Udemy, Inc. (UDMY) Earnings Call Transcript & Summary

Okay. Great. Let's get kick it off here. My name is Josh Baer, software analyst at Morgan Stanley. And we have the pleasure of Greg Brown, CEO of Udemy; and Sarah Blanchard, CFO. So some disclosures. For important disclosures, please see the Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative.

So wanted to ask, Greg, you the first question, given your recent change in roles to take over as CEO. And so what are your key priorities looking ahead to this year? What are some things that you want to keep the same? And what are some changes that you want to make?

Great. I appreciate the question, Josh, and I appreciate the opportunity to be here with you. So as far as the priorities for the year, Gregory and I, who is our prior CEO, worked very closely on the strategy as well as near-term priorities for the company for 2023. So as a result of that, there will be no immediate changes with respect to what we are planning on executing against this year. That being said, I'm very focused on continuous improvement. And at our last earnings call, we laid out our priorities for the year for 2023, which include continuing to ensure that Udemy is the platform of choice for professional skill development, validation of skills acquisition through the form of badges and certifications, which we're going to come out with in the back half of the year. Continued investment in our international expansion, which is seeing explosive growth in some regions. So we'll talk about that. And then our focus on continued expense management and driving the company to profitability in the back half of '23.

Okay. That's a great overview, and we'll dig into all those areas. I also wanted to ask, I know that you've just stepped into the role, but thinking about the stock and the performance over the last year. I guess the question is what do you think investors don't understand about the Udemy story?

That's a really good question. Look, our stock and really the entire category has been I think unduly punished partly based on the macro, but also the ed-tech category is a little bit out of favor right now. I think with respect to Udemy, one of the aspects of our business that we feel real strongly about is we really are a transformative company that is very different than any other platform or a company that has been operating in the ed tech space. We're very unique in that we've got this high-growth enterprise SaaS business that sits on top of this, what we believe is the world's most efficient content creation engine, which is our consumer marketplace. And this marketplace has massive scale. We've got 35 million users hitting in the marketplace every month, and that provides tremendous value and benefit throughout the experience that our professional learners are able to take advantage of. But I think one of the misconceptions is that we're investing in equal portion of trying to grow that Consumer business as well as the Enterprise SaaS business. The reality is, our focus is running the consumer business at breakeven. And continuing to optimize that experience, but the focus is vibrancy of that, of the marketplace. It's not growth because the growth and the value creation in our business is going to come from the Enterprise SaaS business, right? So in terms of how we measure vibrancy and what we really measure ourselves against, it's traffic to the marketplace, consistent healthy traffic, both new and existing. It's course creation. And critically important to us in terms of fueling the enterprise growth. And so course creation, we're seeing upwards of 5,000 courses being created on a monthly basis in the marketplace. And just last quarter alone, we brought 1,900 new courses into the Udemy business collection fueling that enterprise software growth. So again, vibrancy there. And then the last component of it for us is instructive payments. As long as our instructors continue to have healthy growth in their share of wallet that they're taking them every year, and their payments and their revenue streams are growing on an annual basis, that's all the incentive in the world for them to continue to update their content and bring new content onto the platform to continue to take advantage of this very robust opportunity they have on our platform. So I think that's the biggest point that I want folks to take away is that we're not optimizing this business. We're not investing in the business to grow the top line on the consumer side. It's about the vibrancy to grow the enterprise business, which we talked about in the last earnings call. This last year came off of almost 70% year-over-year revenue growth at north of $300 million in revenue per year, which there's -- that -- there's probably less than 10 SaaS -- public SaaS companies right now delivering that type of growth. So we're seeing outscaled growth and really excited about the enterprise business sitting on top of this unique demand-gen engine that is our marketplace.

Great. I wanted to ask one follow-up on something you mentioned around operating the consumer segment at breakeven. Is that a goal? Is that where we are now thinking about like...

I'll speak to that. It's a goal and we're pretty close. That's what I'd say, very close. And as you know, we spoke about profitability in the second half of the year across the business. But definitely, the Consumer business, we're close. And we've been shifting investment away from Consumer over the past 18 months really in order to invest more and more in the Udemy Business side, just keeping that marketplace vibrancy top of mind.

Perfect. So I want to talk for a minute about the theme of consolidation and consolidating vendor and consolidating spend of learning and development budgets in this macro environment. And -- the question is, is Udemy holding -- are companies kicking out other vendors and Udemy is holding on to its existing footprint, so sort of like a relative strength scenario? Or are you actually seeing an incremental benefit like a real opportunity to customers choosing Udemy and going -- expanding going wall-to-wall, like how should we think about that consolidation theme?

