Udemy, Inc. (NASDAQ:UDMY) Q2 2023 Earnings Call Transcript

Udemy, Inc. (NASDAQ:UDMY) Q2 2023 Earnings Call Transcript August 4, 2023

Operator: Good day, and welcome to the Udemy Second Quarter 2023 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Dennis Walsh, Vice President of Investor Relations. Please go ahead.

Dennis Walsh: Thank you, and welcome to Udemy’s Second Quarter 2023 Earnings Conference Call. Joining me today are Udemy’s Chief Executive Officer, Greg Brown; and Chief Financial Officer Sarah Blanchard. During this conference 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 and 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 assist management and investors in evaluating our performance in 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 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.

Greg Brown: Thank you, Dennis, and good afternoon to everyone on the call. Udemy delivered strong second quarter results. Revenue came in at more than $178 million, or a 16% year-over-year increase, and exceeded the high end of our guidance range. That growth was driven by a 36% year-over-year increase in Udemy Business revenue. On the bottom line we delivered our first quarter of positive adjusted EBITDA as a public company, thanks to our continued focus on operational efficiencies and prudent expense management. We are proud of our team for their commitment and continued execution against our strategic initiatives, particularly as we navigate this unpredictable macroeconomic environment. While the current backdrop presents some near-term challenges Udemy is well positioned to capitalize on meaningful long-term tailwinds for our business that are shaping the future of work.

First, there is a profound transformation happening right now that impacts every industry: the rise of the skills-based organization; and second is the continued interest and application of generative AI across customers of all sizes. I’d like to take a few moments today to provide color on those trend, In conversations with enterprise customers across all industries and regions the number teheme –theme we hear from C EOs is that ensuring their workforce has the skills required to achieve their strategic objectives as a top priority. This represents a massive opportunity for Udemy to provide the necessary reskilling and upskilling that companies around the world will require for their workforce and that individuals need to stand out in the hypercompetitive job market.

In addition the accelerating pace of innovation means that organizations require support to establish learning strategies and objectives for their teams and also a way to measure and validate skills acquisition. While degrees will always have relevance they do not validate the practical skills the individual has mastered which can lead to a qualified internal and external talent being overlooked. For this reason forward-thinking organizations are shifting to a more skills-based approach. By focusing on skills not just degrees companies can vastly expand and diversify their talent pool to fill open roles as well as drive increased internal mobility by reskilling and upskilling existing talent. As companies shift from offline to online to reskill and upskill their workforce they realize it is a more efficient and cost-effective solution that drives high ROI boost morale and provide significant cost savings.

To give you a sense of the size of the potential savings a recent study found that the average per employee spend on L&D by employers worldwide was approximately $1300 per head in 2021. The cost for one Udemy Business license starts at just $360 per year. As you can imagine, the cost savings for a global enterprise are meaningful. When companies embrace a culture of continuous learning’s they future-proof their workforce. Demand for technical skills has never been higher with nearly 90% of companies reporting skills gaps within their organization. And many executives believing that finding talent with specialized skills is a major challenge. L&D leaders must understand the skill level of their workforce particularly within technology-focused areas.

Yet one of their top concerns is that they do not have a reliable strategy for measuring the success of their learning programs. To help customers address this need, Udemy has introduced Badging as a part of its Integrated Skills Framework a comprehensive skill-building approach for organizations. The framework will enable customers to keep pace with innovation through a series of exciting new offerings. Working with Udemy organizations will be provided with a seamless way to quickly assess their current skills landscape and identify critical skills gaps. In addition, it provides employees with an effective way to acquire and demonstrate skill mastery through the acquisition of leading certifications and badges. At the core of our Badging program is Udemy’s certification prep center.

We have made it simple to discover curated learning paths including labs and assessments to help professionals prepare for certification exams and badges. This will enable learners to validate mastery of in-demand skills such as AWS, Azure, CompTIA and more. As of today, our catalog includes certification preparation for nearly 200 highly sought after and reputable badges across more than 160 certification topics and nearly 30 subject areas. The other meaningful tailwind is the evolution of generative AI and its ability to accelerate change across all industries and geographies. Professional learners recognize the importance of understanding how generative AI will impact their role and how they can leverage these technologies to be more effective or to land their next job.

