Udemy Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 2, 2023

There are 11 speakers on the call.

Operator

Good day, and welcome to the Udemy Third Quarter 2023 Earnings Conference Call. All participants will be in a listen only mode. After today's presentation, there will be an opportunity to ask questions. Please also note that this event is being recorded today. I would now like to turn the conference over to Dennis Walsh, Vice President, Investor Relations.

Operator

Please go ahead.

Speaker 1

Thank you, Joe. Joining me today are Udemy's Chief Executive Officer, Greg Brown and Chief Financial Officer, Sarah Blanchard. During this conference call, we will make Statements within the meaning of federal securities laws. These statements involve assumptions and are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those discussed or anticipated. For a complete discussion of risks Associated with these forward looking statements, we encourage you to refer to our most recent Form 10 ks and Form 10 Q filings with the Securities and Exchange Commission.

Speaker 1

Our forward looking statements are based upon information currently available to us. We caution you to not place undue reliance on forward looking statements, We do not undertake or expressly disclaim any duty or obligation to update or alter our forward looking statements, except as required by applicable law. In addition, during this call, certain financial performance measures may be discussed that differ from comparable measures in our financial statements prepared in accordance with U. S. Generally Accepted Accounting Principles referred to by the Securities and Exchange Commission as non GAAP Financial Measures.

Speaker 1

We believe these non GAAP financial measures assist management and investors in evaluating our performance and comparing period to period results A reconciliation of these non GAAP measures to the most comparable GAAP financial measures is included in our earnings press release. These reconciliations together with additional supplemental All information are available on the Investor Relations section of our website. A replay of today's call will also be posted on the website. With that, I will now turn the call over to Greg.

Speaker 2

Thank you, Dennis, and good afternoon to everyone on the call. Udemy once again delivered results that exceeded our expectations for both revenue and adjusted EBITDA. On a year over year basis, Udemy Business revenue increased 30%, while consumer revenue increased 1%. We also raised our outlook, which now projects our 1st full year of positive adjusted EBITDA well ahead of plan. During the quarter, Udemy Business customers remain highly engaged with our platform As demonstrated by the 14% year over year increase in logos and the 114% large customer net dollar retention rate.

Speaker 2

We added new or expanded existing relationships with global customers, including Assurant, Deutsche Telekom, Schlumberger, Shell and Walmart Chile to name a few. We closed many 6 figure deals during the quarter, including $31,000,000 plus deals, contributing to Udemy Business ARR growth of 26% year over year. Compared to the prior quarter, deal velocity improved, our win rates increased and we are seeing higher average enterprise plan contract values. Given these results, we are very encouraged by the demand on both sides of our business. While still too soon to call the bottom, We're seeing customers beginning to ease their budgetary constraints, although still below historic norms.

Speaker 2

As customers plan for 2024, It is clear that investments in upskilling and reskilling are a key focus. Our conversations with CLOs across the globe suggest that developing skills based practices will be a top priority for the foreseeable future. This gives us confidence in the significant opportunity for long term growth. With that in mind, today I wanted to share some insights into, 1st, what is driving the transformative shift that is reshaping company's approach to skills based And second, the strategic investments Udemy is making now in order to capitalize on this opportunity and drive long term profitable growth. Let's start with the market trends.

Speaker 2

The current environment is characterized by an accelerated pace of innovation, driven by digital transformation, The emergence of generative AI and the widespread adoption of hybrid work. These profound forces are reshaping the way we work and redefining the skills needed to drive future growth and success. The study for Mackenzie underscored the urgency of the situation, revealing that 87% of executives are already identifying skills gaps within their organizations. In addition, The World Economic Forum found that 60% of all workers will need retraining before 2027 as skills rapidly evolve or become obsolete due to automation. It is abundantly clear that we are in the early innings of a dramatic global transformation, one that businesses must fully embrace to enhance productivity, Foster innovation and create sustainable value.

Speaker 2

This new reality demands the immediate and ongoing attention of all organizations and workers. Many forward thinking companies are already responding to this challenge by recognizing skills as the new currency within their organizations. Global enterprises such as IBM, Bank of America, Kellogg's and Walmart as well as multiple U. S. State governments Are leading the way by prioritizing skills proficiency, including implementing credentialing programs and easing degree requirements for certain roles.

Speaker 2

Having a clear skills based transformation strategy is critical for company's future success and ensures talent decisions are based on what workers actually are capable of A study by Deloitte reinforces this, revealing that organizations embracing skills first practices are 107 percent more likely to

Speaker 3

place talent

Speaker 2

effectively, 52% more likely to foster innovation, and 57% more adept at anticipating and navigating change. We firmly believe that companies aiming to stay ahead of the pace of change must invest in talent mobility to support career growth and the attraction and retention of top tier talent. In today's world, people are as vital as technology and creating sustainable differentiation. For example, a prominent global airline partnered with Udemy Business this quarter to enhance the digital skills of its employees. The company chose Udemy as its learning partner to increase digital literacy, Improve productivity, bridge skills gaps and retain talented staff.

Speaker 2

Udemy Business was chosen or an incumbent because of our demonstrated ability to develop and implement a skilling strategy, the breadth of our skills content and skills validation capabilities. Layering on to that, AI continues to reshape industries across all geographies. Organizations and professionals must understand how generative AI will impact individual roles and how it can be integrated into transformation strategies to foster agility, During the quarter, a large global pharmaceutical company doubled its seat count with us and a multiyear expansion deal to address the full extent of the AI opportunity. The CEO set a mandate for upskilling the entire workforce on this technology Udemy is supporting our customers' efforts to achieve these critical business objectives by providing its employees access to relevant AI content, The demand for generative AI related content on the Umi platform is remarkable. Currently, we offer an extensive selection of over 1500 courses, which have collectively garnered more than 2,500,000 learner enrollments.

