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

Okay. I think we'll get started. Thanks, everyone, so much for coming today to JPMorgan's TMC Conference. My name is Noah Herman. I cover SMID Cap software here at JPMorgan. Delighted to have both Greg Brown, CEO of Udemy as well as Sarah Blanchard as CFO of Udemy. Thanks so much for coming guys. Really appreciate it.

Great to be here. Thanks for having us.

Yes. So maybe just to kick start things, if you could just provide a brief overview of Udemy and the value proposition you provide.

Happy to. So for those of you that don't know us, we are a skills development platform, very much focused on developing skills or enabling skills development for both tech skills as well as soft skills and power skills. And we serve individuals as well as organizations from SMBs all the way up to the largest multinational enterprises. We've got on board today over 50% of the Fortune 1000, over 70% of the NIKKIE 225.So very global platform. Over 60% of our revenue is outside of North America. What makes us a little bit unique is that we're -- our competitive set, our publishers of content, our content comes out of a global marketplace that today host 220,000 courses with over 75,000 instructors around the world developing local content that enables us to curate about 26,000 courses today that we sell and serve up to our enterprise customers. And that is a very unique aspect of our business and really does enable us to serve up the freshest, broadest, deepest, most international set of content in our category. And then on the Udemy Business side, which is the growth engine of the company, we've got 16,000 customers on platform today. As I mentioned, over 60% of our revenue is outside North America, and we're very focused on our Enterprise segment, which is our strength. Over 80% of our revenue comes out of companies of over 1,000 employees around the world. And we have a platform that sits on top of our rich content array that supports all of the various learning needs or learning modalities that enterprises have as requirements to enable us to be the platform of choice for upskilling and reskilling across the entire organization -- entire enterprise. So that gives you a bit of a flavor.

That's a great overview. So I mean, Greg, you became the CEO roughly about 15 months ago. Before that was leading the Udemy Business portion of the company for a little more than 2 years. Now that you've sort of assailed into the CEO role, what do you think is really going well within the company? Where do you think there's room for improvement? And what are some of your top priorities both short term and long term for the company?

Yes. Very proud of the durable growth that we've been able to deliver on the Udemy Business side over the last 3 or so years. In 2022, we had a 68% year-over-year growth. Last year, a 34% year-over-year revenue growth in a very tough macro. And we're projecting solid growth again for this year on the Udemy Business side. Our product road map is something that we're all extremely excited about in the organization, and we're right now on tap to deliver some AI-enabled capabilities in the back half of the year that we believe are going to start the transformation of how learners engage with our platform. So I couldn't be more excited about those investments and really the opportunity that lies ahead there. The success we've had building multiyear strategic relationships with organizations is something Sarah and I could not be happier about. When we came into the business about the same time 3.5 years ago, we had less than 10% -- significantly less than 10% of our relationships were multiyear relationships with organizations. Now it's over 50%. It really substantiates the value and the strategic nature of the relationships that our team is establishing and in a very -- again, a very tough macroeconomic environment. So it further validates this transition that we talk a lot about that's happening to a skills-based organization and our platform being the platform of choice to helping organizations in that endeavor. And then I would say, looking forward, we've talked publicly about the fact that we are very focused on establishing Udemy as the brand synonymous with skills and skills development. We're making conservative investments in that area. Our teams are doing a great job making progress in that endeavor from the relationship we've established with McLaren Sports and McLaren Racing, and some of the other partnerships that we've developed as well as just the execution through social media and the various channels that have enabled us to really start to elevate the brand and really start to become synonymous with skills and skills development. So those are some of the areas of investment, some of the areas that we're proud of as far as what we delivered over the last couple of years.

Yes. And just sticking with the product road map. I thought last quarter you threw out some interesting stats around Gen AI. Just the fact that you already have 4 million enrollments in some of these Gen AI related courses, 2,000 AI courses already on the platform itself already. So I mean it really just seems like this could act as a catalyst for upskilling employees in different ways and you're sort of seeing that demand come into the platform. So how do you sort of envision AI playing out within this category. Because on one hand, it is going to be a catalyst for upskilling employees, but at the same time could be somewhat of a potential threat as maybe another avenue for people to reskill. So how do you sort of think about those two dynamics?

