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

Welcome, everyone. I'm Curt Nagle, this mid-cap U.S. Internet Analyst here at BofA. With me today CEO of Udemy, Greg Brown, thank you very much for coming. I appreciate the time and looking forward to the discussion.

Great to be here with you, Curt.

So kicking off, I think to begin with just a better basic question. What is most misunderstood by investors about the stock. Like clearly, software enterprise market, that's not helping, right? Maybe more specifically, is it just like the basic caution in terms of the belief that you're going to reaccelerate this year? Something even more specific than that? What would you -- if that's the case, what's your rebuttal? And I guess, what gives you confidence right, that we're on a glide pass -- path or have a structure in place to get growth accelerating, right? You're [indiscernible] it a good rate, but just, I mean that's basically the kind of big I think the thing we're hanging on, right?

Yes, that's right. Yes. So it's a good question. I think it's the right question to kick things off with. So we've been very clear that we're running the consumer business at breakeven, plus or minus, that is the flywheel in terms of the content generation engine that fuels the growth of Udemy business, which is the growth engine of the company. So if you level set on that and then just look at the unit economics and growth trajectory of Udemy business, which is a business that is $0.5 billion -- $500 million of ARR growing 20%, with net dollar retention at 111%, gross margin north of 70%. If you look at that business as a stand-alone SaaS business, that's a top quartile SaaS business at our size. But today, we're not currently valued nearly what the top quartile SaaS businesses are valued at in that category. So I think that's what's most misunderstood is that we've been very clear around how we're running the business, but yet, we're not quite -- the valuation is not reflective of the performance of the business. I think going forward -- you mentioned a couple of key points, which is we've all heard a lot about in Salesforce, which is on stage a little bit ago. Talking about the downward pressure on enterprise software right now. That's real. And we've been pretty open about that for the last 4 or 5 quarters that we've seen some of that softness both in EMEA and as well as in our SMB segment and then in Asia Pacific that we've called out in countries like Korea and Vietnam. And that continues to persist. We're not seeing that softness get worse. But we are seeing some signs of strength on the enterprise side of the business. And we've also been very clear about that, that our pipeline continues -- pipeline generation supporting the enterprise business continues to be robust. And we're energized by what we're seeing in terms of the flow-through to close business in terms of the enterprise pipeline. And our enterprise segment is 80% of the revenue of Udemy business. So there's some soft spots. There's some areas of focus for us that we're addressing. And then there are some areas that we're quite happy with based on the macroeconomic conditions. So anyway, and I think that's also pretty consistent with what you're hearing from other enterprise software companies. So I think we're not much different right now in terms of the impact of the macroeconomic conditions. And then you talked about the category itself. And we don't consider ourselves, a traditional EdTech company because we are different. We've got this marketplace model that is very unique and different than the publisher EdTech companies that we compete against. But that being said, the category really has been beat up a little bit as of late. And I think there's some fair uncertainty in doubt around generative AI and the impact of generative AI long term. We saw what happened with Duolingo. And I can -- I'll say emphatically and repeatedly as I have -- when I've been asked about this, we've huge generative AI as an accelerant to our business. And I know we're going to talk more about that, right? Not as a risk. And Sam Altman came out not too long ago in a video talking with Reid Hoffman about exactly this point. And echo the points that I'll make around the impact of generative AI and an accelerant for companies like you to me. So all to say, we are a bit misunderstood right now. I think it's on us to execute our way out of it by delivering the numbers on the enterprise side, and that's what we plan to do.

Just a side on to that, so good overview. You mentioned there are a couple areas where you're seeing some strength? Is that just in the pipeline or something more specific you'd like to...