Speaker 2

The organic creation of content in response to demand reaffirms the effectiveness of our marketplace model, which seamlessly adapts to evolving technology and learner needs. It's important to note that as technology continues to advance and new demands arise, our platform organically fosters the creation of fresh relevant content. GenAI is a prime example of this dynamic process. Looking ahead, With further technological advancements on the horizon, we are confident in Unimi's ability to lead by providing relevant high quality content It will continue to attract a growing number of learners and customers. As demand for training skills and digital transformation strategies increases, We will align our own strategy as well as our investments in product innovation, brand and go to market to capture that demand.

Speaker 2

Heading into the New Year, you can expect to hear more about our investments and new campaigns that we believe will have the potential to dramatically increase Udemy brand awareness globally. As part of those efforts, we plan to bolster our go to market engine and lean into strategic partnerships that extend our reach more rapidly and into new markets. We recently announced a partnership with Docker, a leading provider of development tools and have more exciting collaborations with technology leaders to announce over the next few months. These partnerships will allow us to expand and introduce Uniti to millions of new learners. For example, We are already seeing significant traction with our AWS partnership.

Speaker 2

During Q3, total contract value of bookings through AWS Increased 214 percent quarter over quarter and we grew the number of deals transacted by more than 5x year over year. Over time, we anticipate our strategic partnerships will become even more impactful. In addition, we remain bullish on the opportunities Generative AI brings to our business and have built a robust product roadmap that will supercharge the Udemy experience. We are building highly relevant generative AI enabled capabilities for 3 distinct personas: our enterprise customers, learners and instructors. In response to the evolving needs of our enterprise customers, Udemy is committed to delivering tailored solutions.

Speaker 2

With industries undergoing rapid transformations, organizations are turning to Udemy to address their specific upskilling requirements. To serve them better, we're developing a cutting edge generative AI powered skills mapping system. This innovative solution When integrated with our extensive course catalog of more than 210,000 courses, positions us at the forefront of addressing each customer's precise skills demands. Leveraging generative AI, we will automate the creation of personalized learning paths and guidance, ensuring that every professional skills development need For learners, we are focused on enhancing the experience on our platform. We are harnessing the power of GenAI For example, we recently introduced SmartSearch capabilities that enable learners to access bite sized micro learning opportunities within our vast course catalog.

Speaker 2

This not only streamlines the experience, but it also enhances engagement and optimizes time spent on our platform. Finally, we are committed to empowering instructors with tools that supercharge their ability to create high quality content more efficiently and effectively. Instructors often spend substantial time responding to learner inquiries with some even hiring teaching assistants. We will leverage AI to automate responses for learner questions, saving instructors valuable time. Learners 2 will benefit from a more responsive and engaging experience.

Speaker 2

Instructors also dedicate significant time developing practice tests and quizzes. We will apply generative AI to automatically create interactive materials for instructors. These enhancements will be applicable to all new and existing courses and will be available to all 75,000 Udemy instructors. The synergy between generative AI coupled with the depth and breadth of Udemy's content In order to properly fund these initiatives, We announced to our instructor partners today that we will be adjusting our instructor revenue share. Our plan is to gradually lower the rate for our subscription programs over the next few years, which will reduce costs as a percentage of revenue.

Speaker 2

We believe that our investments in brand and product Will be a net positive over time for instructors. Sarah will share more details on this in a moment. Finally, our commitment to innovation extends beyond our customer offerings. We are actively leveraging the power of AI to transform our internal operations, ultimately enhancing the service we provide to our valued customers. Our recent investment in cutting edge technology is leading to the launch of a generative AI powered chatbot that can efficiently handle over 70% of our incoming request, streamlining our support processes and providing quicker resolutions for our customers.

Speaker 2

In tandem with this development, we're equally committed to upscaling our customer support teams, underscoring our dedication to becoming a premier center for generative AI support. In conclusion, We are committed to helping individuals and organizations navigate this exciting period of rapid change. Udemy is prioritizing skills, embracing the potential of AI, adapting to the hybrid future of work and fostering a culture of agility and resilience. These strategic pillars will guide us as we continue to lead the transformation to a skills based economy and innovate in this ever evolving landscape. Now, I'll turn the call over to Sarah for a financial review.

Speaker 4

Thank you, Greg. I'll focus my comments on the key financial highlights and then provide our outlook for Q4 and full year 2023. You can find the complete set of financial tables in our news release, which is available on our Investor Relations website. We had a strong 3rd quarter as we exceeded expectations on both the top and bottom line. Revenue increased 17% year over year to 185,000,000 or nearly $5,000,000 above the high end of our guidance range.

Speaker 4

The year over year growth included a negative impact from foreign exchange or FX of 1 percentage point. The contribution from regions outside of North America was 60% of total revenue, an increase from 58% in Q3 of the prior year, as we continue to expand our geographic footprint. Udemy Business revenue increased 30% year over year to 109,000,000 Included in net growth was a 2 percentage point headwind from changes in FX rates. We ended the quarter with annual recurring revenue or ARR $443,000,000 up 26 percent from a year ago. Our consolidated net dollar retention rate for Q3 was 106%, A 2 point decrease from the prior quarter.

