifestou confiança em manter o forte desempenho da margem bruta e em alcançar novos avanços no lucro operacional no segundo semestre de 2026.

Riscos e Pontos de Atenção

• Os dispositivos inteligentes permanecem sob pressão diante da queda na demanda, dos elevados custos de memória e de economias de escala mais fracas.
• A receita de marketing pode continuar limitada no curto prazo, uma vez que a Youdao segue recusando oportunidades publicitárias de menor ROI em prol da lucratividade.
• As despesas operacionais aumentaram de RMB 580,6 milhões para RMB 605,3 milhões, incluindo maiores gastos com vendas e marketing, além de pesquisa e desenvolvimento.
• A execução da estratégia de IA nativa depende da conversão de novos modelos e agentes em adoção sustentada de usuários, retenção, eficiência operacional e receita comercial.

Destaques da Sessão de Perguntas e Respostas com Analistas

A administração identificou a tecnologia de voz avançada e o aprendizado de matemática como duas áreas prioritárias para o Confucius 4. As aplicações potenciais para seu modelo de clonagem de voz em 14 idiomas incluem aprendizagem multilíngue, criação de conteúdo, dublagem e comunicação internacional.

Para o Youdao Lingshi, a administração afirmou que a IA está aprimorando tanto os resultados dos usuários quanto a escalabilidade dos serviços. As principais funções incluem trilhas de aprendizagem personalizadas, recomendações adaptativas de exercícios, correção de redações em chinês e inglês e serviços de consultoria de admissão universitária.

Em relação à publicidade, a administração destacou três prioridades para o 3T: expandir a capacidade de publicidade voltada para IA, captar clientes em setores como aplicativos de IA e dramas curtos, e melhorar as margens por meio da produção criativa de menor custo e de uma seleção de tráfego mais eficiente.

Transcrição Completa da Teleconferência de Resultados

Transcrição completa da teleconferência de resultados

Comentários da administração

Operator

Good day, and welcome to Youdao's second quarter 2026 earnings conference call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Mr. Jeffrey Wang, Investor Relations Director of Youdao. Please go ahead.

Jeffrey Wang

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 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 2026 second 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. Yongwei 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.

Feng Zhou

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 maintained solid momentum in the second quarter, delivering robust results. Net revenues for the quarter reached RMB 1.5 billion, representing a 3.5% year-over-year increase. In terms of profitability, we achieved a record high in Q2, with operating profit reaching RMB 111.5 million, nearly fourfold year-over-year. This marks our eighth consecutive quarter of operating profitability, representing a critical step towards our goal of healthy and sustainable development. Meanwhile, net cash inflow from operating activities was RMB 334.2 million, up 80.7% compared with the same period last year. These strong quarterly results also drove strong first-half performance.

In the first half of 2026, total net revenues reached RMB 2.8 billion, up 3.6% year-over-year, while operating profit increased 27.3% to a record RMB 169 million. We also generated RMB 241.1 million in net operating cash flow, compared with a net outflow of RMB 70.5 million in the same period last year, reflecting a substantial improvement in cash generation.

Let me begin with an update on our progress in AI technology and Confucius, our proprietary Large Language Model. AI remains a key driver across our business. During the second quarter, we continued to translate advances in our LLM capabilities into practical products and applications across our business lines. First, we rolled out Confucius 4 in the second quarter, with significant upgrades in multimodal, voice and translation capabilities. The new model delivers stronger performance in visual math and physics reasoning, particularly on complex diagrams. We also improved its reasoning architecture and training data to significantly reduce inference costs.

In translation, an optimized acceleration mechanism increased inference speed by approximately 80%. Second, our growing portfolio of AI agents was showcased at the 2026 World AI Conference. Products including LobsterAI, Hi Echo, Youdao Baoku, InfunEase and iMagicbox, together with Confucius 4, demonstrated how AI is moving beyond basic Q&A toward executing more complex tasks across learning, work and advertising scenarios. Beyond technological advances and user adoption, our AI capabilities also continued to gain recognition and support from authoritative bodies. In Q2, the Beijing Key Laboratory of Artificial Intelligence for Multilingual Translation co-founded by Youdao was officially launched. Going forward, we will continue advancing end-to-end multilingual translation models and accelerate their application across learning, international conferences and cross-border trade.

