Good day and welcome to UDAO's second quarter 2026 ERNEX conference call. All participants will be listened on the mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star and one or your telephone keypad. To withdraw your question, please press star and two. Please note, this event is being recorded. I would now like to turn the conference over to Mr. Jeffrey Wang, Investor Relations Director of UDAO. Please go ahead.

Thank you, operator. Please note that the discussion today will contain forward-looking statements related to the future performance of the companies, which are intended to qualify for the safe harbor fund liability as established by the U.S. Private Securities Litigation Reform Act. Such statements are now 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 UW'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 and Feng Zhou, our Chief Executive Officer. Mr. Lei Jin, our President, Mr. Peng Su, our Senior VP, and Mr. Wen Li, our VP of Finance. I will now turn the call over to Dr. Zhou to reveal 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 MMB 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% yearly 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, Lai, and Zeng Li. 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 Wu, and Zeng Li. 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 continue to translate advances in our LRM capabilities into practical products and applications across our business lines. We rolled out Confucius 4 in the second quarter, with significant upgrades in multi-model 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, Infonese, and iMagicBox, together with Confucius4, demonstrated how AI is moving beyond basic Q&A towards executing more complex tasks across learning, work, and advertising scenarios. Beyond technological advances in user adoption, our AI capabilities also continue to gain recognition and support from authoritative bodies. In Q2, the Beijing Key Laboratory of Artificial Intelligence for Multilingual Translation, co-funded 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. Network News from Learning Services were RMB 795.6 million, up 20.9% year-over-year. primarily driven by the strong performance of Ye Dao Ling Shi, 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 Lingshi in the second quarter. For our programming courses, continued product upgrades and channel expansion helped to 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 maintains strong momentum with user engagement 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 growth feelings increasing by more than 100% year-over-year. The product also received positive feedback from both domestic and international users at WAIT. 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 three percentage points year-over-year. At the same time, we continue 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 maintain 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 app 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 20 by 7 anomaly detection with second-level response tasks, 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 80.6.8 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 6-18 shopping festival, Yu Dao 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 receives 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.

Thank you, Dr. Zhou, and I follow everyone. Today I will be presenting some financial highlights from the second quarter of 2026. We encourage you to listen to our press release issued earlier today for further details. For the second quarter, total net revenue of RMB 1.5 billion, or U.S. dollar, 216.2 million, representing a 3.5% increase from the same period of 2025. Net revenue from our lending services were RMB 795.6 million, or U.S. dollar, 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 children's services compared with the same period of 2025. Net revenue from our smart devices were RMB 86.8 million, for U.S. dollar, 12.8 million, representing a 31.5% decrease from the same period of 2025, primarily due to the decline in demand for smart devices, smart learning devices. Net revenue from our online marketing services were RMB $584.4 million, or US dollars $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 engage acceptance, which places a greater emphasis on high ROI, return on investment, engagement. 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 $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 2005. Gross margin for online marketing services was 28.7% for the same quarter of 2006 compared with 25.8% for the same period of 2005. For the second quarter, our total operating expense was RMB $605.3 million. Oil and solar, $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 2096 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 2096 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 2096, compared with 2% for the same period of last year. For the second quarter of 2016, our net income attributable to the ordinary shareholder was RMB $73.8 million, U.S. dollar $10.9 million. Comparison net loss attributable to the U.S. dollar's ordinary shareholders of the $17.8 million for the same period of last year. Net income attributable to the ordinary shareholder for the second quarter was RMB $90.6 million, U.S. dollar $13.4 million. compared with RMB 12.5 million in the same period of last year. Basic and dilute net income per ADS attributable to the ordinary shareholder for the second quarter of 2006 were RMB 0.62 or U.S. dollar 0.09 and RMB 0.61 or U.S. dollar 0.09 respectively. Non-GAAP basic and dilute net income per ADS attributable to the ordinary shareholders for the second quarter was RMB 0.76 or U.S. dollar 0.11. and RMB 0.75 or USD 0.11, respectively. Our net cash provided by operating activity 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 liability, which mainly consists of the full revenue 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, 2075. At the end of the period, our cash, cash equivalents, current and non-current restricted cash, and short-term investment total RMB 849.3 million, or U.S. dollar, 125.2 million. This concludes our prepared remarks. Thank you for your attention. We would now like to open the call to our questions. Operator, please go ahead.

We will now begin the question and answer session. To ask a question, you may press star N1 on your telephone keypad. If you are using a speakerphone, please pick up your headset before pressing the key. To withdraw your question, please press star N2. At this time, we will pause momentarily to assemble our roster.

Our first question comes from Brian Gong with Siri.

Please go ahead.

Good evening, management.

Thanks for taking my question. I want to ask about the ongoing integration of the computer C++ language model that's built a positive momentum across our business and financial performance. So I would like to ask management, what is the core strengths of this model, and are there new product launches in the pipeline targeting this capability?

Thank you.