Yes. On the enterprise side, we continue to be encouraged by the strength of the pipeline development, top line -- excuse me, top of the funnel coming into the sales pipeline and our ability to convert it. And I mentioned a couple of quarters ago that we just brought in a new CRO. And since we exited last year, Q4 last year, I've had my sleeves rolled up. You all know I did run our business were over 2 years. And I've been very close to what we're doing in terms of the adaptations we're making to be able to execute on a global basis through this macroeconomic environment we're operating in. And I'm very pleased with what I'm seeing on the enterprise side of the business and expect our teams to continue to execute quite well through the balance of this year and beyond. So yes, I'm encouraged by what I'm seeing there. At the same time, on the SMB side, like most software businesses, SMB is about 20% of our revenue, which is still material enough to have an impact. We are challenged down market right now in terms of generating enough pipeline to support the productivity that we want to see at that level. And so we're doing some things about it. We invest more in these teams than and definitively say more than our competition does. We view as one of our strong differentiators and our customers do as well. The resources we bring to bear to help them develop the right strategies to begin that transition to a skills-based organization. And then generative AI is without question an accelerant. So on the earnings calls, I'm talking about Genpact and some other companies that are on the forefront of this and that we've developed skills academies or boot camps or GenAI learning path, specific learning path, which is why we came out with our own specific set of learning paths around generative AI to help organizations in this endeavor. So it's early days. We're seeing the more progressive organization, the 10% or 20% that are out front in execution mode, the majority of organizations are still in that observation or discovery mode. And again, we're spending a lot of time in those areas, helping these organizations how to think about and then how to leverage our platform and what a relationship with Udemy would look like as we help them begin to execute this transition to a skills-based organization. So what are we doing beyond the services to differentiate ourselves and to be viewed as the platform for organizations to leverage in the partner. One area is to continue to invest in the -- what is our core strength right now, which is the content generation engine that is our marketplace. We're bringing -- we -- today, we still spend off 5,000 new courses a month into our marketplace and harvest the best of the best content and bring that into Udemy business. And this is a very global catalog from the standpoint that we've got 70,000 instructors around the world that bring the best of the best content and they're chosen domains into our marketplace. And then we bring the best of that content, 26,000 courses into our Udemy business collection. That flywheel is spinning faster and faster as the development of technology continues to innovate faster and faster. And that's something that's very unique to our model versus our competitors, which are publishers. They cannot move as fast as we can to bring content to market. And I've talked about this in the past, when GenAI came out 2 months after the earnings announcement, we announced that we had 125 courses on our platform, 25 within the Udemy business collection. All of our competitors combined only at least 1. That's just an example of how much faster we can move based on the nature of our content generation engine. We continue to fuel that. right? So from a skills development standpoint, it matters a lot in organizations are looking at us versus one of our competitors to not just where we are today, but where we're going to be tomorrow in terms of our ability to keep up with the technology changes and advancements that are happening in real time. And then it's our platform. And we're going to talk about generative AI and how we're leveraging generative AI on our platform, but we're making big investments in our platform many of which are GenAI enabled in the form of our learning assistant and skills mapping. They're coming out in -- they're moving to beta in H2 and coming out towards the end of the year in [ GA ] that we believe, based on the feedback we're getting in Alpha, we are going to transform the learning experience. So we're adding to the breadth of our platform that sits on top of this differentiated content generation engine and then you've got the services I talked about. Those are the 3 areas that we're fundamentally different and unique and why we believe we will lead this change into a skills-based economy.

And then I guess in terms of kind of where you are -- where Udemy is now and I guess where you could be, let's say, a year out in terms of some of the investments you're making and the ability to customize, whether it's courses to curricula, I guess how does that change? And then could you help us with any statistics, whether it's productivity, whether it's retention, whether it's internal mobility for your clients, right? To me, those seem like really important criteria that I think would convince them to invest with Udemy in terms of driving real world outcomes for them. Anything you could -- any details you could provide on that?

