Udemy, Inc. (NASDAQ:UDMY) Q1 2024 Earnings Call Transcript

Udemy, Inc. (NASDAQ:UDMY) Q1 2024 Earnings Call Transcript May 5, 2024

Udemy, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day and welcome to Udemy’s First Quarter of 2024 Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to Dennis Walsh, Vice President, Investor Relations. Please go ahead.

Dennis Walsh: Thank you, Joe. Joining me today are Udemy’s Chief Executive Officer, Gregory Brown; and Chief Financial Officer, Sarah Blanchard. During this call, we will make forward-looking statements within the meaning of federal securities laws. These statements involve assumptions and are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those discussed or anticipated. For a complete discussion of risks associated with these forward-looking statements, we encourage you to refer to our most recent Form 10-K and Form 10-Q filings with the Securities and Exchange Commission. Our forward-looking statements are based upon information currently available to us. We caution you to not place undue reliance on forward-looking statements.

We do not undertake and expressly disclaim any duty or obligation to update or alter our forward-looking statements, except as required by applicable law. In addition, during this call, certain financial performance measures may be discussed that differ from comparable measures contained in our financial statements prepared in accordance with U.S. generally accepted accounting principles referred to by the Securities and Exchange Commission as non-GAAP financial measures. We believe that these non-GAAP financial measures support management and investors in evaluating our performance and comparing period-to-period results of operations in a more meaningful and consistent manner as discussed in greater detail in the supplemental schedules to our earnings news release.

A reconciliation of these non-GAAP measures to the most comparable GAAP financial measures is included in our earnings press release. These reconciliations together with additional supplemental information are available on the Investor Relations section of our website. A replay of today’s call will also be posted on the website. With that, I will now turn the call over to Greg.

Gregory Brown: Thank you, Dennis, and good afternoon to everyone on the call. It was a good start to the year for Udemy, and we continue to be excited about the significant opportunity in front of us. During Q1, we further expanded our global enterprise customer base and executed on our strategy to meet customers’ evolving needs with our innovative Intelligent Skills Platform. Looking at our results for the first quarter. We met expectations for revenue and adjusted EBITDA margin. Total revenue increased 12% year-over-year, while we grew Udemy business revenue by 24% compared to Q1 2023. These results reflect the increased global demand for reskilling and upscaling as the pace of change driven by advancements in technology such as generative AI continues to shape the way we learn and work.

Today, I’d like to discuss the current demand environment and how we’re positioning Udemy to more effectively capture market share in our category. I’ll then discuss the actions we’re taking to address the short-term challenges to our business in order to deliver on our growth expectations for the year and beyond. We continue to see solid demand across most sectors and regions as companies seek a partner to support their workforce learning and development needs in all capacities. Udemy is differentiated by the high quality, immersive and localized learning experiences we provide. Our comprehensive solution is purpose-built to provide three essential learning modalities, on-demand, immersive and cohort based. This combination allows us to offer an end-to-end solution where professional learners and organizations around the world can easily identify and quickly develop the skills they need to deliver better business outcomes today and in the future.

The benefits of our approach are reflected in our results and some of the milestones we hit this quarter. During Q1, we entered into new or expanded existing relationships with enterprise customers, including Pepsi, Flutter Entertainment and the South African Reserve Bank. In total, we now have more than 16,000 Udemy business customers in over 150 countries. Notably, we have more than doubled our enterprise customer base in the past three years. This is a testament to the value we provide and the continued innovation we’re building into our comprehensive platform. For example, a leading global IT consulting company based in Europe expanded their relationship with us during Q1. By leveraging the Udemy business platform to prepare for internal IT certifications, the customer experienced a 17% increase in certifications per consultant, which in turn allows them to charge a higher rate for their services.

More recently, in order to support their business objectives related to certification and generative AI upskilling, the company expanded their deployment of Udemy Business Pro. By assessing and guiding learners’ capabilities, Udemy Business Pro enables technical professionals to achieve their desired learning and business outcomes more quickly and effectively. Also, during the quarter, a customer that’s been with Udemy since 2017 and is a global leader in AI computing expanded their relationship with us. This is another example of a customer that has been effectively leveraging Udemy for AI training and IT certification prep. The expansion of seats from 3,000 to 9,000, almost one-third of the total employees underscores the tangible impact our platform has had on their business.

