Udemy Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 3, 2023

There are 11 speakers on the call.

Operator

Good day, and welcome to the Udemy Second 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 note this event is being recorded. I would now like to turn the conference over to Dennis Walsh, Vice President of Investor Relations, please go ahead.

Speaker 1

Thank you, and welcome to Udemy's Q2 2023 earnings conference call. Joining me today are Udemy's Chief Executive Officer, Greg Brown and Chief Financial Officer, Sarah Blanchard.

Speaker 2

During this conference call, We

Speaker 1

will make forward looking 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. Our forward looking statements are based upon information currently available to us. We caution you to not place undue reliance on forward looking statements, And we do not undertake and expressly disclaim any duty or obligation to update or alter our forward looking statements, except as required by applicable law.

Speaker 1

In addition, during this call, certain financial performance measures may be discussed that differ from comparable measures contained 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. We believe that these non GAAP financial measures assist management and investors in evaluating our performance and comparing period to period results of operations In a more meaningful and consistent manner as discussed in greater detail in the supplemental schedules to our earnings release. A reconciliation of these non GAAP measures to the most comparable GAAP financial measures is included in our earnings press release.

Speaker 1

These reconciliations together with additional supplemental 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 3

Thank you, Dennis, and good afternoon to everyone on the call. Udemy delivered strong second quarter results. Revenue came in at more than 178,000,000 for a 16% year over year increase and exceeded the high end of our guidance range. That growth was driven by a 36% year over year increase in Udemy Business Revenue. On the bottom line, we delivered our Q1 of positive adjusted EBITDA as a public company, Thanks to our continued focus on operational efficiencies and prudent expense management.

Speaker 3

We are proud of our team for their commitment And continued execution against our strategic initiatives, particularly as we navigate this unpredictable macroeconomic environment. While the current backdrop presents some near term challenges, Udemy is well positioned to capitalize on meaningful long term tailwinds for our business that are shaping the future of work. First, there is a profound transformation happening right now that impacts every industry, the rise of the skills based organization. And second is the continued interest and application of generative AI across customers of all sizes. I'd like to take a few moments today to provide color on those In conversations with enterprise customers across all industries and regions, the number one theme we hear from CEOs Is that ensuring their workforce has the skills required to achieve their strategic objectives is a top priority.

Speaker 3

This represents a massive opportunity for Udemy in the hypercompetitive job market. In addition, the accelerating pace of innovation means that organizations Our support to establish learning strategies and objectives for their teams and also a way to measure and validate skills acquisition. While degrees will always have relevance, they do not validate the practical skills the individual has mastered, which can lead to qualified internal For this reason, forward thinking organizations are shifting to a more skills based approach. By focusing on skills, not just degrees, companies can vastly expand and diversify their talent pool to fill open roles, as well as drive increased internal mobility by reskilling and upscaling existing talent. As companies shift from offline to online to reskill and up They realize it is a more efficient and cost effective solution that drives high ROI, boosts morale and provide significant cost savings.

Speaker 3

To give you a sense of the size of the potential savings, a recent study found that the average Per employee spend on L and D by employers worldwide was approximately $1300 per head in 2021. The cost for one U2B business license starts at just $3.60 per year. As you can imagine, the cost savings for a global enterprise When companies embrace a culture of continuous learning, the future proved their workforce. Demand for technical skills has never been higher with nearly 90% of companies reporting skills gaps within their organization. And many executives believing that finding talent with specialized skills is a major challenge.

Speaker 3

L and D leaders must understand the skill level of their workforce, particularly within technology focused areas. Yet, one of their top concerns is that they do not have a reliable strategy for measuring the success of their learning programs. To help customers address this need, Uniti has introduced badging as a part of its integrated skills framework, a comprehensive skill building approach for organizations. The framework will enable customers to keep pace with innovation through a series of exciting new offerings. Working with Udemy, organizations will be provided with a seamless way to quickly assess their current skills landscape and identify critical skills gaps.

Speaker 3

In addition, it provides employees with an effective way to acquire and demonstrate skill mastery through the acquisition of leading certifications and badges. At the core of our badging program is Udemy's Certification Prep Center. We have made it simple to discover curated learning paths, including labs and assessments to help professionals prepare for certification, exams and badges. This will enable learners to validate mastery of in demand skills such as AWS, Azure, CompTIA and more. As of today, our catalog includes certification preparation For nearly 200 highly sought after and reputable badges across more than 160 certification topics and nearly 30 subject areas.