Yes, absolutely. I'll answer the first question. Both are good questions, two-part. So the first question is how do we address gaps that may be in our catalog as a result of engagement with customers. So we have the capability built into our platform to systematically take feedback from our customers in terms of where there may be a gap where we may not have content in our Udemy business content library that they want or need to support skills development in a specific area. The first thing we do is our team goes and look into our marketplace. We have 220,000 courses in the marketplace and then a subset, which is 26,000 courses in the contact collection that we sell to our enterprise customers. If we don't have that course and the 220,000 that is available to the broader marketplace, then we have the ability to systematically message to our instructors to give them insight that there is an unmet demand right now that they can develop content against. They rapidly then develop that content and then we move that content into our enterprise collection. Now to bring that point home. Last year, we moved over 2,000 courses into our enterprise collection that were not there as a result of feedback from customers and requests for demand that was unmet. So we're very systematic in our ability to move content in and develop content to address gaps on an ongoing basis. And then second -- the second part of your question is we are very outcome driven in terms of how we engage with customers. Because in this -- especially in this environment, you have to be, right? Nice to haves aren't getting funded. It's -- whatever we're doing, we've got to be able to show that we're having quantifiable impact, ROI and be able to move the dial. An example, one of our large APAC customer, [ Circo ] recently, brought our platform online and they published themselves in the sustainability report, the fact that we more than doubled -- because we were the only factor that they changed the attribution was to our platform, more than doubled the percentage of positions that were filled from internal candidates to 30%. And which is material, and the employee engagement scores went up significantly year-over-year. And we were the only variable that they changed at this fundamental. So they have attributed both to the implementation and development of skills associated with our platform. So again, those are the quantifiable type case studies and use cases that we're looking for that we want to be able to harvest and enable our sales organization to tell those stories to convince the C-suite, both to sit in my chair and CFO and the CHROs, than an investment that is a must happen as a need to have to develop skills that are going to help you achieve organizational outcomes.

And before we dive a little more into GenAI, in terms of just thinking about maybe it's a relatively wide swath, but your most direct competitors within enterprise, who are they, what do they do well? What don't do they well? And which -- who do you kind of keep a closest eye on?

Yes. Good question. So in terms of the folks that we see in the enterprise, it's the organizations that I think you all cover and would expect LinkedIn, Pluralsight, Skillsoft, and to a lesser degree, Coursera, because Coursera's strength is on the consumer side. And Jeff and team have done a great job building that consumer business. But -- so we don't see them as much as the enterprise. So in terms of our strengths, I talked about some of our strengths earlier. It's the marketplace model and the value and impact of that in terms of our ability to keep up with the speed of technology changes and advancement and then the global nature of our catalog. How in Japan, our content is locally developed by instructors in Japan. It's not dubbed and subtitle, which is effectively how all of our competition sell into these other markets, Germany, Brazil and what have you, right? It's not locally developed content. Ours is, very unique to us, and that is a sustainable competitive advantage. I won't go through the litany of things that organizations look at when they are comparing us to the other folks. But I will say the investment in services is unique on our side, and that's something that we're very convicted about because organizations need to support and the guidance and the strategic involvement of a partner when they're thinking about making a transition to a skills-based organization and we lean in hard to that. And it does affect our CAC and so on and so forth to some degree. But look, we've been able to move the dial from less than 5% of revenue multiyear contracts to now over 50% of our revenue in multiyear contracts in 3 years since I've been here. And that's largely as a result of the impact that we have on an organization's ability to strategically develop skills to achieve organizational outcomes. Otherwise, these companies aren't signing multiyear contracts, right? You're not a large enterprise and multiyear contract. If you don't believe this is a strategic investment with a partner that you're making a big bet on. So we know that the bet on services is the right bet for us. And in terms of the platform, our platform of now, which is a multifaceted as far as having management -- cohort-based management, leadership development capability, soft skills and power sales capability that is best in class. Which is demonstrated by ServiceNow selecting our content to be brought into their bundle that they're selling to their customers now. Had to develop skills within 16 different career journeys. And then we've got what has always been a strength of ours, which is the technology, the tech content, right, the technology skills development capability we have. And then on top of that is the immersive learning, product that we've developed, which is Udemy Business Pro. So we have a platform of capabilities that's unique. Everything I just described on 1 platform, none of our competitors have, right? So that's, I guess, I would say, the final way that we are a bit unique and different in the enterprise segment.