Speaker 4

The rate was 114% for large customers or those with 1,000 or more employees, just one point lower than the prior quarter. It is encouraging to see the pressure on net dollar retention soften, which gives us confidence that we will continue to deliver net dollar retention above 100% as customers recognize the value of our platform. On top of that, gross dollar retention remains stable, which is impressive considering the current macroeconomic environment. In aggregate, we grew our customer base by 14% year over year or 432 net adds to more than 15,000 customers globally. The number of customers spending more than $100,000 in ARR Is up 37% from a year ago.

Speaker 4

From a geographic perspective, the strongest demand during the quarter came from our North America and Asia Pacific regions. Our consumer marketplace continues to be vibrant. Although traffic was flat year over year at 34,000,000 average monthly unique visitors, We added nearly 3,000,000 learners to the platform, ending the quarter with 67,000,000 or an 18% year over year increase. Course creation and refresh are strong with more than 5,000 new courses added each month and 60% of our top courses were updated in the past 90 days. This further demonstrates the power of the marketplace model to keep up with the pace of change.

Speaker 4

As a result, we were pleased to deliver year over year segment revenue growth For the first time in 6 quarters of more than 1%, including the negative impact of 0.5 percentage point from FX. We also achieved an exciting milestone with our consumer subscription, which we call Personal Plan. We have been testing Personal Plan in several markets We look forward to providing more updates as the program evolves. As we move down the P and L, note that all financial metrics are non GAAP unless stated otherwise. Q3 gross margin was 60%, a 200 basis point improvement from Q3 2022, driven by the continued revenue mix shift to U2E Business, which accounted for 59% of total revenue in Q3.

Speaker 4

Total operating expense was $107,000,000 or 58 percent of revenue and 1100 basis points lower than Q3 of last Thanks to our focus on company wide cost efficiency. Sales and marketing expense represented 37% of revenue, down 600 basis points. R and D expense was 13%, down 100 basis points and G and A expense was 8%, down 400 basis points. On the bottom line, we delivered positive net income of approximately $8,000,000 or 4% of revenue. Adjusted EBITDA was positive for the 2nd consecutive quarter at approximately $8,000,000 or 4% of revenue, which represents a 1200 basis point expansion year over year and nearly 300 basis points better than the high end of our guidance range.

Speaker 4

The better than expected adjusted EBITDA result was primarily driven by revenue outperformance and our disciplined approach to driving operational efficiency throughout the organization. Moving on to key cash flow and balance sheet items. We ended the quarter with $483,000,000 of cash, cash equivalents, restricted cash and marketable securities. Free cash flow for the quarter was positive 9,000,000 driven by collections timing and lower expenses. Now turning to our outlook for Q4 and full year 2023.

Speaker 4

We expect Q4 revenue to be between $184,000,000 $187,000,000 Assuming foreign currency exchange rates remain constant, FX is expected to negatively impact Q4 year over year total revenue growth by approximately 2 percentage points. On the bottom line, we anticipate Q4 adjusted EBITDA margin of breakeven to positive 1%. For the full year, we are raising our outlook. We now expect revenue to be within a range of $723,000,000 $726,000,000 or 15% year over year growth at the midpoint, including an estimated 3 percentage point negative impact from FX, assuming no further changes in rates. On the bottom line, we are committing to our 1st full year of positive adjusted EBITDA well ahead of plan.

Speaker 4

We expect full year 2023 adjusted EBITDA margin to be Between 50 and 100 basis points or a nearly 900 basis point expansion at the midpoint compared to 2022. Although we expect to end the year strong, we remain cautiously optimistic going into 2024. We've continued to see delays in decision making from new and existing customers, the effects of which will flow into next year. We're also seeing some softness in EMEA as geopolitical tensions rise in that region. Therefore, we are exercising caution until we start to see green shoots materialize and have more visibility into next year.

Speaker 4

With that said, the long term opportunity is significant. Given our efforts to focus on operational excellence through these turbulent times, Before taking questions, we wanted to address an update. Earlier today, we shared with Udemy's instructor partners that we will be adjusting our instructor revenue share. Under the current payment structure, Instructors earned 37% of revenue for individual course purchases on Udemy's marketplace. Instructors earned 25% for Udemy Business our personal plan subscription offerings, which is allocated pro rata based on consumption of their content.

Speaker 4

Due to the rapid growth of Udemy Business, our instructor payment pool has grown at a significantly faster rate than our marketplace revenue since 2020, With the total Instructure earnings expected to be more than $200,000,000 for 2023. As we continue to scale, the cost of acquiring, On boarding and servicing customers has risen as well. Now is the right time for Udemy to further lean into capitalizing on a massive long exciting product roadmap that leverages generative AI and will accelerate our growth. We believe that these new products will drive greater customer adoption and engagement, ultimately increasing LTV over time as customers grow with us. We also plan to invest in brand building initiatives to increase awareness and expand our global customer base, which will help grow instructor's businesses by connecting them to more learners.

Speaker 4

Under the new structure, the revenue share for the marketplace will remain unchanged, but we will be gradually reducing the instructor share of subscription revenue. Our first adjustment to 20% will be effective January 1, 2024, followed by 17.5% in 2025 15% in 2026. Considering the growth potential we see for our enterprise and subscription products, we will The positive impact on gross margin from the revenue share adjustment is expected to be meaningful, allowing us to continue to grow sustainably, make the necessary investments to capitalize on the opportunity and expand our bottom line. Let me take a minute to walk you through some of our preliminary assumptions to illustrate how we're thinking about margin expansion as we progress toward our long term targets. Starting with a baseline estimated gross margin for 2023 of 58% to 59%, we expect an approximate 300 basis point improvement on average annually from 2024 to 2026.

