Udemy Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
May 2, 2024

There are 11 speakers on the call.

Operator

Good day, and welcome to Udemy's First Quarter of 2024 Earnings Conference Call. Participants will be in a listen only mode during the call. Please also note that today's call is being recorded. I would now like to turn the call over to Dennis Walsh, Vice President of Investor Relations. 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 call, we 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.

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 and 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 contained in our financial statements prepared in accordance with U. S.

Speaker 1

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 support management and investors in greater detail in the supplemental schedules to our earnings news release. In greater detail in the supplemental schedules to our earnings news release. 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 information, are available on the Investor Relations section of our website.

Speaker 1

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. It was a good start to the year for Udemy, and we continue to be excited about the significant opportunity in front of us. During Q1, we further expanded our global enterprise customer base and executed on our strategy to meet customers' evolving needs with our innovative intelligent skills platform. Looking at our results for the Q1, we met expectations for revenue and adjusted EBITDA margin. Total revenue increased 12% year over year, while we grew Uniti Business revenue by 24% compared to Q1 2023.

Speaker 2

These results reflect the increased global demand for reskilling and upskilling. As the pace of change driven by advancements in technology such as generative AI continues to shape the way we learn and work. Today, I'd like to discuss the current demand environment and how we're positioning Udemy to more effectively capture market share in our category. I'll then discuss the actions we're taking to address the short term challenges to our business in order to deliver on our growth expectations for the year and beyond. We continue to see solid demand across most sectors and regions as companies seek a partner to support their workforce learning and development needs in all capacities.

Speaker 2

Udemy is differentiated by the high quality, immersive and localized learning experiences we provide. Our comprehensive solution is purpose built to provide 3 essential learning modalities on demand, immersive and cohort based. This combination allows us to offer an end to end solution where professional learners and organizations around the world can easily identify and quickly develop skills they need to deliver better business outcomes today and in the future. The benefits of our approach are reflected in our results and some of the milestones we hit quarter. During Q1, we entered into new or expanded existing relationships with enterprise customers including Pepsi, Flutter Entertainment and the South African Reserve Bank.

Speaker 2

In total, we now have more than 16,000 Udemy Business customers in over 150 countries. Notably, we have more than doubled our enterprise customer base in the past 3 years. This is a testament to the value we provide and the continued innovation we're building into our comprehensive platform. For example, a leading global IT consulting company based in Europe expanded their relationship with us during Q1. By leveraging the Uniti Business platform to prepare for internal IT certifications, the customer experienced a 17% increase in certifications per consultant, which in turn allows them to charge a higher rate for their services.

Speaker 2

More recently, in order to support their business objectives related to certification and generative AI upskilling, the company expanded their deployment of Udemy Business Pro. By assessing and guiding learners' capabilities, Uniti Business Pro enables technical professionals to achieve their desired learning and business outcomes more quickly and effectively. Also during the quarter, a customer that's been with Udemy since 2017 and it's a global leader in AI computing expanded the relationship with us. This is another example of a customer that has been effectively leveraging Udemy for AI training and IT certification prep. The expansion of seats from 3,000 to 9,000 almost 1 third of their total employees underscores the tangible impact our platform has had on their business.

Speaker 2

We see this use case for AI training and IT certification preparation as a long term driver of demand going forward. In just over a year since ChatGPT launched, we've seen more than 4,000,000 enrollments in the 2,000 plus AI courses in the Udemy catalog. This massive surge in interest from individuals and organizations demonstrates the rapidly growing need to upscale talent on generative AI. Based on what we've seen in the past year, we believe generative AI will have a significant lasting impact across nearly every industry, region and professional role. Organizations will require employees to cultivate new skills to adapt to change and certain roles may be replaced entirely.

Speaker 2

A key reason why Udemy's unique marketplace model is so compelling is how quickly we can expand and adapt our content catalog. This enables organizations to stay ahead of trends in technology, enabling them to better understand and apply these advancements. For example, within a few days of Chat GPT's launch, we were the 1st platform to have a course instructing learners on the topic. In less than 2 months, we had over 100 courses on Chat GPT available as compared to only one course available across all other competitive offerings. This is the perfect example of our marketplace in action and how we can effectively leverage our expert instructor network to quickly meet our customers' needs.

Speaker 2

As generative AI alters the way we work, the development of soft skills ranging from strategic thinking to effective interpersonal communication is becoming more critical than ever. At Udemy, we recognize the pivotal role that developing leadership soft skills plays in harnessing the full potential of generative AI. Our intelligent skills platform is designed to not only enhance technical proficiency, but also to cultivate these essential soft skills. By integrating advanced technology skills with soft skills development, our platform ensures that leaders are well equipped to implement new technologies effectively and lead their teams through the organizational changes. This helps organizations achieve better business outcomes and also enhances engagement on our platform.