Speaker 3

The other meaningful tailwind is the evolution of generative AI and its ability to accelerate change across all industries and geographies. Professional learners recognize the importance of understanding how generative AI will impact their role and how they can leverage these technologies to be more effective In the 7 months since ChatGPT was launched, Udemy has seen more than 1,400,000 enrollments in the more than 1,000 courses on the topic on our platform. Taking that a step further, The number of minutes consumed for Chat GPT related content during Q2 increased nearly 300% from the prior quarter. This is a clear indication that people recognize the importance of understanding this technology and are discovering that they can receive high quality skills training via Udemy. During the past few months, we've continued to invest in further integrating generative AI throughout our platform.

Speaker 3

We are committed to delivering products and features that support instructors with content generation, deliver more personalized learning experiences and help organizations identify and address skills gaps. On our last call, we shared plans to rollout New smart search capabilities, which is one of the several enhancements that leverage the power of generative AI to provide learners with more personalized bite sized learning experiences. Subsequent enhancements will include skills based guidance that automatically recommends Udemy Learning Pass based on defined objectives, including badge acquisition and certification. In addition, we began to incorporate generative AI into our reports for our cohort learning solution, Leadership Academy, to provide admins with increased visibility into learning outcomes. We have also introduced further automation into the generation of these reports to speed up time to value and ensure leaders can access the right data as soon as they need it.

Speaker 3

Our investments in generative AI are expected to provide meaningful tailwinds for learner demand, enhanced personalized learning, deepen our customer relationships and further accelerate the pace at which we can add new relevant and immersive content. You can expect to hear more updates over time on how we are leveraging this exciting technology. As you can see, We believe that these trends, the rise of skills based organizations and generative AI, will continue to increase in importance and are expected to present significant opportunities As companies embrace a culture of continuous learning with the goal of future proofing their workforce, we believe demand for Udemy will continue to grow. Before I turn the call over to Sarah, I'd like to highlight that we've significantly strengthened Udemy's Board And leadership team with 3 seasoned professionals who will further develop our strategic vision and help scale our business globally. First, we welcome Sohid Abhatsi as Independent Board Chairman.

Speaker 3

Sohid brings more than 30 years of deep enterprise software We also recently bolstered our executive leadership team with 2 newly created positions. First, we appointed our Chief Marketing Officer, Janetha Murphy, who brings extensive experience leading marketing initiatives for fast growing software and technology companies. And second, we added a Chief Product Officer, Prasad Raja, who brings a wealth of enterprise SaaS product experience to Udemy. I'm very proud of the world class executive leadership team that we have built as we heighten our focus on driving results at every level of the organization. We look forward to Selhad, Janepa and Prasad's contributions as we take Udemy to the next level and continue to lead the transformation to a skills based economy.

Speaker 3

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 Q3 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. As Greg mentioned at the outset, we delivered solid Q2 results. Revenue increased 16% year over year to $178,000,000 and exceeded the high end of our guidance range by $4,000,000 The year over year growth included a negative impact from foreign exchange or FX of 3 percentage points.

Speaker 4

Our Enterprise segment, or Udemy business, drove our total revenue growth, delivering revenue of $102,000,000 or an increase of 36% year over year. Included in that growth was a 3 percentage point headwind from changes in FX rates. This is a major milestone for Udemy as it was our Q1 delivering We ended the quarter with annual recurring revenue or ARR of $420,000,000 up 33 percent from a year ago. Our consolidated net dollar retention rate for Q2 was 108%. The rate was 115% for large customers for those with 1,000 or more employees.

Speaker 4

Gross dollar retention remained stable, Large customer churn was minimal and growth in multiyear contracts continued during the quarter. This is a testament to the strength of our customer relationships, driven by the clear value and impact that Udemy provides to help them achieve their strategic outcomes. However, we do expect Pressure to continue on net dollar retention as some companies remain hesitant to move forward with expansions and upsells during this unpredictable macroeconomic environment. The strong U2B business growth was slightly offset by a 2% year over year decline in Consumer segment revenue, which included a negative 3 percentage point impact from FX. We continue to be encouraged by the vibrancy of our marketplace, which fuels the powerful flywheel effect that has the ability to increase customer engagement and reduce acquisition costs over time.