On the enterprise side of our business, customers across all industries are asking Udemy to help them develop AI and digital transformation strategies to become more agile, durable and competitive. The level of engagement on our platform related to this topic is unprecedented. In the seven months since ChatGPT was launched, Udemy has seen more than 1.4 million enrollments in the more than 1,000 courses on the topic on our platform. Taking that a step further, the number of minutes consumed for ChatGPT-related content during Q2 increased nearly 300% from the prior quarter. This is a clear indication that people recognize the importance of understanding this technology and are discovering that they can receive high-quality skills training via Udemy.

During the past few months we’ve continued to invest in further integrating generative AI throughout our platform. We are committed to delivering products and features that support instructors with content generation, deliver more personalized learning experiences and help organizations identify and address skills gaps. On our last call we shared plans to roll out new smart search capabilities, which is one of the several enhancements that leverage the power of generative AI to provide learners with more personalized bite-sized learning experiences. Subsequent enhancements will include skills-based guidance that automatically recommends Udemy learning paths based on defined objectives, including badge, acquisition and certification. In addition, we began to incorporate generative AI into our reports for our cohort learning solution Leadership Academy to provide admins with increased visibility into learning outcomes.

We have also introduced further automation into the generation of these reports to speed up time to value and ensure leaders can access the right data as soon as they need it. Our investments in generative AI are expected to provide meaningful tailwinds for learner demand, enhance personalized learning, deepen our customer relationships and further accelerate the pace at which we can add new relevant and immersive content. You can expect to hear more updates over time on how we are leveraging this exciting technology. As you can see we believe that these trends the rise of skills-based organizations and generative AI will continue to increase in importance and are expected to present significant opportunities for our business. As companies embrace a culture of continuous learning with the goal of future-proofing their workforce we believe demand for Udemy will continue to grow.

Before I turn the call over to Sarah, I’d like to highlight that we’ve significantly strengthened Udemy’s Board and leadership team with three seasoned professionals who will further develop our strategic vision and help scale our business globally. First, we welcome Sohaib Abbasi, as Independent Board Chairman. Sohaib brings more than 30 years of deep enterprise software and strategic leadership experience including more than 10 years serving as CEO of Informatica. We also recently bolstered our executive leadership team with two newly created positions. First, we appointed our Chief Marketing Officer, Genefa Murphy who brings extensive experience leading marketing initiatives for fast-growing software and technology companies. And second, we added a Chief Product Officer, Prasad Raje, who brings a wealth of enterprise SaaS product experience to Udemy.

I’m very proud of the world-class executive leadership team that we have built as we heighten our focus on driving results at every level of the organization. We look forward to Sohaib, Genefa and Prasad’s contributions as we take Udemy to the next level and continue to lead the transformation to a skills-based economy. Now I’ll turn the call over to Sarah for a financial review.

Sarah Blanchard: Thank you, Greg. I’ll focus my comments on the key financial highlights and then provide our outlook for Q3 and full year 2023. You can find the complete set of financial tables in our news release, which is available on our Investor Relations website. As Greg mentioned at the outset, we delivered solid Q2 results. Revenue increased 16% year-over-year to $178 million and exceeded the high end of our guidance range by $4 million. The year-over-year growth included a negative impact from foreign exchange or FX of 3 percentage points. Our Enterprise segment or Udemy Business drove our total revenue growth, delivering revenue of $102 million or an increase of 36% year-over-year. Included in the growth was a 3 percentage point headwind from changes in FX rates.

This is a major milestone for Udemy, as it was our first quarter delivering more than $100 million in Udemy Business revenue. We ended the quarter with annual recurring revenue or ARR of $420 million, up 33% from a year ago. Our consolidated net dollar retention rate for Q2 was 108%. The rate was 115% for large customers or those with 1,000 or more employees. Gross dollar retention remained stable, large customer churn was minimal and growth in multiyear contracts continued during the quarter. This is a testament to the strength of our customer relationships, driven by the clear value and impact that Udemy provides to help them achieve their strategic outcomes. However, we do expect some pressure to continue on net dollar retention, as some companies remain hesitant to move forward with expansions and upsells during this unpredictable macroeconomic environment.

The strong Udemy Business growth was slightly offset by a 2% year-over-year decline in Consumer segment revenue, which included a negative 3 percentage point impact from FX. We continue to be encouraged by the vibrancy of our marketplace, which fuels the powerful flywheel effect that has the ability to increase customer engagement and reduce acquisition costs over time. Traffic was up 8% year-over-year during Q2 to 34 million unique visitors, despite spending significantly less on performance marketing than we did a year ago. More than 80% of learners enroll in courses to develop professional skills, which creates a healthy funnel of leads for Udemy Business. Also attracting instructors organically to create courses continue to be a strength.