I will now walk through the performance of each of our business lines during the second quarter. Net revenues from learning services were RMB 795.6 million, up 20.9% year-over-year, primarily driven by the strong performance of Youdao Lingshi, one of our strategic focused areas. AI continues to play an increasingly important role across our learning ecosystem. Following the strong reception of our AI English Essay Grading feature launched in the first quarter, grading volume more than doubled sequentially in Q2. Together with AI-powered quiz recommendations and college admission advisory services, these differentiated AI capabilities helped enhance the user experience and contributed to a retention rate of over 75% for Youdao Lingshi in the second quarter.

For our programming courses, continued product upgrades and channel expansion helped broaden the user base, while improvements in the learning experience supported a retention rate of over 75% in the second quarter. Within learning services, our AI-driven subscription products generated approximately RMB100 million in sales during the second quarter, up more than 20% year-over-year. Our AI Simultaneous Interpretation feature also maintained strong momentum, with user engagement increasing by approximately 100% year-over-year. We also launched what we believe is the world's first 14-language, cross-lingual, accent-free voice cloning technology, enabling rapid voice replication across languages while preserving the speaker's emotional characteristics. To support broader adoption, we open-sourced the model weights and tool chains for local deployment and commercial use, significantly lowering the barrier to multilingual content production.

Meanwhile, Hi Echo continued to perform strongly, with second quarter gross billings increasing by more than 100% year-over-year. The product also received positive feedback from both domestic and international users at WAIC.

Turning to online marketing services, net revenues were RMB 584.4 million in the second quarter, down 7.7% year-over-year. The decline reflects our deliberate focus on higher-quality, higher-margin opportunities as we continue to prioritize the long-term health and profitability of the business. As a result, gross margin improved to 28.7%, up approximately 3 percentage points year-over-year. At the same time, we continued to make progress in client acquisition and retention, adding more than 100 new clients during the quarter and increasing advertiser retention by approximately 5 percentage points sequentially. Our AI application and short-form drama advertising businesses also maintained strong momentum, with revenues growing more than 50% year-over-year for the second consecutive quarter.

On the product side, we recently launched the second generation of our AI Ad Placement Optimizer, further improving advertising efficiency and quality. Unified Account Management provides centralized access across accounts, simplifying campaign operations. Automated Push Notifications delivers real-time data updates to help users respond more quickly. Intelligent Alerts provides 24/7 anomaly detection with second-level response times, helping reduce wasted ad spend and operational losses. Together, these upgrades further enhance advertiser value and strengthen the long-term health of our marketing ecosystem.

Moving to smart devices, improving profitability remains our primary objective. Net revenues were RMB 86.8 million in the second quarter, down 31.5% year-over-year, while the overall operational health of the business continued to improve. Our market position remained strong. During the 618 Shopping Festival, Youdao Dictionary Pen ranked #1 in sales in its category on both JD.com and Tmall for the seventh consecutive year. Our Youdao Tutoring Pen also received recognition from several government authorities for its application of AI in education, including the Ministry of Education, the Cyberspace Administration of China, and the Ministry of Industry and Information Technology.

We also recently launched the Youdao Dictionary Pen X8, featuring an expanded database of 80 million authoritative words and AI-powered, photo-based tutoring across multiple subjects. Initial market response has been positive. Looking ahead, we will continue to execute our AI-Native Strategy, leveraging our technical capabilities to deepen the application of vertical LLMs across learning and advertising. We will also continue expanding our portfolio of AI Agents to enhance user experience and satisfaction, supporting further improvements in our key financial metrics in the second half of the year.

With that, I will hand over the call over to Peng Su for a deeper dive into our financial results. Thank you.

Peng Su

Thank you, Dr. Zhou, and hello everyone. Today I will be presenting some financial highlights from the second quarter of 2026. We encourage you to read through our press release issued earlier today for further details. For the second quarter, total net revenues were RMB 1.5 billion or USD 216.2 million, representing a 3.5% increase from the same period of 2025. Net revenues from our learning services were RMB 795.6 million or USD 117.3 million, representing a 20.9% increase from the same period of 2025. The year-over-year increase was primarily driven by the strong momentum of tutoring services compared with the same period of 2025.