Speaker 4

Traffic was up 8% year over year during Q2 to 34,000,000 unique visitors despite spending significantly less on performance marketing than we did a year ago. More than 80% of learners enroll in courses to develop professional skills, which creates a healthy funnel of leads for Udemy Business. Also, attracting instructors organically to create courses continues to be a strength. As a result, We saw an 11% year over year increase in courses in the Udemy catalog with nearly 5,000 new courses added each month. As we move down the P and L, note that all financial metrics are non GAAP unless stated otherwise.

Speaker 4

Q2 gross margin was 59%, a 100 basis point improvement from Q2 2022, driven by the continued revenue mix shift to Udemy Business, since content costs as a percent of revenue are lower for that segment. U2E Business accounted for 57% of total revenue in Q2, which represents a meaningful mix shift from 49% a year ago. With nearly 15,000 Udemy Business customers and growing, This mix shift is expected to continue toward our long term target of approximately 75% of revenue. Total operating expense was $108,000,000 or 61 percent of revenue and 500 basis points lower than Q2 of last year. Or flat compared with the same period last year and G and A expense was 9%, down 300 basis points compared with last year.

Speaker 4

And the bottom line, net loss in the quarter was approximately $1,000,000 or negative 1 percent of revenue. Adjusted EBITDA was approximately $2,000,000 or positive 1% of revenue, which represents a 700 basis point expansion year over year and 400 basis points better than our high end of the guidance range. This was another major milestone for Udemy as it was our first time showing positive adjusted EBITDA since our IPO. The better than expected adjusted EBITDA result was primarily driven by revenue outperformance and our disciplined approach to driving operational efficiency throughout the organization. We continue to maintain financial flexibility that allows us to make opportunistic investments that can accelerate or enhance our strategy and returns.

Speaker 4

Moving on to key cash flow and balance sheet items. We ended the quarter with $469,000,000 of unrestricted cash, Cash equivalents, restricted cash and marketable securities. Free cash flow for the quarter was positive $10,000,000 due to improved collections timing and lower expenses. Now turning to our outlook for Q3 and full year 2023. During the Q2, we did not see any signs that the macro environment is improving.

Speaker 4

Within Udemy Business, we are seeing further sales cycle elongation and additional layers for deal approvals. We are also seeing smaller deal sizes as companies I'll now turn the call over to Steve. Thank you, Steve. Thank you, Steve. Thank you, Steve.

Speaker 4

Thank you, Steve. Thank you, Steve. Thank you, Steve. Thank you, Steve. Thank you, Steve.

Speaker 4

Good morning, everyone. There are challenges that ultimately may impact our results in the near term. With that in mind, we expect Q3 revenue to be between 176 and $180,000,000 Assuming foreign currency exchange rates remain constant, FX is expected to negatively impact Q3 year over year total revenue growth by approximately 2 percentage points. Due to the continued macro related dynamics I just mentioned, We now expect U2B business growth in the near term to be pressured more than we had originally anticipated. As a result, we currently believe a 2023 udemybusiness year over year revenue growth rate in the low 30s is achievable versus our previous view of mid-30s.

Speaker 4

On the bottom line, we anticipate Q3 adjusted EBITDA margin of negative 0.5% to positive 1.5%. Looking ahead, we are on track to deliver a profitable second half of the year and now expect Q3 adjusted EBITDA to come in stronger than Q4 due to the better than expected consumer performance in the 2nd quarter and resulting Q3 revenue recognition. For the full year, we are narrowing our range on revenues to be between $712,000,000 $720,000,000 which still anticipate 16% year over year growth at the midpoint. Net growth includes an estimated 3 percentage point negative impact from FX, assuming no further changes in rates. For full year 2023 adjusted EBITDA margin, we currently expect between negative 1% to breakeven for a 7 50 basis point expansion at the midpoint compared to 2022.

Speaker 4

Looking ahead, While we do not plan to provide formal 2024 guidance until our Q4 2023 earnings call, we'd like to provide color on how we are thinking about the business heading into next year. As a reminder, at our November 2022 Investor Day, we shared that we thought we would be able to drive 23% to 25% total revenue growth in 2024. Due to the deterioration of the macro environment since that time, We now believe our total 2024 revenue growth will be lower than the range we had provided. That said, for full year 2024, we continue to believe Uniti Business We'll represent more than 60% of total revenue. Non GAAP gross margins will be 58% to 59% and we absolutely remain committed to delivering It is important to note that while we are adapting in real time and navigating some short term obstacles, We feel confident that the long term opportunity available to Udemy is as strong as ever.

