Good day, and welcome to Youdao's Fourth Quarter 2025 and Full Year Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Jeffrey Wang, Investor Relations Director of Youdao. Please go ahead.

Thank you, operator. Please note 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 the 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 2025 fourth quarter and full year 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. 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 renminbi, unless otherwise stated. In the fourth quarter, both net revenues and cash flow showed strong improvement. Net revenues reached RMB 1.6 billion, a 16.8% year-over-year increase. This growth was primarily driven by the Learning Services segment returning to a growth trajectory, combined with the sustained strong performance of our online marketing services. Net cash flow from operating activities for the quarter was RMB 184.2 million, up 16.4% year-over-year. Our operating profit for the fourth quarter was RMB 60.2 million, marking our sixth consecutive quarters of operating profitability, representing an increase of 113% quarter-over-quarter and a decrease of 28.5% year-over-year. For the full year 2025, our key financial performance demonstrated positive momentum across the board. Total net revenues for the year reached RMB 5.9 billion, an increase of 5% year-over-year. Operating profit grew to RMB 221.3 million, up 48.7% year-over-year. Notably, 2025 marked the first year we achieved full year net cash flow -- net cash inflow from operating activities totaling RMB 55.2 million. This compared with a net cash outflow of RMB 67.9 million in 2024. This milestone reflects continued improvements in our competitiveness and operating efficiency and fulfills the financial objectives we set at the beginning of the year. I will now walk through the performance of each business line during the fourth quarter. Starting with Learning Services. Fourth quarter net revenues reached RMB 727.2 million, representing a 17.7% year-over-year increase. This performance reflects a clear return to growth following the successful completion of our strategic restructuring. Within the segment, digital content services contributed RMB 436.1 million, up 12.2% year-over-year. Youdao Lingshi continued to perform well with revenue surging over 40%…

Thank you, Dr. Zhou, and hello, everyone. Today, I will be presenting some financial highlights from the fourth quarter and the full year of 2025. We encourage you to read through our press release issued earlier today for further details. For the fourth quarter, total net revenue were RMB 1.6 billion or USD 223.7 million, representing a 16.8% increase from the same period of 2024. Net revenue from our learning services were RMB 727.2 million or USD 104 million, representing a 17.7% increase from the same period of 2024. This year-over-year increase was primarily driven by the strong sales performance of AI-driven subscription services compared with the same period of 2024. Net revenue from our smart devices were RMB 176.5 million or USD 25.2 million, down 26.6% from the same period of 2024, primarily due to the decline in demand of smart learning devices in the fourth quarter of 2025. Net revenue from our online marketing services were RMB 660.9 million or USD 94.5 million, representing a 37.2% increase from RMB 481.7 million for the same period of 2024. This year-over-year increase was mainly attributable to the increased demand from the NetEase Group and overseas markets, which was driven by our continued investment in AI technology. For the fourth quarter, our total gross profit was RMB 705.4 million or USD 100.9 million, representing a 10.1% increase from the fourth quarter of 2024. Gross margin for learning services was 62.5% for the fourth quarter of 2025 compared with 60% for the same period of 2024. Gross margin for smart devices was 38.1% for the fourth quarter of 2025 compared with 43.9% for the same period of 2024. Gross margin for online marketing services was 27.8% for the fourth quarter of 2025 compared with 34.2% for the same period of 2024. For…

[Operator Instructions] Our first question comes from Brian Gong with Citi.

Congratulations on decent results. So can management share your thoughts on 2026 outlook and across different business lines? Yes.

Yes, I will take the question. So our overall goal for 2026 is to continue serving our users and customers with more innovative and competitive products while growing the business at a sustainable and healthy manner as always. So a key foundation supporting these objectives is our AI-native strategy while -- which enhances our ability to innovate and compete effectively across our learning services and advertising businesses. So let me provide additional details across our business lines. So first on the online marketing services. In 2025, online marketing revenue grew by 29% to RMB 2.5 billion. So in 2026, we plan to continue to focus on key growth areas by deploying more innovative solutions to capture favorable industry tailwinds. So we are seeing strong momentum in marketing demands across sectors such as AI applications, gaming and also areas like short-form drama content. To capture these opportunities, we will continue to leverage advanced AI capabilities, including our AI Ad Placement Optimizer, which we will release our version 2 shortly and iMagic Box alongside programmatic advertisement and [ KOR ] marketing solutions. So these initiatives, we believe, will help us further improve targeting precision and conversion efficiency for our customers. So our goal remains clear to deliver higher ROI for advertisers while providing a superior content experience for our users. Second, for learning services, we completed the restructuring of our online courses business by the end of 2025, as you already know. And we expect the Learning Services segment to return to around double-digit year-over-year growth in 2026. So encouragingly, the segment already achieved 18% year-over-year growth in the fourth quarter. So that's very good to see. So in terms of more details, Youdao Lingshi remains the centerpiece of our learning ecosystem. So in 2026, we will continue to leverage the stronger…