We see this use case for AI training and IT certification preparation as a long-term driver of demand going forward. In just over a year since Chat GPT launched, we’ve seen more than 4 million enrollments in the 2,000 plus AI courses in the Udemy catalog. This massive surge in interest from individuals and organizations demonstrates the rapidly growing need to upskill talent on generative AI. Based on what we’ve seen in the past year, we believe generative AI will have a significant lasting impact across nearly every industry, region and professional role. Organizations will require employees to cultivate new skills to adapt to change and certain roles may be replaced entirely. A key reason why Udemy’s unique marketplace model is so compelling is how quickly we can expand and adapt our content catalog.

This enables organizations to stay ahead of trends in technology, enabling them to better understand and apply these advancements. For example, within a few days of Chat GPT’s launch, we were the first platform to have a course instructing learners on the topic. In less than two months, we had over 100 courses on Chat GPT available as compared to only one course available across all other competitive offerings. This is a perfect example of our marketplace in action and how we can effectively leverage our expert instructor network to quickly meet our customers’ needs. As Generative AI alters the way we work, the development of soft skills ranging from strategic thinking to effective interpersonal communication is becoming more critical than ever.

At Udemy, we recognize the pivotal role that developing leadership soft skills plays in harnessing the full potential of Generative AI. Our intelligence skills platform is designed to not only enhance technical proficiency, but also to cultivate these essential soft skills. By integrating advanced technology skills with soft skills development, our platform ensures that leaders are well equipped to implement new technologies effectively and lead their teams through organizational changes. This helps organizations achieve better business outcomes and also enhances engagement on our platform. As engagement increases on our platform, it generates a virtuous cycle where the more learners engage, the more data we can collect. That data, in turn, translates into valuable insights that customers can then leverage to make more informed business decisions.

As organizations increasingly rely on our platform to develop their workforce, the increased engagement unlocks long-term growth opportunities, enables us to provide more effective learning experiences. Ultimately, we see Udemy’s platform as mission-critical for fostering a more agile, resilient and skilled workforce that is better equipped to tackle the challenges of today and the opportunities of tomorrow. Further illustrating this growing opportunity, a recent KPMG survey found that nearly 75% of business leaders ranked Generative AI at the top emerging technology that will impact our business over the next 1.5 years. However, in a recent study conducted by Udemy, we found that only 55% of employees are confident in their management team’s ability to seize the opportunities and mitigate the risks brought upon by generative AI.

At Udemy, we are committed to bridging this gap by supporting our customers and strengthening the skills of their leadership teams. Our comprehensive skills development programs, including the cohort-based Udemy Business Leadership Academy are tailored to equip leaders with advanced technical knowledge as well as the soft skills needed to innovate and lead confidently in an increasingly competitive and evolving environment. Recently, a multiproduct Udemy business customer added additional leadership academy cohorts after seeing positive results following their first engagement. Insurance provider, Blue Cross Blue Shield of North Carolina was seeking new ways to help their customer service leaders better connect with and coach their direct reports in a hybrid work environment.

To support this effort, the customer pilot Leadership Academy and noticed immediate changes among the pilot group of leaders, including improved communication skills and additional leadership traits that were not exhibited prior to the pilot. Additionally, many of the leaders felt that they were able to connect better in interviews with candidates. The team also saw significant value in the analytics and data from this program the Udemy provided. Because of the success of the program, the company added two additional cohorts within six weeks of the delivery of our insights. During Q1, we also launched our Gen AI skills pack to enable Udemy Business customers to upscale their workforce on Generative AI in order to achieve better business outcomes.

The skills stack supports leaders and other workers in establishing a fundamental understanding of the technology and how to apply it responsibly to enhance productivity, communication and project management. Since its launch, the skills stack has driven meaningful pipeline generation, further validating the growing demand for developing generative AI skills for companies of all sizes, sectors and regions. The use cases I highlighted provide you with a snapshot of the value we’re delivering for our customers every day. However, we recognize that we can do better in certain areas of the business. We are committed to addressing the execution challenges that impacted our outlook for the year. As we mentioned on our last earnings call, we identified issues with two reseller partners in the APAC region, and we experienced some softness in EMEA as well as some underperforming cohorts within larger markets.