As a result, we saw an 11% year-over-year increase in courses in the Udemy catalog, with nearly 5000 new courses added each month. As we move down the P&L, note that all financial metrics are non-GAAP unless stated otherwise. Q2 gross margin was 59%, a 100 basis point improvement from Q2 2022, driven by the continued revenue mix shift to Udemy Business since content cost as a percent of revenue are lower for that segment. Udemy Business accounted for 57% of total revenue in Q2, which represents a meaningful mix shift from 49% a year ago. With nearly 15,000 Udemy Business customers and growing, this mix shift is expected to continue toward our long-term target of approximately 75% of revenue. Total operating expense was $108 million or 61% of revenue and 500 basis points lower than Q2 of last year.

Sales and marketing expense represented 39% of revenue, down 200 basis points year-over-year. R&D expense was 13% or flat compared with the same period last year. And G&A expense was 9%, down 300 basis points compared with last year. On the bottom line, net loss in the quarter was approximately $1 million or negative 1% of revenue. Adjusted EBITDA was approximately $2 million or positive 1% of revenue, which represents a 700 basis point expansion year-over-year and 400 basis points better than our high end of the guidance range. This was another major milestone for Udemy, as it was our first time showing positive adjusted EBITDA since our IPO. The better-than-expected adjusted EBITDA result was primarily driven by revenue outperformance and our disciplined approach to driving operational efficiency throughout the organization.

We continue to maintain financial flexibility that allows us to make opportunistic investments that can accelerate or enhance our strategy and returns. Moving on to key cash flow and balance sheet items. We ended the quarter with $469 million of unrestricted cash, cash equivalents, restricted cash and marketable securities. Free cash flow for the quarter was positive $10 million due to improved collections timing and lower expenses. Now turning to our outlook for Q3 and full year 2023. During the second quarter, we did not see any signs that the macro environment is improving. Within Udemy Business, we are seeing further sales cycle elongation and additional layers for deal approvals. We are also seeing smaller deal sizes, as companies optimize their budgets during this time of uncertainty.

As we continue to adapt and manage the business through this unpredictable macroeconomic environment, there are challenges that ultimately may impact our results in the near term. With that in mind, we expect Q3 revenue to be between $176 million and $180 million. Assuming foreign currency exchange rates remain constant, FX is expected to negatively impact Q3 year-over-year total revenue growth by approximately 2 percentage points. Due to the continued macro-related dynamics I just mentioned, we now expect Udemy Business growth in the near-term to be pressured more than we had originally anticipated. As a result, we currently believe a 2023, Udemy Business year-over-year revenue growth rate in the low 30s is achievable versus our previous view of mid-30s.

On the bottom line, we anticipate Q3 adjusted EBITDA margin of negative 0.5% to positive 1.5%. Looking ahead, we are on track to deliver a profitable second half of the year, and now expect Q3 adjusted EBITDA to come in stronger than Q4 due to the better-than-expected consumer performance in the second quarter and result in Q3 revenue recognition. For the full year, we are narrowing our range on revenues to be between $712 million and $720 million which still anticipate 16% year-over-year growth at the midpoint. That growth includes an estimated three percentage point negative impact from FX assuming no further changes in rates. For full year 2023 adjusted EBITDA margin, we currently expect between negative 1% to breakeven or a 750 basis point expansion at the midpoint compared to 2022.

Looking ahead, while we do not plan to provide formal 2024 guidance until our Q4 2023 earnings call, we’d like to provide color on how we are thinking about the business heading into next year. As a reminder, at our November 2022 Investor Day, we shared that we thought we would be able to drive 23% to 25% total revenue growth in 2024. Due to the deterioration of the macro environment since that time, we now believe our total 2024 revenue growth will be lower than the range what we had provided. That said, for full year 2024 we continue to believe Udemy Business will represent more than 60% of total revenue. Non-GAAP gross margins will be 58% to 59%. And we absolutely remain committed to delivering positive adjusted EBITDA for the full year of 2024.

It is important to note, that while we are adapting in real-time and navigating some short-term obstacles we feel confident that the long-term opportunity available to Udemy is as strong as ever. In closing, Udemy delivered a solid performance in an uncertain environment. Our results illustrate the agility in our business model. We beat expectations on both top and bottom-line delivered more than $100 million Udemy Business revenue and reported our first quarter of positive adjusted EBITDA as a public company, ahead of plan. The foundation we are laying today is expected to yield sustainable recurring revenue growth and generate attractive profit and cash flows overtime. We look forward to continuing to deliver value to all of our stakeholders and updating everyone on our progress.

