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 purpose 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 senior management are Dr. Feng Zhou, our Chief Executive Officer; Mr.

Lei Jin, our President; Mr. Peng Su, our Senior VP; and Mr.

Wayne 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.

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 RMB 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, 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 Lobster AI, Hi Echo, Youdao Baoku, InfiniSys, and IMagicBox, together with Confucius 4, demonstrated how AI is moving beyond basic Q&A towards 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 Lingxi, one of our strategic focused areas.

AI continued 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 recommendation 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 Lingxi in the second quarter. For 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 RMB 100 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 up 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 broad adoption, we open-sourced the model weights and toolchains 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 remains strong. During the 618 Shopping Festival, Youdao Dictionary Pen ranked number one 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'll hand over 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 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 revenue was RMB 1.5 billion, or US$216.2 million, representing a 3.5% increase from the same period of 2025. Net revenue from our learning services were RMB 795.6 million, or US$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 revenue from our smart devices were RMB 86.8 million, or US$12.8 million, representing a 31.5% decrease from the same period of 2025, primarily due to the decline in demand for smart learning devices.

Net revenue from our online marketing services were RMB 584.4 million, or US$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 engaged acceptance, which place a greater emphasize on high ROI, return on investment, engagements.

Youdao believe this strategy has enhanced the overall operational efficiency of its business. For the second quarter, our total gross profit were RMB 716.9 million, or US$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 expense were RMB 605.3 million, or US$89.2 million, compared with RMB 580.6 million for the same period of last year.

Looking at our expense in more detail, sales and marketing expense 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 expense 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 the ordinary shareholder was RMB 73.8 million, or US$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 the ordinary shareholder for the second quarter was RMB 90.6 million, or US$13.4 million, compared with RMB 12.5 million in the same period of last year. Basic and diluted net income per ADS attributable to the ordinary shareholder for the second quarter of 2026 were RMB 0.62, or US$0.09, and RMB 0.61, or US$0.09, respectively.

Non-GAAP basic and diluted net income per ADS attributable to the ordinary shareholders for the second quarter was RMB 0.76, or US$0.11, and RMB 0.75, or US$0.11, respectively. Net cash provided by operating activity was RMB 334.2 million, or US$49.3 million, for the second quarter.

Looking at our balance sheet, as of June 30, 2026, our contract liability, which mainly consists of deferred revenue generated from our learning services, were RMB 835.1 million, or US$123.1 million, compared with RMB 837.3 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 849.3 million, or US$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.

Good evening, management. Thanks for taking my question.

I want to ask about the ongoing integration of the Confucius large language model that's built a positive momentum across our business and financial performance. I would like to ask management what is the core strengths of this model, and are there new product launches in the pipeline leveraging this capability?

Thank you.

Hello, 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 strengths for Youdao. In addition to translation, which has long been one of our core strengths, I'd like to highlight two areas today: advanced voice and audio, and mathematics learning.

In both areas, we believe Youdao has significant strengths. 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.

While Hi Echo's gross billings also grew by more than 100%. One recent development I want to highlight is Confucius 4-TTS.

As we discussed in our prepared remarks, this modern text-to-speech model supports cross-lingual accent-free voice cloning across 14 languages while preserving speaker identity and emotional expressions. We see broad potential applications in areas such as cross-lingual learning, multilingual content creation, dubbing, and international communications for this model.

We plan to launch more voice-related models and products in the coming months. 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 strong technology and learning expertise.

Math is, we all know, a challenging subject for many learners, and is foundational to almost all STEM disciplines. At the same time, students' needs in math learning are highly personalized, and often revolve around very specific problems and knowledge gaps.

This makes math learning a significant opportunity for AI to provide personalized explanation, to provide diagnosis, practice, and tutoring at scale. Confucius 4 significantly improved multilingual reasoning for visual math and physics problems, particularly those involving complex diagrams.

Going forward, we plan to introduce additional model capabilities and also AI agents for math learning, which 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.

We will continue expanding our models and agent capabilities around these key areas. We look forward to share more very soon.

Thank you.

Thank you.

Good evening, management. Thank you for taking my question.