Speaker 2

As engagement increases on our platform, it generates a virtuous cycle where the more learners engage, the more data we can collect. That data in turn translates into valuable insights that customers can then leverage to make more informed business decisions. As organizations increasingly rely on our platform to develop their workforce, the increased engagement unlocks long term growth opportunities enables us to provide more effective learning experiences. Ultimately, we see Udemy's platform as mission critical for fostering a more agile, resilient and skilled workforce that is better equipped to tackle the challenges of today and the opportunities of tomorrow. Further illustrating this growing opportunity, a recent KPMG survey found that nearly 75% of business leaders ranked generative AI at the top emerging technology that will impact our business over the next year and a half.

Speaker 2

However, in a recent study conducted by Udemy, we found that only 55% of employees are confident in their management team's ability to seize the opportunities and mitigate the risks brought upon by generative AI. At Udemy, we are committed to bridging this gap by supporting our customers and strengthening the skills of their leadership teams. Our comprehensive skill development programs, including the cohort based Udemy Business Leadership Academy, are tailored to equip leaders with advanced technical knowledge as well as the soft skills needed to innovate and lead confidently in an increasingly competitive and evolving environment. Recently, a multi product Udemy Business customer added additional Leadership Academy cohorts after seeing positive results following their first engagement. Insurance provider Blue Cross Blue Shield of North Carolina was seeking new ways to help their customer service leaders better connect with and coach their direct reports in a hybrid work environment.

Speaker 2

To support this effort, the customer pilot Leadership Academy and noticed immediate changes among the pilot group of leaders, including improved communication skills and additional leadership traits that were not exhibited prior to the pilot. Additionally, many of the leaders felt that they were able to connect better in interviews with candidates. The team also saw significant value in analytics and data from this program that Udemy provided. Because of the success of the program, the company added 2 additional cohorts within 6 weeks of the delivery of our insights. During Q1, we also launched our GenAI Skills Pack to enable Uniti Business customers to subscale their workforce on generative AI in order to achieve better business outcomes.

Speaker 2

The Skills Act supports leaders and other workers in establishing a fundamental understanding of the technology and how to apply it responsibly to enhance productivity, communication and project management. Since its launch, the Skills Pack has driven meaningful pipeline generation further validating the growing demand for developing generative AI skills for companies of all sizes, sectors and regions. The use cases I highlighted provide you with a snapshot of the value we're delivering for our customers every day. However, we recognize that we can do better in certain areas of the business. We are committed to addressing the execution challenges that impacted our outlook for the year.

Speaker 2

As we mentioned on our last earnings call, we identified issues with 2 reseller partners in the APAC region and we experienced some softness in EMEA well as some underperforming cohorts within larger markets. Since that time, we began taking action to address these issues, including hiring general managers on the ground in South Korea and Vietnam to oversee our reseller partners in those markets. In addition, we have commenced a search for a Chief Revenue Officer to lead Udemy Business as our current leader will be leaving the company in June. We made good progress with our search for a new leader with strong go to market leadership experience scaling global businesses from $500,000,000 to $1,000,000,000 in revenue and beyond. The current Udemy business leader will support the transition and I will be actively involved while the new leader ramps into their role.

Speaker 2

We expect to have more to share on this soon. Altogether, these actions will address the short term challenges leading to improved long term performance. To wrap up, the innovative capabilities we're embedding in our intelligent skills platform coupled with the demand from the global transformation to a skills based economy and the rapid advancements of generative AI are expected to drive meaningful momentum and engagement on our platform. Over the long term, these trends are also poised to unlock substantial opportunities for our business. As the corporate world increasingly adopts a culture of continuous learning aimed at future proofing the workforce, we anticipate Udemy's platform will become even more mission critical.

Speaker 2

Now I'll turn the call over to Sarah for a financial review.

Speaker 3

Thank you, Greg. I'll start with comments on the key financial highlights and then provide our outlook. You can find the complete set of financial tables in our news release, which is available on our Investor Relations website. For the 5th consecutive quarter, our results exceeded the high end of our guidance range on both the top and bottom line. Revenue increased 12% year over year to 197,000,000 dollars With more than 60% of our total revenue coming from outside of the U.

Speaker 3

S, we did have a negative impact from FX to our year over year growth rate of 2 percentage points. Udemy Business revenue for the quarter was $118,000,000 an increase of 24% year over year, including a 2 percentage point headwind from changes in FX rates. We ended the quarter with annual recurring revenue, or ARR, of $479,000,000 up 21% from a year ago. Our consolidated net dollar retention rate or NDRR at the quarter end was 104%. The rate was 111% for large customers or those with 1,000 or more employees.

Speaker 3

As expected, we continue to see small decreases in net dollar retention as upsells continue to take longer than historical norms. Gross dollar retention was unchanged once again. In aggregate, we grew our customer base by 12% year over year to more than 16,000 customers globally. Our large customer cohort is growing at a faster rate or 16% year over year. Today, more than 30% of our customers are large customers and the number of contracts with ARR of more than $100,000 increased 16% year over year.

