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

Okay. I think we'll get started. Thanks, everyone, for coming today to JPMorgan's TMC Conference. I'm delighted to be hosting Udemy current CEO, Hugo Sarrazin. Thanks so much for joining us, Hugo.

Thank you for having me.

Yes. So maybe we could start with a quick introduction about yourself, about Udemy and what your reasons were for joining the company recently.

Okay. Very good. Let's start with the easy one. 30 years in tech across a series of different roles. Most of it at McKinsey, where I was on the West Coast, serve a bunch of iconic tech companies in the software space, in the service space, in the hardware space, a whole range. I also worked with private equity when they invested in tech, often also in ed tech. I spent the last 4 years at UKG as the President and Chief Product and Technology Officer, where I helped double the size of the company. It's now almost 15,000 employees. We've had $0.25 billion of revenue in 2023, the last time that was public, just to kind of give you a bit of a sense of scale and scope. We introduced 8 AI products that are broadly used. And it was a space that was very close to this one. It was in the HCM space, serving CHRO and Chief People Officer. So I got to experience a lot of the end buyer understanding their issues. And I think it's really applicable to this space. In terms of your second part of the question, what draw me to Udemy, a few things. First, there's a personal aspect. There's always a personal story. Both my parents were first time -- first in their families to go to university. So I saw the impact it had on social mobility. Our family is currently -- clearly different than what they've experienced. The second piece, I did have the opportunity. I did spend a lot of time in school. I did a PhD in robotics and a bunch of AI stuff back in the early '90s. So I love learning. I worked also for the -- on an advisory basis for the Prime Minister of Canada on the future of education and even at Stanford when they were making the transition to MUC. So learning has been a passion play. So reason number one. Reason number two, it is a space that has gone through a lot of change, but hasn't yet fully realized its potential. And I was excited by Udemy because Udemy is one of the players that has the broadest platform and could end up being the one that will restructure or frame what this could be, and I want to be a part of that. And we're going to talk about some of the investment thesis I had behind that, but I was really drawn to the opportunity because I really wanted to do what's right in terms of creating that social mobility, helping a lot of folks realize their full potential and then do it with a platform that could be very, very powerful.

Yes. No, that's great. You've been in the CEO role for roughly 2 months now, but I understand you've had some time to speak with some customers, partners, other key stakeholders of the business. What have been some of your key observations about the company? And what is sort of your vision over the next couple of years?