My question is also about AI, but it's more about AI features of Youdao Lingxi's AI essay grading. We all know that Lingxi's AI essay grading feature has earned widespread user recognition.

Do we plan to further expand its AI-powered features in Lingxi in the future? Thanks.

Thank you. This is Peng Su.

I will handle the question first. For Youdao Lingxi, we see the AI creating values for Lingxi in two 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 four years, powered by our continued investments on our large language model Confucius, Youdao Lingxi has focused on the resolving the core pain points across the learning and the college applications scenarios. Through continuous products refinements and exploration of creative use cases, we have built a comprehensive AI interactive courses and service matrix.

This platform empowers students to enhance their learning quality and efficiency, winning broad acclaim from our users. At the core learning features level, Youdao Lingxi has crafted granulars and personalized the intelligent learning solutions.

The first is about the personalized learning paths recommendations. Centered around specific knowledge points, this function pinpointed students' weak areas to generate a tailor-made learning plan.

By targeting shortfall directly and eliminating redundant practice, it boosts the learning efficiency a lot. The second is about the AI quiz recommendations.

Leveraging individual learning profiles within the Youdao Lingxi's intelligent learning system, this feature dynamically recommendation adaptive exercise, helps students master core concept through the application every and variations. The third is the AI essay grading for Chinese and English.

Based on the explicit evaluation rubrics, this feature diagnose writing flaws with high precision and provide targeted optimization suggestions, helping students to polish their writing skills efficiently. The last is the AI-based college admission advisors.

Extending beyond academic learning, Youdao Lingxi leverages massive user space and extensive industry data to offer the professional AI-based college application advisory services. By synthesizing users' performance, strengths, interests, and risk preference, it intelligently generate a 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, Youdao Lingxi achieved a retention rate exceeding the 75%, maintaining an industry level in the inside industry-leading levels, and demonstrated high user satisfactions with our AI interactive courses.

For us, AI is not simple addition features for Lingxi. It become an important drivers of both users' value and business efficiency, helping us to improve the quality, skills scalability, and the long-term economics of our business.

I hope answer your questions. Thank you.

Thanks, that's very clear.

Hi, good evening. Thanks management for taking my question.

Could management share the outlook for online marketing services in the third quarter? Thank you.

Hi, 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.

It has helped us expand into new business opportunities. Whenever we capture key opportunities, revenue experienced rapid acceleration in the subsequent quarters.

In the third quarter, we will focus on three areas. The first one, strengthening our AI plus advertising capabilities.

We are integrating AI into all parts of our advertising business through our propriety vertical LLM. One is KOL marketing.

After upgrading InfiniSys in the first quarter, we plan to launch an overseas KOL marketing agent in the third quarter to help Chinese companies reach global market more efficiently. The other is programmatic advertising.

Launched in 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. In the three 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, yeah, improving profitability. We will continue to improve gross margins through two initiatives: using Youdao IMagicBox 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 advertisers' 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 future growth.

Thank you.

Hi. Thanks for taking my question.

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

Thank you.

Thank you, Jiang Bo. This is Wayne Li.

I will take your question. As reflected in our financial results, we delivered a 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 the 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 decisive execution of our AI-native strategy and a profitability priority discipline. As for AI-native strategy, the agents such as the AI ad placement optimizer and the IMagicBox have significantly boosted productive across ad planning, user profiling, and creative assets production.

As for profitability priority approach, we proactively forewent 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 benefit. On the AI empowerment side, features such as AI essay grading for Chinese and English and AI quiz recommendation have been widely adopted.

These tools effectively elevated the efficiency of our teaching assistants, which in turn boosted both student retention rate and gross margin. On the economies of scale side, as cost per 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, as aspect of smart devices, similar to the broader consumer electronics industry, our smart devices segment has faced cost pressure from rising memory costs alongside a reduction in hardware economies of scale. Consequently, 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 remain elevated in the near term, architecture and engineering improvement designed to reduce memory reliance will meaningful 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 maintain rigorous cost and operation efficiency optimization. This strategy will maintain central throughout 2026, giving us confidence in delivering stronger 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.

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.