So with that, we’ll open up the call for your questions, Moderator?

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Q&A Session

Operator: We will now begin the question-and-answer session. [Operator Instructions] First question today comes from Ryan MacDonald with Needham. Please go ahead.

Ryan MacDonald: Hi. Thanks for taking my question and congrats on a nice quarter. Maybe just starting on the guidance you just provided especially as we think about fiscal 2024. As you think about what type of investments might need to be made to reinvigorate the growth rate in UB going into next year. How do you factor that? And I guess, around the targets for still being adjusted EBITDA breakeven into next year? Do you feel like the run rate of where you’re investing there right now is enough to sort of help drive that growth as the market recovers, or do you feel like new investments will be required?

Sarah Blanchard: Hi, Ryan, thanks for the question. So as you can see like many companies we are currently adapting to a very dynamic environment. That being said, we feel good about the investments that we’ve made to-date in our go-to-market team and also in our product. And we’re committed to delivering an EBITDA positive full 2024, and that takes into consideration a range of outcomes based on what the macro does and the investment that we would need to make from a go-to-market perspective in order to achieve those outcomes.

Greg Brown: I’ll add Ryan…

Ryan MacDonald: All right. That’s clear. Maybe…

Greg Brown: I’ll add Ryan real quick that, as soon as we see the macroeconomic environment improving and the impact on our sales cycle elongation coming back to a more normal cycle times we absolutely are going to lean in and start investing in go-to-market growth. And so as soon as that happens, we will trigger that. And as you just alluded to whether it be the back half of this year or next year we’re not sure when that’s going to happen. But when it does we will absolutely move.

Ryan MacDonald: Super helpful color. Greg, maybe just to follow up with you, I appreciate the comments about sort of this evolving environment within the enterprise around a shift towards skills-based learning. I’m curious, what you think the impact or how will — what the impact will be in terms of how enterprise organizations choose to allocate spend in that environment? Do you think that this shift to skills-based learning accelerates the consolidation trend or creates sort of a new maybe funding environment or sort of reinvigorates the funding environment around L&D spending, for the skills-based learning?

Greg Brown: It’s a good question, Ryan. And we’re already seeing that play out now. And I’ll give you a couple of examples Unilever gracious enough to let us talk about it. Significant expansion with Unilever this past quarter driven by their intent to re-skill and up-skill their entire workforce to “future-fit” their organization with the skills necessary for them to achieve their organizational objectives. They want to get this done by 2025. In addition to that they’ve selected us to support their digital university program, which they’ve just launched this past year in accordance with their focus around skills development. And so this is real, it’s happening in real-time. And we’re seeing examples of this and wins reflected in the commitment organizations have and shifting from long-form learning and degrees to skills that can be applied now to get work done.

And in fact interestingly enough as we’re preparing for the call the White House this week came out with a report on a National Cyber Workforce and Education Strategy. And I’m just going to read a couple of lines that are relevant here, a skills-based approach is critical to connect more Americans to good careers. They should compete for jobs based on what they can do rather than merely credentials. So we’re seeing it pretty much from all sectors; federal government, we’re seeing it from customers, we’re hearing it from employees. And so this is a massive secular shift that we’re seeing that we’re on the front-end of that is not only going to drive — that plays to our favor and it’s going to drive organizations to us based on our marketplace and our unique position that we have to keep up with the pace of change and aid them in developing the skills necessary for them to stay up with the technological advancements that are coming at us in real-time.

We, obviously, know what’s going on with generative AI. And we saw a couple of key wins just to add briefly — just to add a couple of key wins this last quarter from large multinational enterprises that told us they selected us because of the breadth and depth in our marketplace around AI. These organizations are focused on upping the digital literacy across the organizations but specific to AI. And they need investments in our platform and us as a long-term strategic partner as a result. So it’s playing out right now Ryan and we’re on the front end of a big trend.

Ryan MacDonald: Thanks for taking the time. I’ll hop back in the queue.

Operator: The next question comes from Terry Tillman with Truist. Please go ahead.

Connor Passarella: Great. Good afternoon. This is Connor Passarella on for Terry. First question maybe a little bit more high level just on the recent executive hires, Chief Product Officer, Chief Marketing Officer. I guess, how do you see the evolution of the platform from a product and messaging standpoint evolving as you continue to position yourself to take a skills-based platform approach to learning with these executives?