Speaker 4

By the end of 2026, We expect gross margin to be approaching 70%, and for 2027, we expect to exceed 70%. The majority of gross margin expansion will be driven by the instructor revenue share change and to a lesser extent the continued mix shift to U2B Business and other leverage as we scale the business globally. During that time, we will make opportunistic investments that will support the long term growth of our business. As a result, while it won't be a straight line, we are confident that we will achieve our adjusted EBITDA target range of 15% to 20% by 2027. In closing, 2023 has so far been a transformative year for Udemy.

Speaker 4

We significantly strengthened our leadership team, Strategically navigated a very challenging macroeconomic environment, and we delivered positive adjusted EBITDA well ahead of plan. As we approach the end of 2023, we remain focused on consistently balancing strong top line growth and profitability on an annual basis. We look forward to keeping you updated as we progress toward that goal. So with that, we'll open up the call for your questions. Moderator?

Operator

At this time, we will take our first question, which will come from Ryan MacDonald with Needham. Please go ahead.

Speaker 3

Hi. Thanks for taking my question and congrats on a great quarter. Maybe just starting with the instructor revenue share adjustments. As you think about what is rolling out, is this going to be rolled out on January 1st to all Unity Business and Consumer Subscription Content or only net new content that is created after Jan 1. And then as you think about the savings that this is going to generate On gross margin, the cost of revenues line, how much of that do you expect to reinvest below the gross margin line?

Speaker 3

Well, how much of that do you expect that should fall down to the bottom line as we go look over the next couple of years here?

Speaker 2

Hi, Ryan. Thanks for the question. I'll answer the first part and then turn over to Sarah to answer the second. Yes, as of Jan 1, The changes in instructor payment fees will apply to all courses that are Personal plan as well as team plan enterprise plan. And we surely are going to be reinvesting These funds to grow the business in significant ways.

Speaker 2

But I'll let Sarah add a little bit more color in terms of the balance between gross margin impact And bottom line, EBITDA margin, Sarah?

Speaker 4

Yes. Hi, Ryan. Thanks for the question. So from a gross margin perspective, As we talked about, we expect about 300 basis points expansion on average, which is a combination of the instructor revenue share, Which starts impacting immediately as Greg just spoke about we are making that change effective January 1 for all of our subscription courses. And then in addition to that, the revenue mix shift to Udemy Business over time also contributes to that gross margin expansion.

Speaker 4

From an EBITDA perspective, For next year, we expect just modest expansion because we are going to be reinvesting some of those dollars in some of the things you heard Talking about around brand, around product and around go to market as we see green shoots in different areas. We're really focused on capturing This massive opportunity that is in front of us. So from a longer term perspective, that means we expect to deliver meaningful bottom line Expansion in 20252026, as a result of these investments, and we're confident we're going to reach our long term EBITDA target in 2027.

Speaker 3

Excellent. Thanks for the color there. Really appreciate it. Maybe just one more, Greg, for you on just the environment within We've seen recently from one of the largest HCM surveys in the industry that net new dollars And sort of HR broadly are expected to be down, I think, 10%, 11% next year, but learning remains and training remains the top So I'm curious, given this sort of shift towards skills based training within enterprises, How are those conversations and where are you seeing the most demanded? Are you seeing a healthy mix of net new versus existing or is it more weighted towards existing customers?

Speaker 3

Thanks.

Speaker 2

That's a really good question, Ryan. So as we mentioned, we saw in quarter, we saw improvement in sales cycle velocity, win rates, Average deal sizes, improvement in deals over $100,000 And so from the Perspective of the leading indicators we're looking at, that give us confidence in the opportunity not just today, but tomorrow, We feel really good about the momentum and feel really good about our team's ability to execute. We are seeing a balance of net new A really healthy balance of net new customers as well as existing customer upsells. And I'll tell you I'll give you an example of net new that is exciting for us. Large Fortune 500 Financial Services Company signed a $2,000,000 3 year contract with us for the specific purpose Developing and transitioning to a skills based organization, so developing skills capability across the entire organization and They're leveraging all products, not just our core, but Udemy Business Pro, Professional Services as well as Badging and Certification.

Speaker 2

And the nature of those conversations, which I had an opportunity to take part of, what was really exciting is the Station which I had an opportunity to take part of, what was really exciting is the strategic nature of the partnership and the way that they were looking at it. They've got goals So we've talked a bit in the past that this transition to a skills based org and skills based economy is gaining steam and now it's starting to manifest And large multiyear contracts net new customers coming in, in addition to a healthy dose of expansion, that we continue to see. I'll just add, I've recently over the last 6 weeks had an opportunity to go visit both Europe and India And spend time with a number of our larger customers. And I can tell you after meeting with the CLOs and heads of people in these organizations that They're under immense pressure by their CEOs to develop a strategy and a capability to upskill across the organization With respect to AI, well, how are they going to internally leverage this transformational technology, Right. To get operating leverage, with respect to how they're running their business and at the same time, leverage AI into the products and services they're developing To provide competitive advantage for their customers.

Speaker 2

This is unlike anything I've seen before in my career in terms of the consistency. Every We talked to this was the number one topic of conversation. And we and the conversations we were in We're all about us being a primary partner and strategic partner and helping them through this endeavor of transitioning to Just a skills based organization, but an organization that truly understands how to leverage AI to get operating leverage internally as well as extend that externally. So We're at the front end of a transformational shift and we're going to see more and more of as we move forward.

Speaker 3

Appreciate the color. Congrats again.

Operator

And our next question will come from Stephen Sheldon with William Blair. Please go ahead.