So you brought up ServiceNow. Maybe that's a good segue in terms of talking about some of the partnerships you've developed [ AWS ] one of the bigger ones, Google Cloud Docker, in case of AWS, I think their Salesforce can sell direct product, right, compensated one for one, right? So that's pretty powerful. So just maybe talk about the potential of those partnerships. And then you guys made an announcement today in terms of the new GenAI product with AWS. So I would love to dive into that a little bit more.

Yes. Look, we're very committed to our multi-distribution channel strategy. And this is an area that we've evolved significantly over the last 2 years from being primarily a point solution selling almost exclusively through our direct sales organization to now having channels and partners like ServiceNow, Docker and AWS, which you mentioned, which we could not be more excited about. We are at a level now where it's a strategic partnership that has demonstrated in a number of ways today was a good reflection of that. The announcement we made, we've co-developed an AI learning boot camp, if you will, that is in a leadership academy that the entire 20,000 and growing AWS [indiscernible] sales and service folks are now selling aggressively into their customer base based on their commitment around generative AI, their commitment, meaning AWS's commitment to compete on that field with the other folks, the other superscalers that are out there. So this is co-developed, something that they're very passionate about, something we're very passionate about reporting. And yes, their sales reps across their 2.5 million customers now get dollar-for-dollar quota credit for selling Udemy products into their customer base. In addition to that, all the retainers that AWS has in the large enterprise customers, those are drawn down by Udemy products. And we've already seen, over the last couple of quarters, the positive impact of that. And multi-6-figure and beyond deals getting closed on Amazon Paper as a result of that relationship and that dynamic playing out to where the customers can actually just draw down the retainer by putting everything on Amazon Paper and running Udemy products purchased through that relationship. So this is a strategic relationship, and we could not be more excited about the long-term impact that this is going to have on our ability to scale. Again, we're 16,000 customers, they are 2.5 million, right? So there's leverage the other -- that we're thrilled to be able to, again, take advantage of as we build this relationship with them.

How should we think about the economics of these partnerships or at least from a margin perspective?

Very attractive. We're not disclosing that at this point, but very attractive economics. And at some point in the future, we may provide more insight there, but we're very happy with the economics on the relationship.

Okay. Around a little bit more -- just I want to go back to AI. So some of your initial comments, I mean, it's very early people are trying to figure out kind of what to do and how to approach it. And from a course or learning perspective or just more generally, right? I mean will change seemingly by the week in terms of some of these data. So at the point, what is the, I guess, the demand for AI training? Is it still just -- like you said, just we're at the absolute ground stage and just really haven't seen a deployment yet? And then what have been -- what has been the response to some of the products you've rolled out in earlier stages?