Your next question comes from the line of Brenda Xiao with CICC.

Congrats on achieving another solid quarter. I just have a quick follow-up on the Youdao Lingshi business because last year, Youdao Lingshi made positive progress. And what's the plan and outlook for 2026? Can the management give us more details?

This is Su Peng. I will handle the questions. And yes, heading into the 2026, we are -- first, we are very confident about the future growth of Youdao Lingshi business. because of the outcome of the insurance customers in 2025 and also the upgrade features of Youdao Lingshi's AI functions and which pushed the retention rate to over 75%, just like Dr. Zhou shared with this information with you and in the previous comments. And I think for the 2026, our strategy is in 2 ways, product refinement and efficient customer acquisition. The first, the AI is core building differentiated competitive edge, we believe. We remain to commit our unique AI interactive class service model. We will continue to expand and polish our AI features, ensuring that the technology truly serve the learning outcomes. Leveraging the power of our large language model Confucius, we are making the teaching process more precise and scientific, we believe. And let's start with a little bit more details. The first is the precision diagnose and planning in our services. We will improve the accuracy of diagnosing the knowledge gaps to the generate scientific and personalized learning paths, essentially teaching students according to their attitude. Second, solving the core pain points. We are addressing the critical needs in the college entrance and prepare process with the practical features like the AI-based college admissions advisers and AI Essay grading, comprehensively elevating the users' experience and loyalty. And the next is about the dual approach we are exploring a more efficient path for the customer acquisition. First is definitely we need to highlight the organic traffic owned by Youdao. We will further activate the traffic value within our own ecosystem by deeply integrating with our apps like the Youdao Dictionary and Mr. P AI tutors as well as our smart devices like the Youdao Tutoring Pen. We can improve the acquisition perception while efficiently lowering the cost, leveraging the conversion from our existing broad user base. The new AI-driven channels, we are exploring the franchise customer acquisition channels powered by our AI features using our technology and advantage to pop up a new growth space and inject volatility into our business. In 2026, driven by the tech innovation and guided by our users' value, we expect to push the insurance business to a new height. We believe we will keep growing and keep investment in that business. I hope that answers your question.

Our next question comes from Linda Huang with Macquarie.

So I just want to know that how does the management think about the outlook in 2026? So that's my question.

This is Lei Jin. In 2025, our advertising business achieved several key milestones, including the launch of Youdao iMagic Box and our AI Ad Placement Optimizer, alongside our official partnership with [indiscernible]. Those initiatives drove our online marketing revenues to a record RMB 2.1 billion, a robust 28.5% increase year-over-year. Looking ahead to 2026, we aim to drive high-quality growth by deepening our core resources and pushing our technological boundaries. First, we will double down on our international KOL business. We are capitalizing on wave of the Chinese enterprises going global, positioning ourselves as their strategic accelerator -- this remains our core stronghold. We have built a highly competitive global traffic ecosystem with 2 key pillars. First, our resource mode. We now reach over 30 million influencers and bidders globally with more than 1,000 top-tier influencers under exclusive contracts. This creates a significant barrier to entry. Second, our service track record. We have successfully helped over 1,000 companies go global, covering more than 50 countries. Our coverage is diverse as traditional stronghold like gaming, e-commerce, automotive and consumer electronics. We are also capturing emerging opportunities like short-form drama. In 2026, we will scale this further, using our resource advantage to serve more Chinese companies seeking global growth. Second, we are actively exploring overseas programmatic advertising to drive teched long-term growth. If the QR business is about human connection, programmatic advertising is an efficiency revolution based on technology. We will leverage our proprietary vertical [ AD ] model, combined with our experience and broad client base from domestic programmatic ADS to explore this market abroad. Empowered by our [ RM ], we are committed to achieve more precise traffic distribution and higher ROI. Our goal is to translate those technical capabilities into actual business increments, aiming to build a second growth curve for our overseas advertising business in the medium to long term. In summary, through the dual engines of our international KOL business and programmatic AD exploration, we expect to take our overseas advertising to the next level in 2026.