Speaker 5

Hey, thanks. Really, really helpful commentary, Sarah, on the margin progression, which I'm sure a lot of investors appreciate. It feels like you're targeting to hit that long term EBITDA margin target of 15% to 20% by 2027. Just curious, Does this change impact your view of what longer term margins beyond 2027 could look like?

Speaker 4

Yes. It's a great question, Stephen. And really with this change, that gives us a lot of confidence that over time, we're going to be able To hit the high end of that target and the industry and what is happening, as Greg just said, This is a massive transformation that we haven't seen in a decade or 2 since like the move to the cloud and that sort of thing. There are so many things that are happening and our ability to invest and to build out these capabilities that Really allow us to serve customers who, as Greg just said, they're really struggling to figure out how do I upscale my team? How do I make sure that they can embrace AI and that my business can be really competitive?

Speaker 4

And so we're going to be investing more next year. It's a heavier investment year That we'll have in future periods as we look to really take advantage of these tailwinds.

Speaker 5

Got it. That's helpful. And then maybe in UB and just thinking about the expansions, I think you've talked historically with Current UB customers only having 10% of current employees covered under a license. Curious if that's moved any higher over the last year or so, Especially with consolidation of L and D spend that might be going on right now. And is there anything that you need such as even more content breadth to be able to push

Speaker 2

That's a really good question. The acceleration of consolidation continues to happen And we're seeing it accelerate as a result of this massive trend, which we just talked about through a skills based org. In fact, I'll talk briefly about 2 of our larger global financial services customers. 1, one of the largest banks in all of APAC Made a decision to consolidate from 4 vendors, of which we were 1, to 1 vendor and standardize on a strategic Approach to developing AI skills across the organization. Fortunately, we ended up being their selected partner, Right.

Speaker 2

So they doubled the size of the contract. We're now in process of developing a multiyear Strategy to develop AI skills across the organization in a number of capacities, added on Udemy Business Pro to help them on the technical side of the house. In addition to that, we talked about our AWS partnership. They were an AWS customer and that partnership enabled us to move through Procurement, the whole procurement process and accelerated pace and benefited everybody involved for us to do this deal through AWS. So The consolidation trend continues.

Speaker 2

The focus on transition to skills based ore continues. And in terms of our penetration, north of 10%. We haven't seen significant movement in that. I would say modest, right, modest movement. But in our larger customers, especially in the Financial Services vertical, we're seeing significant movement in Fiserv right now.

Speaker 2

And what we are seeing is We now have this last year over 100% year over year growth and our Fortune 100 Financial Services Of which, by the way, we're now over 70% penetrated into the Fortune 100 Fiserv sector, right? So we have, For all intents and purposes locked up by that segment of customers and they're investing heavily to upskill and reskill Both to develop AI capability and skills development, specifically around cybersecurity, in areas that are critical for their Compliance and very unique circumstance in that financial sector. So anyway, nonetheless, we're seeing some vertical momentum as far as expansion As well as we're seeing a continued trend toward building out that skills based org capability and so that deal sizes for us are getting larger. I mentioned The deal is over $100,000 was our biggest quarter ever in terms of percentage of deals over $100,000 So there's good momentum for us there.

Speaker 5

Great to hear. Congrats on the results.

Speaker 2

Thank you.

Operator

Our next question will come from Jeff Meuler with Baird. Please go ahead.

Speaker 5

Yes. Thank you. It seems

Speaker 2

like we've had a couple

Speaker 5

of quarters in a row now of better than you were expecting. Just I guess how much of that is just a better demand environment? And does it If it continues, does it make you rethink at all, I guess the ambitions for how you can manage profitability In the consumer segment, if the vibrant marketplace remains from a content creation standpoint?

Speaker 4

Thanks for the question, Jeff. So consumer, we have been really pleased with the stability of the marketplace. And as you saw, unique visitors were stable, monthly average buyers were up. We do though know that There is some other things that are happening with consumers like credit card debt is now it's creeped up to a high in comparison to where it's been. And so when you look at as an example forecast for Black Friday promotions and that sort of thing, spending is actually expected to be muted.

Speaker 4

And so in the short term, there continues to be volatility. We think that the consumer business is going to be flat, Maybe down a few points. We're all going to just have to wait and see what that looks like. But longer term, there are some Things that are really exciting that we are building out for learners generally, but first we build for our Udemy Business Learners. And over time, we'll be rolling those out onto our consumer platform.

Speaker 4

And so some of those capabilities, we believe, Could start to drive more interest in our consumer. An example of that is the badging and certification. So that ability to Take these classes and go out and get that certification and actually share that on the Ume platform. That capability is Coming to the platform and so things like that help us really shape how we see consumer as over time being an area that We're going to keep an eye on. Some growth could happen, we don't think in the near term.

Speaker 4

It's a little bit of a wait and see still, but that stability has been great for us.

Speaker 5

Great. And then just anything you can say about the initial instructor response to receiving the letter and the changed

Speaker 2

Yes, it's a good question. So we did communicate directly with our instructors this morning With respect to the changes, I'm hosting a webinar as well with our instructors tomorrow and we're going to go into a lot more detail there. But What we did share with them and let me just say we've been monitoring our instructor forms very closely today. There's a couple of points that I'm going to with them. One of which is our instructors are the lifeblood of our business.