Speaker 3

We're also closing longer term deals, which means that for Udemy Business segment came in at 72% for the quarter, up 700 basis points from the prior year, primarily due to the instructor revenue share change that went into effect on January 1 this year. 1st quarter consumer revenue was down 2% on a year over year basis, including a negative 2 percentage point impact from FX. During Q1, average monthly visitors grew 7% year over year to 37,000,000 dollars As we move down the P and L, note that all financial metrics are non GAAP unless stated otherwise. Q1 gross margin was 62%, a 400 basis point improvement from Q1 2023, driven by the instructor revenue share change as well as the continued revenue mix shift to U2B Business, which accounted for approximately 60% of total revenue in Q1, an increase of 600 basis points year over year. Total operating expense was $122,000,000 or 62 percent of revenue and 200 basis points lower than Q1 of last year, thanks to our focus on company wide cost efficiency.

Speaker 3

On the bottom line, we delivered net income of approximately $5,000,000 or 3 percent of revenue. Adjusted EBITDA was positive for the 4th consecutive quarter at approximately $6,500,000 or 3 percent of revenue, representing a 700 basis point expansion year over year. The better than expected adjusted EBITDA result was driven by revenue outperformance and our disciplined approach to ensuring operational efficiency throughout the organization. Moving on to key cash flow and balance sheet items. We ended the quarter with $434,000,000 of cash, cash equivalents, restricted cash and marketable securities.

Speaker 3

Free cash flow for the quarter was positive $18,000,000 Our solid cash position enabled us to return capital to shareholders. During Q1, we spent approximately $55,000,000 of our $100,000,000 share repurchase program to buy back nearly 5,000,000 Udemy shares. Consistent with our disciplined capital allocation strategy, we are committed to continuing to grow the company, while returning capital to shareholders through opportunistic share repurchases. To that end, our Board has approved the expansion of our share repurchase program to $150,000,000 up from $100,000,000 We will remain prudent in deploying capital and the increased buyback reflects the confidence our board and management team have in the business and the opportunities ahead. Now for our outlook for Q2 and full year 2024.

Speaker 3

As a volatile macroeconomic environment continues to persist and as we work to address the short term execution challenges, we are taking a prudent approach to our outlook for the remainder of the year. As a result, we expect Q2 revenue to be between $192,000,000 $195,000,000 or approximately 9% year over year growth at the midpoint. Assuming exchange rates remain constant, FX is expected to negatively impact Q2 revenue growth by 1 percentage point. On the bottom line, we are targeting negative 50 to positive 50 basis points for Q2 adjusted EBITDA margin. For the full year, we have narrowed our revenue range to $795,000,000 to $805,000,000 or nearly 10% growth at the midpoint.

Speaker 3

As we were recalculating the impact of FX on our full year outlook, we realized there was an issue with our prior estimate. We now expect an estimated negative one percentage point impact from FX on our full year growth rate. As Greg mentioned, we are in the process of identifying a leader for Udemy Business and expect that once the leader is in place and ramped up, we will be well positioned to deliver on our growth projections. We still expect Udemy Business revenue will account for more than 60% of total revenue for the full year. On the consumer side, given the stronger than expected performance in Q1, we now anticipate consumer revenue to be down 2% to 4% year over year on a full year basis.

Speaker 3

Looking ahead, we are focused on delivering efficient growth. We are actively managing our expenses to ensure that every expense is aligned with our core objectives to support the long term health of our business. Commitment to maintaining a solid financial foundation for Udemy is a top priority as we continue to optimize our operations and make strategic investments to secure sustained growth. With all of that in mind, given the outperformance on adjusted EBITDA in Q1, we are raising our full year 2024 adjusted EBITDA margin guidance. We now expect full year 2024 adjusted EBITDA margin to be in the range of 200 to 300 basis points.

Speaker 3

Before we open up the call for your questions, I want to express our excitement about the future of Udemy. Despite the short term challenges we've encountered, the long term opportunity ahead of us is more compelling than ever before. Our strategic investments in product, brand and global expansion are set to extend our leadership position in this category. We thank you for your continued support and look forward to keeping you updated on our progress. So with that, we'll open up the call for your questions.

Speaker 3

Moderator?

Operator

We will now begin the question and answer And our first question will come from Stephen Sheldon with William Blair. Please go ahead.

Speaker 4

Hey, thanks for taking my questions. First one here, I just want to make sure I understood the FX commentary. I think last quarter you said it was going to be a 3% drag. And just to make sure I heard that correctly, so this now you're thinking for the year it's going to be a 1% drag. And can you talk about what that change?

Speaker 3

Hi, Stephen. It's Sarah. Thanks for the question. Listen, we did previously announce that we expected about 3 points of headwinds from FX. The updated estimate is 1%, one point.