Speaker 4

In closing, Udemy delivered a solid performance in an uncertain environment. Our results illustrate the agility in our business model. We beat expectations on both top and bottom line, Delivered more than $100,000,000 in Udemy Business Revenue and reported our Q1 of positive adjusted EBITDA as a public company, ahead of plan. The foundation we are laying today is expected to yield sustainable recurring revenue growth and generate attractive profit and cash flows over time. We look forward to continuing to deliver value to all of our stakeholders and updating everyone on our progress.

Speaker 4

So with that, we'll open up the call for your questions. Moderator?

Operator

We will now begin the question and answer session. The first question today comes from Ryan MacDonald with Needham. Please go ahead.

Speaker 5

Hi. Thanks for taking my question and congrats on a nice quarter. Maybe just starting on the guidance you just provided, especially as we think about fiscal 2024. As you think about what type of investments might need to be made to reinvigorate the growth rate in UB going into next year, How do you factor that in, I guess, around the targets for still being adjusted EBITDA breakeven into next year? Do you feel like The run rate of where you're investing there right now is enough to sort of help drive that growth as the market recovers?

Speaker 5

Or do you feel like new investments will be required?

Speaker 4

Hi, Ryan. Thanks for the question. So as you can see, like many companies, we are And we're committed to delivering an EBITDA positive full 2024 And that takes into consideration a range of outcomes based on what the macro does and the investment that we would need to make from a go to market perspective in order to achieve those outcomes.

Speaker 3

All right. Let's really I'll just add, Ryan, real quick that Yes. As soon as we see the macroeconomic environment improving and the impact on our sales cycle elongation Coming back to more normal cycle times, we absolutely are going to lean in and start investing in Go to market growth. And so as soon as that happens, we will trigger that. And as you just alluded to, Whether it be the back half of this year or next year, we're not sure when that's going to happen, but when it does, we will absolutely move.

Speaker 2

Super helpful color. Greg, maybe just a follow-up

Speaker 5

with you. I appreciate the comments about sort of this evolving environment Within the enterprise around a shift towards skills based learning, I'm curious what you think the impact What the impact will be in terms of how enterprise organizations choose to allocate spend in that environment? Do you think that this shift to skills based learning accelerates the consolidation trend or creates sort of a new Maybe funding environment or sort of reinvigorates the funding environment around L and D spending for the skills based learning?

Speaker 3

Good question, Ryan. And we're already seeing that play out now. I'll give you a couple of examples. Unilever, Greg just don't have to let us talk about it. Significant expansion with Unilever this past quarter, driven by their intent to reskill and upskill their entire workforce Future fit their organization with the skills necessary for them to achieve their organizational objectives.

Speaker 3

They want to get this done by 2025. In addition to that, they've selected us to support their digital university program, which they've just launched this past year In accordance with their focus around skills development. And so this is real. It's happening in real time. And We're seeing examples of this and wins reflected in the commitment organizations have and shifting from Long form learning and degrees to skills that can be applied now to get work done.

Speaker 3

And in fact, interestingly enough, as we're Thanks for the call. The White House this week came out with a report on National Cyber Workforce and Education Strategy. I'm just going to read a couple of lines that are relevant here. A skills based approach is critical to connect more Americans to good careers. They should compete for jobs based on what they can do rather than merely credentials.

Speaker 3

So we're seeing it pretty much from all vectors. Federal government, we're seeing it from customers. We're hearing it from employees. And so this is a massive secular shift that we're seeing that we're on the front end of That is not only going to drive the place to our favor, it's going to drive organizations to us based on our marketplace And our unique position that we have to keep up with the pace of change and aid them in developing the skills necessary for them to stay up with The technological advancements that are coming at us in real time, we obviously know what's going on with generative AI And we saw a couple of key wins just to add briefly just to add a couple of key wins this last quarter from large multinational enterprises that Aldis, they selected us because of the breadth and depth in our marketplace around AI. These organizations are focused on upping the digital literacy across their organizations, but specific to AI and they made investments in our platform and As a long term strategic partner as a result, so it's playing out right now, Ryan, and we're on the front end of a big trend.

Speaker 5

Thanks for taking the time. I'll hop back in the queue.

Operator

The next question comes from Terry Tillman with Truist. Please go ahead.

Speaker 6

Great. Good afternoon, Ian. This is Conor Vazarela on for Terry. First question, maybe a little bit more high level, just The recent executive hires, Chief Product Officer, Chief Marketing Officer, I guess how do you see the evolution of the platform from a product Messaging standpoint evolving as you continue to position yourselves to take a skills based platform approach to learning with these executives?