Speaker 2

We don't have a business without our instructor community, Right. So we took tremendous care in modeling and assessing the impact of this change As well as looking back into 2019, in terms of how we executed the change back in 2019 that predated Cerini, But how that impacted our instructors and what that change was very clearly was in 2019, we move instructor payments For our subscription business, Uniti Business from 50% to 25% in one fell swoop. As a result of that, one of the instructors that was with us back then made the comment in the community and actually showed his graph I said back in 2019 when they made this change, they made the same commitments to investing in go to market and technology to enable us To grow Udemy Business at an accelerated rate. At the time, I did take a short term hit, but I'll show you my graph Since they made that change, I've more than 6x ed my instructor revenues as a result of the investments that they've made and the growth of Udemy Business. I believe in this team.

Speaker 2

I believe in their ability to go do the same thing again. And that's a truncated paraphrased version. But as you can imagine, there's mixed comments. Some instructors that may be a little bit newer, maybe racked a little bit more emotionally and what have you, but we had a number of instructors Balancing that feedback with a little bit more levity and a little bit more experience and a little more understanding around how this change impacted them last time and what the end result has been. And we care about all the responses because the reality is without our instructor community, again, We're not here, right?

Speaker 2

So we did a couple of things to soften the So to speak in the short term that we did not do last time, one of which is we made this a 3 year transition, not making the shift from 25 to 15 in 1 year. And the modeling shows us right now that if we execute our growth projections for Udemy Business That we will actually grow the instructor pool through this 3 year transition and then coming out the other side, we're off and running and we're back to significant growth, Right. So we've done a lot of work. We've done a lot of modeling. I'm going to go into more detail with our instructors tomorrow.

Speaker 2

But very pleased by the from a number of the instructors that have been with us for a long time that have commented on the impact over the years and our ability to execute a similar outcome here.

Speaker 5

Helpful detail. Thank you.

Operator

And our next We'll come from Noah Herman with JPMorgan. Please go ahead.

Speaker 6

Hey guys, thanks for taking the questions and congrats I just wanted to touch a little bit about maybe the linearity you saw in terms of The EYVONDA sales cycles you're continuing to see, has that it sounded like that has improved a little bit. So I'm just curious on How that tracked in Q3 versus Q2 and what maybe you're sort of seeing in October? Thanks.

Speaker 2

What we are seeing is it's a good question, thank you. Is in some sectors and segments, we're seeing sales cycle velocity improvement. We did touch on that In the opening. And so in aggregate, that is the case. But look, the SMB business is still heavily impacted by the macro.

Speaker 2

And Regionally, EMEA, based on everything that's going on that Sarah mentioned earlier, geopolitical impact in EMEA, it's without question, It's present. And so we're not again ready to call a bottom, but we are encouraged by improving sales velocity, especially in the enterprise segments in Asia Pacific as well as in North America and through our channel programs. There's it's mix right now and we're obviously we're monitoring it very closely. And we're hopeful that as we move into next year For all of us, we're going to start to see the geopolitical concerns start to wane and get some of that addressed and We'll have a different year next year in terms of the macroeconomic impact.

Speaker 6

Got it. And then just a quick follow-up. I realized some of the comments made around EMEA, but in the quarter, it actually looked like across each region internationally, Actually, the growth actually accelerated a bit. So I just wanted to double click and see what's really driving that. If you can maybe provide a brief breakdown you're seeing in each region.

Speaker 4

Thanks. Yes. I think what you're looking at is the Total numbers that you're seeing in the geo, how that growth is happening, and we did see EMEA growing at about 20% overall. Again, as Greg said, we're seeing pressure on the Udemy business side, but what we're seeing is some strength on the consumer side. And so both of those Go into what's happening.

Speaker 4

North America Enterprise Business, as Greg just said, that was strong. We saw a slight improvement in the Sales cycle velocity there as well as APAC, but we do continue those sales cycles are still longer than historical. So the geo mix that you're Seeing and what's happening is a blend of what's happening within UB and what's happening with consumer.

Speaker 6

Got it. Thank you.

Speaker 4

Thanks for the question.

Operator

And Our next question will come from Josh Baehr with Morgan Stanley. Please go ahead.

Speaker 7

Great. Thank you for the question. Wanted to just confirm, is it correct that this content revenue share change, it was not contemplated or needed to Get to that 15% to 20 percent EBITDA margin guidance originally?

Speaker 4

Yes, Josh, thanks for the question. It was not originally anticipated, But we do believe that we're going to get to that target sooner end 2027, and it also gives us confidence that we'll be able to get to the high end of the range And over in the years beyond that. So this change really is, to allow us right now to really invest in these things that are continued to drive That sustained growth that you see in Udemy Business and well muted based on the macro, we think when that macro starts to clear up, we'll see a reacceleration again because we are in Really great position to capitalize on that opportunity.

Speaker 7

Great. Really clear. And one on translation, Using GenAI to do translations for your courses. Just wondering for you if how helpful that is or if it's helpful. I know that you have a lot of focus in actually having like local language content.

Speaker 7

And so just wondering if that's In the area of cost savings for you or maybe not as relevant? Thank you.

Speaker 2

Hi, Josh. Thanks for the question. It is not as relevant for us because we do have the advantage on a global basis of our instructors developing localized content And local language, local tone, local context that we package and make available to our enterprise customers around the globe. So And not relevant to us because it's not needed. And the second thing I would say is leveraging GenAI for language translation is a fairly basic capability.

Speaker 2

And we're really focused on developing next generation learning experiences as a result of the investments we talked about And the learner experience capabilities we're providing our instructors as well as organizations. And you're going to hear a lot more from us around our ability to deliver skills mapping capability and mapping that to content, learning paths and tailored learning paths in product, to truly transform how organizations develop skills As a result of getting more systematic access to personalized learning experiences through our platform. And it's these types of investments that we're making that are truly going to be transformational as we move forward in helping organizations transition to a skills based economy. And that's really where our energy

Operator

And our next question will come from Brent Thill with Jefferies. Please go ahead.