Since that time, we began taking action to address these issues, including hiring general managers on the ground in South Korea and Vietnam to oversee our reseller partners in those markets. In addition, we have commenced a search for our Chief Revenue Officer to lead Udemy Business as our current leader will be leaving the company in June. We made good progress with our search for a new leader with strong go-to-market leadership experience, scaling global businesses from $500 million to $1 billion in revenue and beyond. The current Udemy Business leader will support the transition, and I will be actively involved while the new leader ramps into their role. We expect to have more to share on this soon. Altogether, these actions will address the short-term challenges leading to improved long-term performance.

To wrap-up, the innovative capabilities we’re embedding in our intelligent skills platform, coupled with the demand from the global transformation to a skills-based economy and the rapid advancements of generative AI are expected to drive meaningful momentum and engagement on our platform. Over the long-term, these trends are also poised to unlock substantial opportunities for our business. As the corporate world increasingly adopts a culture of continuous learning aimed at future-proofing the workforce, we anticipate Udemy’s platform will become even more mission-critical. Now I’ll turn the call over to Sarah for a financial review.

Sarah Blanchard: Thank you, Greg. I’ll start with comments on the key financial highlights and then provide our outlook. You can find the complete set of financial tables in our news release, which is available on our Investor Relations website. For the fifth consecutive quarter, our results exceeded the high end of our guidance range on both the top and bottom line. Revenue increased 12% year-over-year to $197 million. With more than 60% of our total revenue coming from outside of the U.S., we did have a negative impact from FX to our year-over-year growth rate of 2 percentage points. Udemy’s business revenue for the quarter was $180 million, an increase of 24% year-over-year, including a 2 percentage point headwind from changes in FX rates.

We ended the quarter with annual recurring revenue, or ARR, of $479 million, up 21% from a year ago. Our consolidated Net Dollar Retention Rate, or NDRR, at the quarter end was 104%. The rate was 111% for large customers or those with 1,000 or more employees. As expected, we continue to see small decreases in net dollar retention as upsells continue to take longer than historical norms. Gross salary retention was unchanged once again. In aggregate, we grew our customer base by 12% year-over-year to more than 16,000 customers globally. Our large customer cohort is growing at a faster rate or 16% year-over-year. Today, more than 30% of our customers are large customers and the number of contracts with ARR of more than $100,000 increased 16% year-over-year.

We’re also closing longer term deals, which means that approximately 50% of our ARR is from multiyear contracts, up from 44% a year ago. Gross margin for our Udemy Business segment came in at 72% for the quarter, up 700 basis points from the prior year, primarily due to the instructor revenue share change that went into effect on January 1 of this year. First quarter consumer revenue was down 2% on a year-over-year basis, including a negative 2 percentage point impact from the FX. During Q1, average monthly visitors grew 7% year-over-year to $37 million. As we move down the P&L, note that all financial metrics are non-GAAP unless stated otherwise. Q1 gross margin was 62%, a 400 basis point improvement from Q1 2023, driven by the instructor revenue share change as well as the continued revenue mix shift to Udemy Business, which accounted for approximately 60% of total revenue in Q1, an increase of 600 basis points year-over-year.

Total operating expense was $122 million or 62% of revenue and 200 basis points lower than Q1 of last year, thanks to our focus on company-wide cost efficiency. On the bottom line, we delivered net income of approximately $5 million or 3% of revenue. Adjusted EBITDA was positive for the fourth consecutive quarter at approximately $6.5 million or 3% of revenue, representing a 700 basis point expansion year-over-year. The better-than-expected adjusted EBITDA result was driven by revenue outperformance and our disciplined approach to ensuring operational efficiency throughout the organization. Moving on to key cash flow and balance sheet items. We ended the quarter with $434 million of cash, cash equivalents, restricted cash and marketable securities.