Net revenues from our smart devices were RMB 86.8 million or USD 12.8 million, representing a 31.5% decrease from the same period of 2025, primarily due to a decline in demand for smart learning devices. Net revenues from our online marketing services were RMB 584.4 million or USD 86.1 million, representing a 7.7% decrease from the same period of 2025. The year-over-year decrease reflects Youdao's disciplined, strategic approach to engagement acceptance, which places greater emphasis on higher ROI return on investment engagements. Youdao believes this strategy has enhanced the overall operational efficiency of its business.

For the second quarter, our total gross profit was RMB 716.9 million or USD 105.7 million, representing a 17.6% increase from the same period of 2025. Gross margin for learning services was 65.5% for the second quarter of 2026, compared with 59.8% for the same period of 2025. Gross margin for smart devices was 32.8% for the second quarter of 2026, compared with 41.5% for the same period of 2025. Gross margin for online marketing services was 28.7% for the second quarter of 2026, compared with 25.8% for the same period of 2025. For the second quarter, our total operating expenses were RMB 605.3 million or USD 89.2 million, compared with RMB 580.6 million for the same period of last year.

Looking at our expenses in more detail. Sales and marketing expenses for the second quarter of 2026 were RMB 424.1 million, compared with RMB 401.8 million in the second quarter of 2025. Research and development expenses for the second quarter of 2026 were RMB 142 million, compared with RMB 128.3 million in the second quarter of 2025. Our operating income margin was 7.6% in the second quarter of 2026, compared with 2% for the same period of last year. For the second quarter of 2026, our net income attributable to ordinary shareholders was RMB 73.8 million or USD 10.9 million, compared with net loss attributable to Youdao's ordinary shareholders of RMB 17.8 million for the same period of last year.

Non-GAAP net income attributable to ordinary shareholders for the second quarter was RMB 90.6 million or USD 13.4 million compared with RMB 12.5 million in the same period last year. Basic and diluted net income per ADS attributable to ordinary shareholders for the second quarter of 2026 were RMB 0.62 or USD 0.09 and RMB 0.61 or USD 0.09 respectively. Non-GAAP basic and diluted net income per ADS attributable to ordinary shareholders for the second quarter was RMB 0.76 or USD 0.11 and RMB 0.75 or USD 0.11 respectively. Our net cash provided by operating activities was RMB 334.2 million or USD 49.3 million, for the second quarter.

Looking at our balance sheet, as of June 30, 2026, our contract liabilities, which mainly consisted of deferred revenues generated from our learning services, were RMB 835.1 million or USD 123.1 million, compared with RMB 847.7 million as of December 31, 2025. At the end of the period, our cash, cash equivalents, current and non-current restricted cash, and short-term investments totaled RMB 849.3 million or USD 125.2 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.

Operator

[Operator Instructions]

Our first question comes from Brian Gong with Citi.

Perguntas e respostas

Brian Gong

I want to ask about the ongoing integration of the large language model across our business and financial performance. So I would like to ask management what is the core strength of this model? And are there new product launches in the pipeline targeting this capability?

Feng Zhou

Brian, I will take the question. For large language models, we focus on areas where we see strong user demand, significant potential for value creation and also differentiated strength for Youdao. In addition to translation, which has long been one of our core strengths, I'd like to highlight 2 areas today: advanced voice and audio and mathematics learning. So in both areas, we believe Youdao has a significant strength. For voice, we have seen strong user adoption for several years already. The success of our products, Hi Echo and Youdao Simultaneous Interpretation demonstrated clear demand for high-quality, low-latency voice interactions in both learning and communications.

In Q2, user engagement with simultaneous interpretation increased by approximately 100% year-over-year. So while Hi Echo's gross billings also grew by more than 100%. So one recent development I want to highlight is Confucius4-TTS. As we discussed in our prepared remarks, this modern text-to-speech model supports cross-lingual accident-free voice cloning across 14 languages while preserving speaker identity and emotional expressions. So we see broad potential applications in areas such as cross-lingual learning, multilingual content creation, dubbing and international communications for this model. So we plan to launch more voice-related models and products in the coming months.