Speaker 8

Thanks, guys. This is Dave Locksberg on for Brent. I have 2, if I may. Maybe to start, I wanted to ask on the consumer subscription, nice to hear. I think 100,000 subs passed.

Speaker 8

Mino, maybe how long has that been rolled out? I guess, if there's like a data point on the quarterly growth and where do you guys see that getting to over time?

Speaker 4

Hi, Dave. Thanks for the question. So we really started rolling out in small test markets Almost 2 years ago with our subscriptions, it's been a while. But part of that rollout was really taking into consideration bringing Because again, the consumer marketplace, they or the consumer transactional marketplace, they received 37% At the time, subscriptions were at 25, and as we know now, the 25 is going to be going to 15 over time. And so just bringing them along and making sure that we are gradually rolling that out To really be thoughtful about their earnings was important to us.

Speaker 4

Where this goes over time, we think it's reasonable that this becomes a meaningful portion of our consumer revenue and at the same time that marketplace, that transactional marketplace is where new courses are tested, It's where they get feedback and it's where we are able to see the quality and applicability of those courses so that then we can put them over in our subscription Product, so hard to say exactly where that's going to go. We do think a lot of the features and functionality that we're building out for learners on the UB side first, those are most applicable 2, the personal plan or subscription plan. And so we're going to continue to update you as that program rolls out. What I will say is while we started first in the U. S.

Speaker 4

And about 50% of our subs are subscribers are in the U. S. Still to date, we have Added on a number of markets over 10 additional markets slowly over time. And right now, what we're seeing is the fastest growth in India. More to come on that, but we're really excited about the response that we've seen from consumers with respect to our personal plan.

Speaker 8

Got it. That's helpful. And then maybe just a quick follow-up. Interesting to hear your comments on certifications and credentialing. I think it's a Very topical topic in the industry right now.

Speaker 8

I'm sure many of you saw another company in the space acquired a sizable company around just that credentialing and whatnot. So curious where you guys think you sit today as it relates to those credentialing Capabilities and how hard are you guys going to lean into this? How important is it for you? It would be helpful to hear your thoughts on that. Thanks so much guys.

Speaker 2

Yes, you got it. Thanks for the question. Very important to us. I couldn't be happier with the momentum and the uptake we're seeing with respect to badging I'll give you an example. We have one of our larger Fortune 500 Financial Services customers run a 5,000 seat initial phase deployment That resulted in an increase of 13 days or acceleration of 13 days Faster in terms of certification completion and a 20% higher first time pass rate than the prior vendor they had used.

Speaker 2

So So as a result of that, we've gone from 5,000 seats to 30,000 seats this last quarter through that expansion. And that's really, I think consistent with what we're seeing across the board is because we have the badging and certification capability in platform now And we have end to end continuity with respect to Udemy Business Pro layered on top of our core content To enable folks to come in, have an immersive learning experience, which in and of itself helps accelerate the learning process, which helps accelerate the amount of days that it takes to get through the learning process series of courses. And then as a result of the higher quality experience, A higher pass rate, first time pass rate. So that's just one of a number of examples. We had another large Fortune 500 APAC customer, it's been a customer of ours for some time, do something similar.

Speaker 2

And they ended up standardizing on our platform

Speaker 5

About a year and

Speaker 2

a half ago, they just layered in 10,000 seats of Upro For their tech side of the house and on top of that, they said one of the reasons one of the primary reasons they ended up layering those seats in is because of the badging Certification capability that we now have in conjunction with the immersive learning experience of Upro. So we really couldn't be happier with the momentum And we expect it to continue. Validation is really important. It's important for the learner. It's important for customers.

Speaker 2

And The reality is it's really in support of this whole transition to a skills based economy. And so for us, we are investing heavily there. We just made available the ability for learners to now display those badges in not only in our platform, but External platforms, social platforms and there's further investments coming. So all to say, great momentum on our side, helping us win more deals, expand faster in existing customers And we expect that to continue.

Operator

Our next question will come from Brett Knoblauch With Cantor Fitzgerald, please go ahead.

Speaker 9

Hi, guys. Thanks for the question and congrats on the quarter. I guess One for me. If we kind of look at average ACVs, I mean, the customers added over the last year, it's up 33% in the So I guess my question is what's really driving the ACV growth of, call it, the more recently added customers? Is it really just like the makeup of the customers you're adding And this tough macro might be more forward thinking.

Speaker 9

Anything else to help us understand what's driving that?

Speaker 4

Yes. I'll take that and Greg can chime in here. What we are seeing is the Deal sizes increased, because enterprises are having a little bit easier of a time navigating this tough macro than the smaller businesses. And so as that business has shifted toward Enterprise, you'll see that. Also, I believe the Clarity in which we are sharing with them how AI impacts our business and how it can help them close the gaps that they're looking at.

Speaker 4

These customers, they really are struggling with 5000, 10000, 20000, you name it, employees, all of who have different skills needs and those Skills needs are changing. They're not static. And so they're looking for a solution that they can partner with Not just now, but into the future. And I think the road map that we've laid out and what we are doing And the product innovation really speaks to the problem that they have and helping them solve that in a very automated, very effective, Cost effective way.

