Online Marketing Drives Revenue Growth for Youdao, but Profitability Pressured by Margin Decline
Total Revenue Climbs on Online Marketing Surge Despite Segment Weakness
Youdao’s third-quarter 2025 earnings show a company in strategic transition, with total net revenues reaching RMB1,628.5 million (US$228.8 million), up 3.6% year-over-year. This overall increase was fueled by a striking 51.1% jump in online marketing services, which offset revenue declines in both learning services (-16.2%) and smart devices (-22.1%). While learning and smart device sales faltered due to a focus on higher-ROI engagements and declining demand, the online marketing arm saw record revenues of RMB739.7 million, reflecting successful AI-driven expansion into new customer bases—including robust demand from NetEase Group and international clients.
| Revenue Segment | Q3 2025 (RMB mln) | Y/Y Change (%) | Q3 2025 (USD mln) |
|---|---|---|---|
| Learning Services | 643.1 | -16.2% | 90.33 |
| Smart Devices | 245.8 | -22.1% | 34.53 |
| Online Marketing | 739.7 | +51.1% | 103.90 |
| Total | 1,628.5 | +3.6% | 228.76 |
Margins Tighten: Lower Profitability Highlights Growing Pains
Despite revenue growth, profitability came under pressure. Total gross margin declined sharply to 42.2% (down from 50.2% in Q3 2024). This margin contraction was driven mainly by online marketing, which saw gross margin fall to 25.4% from 36.3% as the company strategically expanded its client base—early-stage collaborations with new advertisers weighed on immediate returns. Income from operations also fell 73.7% to RMB28.3 million (US$4.0 million), and net income attributable to shareholders hovered near zero.
| Segment | Q3 2025 Gross Margin | Q3 2024 Gross Margin |
|---|---|---|
| Learning Services | 58.5% | 62.1% |
| Smart Devices | 50.3% | 42.8% |
| Online Marketing | 25.4% | 36.3% |
| Total Gross Margin | 42.2% | 50.2% |
Strategic Investment in AI and Efficiency Underpin Long-Term Ambitions
Youdao continues to invest heavily in its AI-Native Strategy, with significant R&D growth (+6.9% y/y). The company highlighted substantial gross billing growth (40%+ y/y) in its AI-driven Youdao Lingshi product and hit record sales of AI-powered subscriptions, signaling future monetization opportunities. Management maintains a confident outlook for full-year targets, banking on operational discipline and deeper AI adoption across business lines, even as near-term profitability remains under pressure.
Cash Flow and Liquidity: Reliance on NetEase Support as Company Pushes for Break-even
With RMB557.7 million (US$78.3 million) in total liquidity as of September 30, 2025, Youdao remains reliant on financial support from NetEase Group—drawing both short-term (RMB878 million) and long-term loans (US$131.1 million outstanding) to sustain its growth and cushion regulatory risk. The company's focus for 2025 is on achieving annual operating cash-flow break-even for the first time, reflecting a push towards sustainable operations.
| Cash & Short-term Investments | NetEase Loans (Short-term) | NetEase Loans (Long-term) | Contract Liabilities (Deferred Revenue) |
|---|---|---|---|
| RMB557.7 mln | RMB878.0 mln | US$131.1 mln | RMB751.1 mln |
Takeaway: Mixed Results Highlight Transition Phase and Focus on Future Profitability
Youdao’s Q3 2025 paints the picture of a business reshaping itself for AI-driven growth, even as that process brings short-term challenges in margins and profits. Investors and observers will want to watch for evidence that early-stage expansion in online marketing translates into higher profitability over time and that R&D investment begins to flow to the bottom line. For now, ongoing financial support from NetEase is key to supporting the company’s growth ambitions and bridging the path toward operational break-even and more resilient cash flow.
Key Data at a Glance (Q3 2025)
| Metric | Q3 2025 | Q3 2024 | Change (%) |
|---|---|---|---|
| Net Revenues (RMB mln) | 1,628.5 | 1,572.5 | +3.6% |
| Income from Operations (RMB mln) | 28.3 | 107.3 | -73.7% |
| Gross Margin (%) | 42.2% | 50.2% | -8.0 pts |
| Non-GAAP Net Income per ADS (RMB) | 0.08 | 0.76 | -89.5% |
| Share Repurchased (mln ADSs) | 7.5 | — | — |
The upcoming conference call (November 20, 2025) will provide more color on Youdao’s AI transition, cost management, and outlook for regaining operating leverage.
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