I can I'll take that first, and you can add to it. We're seeing both, right? We are seeing organizations looking to consolidate from 2, 3, sometimes 4 vendors down to 1 platform. And they really are looking at a couple of different factors when they're making these decisions. Number one, it's the quality of the content, first and foremost, which really impacts the learning experience. It's the breadth of the platforms that enable learning to happen that they care a lot about. So it really is the reason why we went out and bought a company to help really address an opportunity for us in leadership development because we didn't have an answer for that. So we went and bought a company, a core-based leadership development company, to address an acute need that we were seeing as well as we've got immersive learning or deep learning experiences on the IT side where certifications and validation is really important. So organizations really are looking. If they're going to consolidate down to one platform, they're looking for the platform that's got the quality and the breadth to serve their needs not just today but tomorrow, right? Because again, they're making multiyear investments in these platform partners. And for us, it's also critically important that we're bringing a level of service to that relationship in the form of our customer success organization that really serves to be a strategic partner and not just the selection of the vendor, but more importantly, I think for the customer, to help them shape what their skill-based strategy should look like, how are they going to think about upskilling and reskilling their employees. And not only what the strategy look like, but the execution and the route to achieve the outcomes they're trying to achieve at a corporate level, map to the skills that they need to achieve those outcomes. That's an area that we invest heavily in, and we're a little bit different and unique in the amount and quality of the resources we bring to bear to help organizations with that. So that's -- I think the first part of the answer you want to take the second part?

Yes. I think it's really important to understand that where Udemy plays is really about value and delivering value to our customers, it's not the low price. The quality of the content that we get and the freshness and the localized language from our marketplace is exceptional. It's extraordinary. You pair that with the customer success and the partnerships that we build with our customers, and that really is the differentiator that I think is allowing us to be on the winning side in these consolidation place.

Great. Really helpful. I want to start with Udemy business and dig in a little bit and start with the macro and what you're seeing in the environment, thinking the last quarter, the relative strength with customers that had over 1,000 employees, pretty durable trends, a little bit more weakness in SMB. So what's the update there as we're several months into 2023.

Go ahead.

Yes. So I mean, similar to what we've said on our last call, which is we continue to see strength on the Enterprise side of things. SMB, it's been a little bit soft for a few quarters, which we've spoken about. We anticipate that to continue to be soft. But from an Enterprise side, companies still need to execute on their strategic initiatives. And in order to do that, they need skills and the skills they need is changing at a faster and faster pace. And so I think that really speaks to our ability to kind of continue along. Even if the sales cycles are a bit longer, they were longer in Q4, we saw some deals slip out of the quarter into the first quarter. We expect that to continue. But the pipeline remains robust. Those deals did not disappear. It's just going to take a little bit longer to get them done.

Okay. That's helpful. And you mentioned the rapid growth in Udemy Business since as long as we have numbers for. The forward guidance or the guidance for this year calls for a deceleration, I believe, to the mid-30s. So I wanted to ask what are some of the main forces that are driving that significant deceleration? Essentially, what is embedded in your guidance from a macro perspective?

Yes. Listen, I think it's prudent right now to expect it to continue to be bumpy out there. And so we expect that to continue certainly through the first half, probably through the remainder of the year kind of remains to be seen. But I think that's the biggest factor is continued lengthening of the sales cycle like that, continue to stay. At the same time, there are companies that are -- they've been reducing their headcount. Sometimes that means that has a little bit of an impact on us. Sometimes that means licenses are reallocated, but we do expect it to be bumpy. We've taken that into consideration, but we expect continued strength on the Enterprise side. If you have a business in this environment that's growing at mid-30s at this scale, I think that says something and it's a testament to the value that we're providing these customers. So listen, more to be seen. We'll have to see how the year plays out, but we do expect it to be bumpy. We took that into consideration. Anything you want to add, Greg?

I'll just add that we did -- we talked about the fact that we throttled the growth of our sales organization, which is a big factor and has been a big factor in our ability to continue to sustain outsized growth like we delivered last year. And so that's one aspect of I think the plan for this year that absolutely has to be factored in and consider is we're not scaling our sales organization at the rate we were. We're fully prepared when we start to see green shoots and the macro start to turn in a more positive direction. We're fully prepared to start throttling that growth back up. And the other thing I would say is last quarter, we delivered -- our net dollar retention on the Enterprise segment was 123%, which was flat from Q3 and within a couple of points of our highest quarter. So we continue to be very encouraged and bullish about our ability to continue to build relationships and see those relationships grow in our Enterprise segment, which gives us a lot of confidence that we're going to fare just fine through whatever macro turbulence we see this year.