Speaker 3

And it really was just an unfortunate error. These things happen. It has been remediated. And we've put additional checks in place to make sure that that doesn't happen again.

Speaker 4

Okay, got it. And so with consumer coming in above or I guess, I think you upped the guidance just a little bit there on the revenue side. I mean, are you effectively bringing down the UB segment growth? I guess, can you just talk about expectations for UB?

Speaker 3

Yes. Let me walk through our some of the puts and takes of our 2024 outlook. The first thing I want to mention is we remain very excited about the long term opportunity, which is unchanged. We did narrow our range and the midpoint is still at approximately 10%. But we're taking a prudent approach to the year.

Speaker 3

We continue to be in a volatile macroeconomic environment. You just heard us talk about we are going through a leadership change and we're still in the process of addressing those execution issues. That being said, we did bring consumer up. We're now expecting that to be down 2 to 4 points as that continues to outperform our expectations, which means that UB will dip slightly below 20%. We expect overall the low point of our growth to be in Q2, Q3 and for revenue to then reaccelerate on the back of all these things I just spoke about such that we're ending the year at about 10% at the midpoint.

Speaker 4

Okay, got it. That's helpful. And just one more for me. I think you talked last quarter about planning to continue investing in the UB go to market teams. How is that progressing relative to plan?

Speaker 4

And it'd be great just to get any additional color on where you're adding sales resources.

Speaker 3

Yes. So we have been adding resources up market. So in the strategic accounts, enterprise accounts, that is going according to plan. The newer reps are ramping very nicely. So we're going to continue to monitor closely.

Speaker 3

We invested some additional funds in enablement to make sure that these new reps could come in and hit the ground running.

Speaker 4

Okay, great. Thank you.

Speaker 3

Thank you.

Operator

And our next question will come from Curtis Nagle with Bank of America. Please go ahead.

Speaker 5

Great. Thanks very much for taking the question. Maybe just first for Sarah, apologies if I missed this, but what's driving the additional, I think, 50 to 100 bps in terms of the EBITDA guide in the year?

Speaker 3

Yes. So we are bringing our expectations for EBITDA up due to the outperformance that we saw in the Q1. We're being very balanced in our approach, which is continuing to invest in the product and the innovation, the go to market, AEs and enablement that will allow us to capture this growth opportunity in front of us and at the same time being really thoughtful about driving that operational efficiency. So just with this balanced approach that we continue to take, we do expect it to be able to deliver another 100 basis points or so on that bottom line.

Speaker 5

Okay. And then just stepping over to UB Business. So understanding the points you made about macro and a challenged environment, could you speak a little more specifically in terms of the slowdown in ARR, a little bit lower, I guess, revenue retention. Are we seeing attrition pickup or what's going on there? And I guess how much is that flowing through to the forecast of lower UB for the UB revenues for the year?

Speaker 3

Yes. We did expect the first half to be muted from a net new ARR perspective due to some of these execution challenges that we saw. Again, remediation is underway. We're very happy with early signs, but it's going to take some time. We also want to be really thoughtful about bringing a new leader in place, giving that person time to ramp up.

Speaker 3

So we are looking and we're in the late stages of finding someone who has been able to scale global businesses from $500,000,000 to $1,000,000,000 plus. We expect to have more to share with you soon. But we're just working through some of these short term challenges. What's really important, again, the long term opportunity, which is the continued move to skills based organizations and the growing demand to be able to adapt to and adapt AI capabilities both for your internal use as well as your product capabilities as an organization that continues to grow.

Speaker 5

Got it. Thanks.

Operator

And our next question will come from Ryan MacDonald with Needham and Company. Please go ahead.

Speaker 6

Hi, thanks for taking my questions. Maybe not to harp too much on UB, but maybe just a clarifying question there. As you're looking at maybe what's coming in below expectations or maybe where the lack of performance or execution was, Is it more concerns in terms of top of the funnel development, and generating pipeline or perhaps that progression through the pipeline? Just trying to understand maybe what wasn't developing as you expected sort of first as we from Q4 earnings call to now through Q1? Thanks.

Speaker 3

Yes. So there were some different pieces that came to play here. The first thing I'll say is, we had identified the issues back in the last quarter. Some of those were more pronounced as we continue to dig in and put those remediation efforts in place. There were areas of pipeline generation that were doing very well.

Speaker 3

For instance, our AE and some of our SDR side of things, but then we had some other areas where certain pieces of our marketing pipeline weren't going as well as we would have liked, especially in the commercial side. I think that's probably not as surprising given that SMBs have been hit pretty hard in this environment. On the execution side, there were pockets of execution from a sales perspective that were going really, really well. We spoke about a very large geographic region that overperformed for the second half of last year and then we set some pockets where frankly there just needed to be more accountability around the sales process. So there were puts and takes across the organization.