Yes. So I used to do this for a living, get into a new company, quickly assess the industry. I did this before I started, and I did this in the last 60 days. And what I told the employees on day 1 on the first town hall, I said, "Hey, I'm going to be learning. I'm going to spend a lot of time with our customers, our partners, our employees." And I did that. I think almost 150 customers, many instructors, something like 250 employees, like a really thorough review of everything and anything under the sun. And what I come back with is I was excited before coming. I'm even more excited now. The opportunity is phenomenal. There are -- both from a market point of view and from what this platform can do, there were things I hoped I could find and I found under the hood. The product road map is pretty exciting. There's more to do, but there was already some good stuff. The transition to the large enterprise side was in flight. It was exactly the right direction of travel. There were some really exciting stuff we've done to improve the bottom line that's delivering results. So that foundation is really, really good. Now to the second part of your question, where to? And here's where I'm going to get a bit into the investment thesis, there's an overhang on the ed tech space. The overhang is at least in part driven by what people think AI is going to do to the space. Is it really going to bring the cost of content creation to 0? Because you can. Like you can now today take a PowerPoint chart and dump it into wonderful tool, and it will create some sort of little talking avatar. You can put the same PowerPoint into another Gizmo and will create a podcast for you. So that's an overhang. What is going to happen to the space? If now you have AI, then you can do these wonderful things. And I have the thesis that actually it's going to unleash a bunch of new wonderful things. And I'm going to try to make the case for that and tell you why I think Udemy in that context is well positioned to do that. The first one, it's creating new demand. So in the last 6 months -- not 6 months, 60 days, I spent a lot of time with enterprise leaders, and they're all saying AI is really overwhelming. I don't know how to do the reskilling of my organization. I don't know what it means for marketing. I don't know what it means for HR. I don't know what it means for finance. I don't know what it means for legal, my frontline employees. And every CEO goes to some wonderful conference and comes back and says, "Hey, I've heard that XYZ is doing some AI amazing thing. Why can't we do the same thing? So everybody now is like trying to figure out what to do. And every vendor, whether it's the Salesforce, the ServiceNow, the Googles of the world, they're all coming up with their own version of things. So there is a moment in time right now where reskilling is the demand question. And that's wonderful because we have 4,000 AI classes on the platform to facilitate reskilling. And that's new demand, demand that did not exist a year ago. That's number one. Number two, I think online learning did not fulfill its potential, full stop. Full stop. It was wonderful to change the economic of distribution and create an opportunity for long-form video to be distributed and reach thousands, millions of people around the world. But it didn't fundamentally change the experience. Like you choose whether you're a beginner, an intermediate or advance and then you go. And then we're going to walk you through the same learning experience no matter who you are, what you know and what your learning experience is. And this is where AI changes the game. This is why we have this amazing opportunity to raise the effectiveness of learning because now you can start and I can go through 250,000 courses, reverse engineer using AI, a bunch of assessment that instructor cannot create on their own, create a bunch of assessment, assessment, assessment, assessment, start you at the beginning of your journey for reskilling with an assessment, understand where your learning gaps are, then take the curriculum, which is long form, reassemble it to meet the gaps. That's pretty amazing. So I can do massively personalized learning. And that experience is better, more engaging. You will complete the classes, which is often the issue that many traditional players have. And then you will have better learning outcomes. So you can deliver a better ROI. So my ability now to show up to a business leader and say, take this reskilling program, it will be personalized to your need because I'm using AI in a very powerful way. I will create feedback loop. I can introduce it in the flow of work. There's a lot of new things now that AI is creating. And that's the opportunity. And our entire product road map right now is made to do one thing, is to take what made Udemy great in this first round, which is this marketplace, the 2-sided Gizmo, blah, blah, blah, but now inject AI for the creators and inject AI for the learners. And that is a huge, huge opportunity. And what that allows us to do is this mega idea, at least I think it's a mega idea, is online catalogs are interesting, but not the future. The future is about an AI-enabled platform that will facilitate the reskilling of the workforce of the future. And that I can deliver an ROI and I can become mission-critical for large enterprise.

Yes. So maybe there's a lot to unpack.

Yes. I just went in to give you the investment thesis in the most succinct way.

That's great. Well, I mean, you have recently launched a few AI offerings like skills mapping, learning assistant. What has been sort of the feedback from those recently?

I couldn't be more proud. I mean we've only begun, by the way. It is just basic, basic, and it's already a game changer. So we can do skill mapping. Imagine this basic -- you're a CHRO and you're trying to figure out what are the initiatives to reposition your workforce from A to B. You need to assess the skills that B requires. You need to assess your starting point, and then you need to connect the 2. Nobody can do that today. Nobody. It's amazing. Like there's a huge opportunity to connect the 2 and then connect it to skill program. Not learning program, skill program. I'm making a very important difference. There's skill acquisition, there's skill mastery and the skill recency. Those are 3 characteristics that need to coexist to deliver the ROI. And the skill mapping stuff right now, people are saying, wow, this is a good first step. We're now getting there. The AI assistant, again, very basic. We're able to be within a class, do the whole AI consumption of the thing and then give you the ability to search through the class. That's pretty good. I mean, wait until what we do next. We're going to go across the whole catalog. And then we're going to do even more because now what we need to create for you both on the consumer and on the business, and it will be a bit different, and we can go into that difference in a second. We want to have your companion to make you successful in the world. And then instead of being a transaction, it becomes kind of something that sticks with you in the same way that you don't want to cut your Spotify subscription or your Netflix subscription. You want to keep that. And that's kind of part of the vision. We need to get to that level of intimacy with you as a person who wants to be successful and needs to learn a bunch of things. So that's the tutor. We've recently launched another thing that's really -- it's Role Play, literally, is it 2.5 weeks now. So Role Play, we're using AI to create an ability to test certain scenarios. And here, we're not the first one. We didn't invent this idea, right? There are other people who do that. But some people have been working on it in the traditional publisher model, and they got 80 role plays. And a role play is like, hey, let's have a tough conversation during a performance review or let's kind of practice how to be -- run a meeting, right? You can have these role plays. We have this marketplace. So what we did is we created in the platform, the ability to create role play. Day 1, we got 32. Day 2, we got 200. After 1 week, we got 400. Now we're 2.5 weeks, we got 1,400 role plays. So this is the power of a platform solution versus a publishing. And I'm going to keep emphasizing that. We're trying to enable the creators to create a lot of these role plays. And will they all be great? No, there's going to be a range of things. But again, because people can choose, they can vote, we will get the better role plays to make it to the top. So we're very focused on making the platform AI-enabled so that we can do role plays, we can do labs, we can do assessment, we can do everything to make you more successful, and we're doing it in a platform way. So we're very excited. There's more. I'll just say one last thing, which is we're at the very beginning, we took as I said, it's a 2-sided platform, one for the creator, one for the learner. On the creator, we took the same set of tools, and now we're making it available to the large enterprise. So now if large enterprise can begin to have agency with the content and use these AI tools to create the role plays that are specific to how they like to do XYZ in there, then they do custom creation. And then what you have is stickiness, stickiness, stickiness, stickiness in a way that an online catalog could not deliver.