Great. You talked about the potential for slower headcount growth and some customers to weigh on some seat expansion, but wanted to ask about another lever of growth for you on the business side, Udemy Pro. And I just wanted to ask about what does that bring from a feature perspective? And what does it do from an economic perspective for you?

Sure. Yes. So Udemy Pro, I touched on this already a little bit, but it's an add-on for us to our core on-demand subscription offering. And it's immersive learning product. And really what that means, and it's tailored to the needs of those IT professionals that are looking to get badges and/or certifications in anything from Amazon, Azure and those dense meaty technical certifications that are so important for most of the companies that we do business with. And the product really entails tailored and personalized learning pass, assessments, labs and workspaces. So it provides for that full immersive experience, so you can practically apply the learning as you go through a course or a series of courses to ensure that you're actually absorbing and learning the content because it is dense and rich. And then there's an opportunity to assess at the end and then certify and/or badge based on skills acquisition. So the product right now, we couldn't be more excited about the impact we're seeing right now as far as in our enterprise customers that initially started with pilots, which makes sense and when a new product is released, and we're seeing those expansions happening in real-time right now. So there's real value for customers, both in being able to validate the skills that have been acquired in the organization and through those assessment, what skills they do have in that side of the house on the IT side of the house. And for learners to be able to validate that they've acquired those skills really does add to employee satisfaction, employee retention and then overall value and impact within the organization of their ability to apply those skills forward to strategic initiatives.

And when a customer adopts Udemy Pro is there any context or guidelines for what happens from a financial perspective.

Do you want to add anything?

Yes. It's an additional state license fee on top of the Udemy Business. It applies just to the tech right now, just with the tech teams that will expand over time. But for now, it's an additional license. And to date, all of our net dollar retention has really come from seat expansion. We're just starting to see some movement in net dollar retention from Udemy Business Pro and CorpU. We're in the really early days.

Okay. Great. Really helpful. You've mentioned some of the different pieces of the platform from guided learning, immersive learning, cohort-based learning, on-demand learning. Are there still gaps or other areas that you're looking to -- that are missing from what seems like a pretty complete platform, but just thinking about future investments and how you think about those decisions, whether you go out and make an acquisition or if you build internally?

Yes, that's a really good question. We're continuing to lean into these investments. Some of them are earlier days for us, if you will, in terms of for instance, our CorpU, which is our cohort-based learning leadership platform. Continuing to invest in bringing that into our core platform and building out the capabilities there as well as in Udemy Pro, which we just talked about. But there are additional learning modalities that we're hearing from our customers, there's interest around as well as instructors. And really for us, our focus is to continue to make investments in the tools and capabilities that we provide our instructors because we've got 70,000 instructors around the world developing, in many cases, the best content in their domain. And making sure they have all the tools necessary to provide a really rich and vibrant and expansive learning experience. So the answer is yes. I mean, look, you can envision a world where coaching and mentorship and podcasts, there's a lot of different learning modalities in areas that we're interested in exploring, we are exploring and how we get there, from our standpoint, it's build, partner, buy. And we're going to determine the appropriate path based on the technology and the experience -- and I think, pace of our ability to get products to market and the costs associated with that. So nothing that's not standard in terms of how most companies look at it.

Great. You mentioned credentials, want to focus there for a second. Your content is so differentiated and valued in the way that it's practical, it's created by individual expert. Is there a way to keep that differentiation in the marketplace, that advantage? And like how do you weave in these branded credentials or certifications from other third-party institutions?