Free cash flow for the quarter was positive $18 million. Our solid cash position enabled us to return capital to shareholders. During Q1, we spent approximately $55 million of our $100 million share repurchase program to buy back nearly 5 million Udemy shares. Consistent with our disciplined capital allocation strategy, we are committed to continuing to grow the company, while returning capital to shareholders through opportunistic share repurchases. To that end, our board has approved the expansion of our share repurchase program to $150 million, up from $100 million. We will remain prudent in deploying capital and the increased buyback reflects the confidence our board and management team have in the business and the opportunities ahead. Now for our outlook for Q2 and full year 2024.

As a volatile macroeconomic environment continues to persist and as we work to address the short-term execution challenges, we are taking a prudent approach to our outlook for the remainder of the year. As a result, we expect Q2 revenue to be between $192 million and $195 million or approximately 9% year-over-year growth at the midpoint. Assuming exchange rates remain constant, FX is expected to negatively impact Q2 revenue growth by 1 percentage point. On the bottom line, we are targeting negative 50 to positive 50 basis points for Q2 adjusted EBITDA margin. For the full year, we have narrowed our revenue range to $795 million to $805 million or nearly 10% growth at the midpoint. As we were recalculating the impact of FX on our full year outlook, we realized there was an issue with our prior estimate.

We now expect an estimated negative 1 percentage point impact from FX on our full year growth rate. As Greg mentioned, we are in the process of identifying a leader for Udemy Business and expect that once the leader is in place and ramped up, we will be well positioned to deliver on our growth projections. We still expect Udemy Business revenue will account for more than 60% of total revenue for the full year. On the consumer side, given the stronger-than-expected performance in Q1, we now anticipate consumer revenue to be down 2% to 4% year-over-year on a full year basis. Looking ahead, we are focused on delivering efficient growth. We are actively managing our expenses to ensure that every expense is aligned with our core objectives to support the long-term health of our business.

Our commitment to maintaining a solid financial foundation for Udemy is a top priority as we continue to optimize our operations and make strategic investments to secure sustained growth. With all of that in mind, Udemy outperformance on adjusted EBITDA in Q1, we are raising our full year 2024 adjusted EBITDA margin guidance. We now expect full year 2024 adjusted EBITDA margin to be in the range of 200 to 300 basis points. Before we open up the call for your questions, I want to express our excitement about the future of Udemy. Despite the short-term challenges we’ve encountered, the long-term opportunity ahead of us is more compelling than ever before. Our strategic investments in product, brand and global expansion are set to extend our leadership position in this category.

We thank you for your continued support and look forward to keeping you updated on our progress. So, with that, we’ll open up the call for your questions. Moderator?

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Q&A Session

Operator: [Operator Instructions] And our first question will come from Stephen Sheldon with William Blair. Please go ahead.

Stephen Sheldon: Hey, thanks for taking my questions. First one here, I just want to make sure I understood the FX commentary. I think last quarter, you said it was going to be a 3% drag and just to make sure I heard that quickly. Now you’re thinking for the year, it’s going to be a 1% drag. And can you talk about what that change?

Sarah Blanchard: Hi, Stephen. Listen, we did previously announced that we expected about 3 points of headwind from FX. The updated estimate is 1%, 1 point. And it really was just an unfortunate error – these things happen. It has been remediated, and we’ve put additional checks in place to make sure that, that doesn’t happen again.

Stephen Sheldon: Okay, got it. And so with consumer coming in above expect or I guess, I think you upped the guidance just a little bit there on the revenue side. I mean, are you effectively bringing down the UB segment growth? I guess, can you just talk about expectations for UB?

Sarah Blanchard: Yes. Let me walk through our – some of the puts and takes of our 2024 outlook. The first thing I want to mention is we remain very excited about the long-term opportunity, which is unchanged. We did narrow our range and the midpoint is still at approximately 10%, but we’re taking a prudent approach to the year. We continue to be in a volatile macroeconomic environment. You just heard us talk about we are going through a leadership change and we’re still in the process of addressing those execution issues. That being said, we did bring consumer up. We’re now expecting that to be down 2 to 4 points as that continues to outperform our expectations, which means that UB will dip slightly below 20%. We expect overall the low point of our growth to be in Q2, Q3 and for revenue to then reaccelerate on the back of all these things I just spoke about, such that we’re ending the year at about 10% at the midpoint.

