Udemy, Inc. (NASDAQ:UDMY) Q4 2023 Earnings Call Transcript

Udemy, Inc. (NASDAQ:UDMY) Q4 2023 Earnings Call Transcript February 14, 2024

Udemy, Inc. beats earnings expectations. Reported EPS is $0.02, expectations were $-0.02. UDMY isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Hello and welcome to the Udemy Fourth Quarter 2023 Earnings Conference Call. All participants will be in listen-only mode. [Operator instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator instructions]. I would now like to hand the call to Dennis Walsh, Vice President, Investor Relations. Please go ahead.

Dennis Walsh: Thank you, MJ. 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 support management and investors in evaluating our performance and comparing period-to-period results of operation 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. I will start today with comments on our results, highlight some achievements from 2023, and then provide an update on our strategic priorities for 2024. Udemy closed out 2023 with strong results that exceeded expectations for both revenue and adjusted EBITDA margin. Despite the challenging macroeconomic environment, Udemy increased full-year revenue by 16% year-over-year. Within that, our leading growth engine, Udemy Business, delivered impressive 34% year-over-year revenue growth as companies around the world are prioritizing investment in the upscaling and reskilling of their talent. From a profitability perspective, we delivered our first full year of positive adjusted EBITDA, well ahead of plan.

As a company, we made meaningful progress in 2023. I stepped into the CEO role last February, and we further bolstered our leadership team with new chief marketing, people, and product officers, who all bring deep experience within their respective functions to Udemy. On our Q4 call last year, we laid out our strategic priorities for investors and other stakeholders. I’m proud to say that we delivered on each of those priorities, which included, first, establish Udemy as the platform of choice for professional learners and increasing skills development through new learning modalities. Last year, we significantly grew our learner base, adding 10 million new learners to our platform and more than 1,800 net new Udemy Business customers. We leveraged generative AI technology to create more personalized learning experiences, including capabilities that enable microlearning.

We empowered our instructor partners with tools that help create high-quality, on-demand, and immersive content faster and more efficiently. Further, we shared our generative AI product roadmap that will transform how professionals develop skills, organizations recruit and manage talent and instructors create content. Second, introduce validation of skills acquisition through badging and professional certification. We partnered with 1EdTech to bring the Open Badges standard to our platform. We introduced curated learning paths, hands-on labs, and assessments to support Udemy Business learners’ preparation for nearly 200 branded third-party certifications and badges. We also enabled learners to import those badges and certifications on to our platform to signal skills proficiency and to empower organizations with valuable data about their workforce’s capabilities.

Later this year, we will be extending our professional badging and certification capabilities to our consumer marketplace. Third, accelerate global expansion. We leaned into our partner strategy, further developing our relationships with AWS, Benesse, and other technology and regional reseller partners that extend our reach domestically and internationally. To further our commitment to upscaling and rescaling, Udemy also entered into new partnerships with Docker, a leading provider of development tools, and ServiceNow, a leading digital workflow company. And finally, increase company-wide operational efficiency and progress toward profitability. Thanks to our disciplined approach to driving efficiencies throughout the organization, we delivered positive adjusted EBITDA for the full year ahead of plan.

Building on that momentum, we entered 2024 well-positioned to capitalize on a large and growing opportunity. AI is changing the way the world works and is expected to have a $4 trillion impact on organizations. This unprecedented transformation, driven by rapidly evolving technology, is expected to affect nearly every professional role in every industry and region. This represents a massive long-term opportunity for Udemy, since skills are at the heart of this revolution. More than ever, employers are recognizing the importance of prioritizing proficiency in specific skills, rather than solely looking at traditional degrees and job histories. A recent study found that more than 90% of companies believe skills-based hiring is more effective than traditional resume-based approaches, leading to a reduction in mishires by nearly 90%.