Hello, Brian. I'll 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 your DAO. In addition to translation, which has long been one of our core strengths, I'd like to highlight two areas today. Yu Dao's simultaneous interpretation demonstrated A clear demand for high-quality, low-latency voice interactions in both learning and communications. In Q2, user engagements with simultaneous interpretation increased by approximately 100% year-over-year. So while higher-cost gross billings also grew by more than 100%. So one recent development I want to highlight is Confucius IV 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. brought 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 strong technology and learning expertise. Math is, we all know, a challenging subject for many learners and is foundational to almost all our 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. 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 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. Yeah, thank you.

Thank you.

Our next question comes from Jing Wang with CICC. Please go ahead.

Thank you for taking my question. My question is also about AI, but it's more about AI features of Lingshi AI IC grading. We all know that Lingshi AI IC grading feature has earned well spread user recognition. Do you plan to further expand its AI powered features in Lingshi in the future? Thanks.

Thank you. This is Feng Su. I will handle the question first. Yeah, and for Lingxue, we see the AI creating values for Lingxue 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 continuing investments in our large-language model computers, Yu Dao Lingxue has focused on resolving the core pinpoints across the learning and the college application scenarios. Through continuous products, refinements, and exploration of the latest use case, we have built a comprehensive AI interactive courses and a 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, Yu Daoling Shi has crafted granular and personalized intelligence learning solutions. The first is about the personalized learning path recommendations. Centered around specific knowledge points, this function pinpoints students' weak areas to generate a tailor-made learning plan by targeting shortfalls directly and eliminating redundant practice. It boosts the learning efficiency a lot. and second is about the AI quiz recommendations. Diverting individual learning profile within the Youdao, Inc.'s Intelligent Learning System. This feature dynamically recommendation adaptive exercise helps students master core concepts through the application and the variations. And the third is the AI athlete grading for Chinese and English based on the explicit evaluation rubrics. These features diagnose writing flaws 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 advisors. Extending beyond academic learning, you'll also ensure leverage its massive user space and extensive industry data to offer the professional AI-based college application advisory services. By licensing users' performance, Wang, and Feng Zhou. 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, without ensuring a retention rate exceeding the 75%, maintaining an industry-leading level and demonstrate high user satisfaction with our AI-directed courses. So for us, AI is not simple and additional features will ensure it becomes an important driver of both user's 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. 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 first quarter? Thank you.

Hi, this is Jinlei. Thank you for your questions. In the second quarter, our advertising business became more profitable, with the gross margin improving by about 3 percentage points. We expect the 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 and many more. 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, then we experience rapid acceleration in the subsequent quarters. In the third quarter, It will focus on the three 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 LRM. That is QR marketing. After upgrading Infinesse in the first quarter, we plan to launch an oversee KOL marketing agents in the third quarter to help Chinese companies reach global markets more efficiently. The other is programming advertising. Launching the second quarter, our second-generation AI AD placement optimizer improves traffic matching and helps increase targeting accuracy and operating efficiency. 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, improving probabilities. We will continue to improve gross margin through two initiatives, using UDAG image box to reduce the cost of producing advertising creatives, and using the AIAD 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 QR marketing. This will help improve advertiser ROI while supporting our growth in both revenue and profitability. In the short term, we will continue to prioritize the protocol and sustainable growth over rapid expansion. We will also keep upgrading our advertising and marketing tools to support the future growth.

Thank you.

Our last question comes from the line of Bo Can with Hu Tai Securities. Please go ahead. Go ahead.

Thanks for taking my question. This is Zhang Bo from Huatai. Could measurement share the outlook for the growth margin in the third column? Thank you.

Thank you, Zhang Bo. This is Wen Lin. I will answer 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. Specially, growth margin for online marketing services and learning services expanded by 1 percentage point and 3 percentage point 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 deficit 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 our magic box have significantly boosted and many more. As for probability 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 cross-margin was primarily driven by AI-enhanced learning efficiency and skilling benefits. On the AI empowerment side, features such as AI ASCII 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 the gross margin. On the economic outskill side, as cost revenue has steadily climbed since the second half of 2025, we expect the economic outskill in learning services to become even more pronounced throughout 2026. which drives further growth module expansion. Third, aspect of smart devices. Similar to the broader consumer electronic industry, our smart devices segment has faced the cost pressure from rising memory costs, alongside a reduction in hardware economic upscale. 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 elevation in the near term, architecture and engineering improvements designed to reduce memory reliance will meaningful mitigate the 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 Barton LRM integration across all product lines while maintaining rigorous cost and operation efficiency optimization. This strategy will maintain centrals throughout 2026, giving us confidence in delivering strong gross margin performance and achieving meaningful breakthroughs at the operating profit level in the second half of 2026. Hope the information mentioned is helpful.

Thank you. 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.

Thank you once again for joining us today. If you have any further questions, Please feel free to contact us at UDAO directly or reach out to PSN Financial Communications in China or the US. Have a great day.

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