Stephen Sheldon: Okay, got it. That’s helpful. I think you talked last quarter about planning to continue investing in the UB go-to-market team. How is that progressing relative to plan? It would be great just to get any additional color on where you’re adding sales resources?

Sarah Blanchard: Yes. So we have been adding resources up market. So, in the strategic accounts, enterprise accounts that is going according to plan. The newer reps are ramping very nicely. So, we’re going to continue to monitor closely. We invested some additional funds in enablement to make sure that these new reps could come in and it’s a growth [indiscernible] running.

Stephen Sheldon: Okay. Great. Thank you.

Sarah Blanchard: Thank you.

Operator: And our next question will come from Curtis Nagle with Bank of America. Please go ahead.

Curtis Nagle: Good. Thanks very much for taking the question. Maybe just first for Sarah. Apologies if I missed this, but what’s driving the additional, [indiscernible] 100 bps in terms of the EBITDA guide for the year?

Sarah Blanchard: Yes. So we are bringing our expectations for EBITDA up due to the outperformance that we saw in the first quarter. We’re being very balanced in our approach, which is continuing to invest in the product, in the innovation, the go-to-market, AEs and enablement that allow us to capture this growth opportunity in front of us. And at the same time, being really thoughtful about driving that operational efficiency. So just with this balanced approach that we continue to take, we do expect it to be able to deliver another 100 basis points or so on the bottom line.

Curtis Nagle: Okay. And then just I guess stepping over to the UB business. So understanding the points you made about macro and challenged environment. Could you speak a little more specifically in terms of the slowdown in ARR a little bit lower, I guess, revenue retention? Are we seeing attrition pick up or what’s going on there? And I guess how much is that flowing through to the forecast of lower [indiscernible] UB revenue for the year?

Sarah Blanchard: We did expect the first half to be muted from a net new ARR perspective due to some of these execution challenges that we saw. Again, remediation is underway. We’re very happy with early signs, but it’s going to take some time. We also want to be really thoughtful about bringing a new leader in place, giving that person time to ramp up. So, we are looking and we’re in the late stages of finding someone who has been able to scale global businesses from $500 million to $1 billion plus. We expect to have more to share with you soon. But we’re just working through some of these short-term challenges. What’s really important, again, the long-term opportunity, which is the continued move to skills-based organization and the growing demand to be able to adapt to and adopt AI capabilities, both for your internal use as well as your product capabilities as an organization. That continues to grow.

Curtis Nagle: Got it. Thanks,

Operator: And our next question will come from Ryan MacDonald with Needham & Company. Please go ahead.

Ryan MacDonald: Thanks for taking my questions. Maybe not harp too much on UB, but maybe just a clarifying question there. As you’re looking at maybe what’s coming in below expectations or maybe where the lack of performance or execution was, is it more concerns in terms of top of the funnel development and generating pipeline or perhaps that progression through the pipeline? Just trying to understand maybe what wasn’t developing as you expected sort of first as we – from fourth quarter earnings call to now through first quarter? Thanks.

Sarah Blanchard: Yes. So there were some different pieces that came to play here. The first thing I’ll say is we had identified the issues back in the last quarter. Some of those were more pronounced as we continue to dig in and put those remediation efforts in place. There were areas of pipeline generation that we’re doing very well. For instance, our AE and some of our SDR side of things. But then we had some other areas where certain pieces of our marketing pipeline weren’t going as well as we would have liked, especially in the commercial side. I think that’s probably not as surprising given that SMBs have been hit pretty hard in this environment. On the execution side, there were pockets of execution from a sales perspective that we’re going really, really well.

We spoke about a very large geographic region that overperformed for the second half of last year. And then we saw some pockets where, frankly, there just needed to be more accountability around the sales process. So there were puts and takes across the organization. Greg has done extensive deep dive. Maybe, Greg, you want to talk a little bit.