Good question. So in our general marketplace, we've seen massive adoption of our generative AI content. We've got now over 2,000 courses focused on generative AI in our catalog in the marketplace, over 4 million enrollments in those courses. And a significant portion of those are in our enterprise customer base. So it's not as if we're not seeing a tremendous amount of momentum and interest in generative AI because we are, by far, the fastest growing content segment, if you will, in our marketplace and in the Udemy business catalog. So -- and we're still, as I mentioned earlier, in the early days of organizations making the significant investments to make this transition to skills-based organization and then focus -- with the focus and conservative focus on generative AI. So it's early days. Now in terms of how we're leveraging GenAI into our products and services, we publicly announced that we're announcing and I talked about this earlier in general, but I'll give you more specifics, an AI learning assistant and skills mapping that's coming out in the second half of this year. We're in alpha right now, the feedback has been tremendous, both on skills mapping. The feedback is this is going to save us hundreds of hours and months of time to be able to not only get it done the first time, but then to keep it fresh in terms of being able to adapt. The skills associated with the jobs and roles that the company is focused on, making sure that they can continue to deliver against the outcomes that are strategic to the company. And this has all been done manual today, right? So that's going to be a huge one. And an AI learning assistant is going to do 2 things, hyper-personalized learning experience down to the lecture level. So based on skills, as a I'm trying to learn and acquire, it's not just going to be down to 4 or 5 courses and then I have to go through and take courses that, in some cases, may already have content that I have skills already developed. I don't need to re-learn that information. Through our effective Q&A capability with the interaction with the chat bot, we're going to be able to filter down to just the specific areas and skills that I need to develop and then down to the lecture level, put together a learning path to give me the focus, right, and efficiency that I'm looking for in terms of the learning that I want to partake in to develop those skills. So that's number one. And then the learning system is going to be available to you through the entire learning experience to ask questions. And that's the copilot experience. And that's not something that's necessarily unique to what we're doing. Of course, there and others have talked about that a bit. The personalization bit, that's very unique. We have -- that's something that we're going to be able to uniquely deliver based on the breadth of our catalog and the array of content access to and the data that we have access to. So anyway, very excited about that. Feedback has been tremendous on both sides. We're on track in terms of timing to move to beta in H2 and then release shortly, they're after that.

Okay. Maybe just playing devil's advocate a little bit. This is something perhaps more topical over the past few weeks and occasionally we'll hear sort of a counter point. But I guess, a structural risk from AI, right? And people see some of these pretty, pretty well demonstrations from AI systems, whether it's Astra or a teammate or whatever it might be, what would be your rebuttal or your counterpoint to that is that this is not -- these tools will not subsume at least parts of your business potentially.

Yes, I touched on this a little bit earlier, and this is the question that Sam Altman answered that Reid Hoffman asked in the video that I mentioned, AI in short to midterm, I'm talking 3 to 5 years, there is a huge chasm between its ability to create a transcript and then just read that transcript, which is effectively what I could do today. And to be able to bring that content to life with examples and experiences and stories and use cases to world-class instructors layer into lectures and series of lectures and courses that they develop. And the divide is so massive in terms of the quality of the experience. That is not something that I'm really not concerned about that right now. And nor are our top instructors who makes 7 figures on our platform and that couldn't be more excited about the work we're co-developing with them in terms of virtual and structural led training, which is future stuff that we're not going to talk about on the road map today, but then also leveraging generative AI to help them continue to advance the learning experience. None of us are concerned about AI subsuming their ability to demonstrate and deliver a world-class learning experience. That's not something that we're concerned about today. In fact, quite frankly, we're leveraging all the same tech you just talked about. And including it in the learning experience as an assistant, as effectively a -- I would just say, a co-pilot, I mean that's the right word, right? I mean, that's why they came up with the name of the technology, copilot, that's what it is.

And to your point, maybe context to something that's very much, not even great I mean all sorts of examples of just AI systems not getting it right. So in terms of exactly what you're saying, having the coursework and the instructors and the adaptability that's just -- is just not there.

It's not. I mean, look, when we're in university, we all had those in instructions that we just read from the book, which is effectively just reading from the transcript and what we do. We stayed home now. We read the book on our own. We went and took the test, and that's how we roll, right? Versus those instructors that brought that experience to life, you couldn't wait to get there because you knew you were going to have a dynamic learning experience. It was going to be very unique, I remember having those instructors in University, and I'm old, but I remember 35 years ago, wanting to get to those courses because I knew it was going to be transformed. There was something I was going to learn, I was going to build to take forward, and it was going to really infuse life into that learning experience. Generative AI, I can't do that, right? That's not something that is equipped to deal with in terms of the human experience that we all know and expect from the world-class instructor. And so no, I'm not concerned about that. Our focus is around leveraging the technology to enhance that instructor experience.