Your next question comes from Bo Zhan with Huatai Securities.

I'm [indiscernible] from Hua. My question is Youdao achieved a full year positive net operating cash flow for the first year in 2025. Is the goal for 2026 to achieve a net inflow for the total cash flow.

This is Wayne. I will take your question. As you know, the company's total cash flow is composed of 3 pillars: operating, investing and financing activities. Among this, operating cash flow stands as the most critical indicator of business healthy and long-term sustainably. Therefore, I would first like to address our performance and strategic objectives regarding operating cash flow. Enhancing profitability and secure positive operating cash flow were our core target for 2025. As mentioned by Dr. Zhou, we have successfully delivered on both of these goals last year. Looking ahead to 2026, our objective is to achieve faster growth in operating profit and propel our operating cash flow to a more meaningful and substantial level. Our confidence in this trajectory is rooted in 3 key drivers. First, AI-driven empowerment. The widespread integration of AI is profoundly transforming our product form and services models. In 2025, we successfully validated AI's immense potential for enhancing quality and efficiency across our business line. Second, the momentum of our core business units powered by [indiscernible] advertising and AI-driven subscription services are expected to maintain their strong momentum. This is expected to drive acceleration in the year-over-year growth of our total revenue and improvement in operating profit. Third, the continuous upgrade of refined management by optimizing credit management for our B2B operations and other key processes. We have significantly bolstered our financial resilience and risk mitigation capability. Regarding the goal of achieving a positive total cash flow, we maintain a balanced and rational stance. We will not blindly tighten expenditures [ import ]simply to reach a positive figure on paper. Instead, we will seek the optimal equilibrium between strategic investment opportunities and the cost discipline. Should strategic investment targets emerge in the market, we will move decisively to capture them. Furthermore, when cash reserves are sufficient, we will optimize our capital structure by investing in wealth management products or repaying principal on loans from our parent company. While these actions are recorded as investing or financing cash outflow, which may affect the total cash flow figure in the short term. However, they serves to increase interest income or reduce financing interest costs in the long run. Above all, we will prioritize the continuous improvement of our operating cash flow as it is the most valuable cash flow metric. Building upon this, we will also steadily advance the healthy development of our total cash flow to generate long-term value for our shareholders.

Your next question comes from Xiangfei Shen with Nomura.

Can you hear me now?

Yes, we can hear you now.

Dr. Zhou and Su, congratulations on a very solid quarter. I recall Dr. Zhou mentioned in the opening remarks, 2026 is a year of AI agent. So my question is, in what areas of Youdao business will you plan to deploy the AI agent and how significant the potential impact will be?

Good to speak. So yes, so we think AI agents is an area of particular interest to us. One of the key reason is that -- so compared with the chat products, we [ refer ]the first-generation AI products. So AI agents, they operate longer. They have access to more customer and user data, and they can make deeper and more meaningful decisions regarding how to serve the customer or user better. So basically, they are more intelligent AI product that can create real value. So -- so we look at all our business to see if we have opportunity to apply this technology. So there are several we are already -- we have mentioned and we are working on. So one is the -- regarding our advertising business. So we already have the AI Ad Placement Optimizer product. So basically, there are a lot of opportunities to apply agents in ads because ads is an area where a lot of experience and a lot of data is needed to achieve good results. So before the people operating the ad systems, they contribute a lot of the value in having good results, ad results. Now we can have these agents to try different combinations to try more combinations and actually transfer more knowledge and experience between ad campaigns of the same customer or even across customer and segments to achieve better results. So this is -- this, I believe, is an area where a lot of value can be created because -- simply because the sheer volume and scale of advertising. So that's one area. So the other area, of course, is learning and productivity applications. So one example I can give is the AI simultaneous interpretation app. So it is -- so we think it is an agent application…

And that concludes the question-and-answer session. I would like to turn the conference over back to management for any additional closing comments.

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 nice day.