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

The cast of characters that we're competing against really hasn't changed through COVID and through the macro. There's companies out there that have been in industry for a while. It's LinkedIn Learning. It's -- Coursera is out there doing good work. Pluralsight on the technology side, on the tech side of the house. Skillsoft has been out in the market for a number of years. And then down market, we see some folks that are emerging that are consolidators like GuildOne. But all of them have -- they're very unique and distinct value propositions. But we, again, feel very strong and confident about the approach we're taking and are having a good amount of success competing against these folks.

So recently, your team launched this investor engagement program, inviting different customers to come and talk about their experience with Udemy and some other tools in the industry. What has been sort of the investor feedback from that engagement program that you've launched? Because I thought it was unique. Not every company does it, and it was great to get that face time with some of the customers that you invited to that program.

Yes. I appreciate you calling that out. It's been very well received. And Dennis and our team have just done a terrific job preparing the content and really establishing a framework by which we can engage and interact with the investment community in a more personalized way and provide insight into our planning and the approach that we're bringing to the, I think, the broader effort with respect to how we serve the investment community. It's an area that we were underinvested in historically, and our team is doing a great job in bridging some of those gaps and providing valuable insight even ahead of conferences like this. We got a lot of compliments throughout the day as we're meeting with folks on the materials and preparation that Dennis and team had provided to enable them to come in and ask very informed questions and have a very informed conversation. So the feedback has been very, very positive.

That's good. That's great to hear. Maybe when we sort of think about the overall growth profile for the company, it's obviously -- it's 2 different stories. The Udemy business side, that's showing very robust growth. I think on the consumer side, there's a little bit more pressure on that. But with that, with the consumer side of the business, that's where you really get all of the great content that's generated that really fuels the business side of things. So what are some of just the top priorities if we can maybe segment both of those different segments for this year?

Yes, it's a good question because I think this may be one of the more misunderstood areas of the valuation of the business. And that we really view the consumer business as you just described, which is the fuel that drives our growth engine, which is Udemy business. And for the consumer business, I'll start with that. We're really not focused on growing the top line of that business. For us, it's about marketplace vibrancy, and that's what the optimization effort is ongoing for us and really is focused on. And the way we measure that is in 3 specific areas: we measure traffic, course creation and instructor payments. And we know that if we're healthy and vibrant in all 3 of those areas, we're going to have all of the fuel we need to be able to accelerate the growth of Udemy business for years to come. And so we pay a lot of attention to making sure that, that flywheel continues to turn in support of the investments we're making on the Udemy business side. And with respect to Udemy business, for us, this year, we throttled back the hiring on the sales and customer success side of the house as a result of the macro, which is reflected in the guidance from last year. We delivered 68% year-over-year growth on $320 million of revenue. And we're guiding in the mid-30s in terms of growth this year, purely as a result of the macroeconomic conditions. As the macro starts to freshen and starts to improve, we are absolutely going to start investing again and staffing our sales and CS organization globally. In addition to that, on the partner side, we've got a tremendous amount of momentum right now in Asia Pacific with Benesse in Japan, which is our fastest-growing country. And we do not have any salespeople on the ground there, which is still astounding to me that we've been able to achieve the growth that we've seen in Japan through a very exclusive and dedicated partnership with Benesse in the country, and they're doing all of the marketing sales and services on our behalf. And we're replicating that same model in Vietnam and Korea, and we're seeing very similar results albeit earlier days. And so the partner motion right now in our new ventures group is outperforming expectations, candidly. And we've developed a strategic relationship with Amazon that we've talked a little bit about in the past that this last quarter resulted in us closing the largest deal through that partnership that we've closed multiple 6-figure deal, which was a boomerang deal that came back from a customer that initially went with a lower-price solution, didn't have success, came back to us, and in 2 weeks made a decision to purchase. And that purchase went through Amazon as a result of the partnership that we have. So nonetheless, very excited about the opportunity through the partnership strategy that we're enabling and executing against in addition to the organic side, which I just touched on.

And with that partnership with Amazon, I mean how do you think about being able to potentially replicate that partnership with maybe some of the other hyperscalers as well? How does that look?

Early days, different phases of conversations, but optimistic because, look, we do something that is native to us that it's not their core competency, right? We're very focused on upskilling and reskilling. And we know that hundreds of thousands of learners come to our platform to acquire the knowledge to go pass a Google certification, an Azure certification, AWS certification for sure, which was the genesis for the partnership with AWS in the first place. So that dynamic continues to grow. And so the opportunity for us to develop similar types of relationships with Google, Microsoft and others is real. And we're in those discussions, and they'll evolve. And when I can talk more about it, I surely will, but we think there's a win-win scenario for us as well as for them.

Got it. I think we'll just take a quick pause here to see if anyone has any questions. Someone in the back will come and assist you with the mic. Just raise your hand. No questions? Okay. I'll just keep going. Maybe we can talk a little bit about the guidance for this year. So the 2023 guidance, it implies about mid-teens revenue growth with an acceleration for next year. Can you help us understand what really gives you confidence in achieving those targets? And what level of visibility you have today on the business?

Yes. We had a strong Q1, as you saw. And so we exceeded on both top and bottom line. And we factored in the macroeconomic conditions and to the guidance for the year. Top of funnel from a marketing standpoint, leads into the top of the funnel. Remains very strong and healthy. We're 40% ahead of where we were last year at this point in time. We have seen a little bit of cycle elongation in the middle of the funnel, but that's baked into the forecast. So very, very optimistic around the top of funnel continuing to accelerate. And our team continues to execute very well, the playbook that we've laid out in terms of expansion, selling a broader platform as well as expanding more rapidly, as I touched on earlier with a number of large deals that we're closing. So on all the key metrics that we measure in terms of sales effectiveness, we continue to execute at a fairly high level right now. So it gives me a lot of optimism that we're going to be able to continue that throughout the course of the year. And our guidance for next year, I believe, is 23% to 25%. And we feel confident coming out of this year based on the investments we're making this year that we're going to be able to accomplish exactly that as at the same time of being profitable. As we've stated, we're driving the company to profitability in the back half of this year, and we'll show modest margin expansion as we move through '24.