This shift to skills-based practices is becoming increasingly necessary to support workforce retention, facilitate internal mobility, and enhance workplace diversity. In addition, corporate leaders around the world are concerned about a pending talent shortage. A new study found that by 2030, less than six years from now, there will be a global talent shortage of more than 85 million people. This could significantly restrain companies’ growth, resulting in trillions of dollars of unrealized annual revenues. In the technology space alone, the U.S. could lose out on more than an estimated $160 billion worth of revenues annually, unless more adequately skilled, high-tech workers are found. As the business landscape further evolves, so do the skills required, as demonstrated by the powerful impact of generative AI in just one year.

In this current environment, developing workforce skills, especially AI proficiency, is essential for organizations to remain competitive over the long term. The number one topic we’re discussing with leaders in almost every company is how Udemy can help them develop a digital transformation strategy. As an example, Genpact, a leading global professional services company committed to leveraging data, tech and AI services, recently expanded their relationship with Udemy. Genpact collaborated with Udemy to develop its GenAI Talent Academy, a comprehensive 12-week program focused on developing AI skills. With the introduction of this innovative learning program, Genpact not only achieved its goal of upscaling its specialized workforce in generative AI, but it also emerged as one of the pioneering entities in the industry.

Genpact achieved this goal two times faster than expected, equipping their team with the essential readiness to address escalating client demands. Another example is Marriott International, which expanded their relationship with Udemy this quarter as they are in the midst of a similar transformation. Marriott will leverage the Udemy learning platform, including our Udemy Pro offering and local language collections, as they further invest in growing their global digital and technology workforce. Forward-thinking companies like Genpact and Marriott recognize the importance and value of investing in employee upscaling and rescaling, those that don’t risk falling behind. We believe skills-based organizations with robust internal L&D programs see increased employee retention and also achieve better business outcomes.

It’s for these reasons that many companies today are redefining jobs as collections of required skills, considering each role’s evolution over the long term. During the fourth quarter, one of the largest financial institutions in the world, engaged Udemy to provide a comprehensive learning solution that supports their goal of upscaling across the organization. This new customer entered into a seven-figure, multi-year, multi-product deal, partnering with our team to accelerate the development of cloud and other technology skills with high-quality and immersive learning experiences. We continue to see a trend of financial institutions becoming early adopters of AI technology, thus driving meaningful demand from that sector. Another new customer that engaged Udemy during Q4 to support their L&D efforts is Airbus, a global aerospace and defense company.

As Airbus is shifting focus towards becoming a technology company, rescaling and upscaling existing employees is fundamental. Udemy was selected as their partner due to our agile content model that aligns with their shift towards becoming a skills-based organization with emphasis on digital badges and professional certifications. An initial focus is on digital profiles via the Airbus Digital Academy, a central hub for all data and tech content, where Udemy provides the skills development that helps their employees keep up with the accelerated pace of technology change. Taking all of that into account truly illustrates the importance of creating a culture of continuous learning as central to the future of work. Traditional L&D models, which were primarily in-person, as well as publisher models, can’t keep pace with today’s ever-evolving skills needs.

With our on-demand, immersive and cohort-based learning modalities, Udemy is well-positioned to become the exclusive partner to support any company’s transition to a skills-based organization. Looking ahead, we are refreshing our strategic priorities for 2024, which include, first, establish Udemy as a skills development platform of choice for professional learners and organizations. Second, elevate the Udemy brand globally so that it becomes synonymous with skills. Third, support Udemy business growth through strategic partnerships, strengthening our global distribution capabilities, opening up new routes to market, and additional ways to access the Udemy platform. Fourth, accelerate global expansion and finally, further transform the Udemy platform from an on-demand learning content provider to the most innovative skills development platform, utilizing AI-powered capabilities to accelerate skills acquisition and validation.

We’re already off to a great start delivering on those priorities. Two weeks ago, we unveiled our near-term generative AI product roadmap and the Udemy Intelligent Skills Platform, a next-generation software solution powered by our rich content model. Udemy’s comprehensive platform is set to redefine the L&D software landscape by incorporating a suite of cutting-edge AI-powered capabilities, including a learning assistant, skills mapping, and several new content creation enhancements for instructors. At the same time, Udemy’s platform will serve as a rich repository of learning data and actionable insights, enabling Udemy business customers to make informed talent management decisions regarding internal mobility and recruitment strategies. Ultimately, Udemy’s platform will revolutionize the way organizations future-proof their workforce by fast-tracking the acquisition and validation of critical professional skills required to more efficiently develop talent and thrive over the long term.