Got it. You made some leadership changes recently right? So a new Head of [ Udemy ] Chief Revenue Officer, Rob Rosenthal, you were very clear with priority, right? You made the hire. I guess why Rob is the person to scale? How do -- I guess, how do we think about it? I don't want to think about it so much in terms of improving execution, but why is Rob the guy get this on a path that can keep $1 billion in terms of revenue?

Yes. So over the last couple of 2, 3 years, we've evolved from -- it was primarily a point solution, a content play. Primarily direct sales into our customer base in EMEA and the U.S. And from a complexity perspective, fairly minimal. Fast forward to where we are today, multichannel. We just talked about all the channel relationships we've developed. Very international, 60% of our revenue is outside North America. We have the highest brand awareness in India and Brazil, any countries in the world right now, and we're very underpenetrated in these countries as it is. And the platform that we've developed is a very different sale, presents a very different opportunity than the point solution that we started with 3 years ago when I arrived. And so the fact that we actually now are selling a platform to an international set of customers through multichannel distribution model, it's a very different game, and we needed somebody that's actually done this before. That's played at this level, that's been where we're going, that has the ability to bring those experiences in and help develop the right strategy and plan of execution to support the massive opportunity that we have that I've just described. And that's what Rob brings. He's got tremendous experience from being the SVP and General Manager of SAP Hybris when he was there and then onto Adobe, where he was responsible for a $2 billion revenue stream. And then most recently at Bloomreach, where he was a CRO and came into a situation where they were struggling a bit in terms of growth. And transform that into a very nice growth story. And the feedback that we got from folks he's worked with was tremendous. And then the last bit for us is really important. We're mission of our company, it's culture fit. And we feel like it's just a wonderful fit. Somebody that balances that. We talk a lot about that balance and that complementary purpose and performance and something that we care a lot about, and we believe he brings a really good blend of both.

Only about a minute or so left, maybe just quickly touch on consumer. For me, I think a little bit better than expected. One, I guess anything you can do to sort of maybe harness that a little bit. And then as kind of a subset to that question. Badging has now been extended, I think, to consumers.

Coming in the back half.

Yes. It is extending, right? So how important is that is perhaps a catalyst to drive a little bit more business in that segment.

Yes. So we did modestly raise our guidance in terms of the consumer business for the year. And -- but look, we've been very clear that we're not optimizing to grow that consumer business as it is. We're investing in the growth of Udemy business. So that's going to ebb and flow a little bit. We're very concerned with the content generation engine, the flywheel that is that consumer business and making sure the vibrancy stays very, very high. and that is the focus on the consumer side. That being said, we're making significant investments. You mentioned one of them, which is badging and certification initially brought into the enterprise segment that's been the fastest adopted new capability that we've seen in the enterprise segment in our platform today. And we're bringing that capability into the consumer experience. So we know that Coursera has done a really nice job of badging the certificates in the consumer side, which has been partly the reason that they've had the success they've had in the consumer growth of their business. And we do expect badging and certification to also have a positive impact on the growth of our consumer business. So we're not, at this point, putting numbers on that, but do we expect that capability to have -- provide some lift and have a positive impact we do.

Just one last quick one in terms of the badging acceptance or importance to enterprises if you're, I guess, someone on the ground looking for a job opposed to within an enterprise where perhaps it's -- I [indiscernible] more accepted, but be part of...

Equally important. Yes, enterprises care a lot about it because the leaders in organizations want to know where skills lie. And that's the validation ball, right? That badge or certificate validates that, that individual is not just gone through the course or series of courses, but they've acquired those skills necessary to do the work associated with that skill development. So now that's -- it's really important in the enterprise, which is why we launched it there first and equally important on the consumer side so that the skills are marketable. You can say, I've got that AWS badge or that data science badge or what have you, to make you a more marketable candidate when you're interviewing for that next job. So equally important.

It is important. Okay. Well, we're on time. Greg, thank you so much. Good discussion, and I really appreciate your thoughts.

Really enjoyed it. Thanks, Curt.