Speaker 3

Yes, it's a good question. Thank you for it. Without question, that is the case. And we saw an opportunity as We're looking forward and projecting from our strategic perspective, the capability we need to have in our To deliver the value and impact to our customers and that really led us to bringing on Janefa and Prasad. Prasad to help us, Prasad comes with Yes.

Speaker 3

A tremendous amount of depth and capability around AI. The company he was just with, he re architected their entire platform Founded based on generative AI in terms of the re architecting of that. And we, without question, are bringing him in to help do the same thing here, both In terms of how we get operational leverage and embedding AI and how we run our business as well as how we develop product and the value that that product is going to have Externally on customers as we move forward and better understand how we can leverage AI to improve the overall learning experience. And then On the marketing side, we really have not invested historically in building Udemy into a global brand that everybody is well aware of and understand how we can help them as an individual, a team or an organization transform lives through learning, whether it be their life or the lives of The individuals in their organization and Genepa has got just tremendous relevant background and experience That we couldn't be more excited to have in our business now to help carry us forward, not only helping to build the brand, but to optimize our go to market motion As we come out of this economic downturn, step on the gas and really start scaling on a global basis.

Speaker 3

So both executives are going to have a significant impact on our ability to take The next step in our evolution of realizing our vision to transform live streaming.

Speaker 6

Great. That's really helpful. Appreciate the color. Maybe just as a quick follow-up, just wanted to touch on immersive learning and upro. So So I guess how does the adoption of ViewPro continue to trend this quarter?

Speaker 6

And then maybe what kind of additional immersive learning capabilities are you looking to maybe layer into the platform? Thank you.

Speaker 3

Yes, thanks for the question. Really happy with the continued adoption and growth of upro within Our global customer base and we're really starting to see that global expansion happen with respect to upro and this last quarter talking about global Nature, large Latin American bank came inbound and had a bake off, which is usual, competitive bake off, Selected us for 2 primary reasons, the immersive learning capability that we provide with upro and The badging capability that we're launching, that we've already launched the first phase of and Phase 2 is in flight. And their focus At that point in time, it's consolidation. They want to consolidate to one platform that they believe was going to be the right platform and company to help lead them forward in transformation and they selected us to do that. And their quote to us was you've saved us months of work by being able to consolidate onto one platform And do all of the work with one partner that we were doing with multiple.

Speaker 3

So really excited about the impact that uproles is having and expect that to continue. What was the second part of the question? I lost that.

Speaker 6

Yes. No, just any additional immersive learning capabilities you may be looking As well, is that a few per hour just in general?

Speaker 3

It's a good question. Yes, we are looking at other immersive learning capabilities and modalities That we believe could be an extension of into and of our platform. Nothing to speak up to date in terms of new modalities that we're layering in into the platform, but we are exploring a number of different options. And for us, it's build partner bot. And As we've talked about on prior calls, we do have an opportunity and are sitting in a good position To acquire capabilities that would potentially enable us to extend the modalities on our platform and that's something that we'll talk about when the appropriate

Speaker 6

Got it. Thanks, Greg.

Operator

The next question comes from Brett Knoblauch with Cantor Fitzgerald. Please go ahead.

Speaker 7

Hi, guys. Thanks for taking my question. So I guess, we're seeing kind of GDP growth accelerate In the U. S, at least hold up a lot better than we all anticipated. I guess it's not really accelerating.

Speaker 7

Then you find out what seems like every company making AI their number Priority. So I guess like what specifically in macro is leading to weakness? Is it just like L and D not being as mission critical as we thought It was going to be in a post pandemic world, but it seems like you guys are very well positioned to capture this unique Moment in time where AI is just beginning to kind of reverberate through enterprises and they need skills for that.

Speaker 8

So I think there should

Speaker 7

be more, I feel like, of Tailwind for you guys. And I know you talked about demand on the platform in minutes for ChatXi and AI. But I guess how is that not translating into More kind of enterprise demand.

Speaker 3

Hey, Brett. Thanks for the question. We actually are seeing it translate into enterprise demand. We had A couple of large wins, one in particular with the European Engineering and Technology firm that Purchase our platform, if you will, have selected us as their partner for specifically for upskilling across The organization, but embedding AI is a critical component of that buying decision based on the breadth and depth of the AI content that we have on platform. And there were a number of those.