Speaker 3

Greg has done, extensive deep dives. Maybe Greg, you want to talk a little bit?

Speaker 2

Yes. Ryan, I'll jump in a little bit on this one. On the enterprise side globally right now, we are very encouraged by the pipeline development that we're seeing and supporting the productivity improvements that we're seeing on the enterprise side as well. So I feel very good about the work that our teams are doing to not only drive pipeline but also execute on the enterprise side. As you all know, enterprise for us is 80% of our revenue.

Speaker 2

So that's a big mover for us. As Sarah just alluded to, down market in our commercial segment, that's where we're focused right now, bolstering our pipeline generation capability. And that work will be ongoing and feel good about the plans in place, but we do need to bolster the SMB segment because what we're saying is SMBs there has been a protracted slowdown and that's something we've talked about. So anyway, we're working hard on that. At the same time, we've got a number of programs in place right now that we're starting to see very positive impact from.

Speaker 2

1 is the partnership that we talked about with McLaren. We just had a significant, for us activation event in the U. K. And within the last two weeks where we had well over 100 senior executives attend our PowerUp event at their innovation center at the MTC and the results of that remain obviously we're going to matriculate through the pipeline and we're going to start to see the results of that as far as productivity and business close over the next couple of quarters. But the early feedback has been tremendous both from our customers as well as our team.

Speaker 2

There's more of those types of things coming as we activate around the world these partnerships as well as the programs and plans that our marketing team has put in place. So feel good about where we're at as far as the planning going forward. This is a short term situation for us down market in the SMB side.

Speaker 4

Really helpful color there. I really appreciate it.

Speaker 6

I jumped on the call late, so I apologize if I missed this and it was said already. But within the consumer business, great to see some of the so this may be success relative to expectations there. Obviously, a competitor of yours had talked about a week ago some softness in North American consumer and maybe lack of conversion. Just curious as what you're seeing geographically with the consumer business or any concerns of sort of softening conversion trends within North America at all? Thanks.

Speaker 3

Yes, thanks. So we do continue to see and this has been happening for many, many quarters, our conversion and business mix really moving overseas from North America, but that is there's nothing new that I would call out. What I'll say is our subs continue to perform well. We continue to roll out to new geographies. We're excited to continue to see that.

Speaker 3

And what we've spoken about is we have some capabilities that we will be able to bring into our personal plan subscription over time that will allow us to drive higher LTV. And then on the back of that, actually start to invest again into the customer acquisition side. So I would say our trends that we have been seeing are very consistent with what we've seen quarter after quarter, and we haven't seen anything unusual of late.

Speaker 6

Thanks for the color. Appreciate it.

Operator

And our next question will come from Terry Tillman with Truist. Please go ahead.

Speaker 4

Great. Thanks, Tim. This is Connor Pascarella on for Terry. Just wanted to start with one on the instructor base. As you've rolled out some changes that impact the group over that group over the past few quarters, whether it be the rev share agreement or integrations of AI tools into the platform.

Speaker 4

Just anything you could speak to about the feedback you're getting from those instructors and maybe what seems to be top of the line for them when you talk about the direction of B2B? Thanks.

Speaker 2

Yes. Thanks for the question. Yes, we remain very connected with our instructors and have a number of communication channels right now that are open that we're all engaged with to ensure that not only are they able to provide meaningful feedback to us, but we're able to clearly articulate and communicate how the investments we're making in product are going to impact in a very positive way their ability to develop learning capability, bring that into the marketplace and build to monetize that bolt in the marketplace and within UB. And effectively what we did is the same thing we did for you all just a couple of months ago, which is have given them a deep dive demonstration into the 3 capabilities we are bringing online. And the excitement and murmur from the group was palpable.

Speaker 2

It could not be more fired up about what we're bringing to market. And the impact of that really is the net of it is, is that no top instructors have opted out of our platform. And I think more now than ever, they're increasingly excited about the earnings potential that we're going to provide as a result of the investments we're making and their ability to develop and transform the learning experience. So all to say, really pleased with how our team has managed, the communications with our instructors and the response from our instructors.

Speaker 4

Great. That's really helpful. Maybe just one quick follow-up. Just strong cash flow numbers this quarter. Wanted to ask if there's any seasonal or timing impacts around the results and maybe how we should think about operating cash flow, free cash flow for the year?

Speaker 4

Thanks guys. Appreciate it.

Speaker 3

Yes. Great question. We do see some seasonality. Q1 tends to be a great quarter for collections on the back of Q4 bookings. We've also been doing some work internally around driving our day sales outstanding down, and so we saw improvements there as well.