Yes, we see it very much as a catalyst. In fact, Jamie Dimon yesterday came out and talked about the fact that all new employees coming into JPMorgan are going to go through an AI boot camp to get -- take courses on prompt engineering and a number of other courses in that array that's going to help them develop an AI literacy as they start to embark on a career within the bank. And we're seeing that across all industries and all sizes of companies and that has us really excited about the future. You mentioned the strength of AI content on our platform. We also recently saw that Boston Consulting Group came out and said that 90% of companies today are still in the observation or discovery mode. They're still determining how they're going to enable their organization, their employees and their customers to take advantage of this transformational technology development. And so for us, we're in the first innings of this in terms of the opportunity to help organizations in this endeavor. As far as the risk associated with it, I do get asked this quite a bit, is, AI -- are you worried about AI taking over the world and taken over the opportunity, if you will, or being able to just become an instructor. The reality is Sam Altman talked about this recently with Reid Hoffman, I'm very much in his camp and feel the same way that what a world-class instructor can do, and we've all been in courses in university where you have that amazing instructor that you can't wait to get to that class to learn what they're going to say because of the examples and the stories and the personal experiences they bring to live through that learning process through that lecture series of lectures in that course. And then we've all had those instructors that are reading from the book and that are just stayed and you're really actually not engaged with it at all, and you'd rather stay at home and just read the book on your own. Right? There is not, right now, a world to where I can see or we see or Altman see's, generative AI being able to replace what a world-class instructor does to write a course and bring that course to life. Now are we going to be able to provide tools so that much like Reid Hoffman's video recently, for those of you who saw it, has an avatar that looks like me, sounds like me -- it sounds like me in multiple languages to be able to deliver that course. So I no longer as an instructor on our platform, have to video it, produce and then publish it. The answer to that is yes. And we're working on that. I'm not going to go into more detail around where we are in the product road map on that because that's future stuff. But that's something that we are absolutely going to enable over time. So our instructors can focus on what they do better than anyone else in the world in some respects, which is develop that course and that content and allow the Avatar and the voice recognition to bring that to life. So yes, AI is going to help transform learning. We believe it's going to help transform learning on our platform in a way that's going to give us a further competitive advantage than we have today. But do I see a situation where we're going to get disintermediated in the near term or midterm? The answer is no.

Well, I thought it was really interesting. You had the product demo, I believe, in April, with a small group of investors, and you were sort of displaying the instant summarization and the skills mapping that comes with some of the capabilities you're rolling out. You also highlighted last quarter, one customer, I believe, who decided to pretty much go all in with Udemy to expand the number of seats they had from, I think, 3,000 to 9,000 because of some of the IT and AI courses you provided. So just curious like what has been the feedback so far from some of these capabilities you're rolling out from customers because it seems like it's getting a bit of traction.

Yes, it is. We've got a number of customers that are in alpha with us that are helping us continue to refine and develop the product as we get closer to beta and then general availability. And the feedback has just been tremendous. Feedback like some customers, large multinational saying, this is going to save us hundreds of hours, the skills mapping capability referred to. And months of work that they're doing today. And then now being able to automatically refresh on an ongoing basis to where today it's all manual. It's going to transform how they map skills to jobs and roles in the organization. And then the learning assistant capability to help hyperpersonalize a learning path so that I'm not having -- I'm not being asked to take a course that 50% of it already know and already have those skills. You're going to build through the dialogue between myself and a chatbot, be able to hone down on exactly the lectures I need to take down to the lecture level, not just the course level, to develop the skills necessary to acquire that badge or certificate regardless of what technical discipline that may happen to be. So we're going to -- that's going to transform learning in that way. In addition to that assistant being along for the ride with me throughout the entire process of taking those lectures, so I can ask questions, think Copilot, right? But we're enabling that on platform, right? So the feedback has been tremendous, and we expect that to continue. We now have clickable demos of these products in our sales team's hands as of this week. That's enabling them to bring to life the experience that we're going to deliver in just a few months, and I couldn't be more excited about it.

That's a great overview. I wanted to shift gears a little bit. You did have a pretty important announcement this morning. You did hire a new CRO and completed that search for Rob Rosenthal. Just wanted to get your first insight on why was Rob fit for the job and what went into that process? And how are you sort of positioning the go-to-market going forward for the rest of the year?

Yes. Yes. Good question. So this hire was all about us taking the next step in the maturation of our Udemy business unit. We're now just under $0.5 billion in revenue. And when you go from what we have done, which is from primarily a point solution with direct sales being the vast majority of our revenue acquisition approach to now a multichannel strategy, very international in nature with the opportunity to now activate a partner like an Amazon Web Services as a super scaler that now we're going to market hand-in-hand with around the world and selling Udemy alongside the Amazon Web Services sales team, it really helps to have somebody that has with Rob's experience at both Adobe and SAP as well as Bloomreach to bring the experience doing exactly what we're embarking on doing, developing the channel capability to sell through an international -- what is for us an international global opportunity with India and Brazil still very underpenetrated and developed the right strategy both on the internationalization side as well as layering in the multichannel approach. Having somebody that's on that before is going to be hugely beneficial. He's also a wonderful culture fit. Couldn't be more passionate about what we do and the impact we have on the world as far as transforming lives to learning. And we're thrilled to have them and looking forward to get moving with them.

And just like with respect to that, any time like a new right head of sales or new CRO comes into the fold, there's always the questions around how much time is it going to take for that person to adjust to the sales force and the company itself. So are you -- do you think that this might take like a quarter or 2 until Rob sort of gets settled into the role and you're able to execute on some of the go-to-market initiatives that you really want to accelerate on the back half of this year? Or how should we think about that?