And are you starting to see some -- I know it's pretty recent, but are you starting to see some of these newer tools drive more customer conversations or even maybe some conversions or maybe even expansion of contracts?

So it's early days. I can tell you that in my conversation, what I'm telling you as the narrative here, the arc, people are saying, wow, this is a different experience. This is a different story than what we've heard from others. And the fact that we can now have agency, it's a pretty big deal. It's a really big deal because L&D teams have been wondering, hey, what's my role in this moving forward? And I'm like, hey, I'm here to help you. I'm going to make it easy for you to have a different role in this new future where you can bring your expertise, your understanding of the company to make sure that these learning and reskilling journeys are built custom to you. So I think this is going to be pretty powerful.

Got it. Maybe we could talk a little bit more about the business segments. So maybe first starting off with Consumer. It's slightly over 1/3 of the total revenue today, just below a $300 million run rate. Growth has been sort of volatile in this business, but it's been very anchored towards, like you said last quarter, a transaction-based approach. But it seems like you're really making a big push to shift that over to subscription going forward. So maybe help us understand what initiatives you're taking to revitalize that part of the business.

Yes. So let me -- great question. If I step all the way back, we came from the B2C world, the consumer side. That's our history. And that's where this marketplace came from. And it was an amazing innovation when it was an innovation. But at the end of the day, we kept the model too heavily focused on transaction. And that is a hard way to make a living. One transaction at a time. So you need to fill the bucket with lots of consumers and then you need to monetize each one of them and go back to the ones who bought one thing to make sure they bought a second thing and a third thing and a fourth thing. And it is really also diminishing the impact of the platform. As I've just told you, with AI, we can kind of be your companion. So we're making a hard pivot towards subscription. Our B2B side is subscription already. Our Consumer, 13% is -- of our $300 million is subscription. We want to grow that significantly because, first of all, it delivers a better experience. It helps the end user, the learner achieve more because the economics are different. We have an LTV to CAC, just the economics is much better. And it allows us to reinvest for the learners and it allows us to be very deliberate in the way we choose to acquire and nurture customer. So it is a really important shift that we're doing. In terms of initiative, we're doing a few things. You can already go -- not this week because it's a week that's special. But in general, you can now see on our marketplace, we're emphasizing subscription more than we've ever had before. So we're changing the way we merchandise things. So instead of emphasizing all the wonderful one-off, we're going to emphasize subscription. So that's one. Two, in our customer acquisition, we're shifting some of the emphasis towards more subscription and nurturing customers from transaction to subscription. So there's a lot of proprietary channel for those migration. We actually know where people live. We know where 80 million people live. So we're going to sit down with them and try to make the case. We're also introducing new products and new subscription. We used to only have one subscription. It's kind of limited. You either hit the mark or miss. So we created career accelerators earlier 2 weeks ago. We have 6 of them. We're going to monetize that as subscription because, again, we're trying to make it clear. We're here to help you achieve your goal. And we've got a bunch of other subscriptions that are in the hopper that we're exploring, and we're going to introduce a bit later this year. So a very important transition for us.