Speaker 3

So really great collections quarter. There will be pluses and minuses on cash flow quarterly because we have different seasonality, both from a revenue perspective, a gross margin perspective and a cash flow perspective between our consumer business and our Udemy business side of things, where the heavy cash in Q1 sorry, Q4 and Q1 on the consumer side around some of our bigger promotions, where the heavier cash outflow is Q1, Q2 from a consumer. And then like I just said, UB tends to have a pretty good Q1 collections. So those are the biggest drivers. But again, just there will be timing noise here and there between the quarters.

Speaker 3

Overall, focused on driving that cash flow margin to be a little bit better than the EBITDA margin.

Operator

And our next question will come from Josh Bair with Morgan Stanley. Please go ahead.

Speaker 7

Great. Thanks for the question. For Greg, just wondering with the skills based future as far as the workplace and hiring, how far along are we in that journey? And what needs to happen in order to really reach an inflection point as far as the focus on skills and skilling in the corporate world?

Speaker 2

Thanks, Josh. I appreciate the question. Right now, we're in early innings. We're seeing the more progressive companies starting to take action and implementing strategies to develop the skills based organization, especially with respect to generative AI. But BCG came out with a report recently that stated that 90% of organizations are still in the observation mode, which is work, but also how they're going to transform organization to take advantage of generative AI, both internally to create operating leverage as well as externally into the products and services they're delivering.

Speaker 2

So it's early innings. And a lot of the work we're doing right now with our enterprise customers is on the strategy side, right? And one of the things we're doing that is we're uniquely positioned to be able to execute against because of the resources we have in our customer success organization is spend the time in that strategy development phase while we're starting to work on the various, I would say, verticals within organizations as well as functions within organizations to develop skills paths, purpose built skills paths we talked about in our announcement, Gen AI Skills Packs that we've released, that all supports our ability to, in a very systematic way, be able to start to operationalize what a skills based organization is going to look like. And we're in early phases with a lot of customers right now. It's early innings.

Speaker 2

And we're excited about the folks that are out in front because those are the case studies and the references we're able to use in conversations with prospective customers. But the vast majority is still to come. And this is a multi, multi year opportunity for us to help organizations through this transition to a skills based work.

Speaker 7

Thank you. That's great.

Operator

And our next question will come from Brett Knoblauch with Cantor Fitzgerald. Please go ahead.

Speaker 4

Hi, this is Tommy Shinske on for Brett. Congrats on the solid quarter. I guess like from the APAC standpoint, seeing the weakness last quarter, have you seen any early positive impacts from the new hires in South Korea and Vietnam? Or do you expect us to see continued weakness in the 2024?

Speaker 2

Thanks. I'll start, Sarah, and you can jump in. Was involved in the process of onboarding the new leaders, very encouraged by the level of talent we brought into the company. And early days as far as the approach that I'm seeing in both those markets, I'm staying very close to it. I'm very encouraged by the approach that we're taking and some of the early indicators as far as the not only pipeline build, but measures of execution.

Speaker 2

I won't get into the specifics, but as far as sales productivity and just productivity in general. So yes, early innings, it's early days. We have to give these leaders time to get their feet underneath them and start the execution process. But I like what I'm seeing so far. Sarah?

Speaker 3

Yes. I would just add from when we expect those new leaders to actually impact ARR, that's in the back half. So you have to give people time to come in and really make these changes and then those changes have to really progress through the pipeline. So like Greg said, we're really excited with what we see. It is early days and we expect that to start to add to net new ARR in the back half of the year.

Speaker 2

I'll just add that in parallel with onboarding those new leaders, I mentioned in the last call that we've taken immediate action in a number of areas. One was leveraging the expertise we had in Japan with respect to process, productivity and sales engagement, field engagement into both Korea and Vietnam. And that in parallel with onboarding the new leaders is why we have the optimism that we have.

Speaker 4

Awesome. Sounds great. And then one more, if I may. It's great to see you guys are expanding the stock buyback program. With valuations contracting a bit across the marketplace, have there been any thoughts about deploying cash to fund inorganic growth opportunities?

Speaker 3

I'll take that. We are obviously always evaluating regularly our capital allocation strategy. We've spoken about our interest in prudent M and A. And so what that means for us is finding the right opportunities at the right time at the right price. So while we remain active, we are sitting on over $400,000,000 in cash.

Speaker 3

We are executing share repurchase because it's a great investment, especially at these prices in comparison to the business and the opportunity we have in front of us. We will still even after execution of that share repurchase program have plenty of cash left to allow us to continue to be opportunistic on the M and A side.

Speaker 2

Awesome. Thank you.

Operator

And our next question will come from Noah Herman with JPMorgan. Please go ahead.

Speaker 8

Hey, thanks for taking the questions. First off, can you maybe just unpack some of the changes you're making at the leadership position for UB? I think you actually mentioned about this position actually encompassing becoming the CRO as well. Is there any change or scope to the position that you're to obtain a higher score?