Yes, I'm happy to answer that. Yes. So for us, it's very complementary. It's additive and in no way competitive with our core offering in that our customers have been asking for some time for not just our ability to enable third-party display of badges and certifications via learners, i.e., third-party being Amazon or Azure or whatever it happens to be, to allow their learners to display and promote those badges. But also for us to be able to deliver against unique Udemy branded badges and certifications. And the feedback we've been from our customers is they really do believe our content is the best content in the industry. So therefore, the associated Badge or certification with our content would be treated equal, if to not greater value than a Badge or certification from a third party because again, the quality of our content in their eyes is better. So it really is -- it's a win-win for everybody involved. And the learner wins for the reasons I just mentioned, and the organization wins because, again, they get access and visibility across the organization as to where those skills lie. And where they have skills today and based off where they need skills for tomorrow, we partner with them and to put learning paths and learning journeys in place for the acquisition of those skills to happen to map against those outcomes that they're looking to achieve. So right now, the work for us is with instructors as making sure the instructors understand the value and impact and us providing the tools for them to tailor their courses to a badging and certification experience. And that's a little bit new. So that's the work we're doing right now, and we're going to be releasing this over the back half of this year and into next year. And we'll be talking more about it as we move forward.

Really interesting. I wanted to ask about the federal opportunity. Is that something that you're focused on? And if so, what -- where are we in the process of addressing that market?

Yes, happy to take that as well more on the go-to-market side. Yes, I mean, look, we've already made nice inroads into federal government and local and state government opportunities in the U.S. as well as around the world through our partner, Benesse. We've got a nice relationship with that -- in Japan with the Tokyo government. And we're expanding that as we speak this year. And we're taking the key learnings from the various early engagements that we've had and taking those and expanding on those around the world as we're starting to get more penetration in state, local and federal government. So massive opportunity. It's early days for us, not a significant revenue generator today. We surely expect the opportunity to continue to grow and for us to be able to take advantage of it. So we're excited about it.

Great. You mentioned sort of the -- around the world, I wanted to ask about the international playbook. I think that's a key area of differentiation besides the content and sort of highlights the importance of both the consumer and the business side of the platforms. Could you lay out sort of the international playbook and where some of the biggest opportunities are around the world?

Yes, happy to. We're right now experiencing explosive growth in Asia Pacific in our new ventures partner programs, and we've talked a bit about this, but our new ventures for us is where we've developed OEM-like relationships with in specific countries where we've been able to identify the right partner to effectively take our product and services to market on our behalf. And that started in Japan, and we've had wonderful success and accelerated growth in Japan. And we've now extended that to China, Korea and Vietnam. And really, really excited about these partnership opportunities because what we've learned in Japan, we now -- for the last year was the first year we were live in these new markets, and we're seeing a very similar growth trajectory in these markets that we saw early days in Japan, which gives us a lot of confidence that we're going to see accelerated growth for years to come. So I couldn't be more excited about that. And then in other regions, we're taking a more traditional reseller approach, i.e., in Latin America, for instance, in Brazil and Mexico. I'm really happy with the partnerships that we have in process of developing and are developing and investing in, and we're going to continue to lean into these investments this year as far as feet on the ground, partner management to ensure they've got all the sales enablement and field enablement and resources they need to be successful as well as identifying new countries and opportunities for us to enter. And EMEA we are a bit more mature than we have been, and we've got strong reseller relationships in our core markets in EMEA, which are the U.K., Germany and France.

Great. How should we balance some of these international investments with the push toward profitability? If you could talk about the economics or the payback period on some of these international investments?

So on the partnership and the new venture side of things, a lot of the investment actually happens with our partners. And so we have an enablement team. It's a pretty small but mighty team that actually can really help them get going. So the payback on that happens pretty quickly. On the other side of things, where we're building out our own direct sales team, especially LatAm with later EMEA. That productivity trajectory is kind of exactly what you'd expect from an enterprise SaaS business, which is you make the investment, it takes some time. But for the most part, when you think about North America, you think about EMEA, those engines are really humming. APAC is humming. LatAm is probably the last. But the investment is coming in, listen, we're going to be profitable in the back half. So we're in pretty good shape. We're pretty far along the trajectory on some of these. And I think also importantly, we are only in 10% of the seats within our customer base. And so when you think about expansion opportunities, you think about the fact that we have now over 40% of our revenue comes from multiyear deals, it becomes more and more efficient to kind of continue to generate that top line.

Let me just add just a couple of thoughts that I think are important on the international conversation, which is one of the unique aspects of our marketplace is this marketplace allows us to deliver localized content in all these countries around the world that we operate in. We're very unique in that none of our content is dubbed and subtitled, it's local content developed by local instructors, local language, tone and context, and then delivered at scale. And all of that content for our Udemy Business customers is curated with the same ratings and reviews and high standards that we have for the content in North America. So that -- those standards remain around the world. And that is a unique differentiator for us. We are the only platform that's delivering that type of local experience. . The other thing I would mention is we talked a little bit about this prior as well is that we made and are making significant investments with the super scalers, first is Amazon. And we're making really good progress and have great traction, both internally within Amazon, upskilling and reskilling their development teams as well as on the go-to-market side. And that gives us an opportunity to do some very interesting things in terms of the channel investments on a global basis to generate leverage that we currently take do not have from an organic standpoint in terms of envisioning the massive sales organization that Amazon has and us being a premier partner going to market with that sales organization, that's a force multiplier, and we're leaning in heavily into these types of relationships.