And the profitability piece, it's really impressive, rapid cost-cutting on that end. How should investors really think about the different levers you're pulling to really drive that margin expansion longer term? Because I think in your long-term model, you're sort of thinking of 15% to 20% EBITDA margin is longer term. How do we really think about that?

Yes. I think longer term, I should expect sales and marketing efficiency as we build our sales organization out to scale, and we can then enable them to sell our products and capabilities through the established org. So we're still in build-out mode right now. So we're going to get leverage, operating leverage, as we move forward in '24 and '25 on the sales and marketing side. On the G&A side, we had to staff up to take the company public just a little over a year ago. So we're going to start to see operating leverage as we rightsize G&A moving forward. And then out of our channel, the investments we're making on the channel side, there's, without question, leverage there that we're going to take advantage of as we start to see the partnerships further materialize in Asia Pacific as well as the super scalers, which we've just been talking about. So there's a number of vectors right now that we're focused on, making sure that we're operating very efficiently as we keep our eye on both on top line growth as well as the margin expansion that we've committed to showing.

And so at this point, there's about $450 million in cash on the balance sheet, no debt. A very strong balance sheet at this point. How are you thinking about the capital allocation policy at this point?

Yes. We're being very thoughtful about the strategic investments that we're considering. Without question, to supplement organic growth, we are looking opportunistically at ways to potentially bring an organization or 2 into the family that will either be a technology add for us to give us extensibility across our platform and/or reach to market in some of the emerging markets like Latin America and Asia Pacific and potentially EMEA that could be an accelerant for us as far as penetrating -- for the penetrating of those markets maybe faster than we could organically. So in those areas, we're, without question, exploring different types of opportunities. I would say on the technology side, just to expand a little bit. Without question, AI is at the front and center of everybody's thought and a level of investment in the category. And we're paying a lot of attention to some of the emerging companies and technologies that are coming out almost every day that could potentially be an accelerant for us. And there's also learning modalities. As we look at the different types of learning modalities that we all, as learners, enjoy and appreciate to complement a learning experience, things like coaching, mentorship, podcasts and those types of things that we potentially have the ability to layer in through acquisition. That could be interesting as we move forward. But nothing right now, imminent, and we'll continue to keep you all posted.

Got it. I think we'll take one more poll for questions if anyone has any. No? Okay. In your discussion with investors, you mentioned that you had a few of them today. Where do you really see investors under-appreciating, over-appreciating in just their overview of the Udemy story? What do you think investors are really missing at this point at a high level?

Yes. I think at a high level, the strength and durability of our enterprise business, if Udemy business was operating stand-alone as an enterprise SaaS learning company with the metrics that we're putting up, last year coming off 68% year-over-year growth, $320 million in revenue with net dollar retention last year of 123%, the valuation we would be getting would be significantly different than what you see right now as a result of where we're valued in at public markets. And I think largely because I think there's some confusion around the consumer business and how investors should think about the consumer business vis-à-vis and juxtapose against the enterprise business. So I think one of the things we're doing is trying to bring a lot of clarity and understanding around how we're investing in the consumer business versus the enterprise business so that, hopefully, the investment community as we move forward and execute against our strategy of driving the company to profitability and continuing to grow that enterprise business in the mid-30s, hopefully, folks will begin to understand that this is very purposeful, that the consumer business is not growing because it's not designed to grow. We're not investing to grow it. We're leveraging that consumer business as the fuel to grow the enterprise software business that is Udemy business. So I think that's probably the most misunderstood aspect of who we are and how the investment community is viewing us. And so as we go forward, we are planning to do exactly what I've mentioned, which is run that consumer business EBITDA breakeven and invest to grow that enterprise business disproportionate to anybody else in this category. And over time, really start to view us as a comp against the top quartile SaaS businesses in the world, not necessarily EdTech.

Right. And just a quick follow-up, but you didn't really talk about NDR at this point. Maybe if you can just unpack that a little bit. I know embedded in the guidance, you're assuming some moderation for that, like most software companies right now. But maybe if you could just provide a little bit more color around the dynamics of the NDR, especially for the Udemy business portion.

Yes, that's a good question because I think to unpack that a little bit because as we go forward, we are going to see that trend down, and we expect it. I think at a baseline, though, we don't actually disclose or report gross dollar retention, but our growth is very stable and at a very high level. And so that's what we pay a lot of attention about to right now. As a result of the fact that we've guided down into the mid-30s of 68% growth last year, it's natural, the NDRR is going to trend down. But what we did see this last quarter, and we expect this to continue, is in terms of the percentage of bookings we closed in Q1, there was a higher percentage in Q1 coming from upsell and cross-sell than from net new, and we do expect that to continue, right? So the health of the business in terms of gross dollar retention and then expansion into our existing customer base remains. It's just you're going to see the net dollar numbers trend down off absolute numbers from last year, which were explosive at 68% year-over-year growth. So because we've got it down, those numbers are naturally going to trend down, but there's no cost for alarm. In fact, a lot of expectation around the fact that the net dollar retention is going to probably trend down into the teens without question as the year continues. But there's no concern around gross dollar retention rate and/or percentage of bookings coming from upselling and cross sell.

Got it. Well, I think that wraps up our discussion for today. But I really appreciate you coming and visiting us, Greg, and thank you all for coming today. Really appreciate it.

It's great to be here. Thanks, everybody.

Thanks.