Speaker 2

No change in scope. We're just normalizing the title with the balance of the titles on my staff. So no change in scope. First thing I'll say is that our current leader, Stephanie, has made significant contributions to this business over the 8 plus years that she has been on board with Udemy. She was one of the founding leaders for Udemy Business.

Speaker 2

And look, we owe her tremendous debt of gratitude and wish her well, both personally and professionally, as she moves on to the next step in her career. But as we mentioned earlier, looking forward, we're going to be bringing on a leader that has demonstrated experience in scaling global multichannel Software as a Service businesses from $500,000,000 to $1,000,000,000 and beyond. And we're excited about that because as companies go through different phases of growth, that does require, in many cases, different skill sets. And that is something that we're going to be layering in as we move forward. So as I mentioned earlier, we expect to have more on this soon, but that's really the impetus behind it is really preparing us for that next phase of growth as an organization.

Speaker 8

Got it. That's really clear. And then just maybe quickly on the guidance.

Speaker 6

It sounds like you might be layering in slightly a

Speaker 8

bit more prudence within the guidance. So just curious to see if did you experience a step down sequentially, worsening conditions in the macro environment? Just trying to

Speaker 6

get a sense for what's sort

Speaker 8

of being layered into the guide now at this point? Thank you.

Speaker 3

Yes. I'll take that. I wouldn't say that we have seen a step down in the macro conditions. I will say that it continues to be volatile that we have a pretty large business in EMEA. EMEA continues to have those macro challenges.

Speaker 3

That being said, we saw the issues that we identified. Some of them were a little bit more pronounced, but we are working through those. We're really happy with the progress. The early indicators are very positive. We're just trying to be really thoughtful that there's a lot going on between macro, new leadership and working through these execution short term challenges.

Speaker 3

But like we said, all is going well. The long term opportunity remains. We are continue to grow our business from multi year deals. We continue to grow the number of accounts that we have over 100,000. So lots of really good things still happening as we manage the business through this.

Speaker 2

I'll just add briefly that we're seeing now in some enterprises optimism to the point to where we have one large bank in Africa that not only signed a 3 year contract, but signed up and bought licenses not just for where they are today as far as demand and employees, but what they expect to be onboarding over the next 12 months, basically buying for the future and purchasing upfront with the level of optimism and foresight associated with that. And they would not be doing that if they didn't, number 1, believe in the value and impact of investing to upskill their employees as they're on boarding and growing and developing the organization. And number 2, if they didn't believe that the environment was going to support that level of investment. So that's just one example of. We're starting to see some green shoots and some examples of organizations kind of coming back to where we've been in normal conditions, buying ahead and projecting ahead and planning ahead versus where it has been in 2023 more prudence in terms of buying behavior and patterns.

Speaker 2

So anyway, there's cause for some optimism here, but again, we're still not completely out of

Speaker 4

it.

Operator

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

Speaker 9

Hey, thanks so much. This is David Lustberg on for Brent. I wanted to ask around net dollar retention. It was down 800 basis points in 1Q last year, down another 800 basis points in 1Q this year. I know you guys don't disclose gross retention, but maybe if you could just provide some color around the dynamics there.

Speaker 9

Is it more so pressure on your gross retention side? Or is it just slower expansion? Commentary there would be helpful. Thank you.

Speaker 3

Thanks for the question, David. Our gross dollar retention has remained stable through the past 6 plus quarters of macro volatility, which we're really happy to see that customers continue to see the value that we bring to them. So it really is on the upselling side taking longer and we did see the net dollar retention come down 2 points. We expect that to continue to remain suppressed as we're working through the next quarter to the first half where we have the net new ARR being lower than in the back half. But it's not a gross salary retention that has remained very stable for us.

Speaker 9

Got it. And maybe as a follow-up, you talked about 2Q, 3Q being a low point of this year on the UB side. And I think you've kind of hinted towards more of an acceleration in 2025 on UB. Maybe just talk about some of the signals you're seeing that give you confidence that you guys can really turn the growth rate around on UB heading into year? Thank you so much guys.

Speaker 9

I appreciate it.

Speaker 2

Yes, I'm happy to start, Sarah, and feel free to jump in. There's some tailwinds that are definitely blowing in our sales right now. And one of them is that transition to a skills based economy with respect to generative AI as a primary driver. And as we've not only announced the capabilities we're bringing to market, but the GenAI Skills Packs, we're seeing more and more organizations like the one we just mentioned earlier, focused on developing capability in the organization such as digital learning academies around generative AI. And as those are coming online, starting to see real quantifiable impact, I.

Speaker 2

E, 17% increase in certifications and being allowing in this case, allowing them to bill at higher rates. And our teams are doing a great job of quantifying value and impact and being able to package up these stories and use cases and bring these to the masses in terms of our go to market approach. So as we're getting better at positioning how we can help organizations transition to a skills based org and help them up level the AI literacy across their company and functionally develop capability to leverage generative AI to transform how they're running their business. As we get better at that and we're getting better every day, that's opening doors right now in the early phases that are going to continue to open at faster and faster rates as we move forward, which is why we're very confident that we're in the early innings of a massive, if you will, tailwind that's going to blow in our direction for years to come. Sarah, I don't know if there's anything you want to add?