Yes. On career accelerators, it seems like an interesting new offering. You're basically making professional development more accessible for people. What has been some of the early learnings from that? And is there any way to kind of get a sense for how it may impact growth for that segment?

So the main idea is be more outcome focused even for consumer, right? People want to be successful. They want to be -- and as we know right now, the economy is -- there's a lot of transition folks from one type of role to another. So we want to give people more control. And again, this word, I keep using it, it's a very important word, agency. So if you have agency with the outcome, you have more engagement. So we're trying to find ways to get that level of engagement and helping our consumer do that. So we're assembling learning path. So that's content. So it's -- again, the idea of that these different classes together help you move up the ladder and achieve a better outcome for yourself as a career. We're including assessment. We're including badging and recognition. And then over time, we've got a bunch of additional value-added services and merchandising opportunity. I'm not ready to announce them that we're going to introduce along with that. So that makes the career more -- not just episodic, but ongoing. I mean if you want to become a cloud engineer, it's not just for 3 months. It's forever, right, for a period of time. It could be multiple years. So how do we become that? What kind of additional membership? What additional recognition? What kind of community do you want to be a part of? So there's some really, really interesting thing. And then the feedback so far is actually pretty good. Now what we need to determine is what are all the different flavors of careers that we want to be supporting. And also, how do we ladder those things up? And how do we bring together folks that are like-minded to participate and help each other and encourage each other.

And so maybe the other portion of the business is on the Udemy Business side. That is about a $500 million run rate business. It's growing positively. Growth has deceled, but you're only less than 10% penetrated with UB across your existing 17,000 customers. So aside from macro, which maybe we'll touch on a little bit, but how would you sort of characterize the opportunity over the next year or 2 to really increase the penetration of that 10%?

Yes. So our enterprise business growing at 9%. I mean I wish -- we were almost at 10%. I could have said double digit, but we didn't quite make it. It is growing faster than anybody else in the industry. So it's a really, really important part of our business. As we all know, enterprise monetize at a different rate and our LTV to CAC there is good. It's already a subscription business and we like that. And 17,000 large enterprise, nobody comes close to that, very iconic brands, very large brands. We made a shift a year ago towards 5 verticals, move up and focus more on large enterprise versus SMB. And we're pretty happy with what we're seeing. We got 40 deals last quarter that were more than $100,000. And we think that strategy is a winning strategy. Right now, we're at a moment in time where the opportunity ahead is humongous. And the stats that you've quoted is the important stat, and we need to figure out, and I'll hit that, 10% penetration in the installed base. That is phenomenal. I've never come across a situation where you have only 10% penetration. So it begs the question, why is that? Why is that? And there's a few pieces to the answer. One piece of the answer is there are different buying center in large organization. So we need to do a better job doing the account coverage and meeting all these different buying centers, which I think as we do this transition to large enterprise, we're getting our heads around. The second, we, until recently, had 3 SKUs. That's it. It's the UB enterprise, UB Pro or the cohort base. That's it, 3 SKUs to try to meet all the needs, all the personas, all the types of workers. That's incredible. It's such a missed opportunity to do basic segmentation based on an understanding of the needs of different population and large organization. So that's one of the things we're doing right now is we're going back to the drawing board and saying, okay, how do we create packages that meet the needs of different types of users. The frontline workers don't need a 30,000 course offering. They don't. it's absolutely not what they need. And to try to monetize that at the same price as we are trying to monetize -- again, back to my cloud engineer, makes no sense. So we are going to do a lot of willingness to pay an appropriate segmentation to cover better the needs in an account. So that's one. The second, we need to recognize where we've come and where we're going as an industry. This industry benefited from this horrific thing called COVID by accelerating an enormous amount of future purchase in a very short amount of time. That's one way to accelerate revenue growth. But now what we need to do is help deliver on the ROI. And when you were in the period of COVID, a lot of purchase was done just to kind of offer a thing to the employees that were all stuck at home in their basement or in their studio. It wasn't an ROI-based purchase. Now we have a product that delivers a really good ROI, better than the average for all sorts of reasons. We can go into that. So the second way we're going to go after beyond better account coverage, beyond more product tailored segmentation is we're going to go make the case for the ROI. And we're in an economic uncertain time. Usually, people ask tough question about your spend. And I like our chances. When there's a consolidation play in an account, I like our chances because our mousetrap is a stronger mousetrap. And we want these conversations to happen because we can demonstrate the engagement, we can demonstrate the learning outcome. We can demonstrate how AI is going to help. Our road map is pretty powerful. So that's the other way we think we're going to move from a 10% penetration to something a bit more reasonable and exciting.