Speaker 2

Yes. I'll just add that the 2 primary trends transition to skills based organization and then AI literacy are acute, and I was even a bit surprised At just how much pressure and how cute the need is for CLOs to be able to answer the question and really solve the problem and really it's more of a Take advantage of the opportunity to upskill an entire organization with respect to AI Literacy. I mean it's And it's also something that I could feel it in the conversations that I was in that they believe and the CEOs believe that if they don't move now, they're Going to get left behind. It's that fear of missing out or fear of losing the competition because they're not moving fast enough To provide more value and impact to their customers. And like I said, I've been doing this a while.

Speaker 2

I've been in enterprise software for going on 30 years. And Even the dotcom era and some of these other transitions, it hasn't been this acute And pointed in terms of the conversations that we're having right now and the investments companies are making, we talked about some large multiyear deals That we're signing as a result of organizations accelerating their transition to skills based org and accelerating their investments in AI, And we truly believe we're on the front end of this, right? We talked about the numbers. The vast majority of organizations Do not have an understanding as to how to transition to this AI world or to a skills based or capability. And so this is going to be in front of us for years to come to help organizations really address.

Speaker 2

And that really is one of the reasons why we're seeing that deal sizes go up And all the accelerants we're seeing on the enterprise side of our business, as much as we're seeing some depression still on the SMB side, The enterprise side and on a global basis within our large multinational organizations, there's an accelerated level of activity around these key trends.

Operator

And our next question will come from Tom Singlehurst with Citi. Please go ahead.

Speaker 10

Yes. Hi, Tom here. Thanks for taking the questions. Thanks for the presentation. A couple of questions.

Speaker 10

First one, and I just wanted to make sure I wasn't missing anything. Combining your sort of The trajectory of the revenue share and the comment about, hopefully, the instructor is not experiencing any absolute compression. Am I right in just inferring that means at least 25% revenue growth next year and around 20% compound revenue growth I would sort of base like a lower level through to 2026. I just want to make sure I got the math right and I didn't see anything.

Speaker 4

Tom, thanks for the question. So that response was overall that, that will grow, not necessarily that UV is 25% next year. But what we do think is we are going to be exiting Q4 on the UV side in the mid-20s. And we do think plus or minus a few points, that's a reasonable range in this continued like tough macro environment. We think that we'll They accelerate when the macro softens, but right now it doesn't look like that's going to be anytime soon.

Speaker 4

And so really what we're focused on is A stable instructor pool and growing over time and investing in the things that will allow that to grow at a greater rate over time than it could have without those investments.

Speaker 10

That's super clear. And The second one was just on, I suppose, cash usage, I mean, we're at the point where you're delivering Obviously, better EBITDA than we were going for a positive free cash flow, which is great. I mean, and you've got that big sort of cash balance. I'm just wondering Whether there is anything in addition, fair to say, on cash usage, given what you've sort of Relayed about the sort of accelerated progress to that sort of 15% to 20% EBITDA range and being more comfortable with the higher end of that. Should we expect more movement on cash usage, whether it's M and A or capital return?

Speaker 2

Yes. It's a good question. Thank you. We're still and we've talked about this on prior calls And happy to just reiterate that we are active in the market with respect to corporate development M and A. But for us, it's going to be the bar is pretty high.

Speaker 2

And We will put that capital to work when we find the right opportunity either to Leverage the technical capabilities an organization has to enable us to potentially move further faster with respect to our AI strategy and or platform strategy at large. And in addition to that, it could be geographic expansion. At this time, we haven't found that right company that we believe is going to help us in one of those areas. And we'll keep going until we do. We do have It is hard to put that capital to work and it definitely is a focus for us.

Speaker 2

So we'll keep you posted.

Operator

Our next question here will come from Terry Tillman with Tremba Securities. Please go ahead.

Speaker 5

Great. Thank you. This is Connor Pascarella on for Terry. Appreciate you taking the question. Just wanted to ask one around the Docker partnership.

Speaker 5

If there's any revenue minimums or financial impact from the partnership? And maybe if you could speak to the greater opportunity around

Speaker 2

That's a good question. No revenue minimums. This is a rev share part, Typical reseller rev share partnership and couldn't be happier with The co marketing capability, which is going to be kind of the primary lever for us, that We're going to execute against them. We're both both Docker and Udemy have agreed to spend into that. And It's early days.

Speaker 2

The ability for us to help them with certification and Skills development is significant, which is why they were excited to partner with us. And I do want to clarify though that as I'm thinking through the question, as far as Revenue per se, this is primarily co marketing right now. We will over time be evaluating The opportunity to develop revenue generating opportunities or rev share opportunities, but right now I think the initial phase of this relationship is primarily co marketing. So we'll keep you posted

Speaker 4

on that. Great. Thank you.

Operator

Our next question comes from Devin with KeyBanc. Please go ahead.

Speaker 8

Hi, Greg. Hi, Sarah. Thanks for fitting me in. Yes, just one question and also just want to ask about the Instructure revenue share. With that structure kind of going

Speaker 4

Yes, it's a great question. And I think I would also remind everyone that we don't just have the instructor revenue share on the Udemy Business But all the instructors that sit in our subscription business sit on our marketplace and they're able to enjoy well above market of 37%. So when you look at the combined, it is still a very, very strong revenue share. In addition to that, the access that they have to 67,000,000 learners and growing globally and the access they have to our Udemy business, which Even though the macro is tough, like we're winning market share. Like we're in a good spot.

Speaker 4

So the combination of those, I would say, make it a very attractive place for instructors

Operator

And this concludes our question and answer session. I'd like to turn the conference back over to Greg Brown for any closing remarks.

Speaker 2

I'd just like to thank everybody for joining us on the call and appreciate all of the feedback and questions and look forward to seeing you again in February.

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.

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Udemy Q3 2023
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