Speaker 3

So we are seeing it impacting our ability to win in the enterprise. But now let me just take a step back and And talk a little bit about what's going on in the business that I believe will help answer this question. The top funnel for us It's extremely encouraging, right, in terms of pipe generation, lead generation into the top of the funnel. But what we are seeing is Sales cycle elongation that we alluded to just a few minutes ago. And that's a macro Circumstance, if you will, that we know is short term, but it's impacting our ability to move deals through the pipeline And get those deals closed.

Speaker 3

And it is a timing situation. I want to make sure that everybody clearly hears that from us is that we strongly believe that this Timing based on the fact that customers continue to tell us that the importance of upskilling and rescaling Has never been higher in the organizations. We're not seeing a material decrease in budget per head per employee, right, and allocated To upskilling and rescaling, that may be happening with respect to broader education. We're not seeing that or hearing that with respect to upskilling and rescaling. But what is happening is what CFOs around the world have been doing, including our own, which is making sure that They're keeping a close watch on what's happening from a macro and geopolitical perspective and being more conservative than we've seen in the past With respect to allocating spend, we know that's going to change at some point in time.

Speaker 3

We see the same indicators that everybody else is saying that we think this is going to be a soft landing And that could start to have a positive impact sooner than later. But sales cycle elongation and timing is really the reason why we're seeing a little bit of what we're seeing on the We strongly believe this is short term and that it's going to change like you all are alluding to As soon as the macroeconomic climate improves, which could be sooner than later.

Speaker 7

Sure. And if I could just add maybe just one more on kind of Net revenue retention. Is the decline there, can you maybe just parse that through what's coming from Upset or kind of fewer upsell or fewer expansion versus churn, has churn kind of been what you'd expected? Has churn picked up from what you'd expected? Or is that Kind of sequential decline mostly related to expansion.

Speaker 4

Yes, thanks for the question. Our gross dollar retention has remained stable. And so really what you're seeing is the same thing that we're seeing kind of across the board, which is these longer sales cycles are impacting The speed at which we're expanding and upselling, but again, the long term opportunity, it hasn't changed. When the macro improves, we expect sales cycle to normalize and net

Operator

The next question comes from Noah Herman with Oppenheimer. Please go ahead.

Speaker 2

Hey, guys. This is Noah from JPMorgan. Just a quick question with respect to the macro environment. Are you seeing Did you see maybe like a sequential step down in the macro environment, potential incremental pressure? Just want to get a sense of whether or not the elongation sales cycles, if that's increasing on a sequential basis and maybe just What you kind of seen through July?

Speaker 2

Thanks.

Speaker 4

Yes, I'll take that. So we did see sales cycles further elongate In the second quarter, and we do expect that to continue in the back half of this year and potentially into the First half, so what we expect to see is from an ARR perspective, growing at a fairly similar amount quarter over quarter until the macro starts Back to sales cycles, come back down and we'll start seeing increases in productivity from our sales team.

Speaker 2

Okay, great. And then just a quick follow-up, but can you maybe just provide us an update on The international expansion as well

Speaker 3

as the partnership strategy there and maybe just which regions you're sort

Speaker 2

of seeing the most traction with Uniti business at this point? Thank you.

Speaker 3

Yes, thanks for the question. On the international expansion side, we continue to see our new ventures division operate At a very high level, Japan continues to be one of our fastest growing countries. Our partner, Benece Ader, continues to perform at a very high level. And From a productivity standpoint, couldn't be happier with what we're seeing there. One data point that I think is relevant is We're now in over 60% of the Nikkei 2 25.

Speaker 3

So We're seeing further expansion into the Japanese market. We had a major event there this last quarter. We had effectively, we Oversold the event in terms of interest and what we're doing as far as upscaling and rescaling our ability to help organizations and countries. Again, very happy with what we're seeing there. And we've taken that model and we ported that model to Korea, Vietnam and in China, and we're seeing very similar traction and trajectory in Korea.

Speaker 3

Vietnam and China are much earlier, so it's early days there, but Korea had a really nice quarter as well. So I feel really good about the investments in Asia Pacific on that front. Additional to that, Our partnership with AWS also had international impact. This last quarter, we had multiple 6 figure deals closed Through the partnership with AWS. And we also saw something that was a bit of a surprise And a surprise obviously to the good when I explain what it is, which is we had a number of deals that for a variety of different reasons We're stalled.

Speaker 3

Our budget potentially was being reevaluated. And when we introduced the AWS partnership and Explain that, the retained committed budget against the AWS partnership could be allocated towards Udemy. It unlocked these deals and one of them was a $500,000 annual contract value deal with a large financial services organization And we saw a number of these. So couldn't be more excited about the momentum we're starting to see with Amazon and their commitment to the partnership It's equally exciting as the impact on customers and our ability to extend reach around the world. So And this is just one example of.