You should think about it as follows, which is my guidance to Rob is going to be, and has been that there's nothing broken that we need you to come in and fix right now. This is about preparing us to take the next step as we just laid out in terms of the opportunity we have ahead. I've been sleeves up for the last 4 months, working very closely with sales leadership and customer success leadership to identify opportunities for us to optimize and we have been doing that. As we're working through some of the challenges and opportunities we have, both in Europe with the continued slowdown that we've seen as well as around the world, we feel very good about some of the adjustments and adaptations we made. The execution that I'm seeing right now. I'm meeting with the teams weekly and that's going to continue as Rob onboards and takes the time to get up to speed. So really what I want him to do in the first 90 days is get out and meet with our customers, meet with our employees, meet with our teams, ask a lot of questions, listen, learn our business, it is somewhat complex with the consumer business and the dependencies and interplay between consumer and the enterprise. Take the time to really get your feet in and learn the business, and I'm going to be co-piloting and ride along with them through that whole process as it comes up to speed. So do not -- you should not expect any major changes in the near term. And we're going to take our time and make sure that he has an opportunity to onboard appropriately.

Got it. And you sort of mentioned a little bit on the -- do you have a question? We'll probably save it towards the end of like 10 minutes left, but we'll just -- maybe like 10 more minutes or so. You really touched on just the macro environment a little bit. What are you hearing from customers at this point? Because it seems like we're getting mixed signals, especially around SMB seems to be a mixed bag and then enterprises seems to be faring out a little bit better. So just curious just here where are we at in terms of the macro environment impacting the business?

Yes. For us, it's fairly similar in that. EMEA continues to be impacted by geopolitical events that still are unfortunately affecting that region as well as the macro specific to the U.K. and Germany. And we're staying very close to our customers over there, as you can imagine, and helping as much as we can as they're moving through and navigating, but that does persist and continue. SMB continues to be an area that, on a global basis that we're seeing in our business, be a bit more challenged than the enterprise. And then we're seeing pockets of strength, North American enterprise. Feel good about where were at pipeline-wise, quite frankly. On a global basis, our enterprise business. And for you all, our enterprise businesses accounts over 1,000 employees. Right now, our pipeline is building and is supporting us meeting, achieving our expectations. So I feel really good about that. And our teams are doing a well of a job. We are working down market in the SMB side to do some things to bolster pipeline there as it has been a bit more challenging. So around the world, it is a little bit of a mixed bag. But all in all, really happy with what we're seeing on the enterprise side. Remember, enterprise is 80% of our revenue, right? So that's really important to us. So, I don't know, Sarah, if there's anything you'd add?

No, I think that's exactly right. And to Greg's point, one of the things that we've been doing over the past few quarters, because we do continue to see strength across enterprise, building out that team a little bit more across the globe, some enterprise reps, some strategic account reps that are now in the process of ramping. As well as we've invested a little more on the sales enablement side because now we have this broad platform that we can sell. And so really happy with what we're seeing, really happy with how our new reps are ramping.

And recently, you implemented some of the instructor fee changes, which is helping, I think, with the gross margin expansion, but you're using some of those savings to reinvest back into the business. And there were concerns that possibly with instructors look somewhere else as the fees were contracting, but it seems like you really haven't seen any disruption from that. Is that still fair to say is the case?

Yes. I think it's really important that, first and foremost, our instructors are our lifeblood. And so we spend a lot of time working with them ahead of that change. Certain of our top instructors getting their feedback but also laying out what we were going to do with that investment and how those investments that we were going to make with some of those additional returns that -- or some of that share that we were going to keep was going to benefit them and how we're building out our business, how we're building out tools for them to allow them to do more on the platform with less of their time and energy. So we're really pleased with how the team has been brought along, and we continue to partner with them. Greg spends a lot of time with them. We've got another event coming up later this week, I think. And so Instructor Summit is getting that feedback and continuing to work on their behalf is important to us.

And as you're sort of making these investments back into the business, where -- how should we expect to see with that inflection in growth sort to reaccelerate within the business because you are making these investments that are necessary. And when are those starting to maybe eventually pay off and show up in the results? And where should investors sort of see that?

Yes. So from an external perspective, we're getting close the next few quarters, you'll see that. Internally, we're starting to see that with the -- like I said, the sales enablement. So our new reps now are at over 100% attainment, that's up 40 basis points. We also invested in growing our partnership team to take advantage of the AWS. So we're seeing that in the early stages of our pipeline with AWS. So across a number of fronts where we've been investing, we are seeing the lead indicators, our McLaren partnership. Greg maybe you can touch on the event we had a few weeks ago there, but really seeing great traction there. We had over 100 customers...

150 actually.

And so I think the early signs we're really pleased with what we're seeing from an investment perspective. And it just takes time for that to turn into a pipeline that then gets converted into wins, ARR and then revenue.