So with that, it seems like you're really changing some of the messaging to around like consolidation cost savings. Does that require you to sort of like revisit the like sales incentives or some of like the playbook there?

Yes. So we're doing a bunch of that in the first 60 days. The first one is really emphasizing, I mentioned earlier that there is -- right now, this is a moment. This may not have been a moment 6 months ago, at least when I was at UKG, I didn't hear it from CHRO and Chief People Officer. But now I'm hearing it. So there is a moment right now, AI is it. So we are changing the messaging so that we can kind of bring to the forefront that conversation and make sure that we merchandise what we're offering to meet that. So that's one piece. The second is we are being very thoughtful about the moment of uncertainty and trying to be proactive in saying we got a better offer. Let me help you. CHRO, you may not have had to demonstrate the ROI, but if we're going to help you because we know we've got a better way to do that. We're going to help you. So we're bringing forward a bunch of value engineering tools to demonstrate the value. We're sitting down proactively with our customers to kind of help with that. And yes, it requires -- both of these require retooling of the sales plays, of retooling of the enablement. We had already made some incentive changes to facilitate expansion. So we didn't need to do much there. But the first 2, absolutely.

So I think like coming into this year, I think we all had a little bit more clarity with the macro and where it was headed until maybe some recent headlines in the last month or so. But I mean you delivered, I think, what it was like a fine Q1 from a P&L perspective. But you are taking a more prudent guidance posture based on some of the signals you're seeing. Maybe just if you can kind of help us understand what are some of those signals and your take on the macro?

Yes. So I mean, Q1, we delivered top line and bottom line. We actually did really well on the bottom line. So it was a really good Q1. And then for the bottom line, it's 10 quarters in a row where we've delivered really to the bottom line. So I think the team has done some really, really good work, and I want to kind of call them out for that. Now right now, we're not seeing a lot of mixed signal in this moment in time. I mean -- sorry, let me kind of rephrase that. So it's not affecting the way the pipeline has been built for Q2. That being said, in the conversation, we have things like -- I'll give you an example. We have a large government account. And all of a sudden, the person we were dealing with no longer is there. They were dodge, that's a verb. So what does that mean? Well, it means that it will take longer to close that thing because the person with whom we were having the conversation just disappeared. So there's a bit of that in the water, not everywhere. We're not seeing it in some geography. We're not seeing in some sector. So it led us to try to be a bit cautious for the second half of the year. And we feel confident that those numbers that we guided to, we can achieve. But we're -- who knows? Who could have predicted all of this? And what happened this week will be different than what will happen tomorrow and will be different when it happen -- I mean, it is unprecedented times, and we're trying to be conservative.

But so far, it's not really impacting pipeline or conversions as of so far.

Q2, we're in really good shape.

Okay. Got it. And then maybe just on the -- we only have a minute or so here, but maybe just we can talk about international. I know that's also like a nice untapped opportunity to sort of tackle there. But maybe if you can kind of characterize what you're seeing on the international front and ways to expand there.

Yes. So 60% of our revenue are coming from international. We have the broadest number of language that we cover in our offering, which is great. But the opportunity is so big, so big. We don't do local activation. Like we don't have in -- on the consumer side, in-market folks who are kind of making sure that a marketing campaign in India doesn't run in the middle of a cricket game. It's pretty obvious stuff. So imagine if we start doing that, on the consumer side, we have a really, really fun opportunity to do full stack in-market activation. On the B2B side, we do have either partners in a country or sales team in the country. So there, we're doing the normal motion, and we're seeing back to where on a differentiated basis, APAC and LatAm are incredibly robust right now, incredibly robust. So we're feeling really good about that. And the diversification we have from a geographic point of view is one of the appeal of the business.

Yes. I think with that, we just ran out of time, but thanks so much for attending. Thank you.

Thank you. Thank you all.