So the second area I want to highlight is mathematics. Mathematics is another very important focus for us. AI-driven math learning is highly demanded by users. And it's also an area where we have a strong technology and learning expertise. Math is, we all know a challenging subject for many learners and is foundational to almost all STEM disciplines. So at the same time, students' needs in math learning are highly personalized and often resolve around very specific problems and knowledge gaps. So this makes math learning a significant opportunity for AI to provide personalized explanation, to provide diagnosis practice and tutoring at scale. So Confucius 4 significantly improved reasoning for vision math and physics prompts, particularly those involving complex diagrams. Going forward, we plan to introduce additional model capabilities and also AI agents for math learning with similar opportunities across other STEM subjects.

I'm also pleased to share that we plan to launch multiple new AI agent and model products in September next month. So we will continue expanding our models and agent capabilities around these key areas. So we look forward to share more very soon. Yes. Thank you.

Operator

Our next question comes from Jing Wang with CICC.

Caini Wang

My question is also about AI, but it's more about AI features of Lingshi's AI Essay Grading. We all know that Lingshi's AI Essay Grading feature has earned well spread user recognition. Do you plan to further expand its AI-powered features in the future?

Peng Su

Thank you. This is Peng Su. I will handle the question first. Yes. And for the Lingshi, we see the AI creating value for Lingshi in 2 important ways by improving the learning experience and also expanding what we can offer to the users. and by improving the scalability and operational efficiency of our services. Over the past 4 years, powered by our continued investments in our large language model computers, Youdao Lingshi has focused on resolving the core pain points across the learning and college application scenarios. Through continuous product refinements and exploration of latest use case, we have built a comprehensive AI interactive courses and service metrics.

This platform empowers students to enhance their learning quality and efficiency, winning broad acclaim from our users. At the core learning features level, Youdao Lingshi has crafted granular and personalized intelligent learning solutions. The first is about the personalized learning path recommendations. Centered around specific knowledge points, this function time points of student's weak areas to generate a tailor-made learning plan by targeting shortfall directly and eliminating redundant practice. It boosted the learning efficiency a lot.

And second is about the AI-based recommendations, leveraging individual learning profile within the Youdao Lingshi Intelligent Learning system. This feature dynamically recommendation adaptively exercise, help students master core concepts through the application and variations. And the third is the AI Essay Grading for Chinese and English. Based on the explicit evaluation rubrics, this feature diagnose writing floors with high precision and provide target optimization suggestions, helping students to polish their writing skill efficiently.

And the last is the AI-based college admission advisers. Expanding beyond academic learning, Youdao Lingshi leverage its massive user space and extensive industry data to offer the professional AI-based college application advisory services. By enhancing user's performance, strength, interest and risk preference, it intelligently generates multiple well-balanced application strategies to guide candidates in their decision-making process. Our retention metrics serve as a strong proof of our service capabilities. In the second quarter of this year, with our Lingshi achieved a retention rate exceeding 75%, maintaining an industry level -- industry-leading level and demonstrated high user satisfaction with our AI direct courses.

So for us, AI is not simple additional features for Lingshi. It became important drivers of both users' value and business efficiency, helping us to improve the quality, scalability and the long-term economics of our business. I hope I answered your questions.

Caini Wang

That's very clear.

Operator

The next question comes from Thomas Chong with Jefferies.

Thomas Chong

Could management share the outlook for online marketing services in the first quarter?

Lei Jin

This is Jin Lei. Thank you for your questions. In the second quarter, our advertising business became more profitable with gross margin improving by about 3 percentage points. We expect gross margin to continue improving year-over-year in the third quarter. Our online marketing revenue grew from about RMB 100 million in the first quarter of 2022 to about RMB 600 million per quarter in the first half of this year. This growth was driven by our continued investment in AI and data capabilities, which has helped us expand into new business opportunities. Whenever we capture key opportunities, revenue experienced a rapid acceleration in the subsequent quarters. In the third quarter, we will focus on the 3 areas.