Speaker 3

So yes, we're seeing meaningful traction in both areas and Latin America as well. We continue to see our partners in both Brazil and Mexico expand and accelerate end market As we're feeling their growth. So internationally, feel good about what we're seeing.

Operator

The next question comes from Stephen Sheldon with William Blair. Please go ahead.

Speaker 7

Thanks for taking my questions.

Speaker 9

First one here, wanted to dig in a little more on the badging and specifically how important it could be to enterprise customers to be able to provide skills badges And just thinking about it from an employer's perspective, you positively might get more visibility into skills within your organization, But it could also arguably make your employees to get badges more marketable if they wanted to move to another company. So just curious if that's ever Sorry, are you here? Or does it kind of seem like providing badges in these kind of skills pathways will become broadly accepted? Employers don't offer them, could hurt their ability to recruit talent. Just curious what you're hearing in conversations on this front, although I know it's really early.

Speaker 3

Yes, Steve. Thanks for the question. It is early, but I believe the short answer is I believe the latter is how it's going to play out, that it's going to be more of a standard And then if employers and organizations don't offer validation in the form of badging and certifications, they're going to be a bit of an outlier. So I believe this soon is going to be a standard in most organizations. But as we talked about, we couldn't be more excited about the integrated skills framework That we're bringing to market and the impact we're already starting to see it have on our ability to win deals.

Speaker 3

I just mentioned, we're winning business right now as a result of The initial capability that we've launched as well as what's to come and what's to come is probably as if not more exciting than what we've already got out there. Right now, organizations have the ability with 1st phase to understand the skills that are being acquired and Skills benchmarks, how their organization stacks up against other organizations in a particular marketplace or vertical. But what's coming is the ability to identify skills gaps within your organization and address those skills gaps with prebuilt pass, Right, that are going to enable them. It's really kind of completing the circle, if you will, or the flywheel that they need to continue To accelerate as far as their ability to keep up with the pace of change and us go and reskill their employees To enable them to reach the outcomes they're trying to achieve as an organization, we've done a tremendous amount of work with our customers, advisory councils and the like. And we have a strong signal from our customers and everybody that we work with that this is exactly what they need In a hyper competitive world, not just today, but tomorrow, to be able to execute their strategy.

Speaker 3

So I feel really good about the early impact, Feel really good about the response from the marketplace and feel even better about where we're going and what's to come.

Speaker 9

Great to hear. Yes, that's really helpful. And then as a follow-up, just I think you maybe talked about still seeing some good growth in multiyear contracts.

Speaker 8

What do you see

Speaker 9

in terms of willingness for enterprises to sign up for multiyear contracts in this environment? And within that, kind of how do you think about balancing pricing In order to secure these multiyear deals and maybe the trade off between the 2, I assume you're giving up some to secure the longer commitments. How do you So yes, demand, what are you seeing in terms of the willingness to sign up and how you think about balancing pricing to secure it?

Speaker 3

Yes, I'll start and then Sarah feel free to add. I feel really good about what we saw in terms of multiyear contracts come in this last quarter. We actually saw a slight bump, Right. So we continue to execute very well in terms of our sales organization, executing the play, if you will. And that really only happens If the customer believes that there's value, strategic value, which gives them the confidence and willingness to sign a multiyear contract.

Speaker 3

So I believe, again, we're executing well in market. The other thing I think that's important to note is our competitive win rate actually increased this quarter, As a result of a lot of what we're doing from a product perspective as well as the adjustments we've made to our go to market motion and The way that we're approaching customers and how we can add value and impact in the environment we're operating. So I think from that standpoint, Yes. Our teams are doing a nice job of adapting and adjusting to the conditions we're operating in. Sarah, I don't know if there's anything you'd like to add.

Speaker 4

I'll just add from a pricing perspective, we have a very typical enterprise SaaS multiyear discount model and that has not changed. And like Greg said, The percent of ARR coming from multiyear deals is up quarter over quarter. We saw a little bit of Pressure on multiyear deals in new business, but still we're able to sell a number of multiyear deals And certainly within our upsells and expansions as well.

Speaker 3

Good to hear. Thank you.

Speaker 4

Thank you.

Operator

The next question comes from Josh Bair with Morgan Stanley. Please go ahead.