Gregory Brown: I’ll jump in a little bit on this one. On the enterprise side, globally right now, we are very encouraged by the pipeline development that we’re seeing and supporting the productivity improvements that we’re seeing on the enterprise side as well. So I feel very good about the work that our teams are doing to not only drive pipeline but also execute on the enterprise side. As you all know, enterprise for us is 80% of our revenue. So that’s a big mover for us. As Sarah just alluded to, down market in our Commercial segment, that’s where we’re focused right now, bolstering our pipeline generation capability. And that work will be ongoing and feel good about the plans in place, but we do you need to bolster the SMB segment because what we’re saying is SMBs. There has been a protracted slowdown, and that’s something we’ve talked about.

So anyway, we’re working hard on that. At the same time, we’ve got a number of programs in place right now that we’re starting to see very positive impact from. One is the partnership that we talked about with McLaren. We just had a significant for us, activation event in the UK and within the last two weeks where we had well over 100 senior executives attend our Power UP event at the innovation center at the MTC and the results of that remain. Obviously, we’re going to matriculate through the pipeline, and we’re going to start to see the results of that as far as productivity and business close over the next couple of quarters. But the early feedback has been tremendous, both from our customers as well as our team. There’s more of those types of things coming as we activate around the world, these partnerships as well as the programs and plans that our marketing team has put in place.

So, feel good about where we’re at as far as the planning going forward. This is a short-term situation for us, down market in the SMB side.

Ryan MacDonald: Really helpful color there, I really appreciate it. I jumped on the call late, so I apologize if I missed this and it was said already. But within the consumer business, great to see some of the – this maybe success relative to expectations there. Obviously, a competitor of yours had talked about a week ago, some softness in North American consumer and maybe lack of conversion. Just curious as what you’re seeing geographically within the consumer business or any concerns of sort of softening conversion trends within North America at all? Thanks.

Sarah Blanchard: Yes. Thanks. So we do continue to see and this has been happening for many, many quarters. Our conversion and business mix really moving overseas from North America, but that is – there’s nothing new that I would call out. While says our stocks continue to perform well, we continue to roll out to new geographies. We’re excited to continue to see that. And what we’ve spoken about is we have some capabilities that we will be able to bring into our personal plan subscription over time that will allow us to drive higher LTV. And then on the back of that, actually start to invest again into the customer acquisition side. So, I would say our trends that we have been seeing are very consistent with what we’ve seen quarter after quarter, and we haven’t seen anything unusual of late.

Ryan MacDonald: Thanks for the color, appreciate it.

Operator: And our next question will come from Terry Tillman with Truist. Please go ahead.

Connor Passarella: Great. Thanks, team. This Connor Passarella on for Terry. I just wanted to start with one on the instructor base. As you rolled out some changes that impact the group over the past few quarters, whether it be the Russia agreement or integration today tools into the platform. Just anything you could speak to about the feedback you’re getting from those instructors and maybe what seems to be top of line for them when you talk about the direction of Udemy? Thanks.

Gregory Brown: Yes. Thanks for the question. We remain very connected with our instructors and have a number of communication channels right now that are open that we’re all engaged with to ensure that not only are they able to provide meaningful feedback to us, but we’re able to clearly articulate and communicate how the investments we’re making in product organic impact in a very positive way, their ability to develop learning capability, bring that into the marketplace and be able to monetize that both in the marketplace and within UB. And effectively, what we did is the same thing we did for you all just a couple of months ago, which is we’ve given them a deep dive demonstration into the three capabilities we’re bringing online.

And the excitement and merger from the group was palpable. It could not be more fired up about what we’re bringing to market. And the impact of that really is the net of it is, is that no top instructors have opted out of our platform. And I think more now than ever, they’re increasingly excited about the earnings potential that we’re going to provide as a result of the investments we’re making and their ability to develop and transform the learning experience. So all to say, really pleased with how our team has managed the communications with our instructors and the response from our instructors.

Connor Passarella: Great. That’s really helpful. Maybe just one quick follow-up. Just strong cash flow numbers this quarter. I wanted to ask if there’s any seasonal or timing impacts around the results and maybe how we should think about operating cash flow, free cash flow for the year? Thanks, guys. Appreciate it!