I have a few more questions on consumer and margins, but do you want to poll the audience. I know there's a question back there.

My question is actually on consumer and margins. On the consumer front, how do you get confidence that you're investing the right amount into that business as we understand it, it's still a really important attractive market for instructors to come and produce their content, it is higher margin for instructors. And so how do you make sure that you continue to invest in that to bring instructors into the Udemy network?

So I think it's -- there's a few things that are really important. We call it marketplace vibrancy. What's important, that we're able to attract the instructors, that our instructor fees are growing overall, not just within consumer, right, because most of our top instructors, they're sitting in Udemy Business. And so their businesses are growing by virtue of Udemy Business. And then courses and publishing are happening. So with over -- with nearly 5,000 courses a month being published, that allows us to get the content that we need to curate and put in the B2B business. So we're really watching, we watch traffic. We watch instructor payments. And we're watching the course publications.

Any other questions? On the consumer topic for 2023, you are looking for declines this year, I think high single digits. What's driving that? And when you -- I know we talked about consumer and how it fits in before, but with sort of declines expecting this year, like how should investors think about the growth profile around consumers?

Yes, it's a great question. So a few things. Like, first, the macro is tough. We expect it to continue to be. We still, especially in the first half, have some FX headwinds. But I think really importantly, it has been an investment shift for us. And so over the last 18 months, we've been shifting investment towards Udemy Business away from consumer. So to see that our traffic is still 35 million uniques. It was up 6% last quarter, and we continue to see all the publishing and the vibrancy there, it feels like we're in a really good place. We're not trying to grow that. It can be plus or minus some, that's okay. It is this content engine that uniquely allows us to have the offering that we have for Udemy Business.

Okay. That's clear. On -- let's talk about margins and profitability and some of the levers to get there to some of your longer-term targets. I guess the first question I have is just around content costs. As you scale, can we expect the content cost as a percent of revenue to decline. Your instructors can still make more money, but is there a leverage there for you?

It's a great question. So I think, first of all, as Udemy Business becomes a bigger portion, that has a lower content cost profile. And so that will naturally shift our content cost as a percentage of revenue down. I think very importantly, the reason that our marketplace is so vibrant and it gives us this quality content is because our instructors do continue to make more and more money. And so our eyes are not on any sort of decrease in our existing products and the revenue share. But what we are thinking about in the early stages of our products that we will be adding on to our platform that will be built by Udemy that will require the same sort of content and investment from our instructors that will be higher-margin products, but always with an eye on our instructor is continuing to grow their businesses because that is the competitive differentiator that's giving us the Udemy Business strength.

Okay. That's helpful. And then maybe the last question. I want to ask about those long-term targets, believe 15% to 20% EBITDA margin. But with a growth attached to it in the low 20s, I believe. So how do you get confidence in achieving that type of margin while still growing that rapidly.

There's a number of things. I think the first is, again, we are in the early, early stages, not just from a customer acquisition perspective, but within those customers. We laid out, if we get -- we're a 10% seat penetration, if we get to 50%, that's a $2 billion opportunity, and we have many multinational wall-to-wall contracts. So we think getting to 50% seat penetration makes sense. We've got additional products that we are -- we've recently in the last 2 years kind of added on to our platform that we'll be selling into. So lots of sales and marketing productivity. Our gross margin expansion is a piece of it. Obviously, leverage on your G&A team that happens over time. And from an R&D perspective, if you look at what our product and our platform really consists of, we will be getting additional leverage on R&D because a lot of the costs actually come from the content cost side of things. That's almost its own like R&D, very unique engine. And so when we think about technology and development, it's enabled the now 70,000 and growing instructors across the world and really harnessing that creator economy. So the sustainable growth is there. We're in the early days, and Greg, feel free to add on to that. We're in the early days there and just lots of leverage off of our investments. We're always building for the long term for the leverage with really efficient expense management.

Perfect. Good place to stop. Greg, Sarah, thank you very much for the conversation.

Thanks for having us.

Thank you. Appreciate it.