Speaker 10

Great. Thanks for the question. Apologies if this was asked already, but I was hoping you could give an update on your federal business. And then also, I was wondering if there's an opportunity to take These new badging initiatives and initiatives around scaling into schools, like into the academic world, In addition to just the business world, if that's something on the radar, like schools acknowledging that there might be learning gaps In preparing their students for jobs or careers, could bring Udemy and this new offering to its students.

Speaker 3

Hey, Josh. Thanks for the questions. I'll start with the last one first. With respect to schools and the opportunity there, I very much agree that Yes, there is an opportunity for us to explore. We have not done that to date in terms of doing the diligence and Spending the time to understand how we could best serve schools in this capacity.

Speaker 3

Not to say that it's not an opportunity for Going forward and something we may look at, we just haven't made it a focus today. So no progress to report on that. As far as government business, we did and we continue to invest on in the government sector, there's no doubt. Can't talk about a lot of what we're doing there, but we did have a significant win this last quarter with a branch of the U. S.

Speaker 3

Government that is We're very focused on skilling. I mean, just coming back to skilling. And we've got a large contingent of folks in the organization that are contractors, In addition to the folks that are government employed and we're doing some very interesting things there. I just can't talk a lot about it for probably obvious reasons, but Yes, we'll continue to invest in the government segment, and we'll continue to see steady progress there. And Sarah, I don't know if there's anything you want to add.

Speaker 4

No, that sounds good. Thanks, Josh.

Speaker 10

Great. Thank you.

Operator

The next question comes from Devin Oh with KeyBanc Capital Markets. Please go ahead.

Speaker 8

Great. Thanks for taking our questions. I have another question on badging. Greg, wanted to get your thoughts on just the adoption pace of this product. I know the macro currently isn't the most favorable, but just given how in demand skills are and the increasing need for learners to Validate and showcase their skills.

Speaker 8

Do you foresee like a faster adoption of this product versus your other modules that you have? Just curious on your thoughts there.

Speaker 3

Yes, we do. Thanks for the question. We are already seeing that now because there's pent up demand candidly for Validation in the form of badging and certification. It's a concept that's been out in market for some time now. We strongly believe that our approach It is the right approach to enabling organizations to understand How they need to be executing against the skills based economy opportunity.

Speaker 3

And, yes, fully expect the adoption

Speaker 8

That's good to hear and really helpful details. Maybe my follow-up for Sarah, I don't know if my math is correct. It seems like the implied 4Q guidance is kind of baking in some step up in operating expenses. Any notable expenses maybe done pushed out

Speaker 4

Thanks for the question. The one normal seasonality step up that we see from an OpEx perspective is in the 4th quarter around our biggest promotion cycle in the marketplace, so it's our Black Friday, Cyber Monday. The other thing that's happening is if you're referring to our Q3 EBITDA being higher than our Q4, that is due to the over performance of our consumer business in the second quarter A lot of that revenue gets recorded in the Q3. And so where previously we'd expected EBITDA to grow, we expect it to actually On a sequential basis, it decreased slightly, but we will be profitable for the back half.

Speaker 8

Great. Thank you so much.

Speaker 4

Thanks for the question.

Operator

This concludes our question and answer session. I would like Turn the conference back over to Greg Brown for any closing remarks.

Speaker 3

I'd just like to thank everybody for joining the call and we look forward to

Operator

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

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Key Takeaways

  • Record Q2 performance: Revenue of $178 million (+16% YoY) topped guidance, Udemy Business revenue rose 36%, and the company achieved its first positive adjusted EBITDA ($2 million, 1% margin) as a public company.
  • Strong enterprise momentum: Annual recurring revenue reached $420 million (+33% YoY) with net dollar retention at 108%, and Udemy Business now accounts for 57% of total revenue despite elongated sales cycles.
  • Integrated skills framework launched: Udemy introduced badging and a Certification Prep Center offering nearly 200 badges across 160 certification topics to help organizations assess gaps and validate workforce skills.
  • Generative AI tailwind: Since ChatGPT’s debut, Udemy has seen over 1.4 million enrollments in AI courses and a 300% QoQ increase in AI content consumption, while embedding AI in search, personalization, and reporting features.
  • Narrowed guidance: Q3 revenue is expected at $176–180 million and full-year revenue at $712–720 million (both ~16% growth), with adjusted EBITDA margin targeted between –1% and breakeven.
A.I. generated. May contain errors.
Earnings Conference Call
Udemy Q2 2023
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