Youdao, Inc. (NYSE:DAO) shares moved higher in premarket trading on Thursday after the AI solutions and education technology company delivered second-quarter earnings well above expectations, despite revenue falling short of analyst forecasts.
The stock gained 1.86% before the opening bell. Youdao reported adjusted earnings of RMB0.76 ($0.11) per ADS, substantially ahead of the analyst consensus of RMB0.26.
Revenue reached RMB1.47 billion ($216.2 million), below expectations of RMB1.56 billion. However, sales still increased 3.5% year on year from approximately RMB1.4 billion in the second quarter of 2025.
Youdao returns to net profit as margins strengthen
Profitability improved considerably during the quarter, with Youdao reporting net income of RMB73.8 million ($10.9 million), reversing a net loss of RMB17.8 million in the corresponding period last year.
Gross margin expanded to 48.9% from 43.0% a year earlier, while operating income increased almost 2.9 times to RMB111.5 million ($16.4 million).
The improvement marked another profitable quarter for the company as it continued to focus on higher-margin operations and tighter cost management.
“We delivered another strong quarter, with continued revenue growth, record operating profit and robust operating cash flow, marking our eighth consecutive quarter of operating profitability,” said Dr. Feng Zhou, Chief Executive Officer.
Learning services growth offsets weakness elsewhere
Learning services remained the strongest part of Youdao’s business, generating revenue of RMB795.6 million ($117.3 million), an increase of 20.9% from the previous year.
The company attributed the expansion primarily to continued momentum across its tutoring services.
Performance elsewhere was weaker. Smart devices revenue declined 31.5% year on year to RMB86.8 million ($12.8 million), reflecting softer demand for the company’s hardware products.
Online marketing services revenue fell 7.7% to RMB584.4 million ($86.1 million). Youdao said the decline reflected its strategy of concentrating on engagements offering higher returns on investment rather than prioritising overall revenue volume.
Operating cash flow reaches RMB334 million
Youdao also delivered strong cash generation during the second quarter, producing RMB334.2 million ($49.3 million) of operating cash flow.
The combination of higher learning services revenue, expanding gross margins, record operating profit and positive cash generation helped offset disappointment surrounding the headline revenue miss.
Thursday’s positive premarket reaction suggests investors placed greater emphasis on Youdao’s improving profitability and earnings performance than on the softer-than-expected top line.
With the company now recording eight consecutive quarters of operating profitability, attention is likely to remain focused on whether growth in learning services and continued margin improvements can compensate for weakness in smart devices and online marketing.
Youdao stock price