The first one, strengthening our AI plus advertising capabilities. We are integrating AI into all parts of our advertising business through our priority vertical LLM by KOL marketing. After upgrading in the first quarter, we plan to launch an overseas KOL marketing agent in the third quarter to help Chinese companies reach global markets more efficiently. The other programmatic advertising matching the second quarter, our second-generation AI Ad Placement Optimizer improved traffic matching and helps increase targeting accuracy and operating efficiency.

The second, expanding our advertiser base. With the support of our team and AI capabilities, we added more than 100 new advertisers in the second quarter. And in the third quarter, we will focus on fast-growing sectors such as AI applications and short-form dramas, both in China and overseas. The third, we are improving profitability. We will continue to improve gross margin through 2 initiatives: using Youdao device to reduce the cost of producing advertising creatives and using the AI Ad Placement Optimizer to identify more cost effective traffic. In summary, over the medium to long term, we will continue to apply AI to programmatic advertising and KOL marketing. This will help improve advertiser's ROI while supporting our growth in both revenue and profitability. In the short term, we will continue to prioritize profitable and sustainable growth over rapid expansion. We will also keep upgrading our advertising and KOL marketing tools to support the future growth. Thank you.

Operator

Our last question comes from the line of Bo Zhan with Huatai Securities.

Bo Zhan

This is Zhan Bo, Huatai. Could management share the outlook for the gross margin in the third quarter?

Yongwei Li

Thank you, Zhan Bo. This is Yongwei Li. I will take your question. As reflected in our financial results, we delivered an impressive performance in gross margin level, reaching 47% in the first half of this year, representing a year-over-year improvement of around 2 percentage points. especially gross margin for online marketing services and learning services expanded by 1 percentage point and 3 percentage points year-over-year, respectively. I will give more details on the reason why for the improvement on the profitability and its outlook by segment.

First, in terms of online marketing services, the margin expansion in our advertising business stems from the execution of our AI native strategy and profitability priority discipline. As for AI native strategy, the agents such as the AI Ad Placement Optimizer and iMagicBox have significantly boosted productive across Ad planning, user profiling and creative asset production. As for profitability priority approach, we proactively prevent certain Ad opportunities with relatively low ROI, focusing our resources instead on campaigns that deliver higher value to users. Second, learning services. The improvement in learning services' gross margin was primarily driven by AI-enhanced learning efficiency and scaling benefits. On the AI empowerment side, features such as AI Essay Grading for Chinese and English and AI quiz recommendation have been widely adopted. This tool effectively elevated the efficiency of our teaching assistance, which in turn boosted both student retention rate and gross margin.

On the economies of scale side, as cost/revenue has steadily declined since the second half of 2025, we expect the economies of scale in learning services to become even more pronounced throughout 2026, which drives further gross margin expansion. Third, aspect of smart devices, similar to the broader consumer electronic industry, our smart devices segment has faced cost pressure from the rising memory costs alongside a reduction in hardware economies of scale. Consequently, the gross margin for smart devices stood at around 37% in the first half of this year, down roughly 11 percentage points year-over-year. Although memory costs are likely to maintain, elevate in the near term. Architecture and engineering improvements designed to reduce memory reliance will meaningfully mitigate margin compression with new product launch planned for the third quarter.

We anticipate the gross margin of smart devices to recover to over 40% in the second half of the year, narrowing the year-over-year decline. Looking ahead, we will further deepen the AI native strategy and broaden LLM integration across all product lines while maintaining rigorous cost and operational efficiency optimization. This strategy will maintain central throughout 2026, giving us confidence in delivering strong gross margin performance and achieving meaningful breakthroughs at the operating profit level in second half of 2026.

Hope the information mentioned is helpful. Thank you.

Operator

Ladies and gentlemen, this concludes our question-and-answer session. I would like to turn the conference back over to the management for any closing remarks.

Jeffrey Wang

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 U.S. Have a great day.

Operator

Ladies and gentlemen, the conference has now concluded. Thank you for attending today's presentation. You may now disconnect. Goodbye.