Speaker 3

Yes. Let's just talk about some internal signals that we're seeing. We have been adding to our go to market AE headcount over Q4 and Q1. And what we're seeing is those ramping reps are actually hitting over 100% of their quota. That's up almost 40 basis points since last year and that is attributable to what Greg just spoke about, our focus on sales enablement and continuing to make sure that we are able to articulate the value that we can provide to our customers.

Speaker 3

So we have some early indicators that are really good. These things will take time, but we're very confident in our ability to hit our projections.

Operator

And our next question will come from Devin Ah with KeyBanc. Please go

Speaker 10

ahead. Hi, great. Thanks for taking my questions. The first one, just in the quarter for UB, for enterprise, any deals that might have shifted 1 or the other or got pulled in or slipped, the second quarter, second half?

Speaker 3

I can answer that. I mean, we always see some deals that are slipping in and out of quarters. We saw that again in the first quarter. What I'll say is the team is getting better and better each quarter on managing those deals and giving us the visibility that we need. But that's part of the business where you do tend to see deals move in and out of quarters.

Speaker 10

Okay, got it. And then second question I have is, I just want to ask about the competitive landscape in enterprise. I believe a couple of months ago Accenture acquired Udacity as they're trying to build out a learning platform to offer to their customers. I mean, any thoughts on this large global services getting into the space, does that impact the competitive landscape in the near term?

Speaker 2

It's a good question. I looked at it very much as a validator that Accenture jumped in and made the acquisition and is making a big bet on where the market is going, so to speak, with respect to skills. And it's very much in line with our point of view and we're and I just mentioned it, where we believe the winds are blowing. Udacity, by the way, is not a usual suspect that we see in competitive situations. But again, the fact that Accenture made that acquisition, it just again continues to validate the opportunity and really where organizations are headed in terms of their investment dollars from a learning and development standpoint.

Speaker 2

So I view that very much as a positive.

Speaker 10

Got it. Not a positive. From a

Speaker 2

competitive perspective yes, and I'll just add that from a competitive perspective, at least on the enterprise side, what we're seeing is we still see the usual suspects that we've seen. We have seen competition with respect to price starts to ramp up a bit in the enterprise in terms of aggressive pricing. And in some respect, I'm not surprised. We've armed our teams with tools and playbooks to address some of these situations and scenarios. And as I've mentioned before, we're never going to be the low price option in the market.

Speaker 2

We're always going to be the high value option. And as we've layered more and more capabilities into our platform and we're having a broader and deeper impact on organization's ability to upskill and reskill, our story continues to get stronger. So we're really focused on sales enablement and enabling our team to tell that story and substantiate the value that we're delivering to offset some of what we're seeing, which is aggressive pricing in some of the deals that we're in. And the SMB side, down market, it continues to remain a challenging environment for small businesses. It does.

Speaker 2

I've run small businesses before and it's a different decision criteria, set of criteria that they have to they use in So So again, SMB, we're making investments to help our teams in that segment. But in the enterprise segment, where the majority of our revenue comes from, our teams are doing a great job competing and substantiating value and impact. And we're seeing organizations continue to allocate budget and spend those dollars to upscale and reskill.

Speaker 10

Great. I appreciate the details.

Operator

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

Speaker 2

I'd just like to thank you all for joining today and we look forward to connecting again for our Q2 call in August. Have a great day and evening everybody.

Operator

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

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Key Takeaways

  • Udemy delivered 12% year-over-year revenue growth in Q1 to $197 million and a 24% increase in Udemy Business revenue, while maintaining positive adjusted EBITDA for the fourth consecutive quarter.
  • Udemy Business now serves over 16,000 enterprise customers across 150+ countries, doubling its enterprise base in three years with key wins at Pepsi, Flutter Entertainment, and the South African Reserve Bank.
  • In response to the generative AI boom, Udemy saw more than 4 million enrollments in over 2,000 AI courses since ChatGPT’s launch and launched a GenAI Skills Pack to help organizations rapidly upskill their workforce.
  • Short-term execution issues in APAC resellers and EMEA prompted Udemy to hire local general managers in South Korea and Vietnam and initiate a search for a new Chief Revenue Officer to strengthen its global go-to-market.
  • Udemy ended Q1 with $434 million in cash, generated $18 million of free cash flow, repurchased $55 million of shares, expanded its buyback program to $150 million, and set full-year revenue guidance at $795–$805 million with a raised EBITDA margin outlook of 2–3%.
AI Generated. May Contain Errors.
Earnings Conference Call
Udemy Q1 2024
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