Shares of Youdao Inc. (NYSE: DAO) plunged 7.69% in pre-market trading on Thursday after the AI-powered learning company reported a steep decline in profitability for the third quarter of 2025.
The Chinese education technology firm saw its net income attributable to ordinary shareholders plummet to just RMB0.1 million ($0.01 million) in Q3, compared to RMB86.3 million in the same period last year. On a non-GAAP basis, net income fell to RMB9.2 million from RMB88.7 million year-over-year.
While total net revenues increased 3.6% to RMB1,628.5 million ($228.8 million), Youdao's gross margin contracted significantly to 42.2% from 50.2% in Q3 2024. The company attributed this to a decline in the gross profit margin of its online marketing services segment.
"We continued to advance our AI-Native strategy in the third quarter, strengthening our technological capabilities and translating innovation into meaningful user and business value," said Dr. Feng Zhou, Chief Executive Officer of Youdao. "Building on the solid operating profit in the first half of the year, we strategically increased investments in Youdao Lingshi and our online marketing services to unlock their long-term growth potential."
Despite the positive tone from management, investors appeared concerned about the sharp drop in profitability and margins. The company's learning services segment, which has been a key growth driver, saw revenues decline 16.2% year-over-year to RMB643.1 million. Youdao said this was due to a more disciplined approach to customer acquisition, focusing on higher return-on-investment engagements.
Looking ahead, Dr. Zhou remained optimistic, stating, "Financially, we remain confident in meeting our full-year targets, delivering strong year-over-year improvements in operating profit and achieving annual operating cash-flow breakeven for the first time." However, the market's reaction suggests investors may need more convincing before regaining confidence in Youdao's growth story.
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