We are excited about the prospects of our product roadmap and are committed to continuing our journey of innovation and transformation. All of this progress sets the stage for 2024. Although the demand environment hasn’t changed meaningfully since our last call in November, we are confident in our ability to grow our business and continue capturing market share. We believe the investments we’re making in brand, product, and our go-to-market capabilities will support our long-term performance, giving us confidence that we will reaccelerate AR growth this year. Sarah will provide more details on our outlook in a moment. One final point before I close; in conjunction with today’s results announcement, we also shared that our board of directors has approved a stock repurchase program to acquire up to $100 million of the company’s outstanding common stock.

This repurchase program not only underscores the confidence that our board and management team have in the future of Udemy, but it also allows us to leverage the strength of our balance sheet and deliver returns back to shareholders. In closing, we remain focused on executing our strategy as we help enterprises around the world transition to skills-based organizations. I want to thank all Udemy’s employees for their hard work and contributions to the results we delivered in 2023, as well as to our valued instructors, customers, partners and shareholders for your continued support. 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 for Q1 and full year 2024. You can find the complete set of financial tables in our news release, which is available on our investor relations website. We outperformed our full year 2023 guidance for both revenue and adjusted EBITDA margin. Revenue of $729 million increased 16% year-over-year, including the negative impact from foreign exchange, or FX, of three percentage points, while we delivered our first full year of positive adjusted EBITDA ahead of plan. We could not be more proud of our team for their hard work over the past year to deliver these results in a challenging environment. I will focus the rest of my comments on the fourth quarter results.

For the fourth consecutive quarter, our results exceeded guidance on both the top and bottom line. Revenue increased 15% year-over-year to $190 million, or nearly $3 million above the high end of our guidance range. The year-over-year growth included a negative impact from FX of one percentage point. The contribution from regions outside of North America was 60% of total revenue, an increase from 59% in Q4 of the prior year. Similar to previous quarters, our enterprise business continues to deliver best-in-class software company performance. Udemy business revenue increased 27% year-over-year to $115 million. Included in that growth was a two percentage point headwind from changes in FX rates. We ended the year with annual recurring revenue, or ARR, of $466 million, up 25% from a year ago.

From a macro perspective, the current environment remains volatile, and sales cycles remain elongated, contributing to slower-than-expected conversions across most regions. While we are generally pleased with Q4 ARR, we did have softer-than-expected performance in Vietnam and South Korea, where we have reseller partnerships, and saw continued weakness in the EMEA region. Encouragingly, we are seeing higher-quality leads coming through the pipeline, and deal size and term lengths are up, with a number of $100,000-plus deals and multi-year contracts in ARR showing meaningful year-over-year growth. As of the end of 2023, we saw an 80% year-over-year increase in seven-figure deals in ARR, a testament to the value large corporations are assigning to L&D investments globally.

Our consolidated net dollar retention rate at year-end was 106%, flat compared to the prior quarter. The rate was 113% for large customers, or those with 1,000 or more employees, just one point lower than the prior quarter. It is encouraging to see net dollar retention showing signs of stabilization as we enter a new year. On top of that, gross dollar retention was unchanged once again. In aggregate, we grew our customer base by 13% year-over-year to nearly 16,000 customers globally. Our consumer marketplace continues to be vibrant. Approximately 34 million average monthly unique visitors came to our site during the quarter, and instructor engagement remains strong. More than 5,000 new courses were added each month, on average, and 60% of our top courses were updated in the past 90 days.

For the quarter, consumer revenue was flat on a year-over-year basis, and the impact from FX was not meaningful. As we move down the P&L, note that all financial metrics are non-GAAP unless stated otherwise. Q4 gross margin was 59%, a 200-basis point improvement from Q4 2022, driven by the continued revenue mix shift to Udemy Business, which accounted for 61% of total revenue in Q4, an increase of 600 basis points year-over-year. Gross margin for our Udemy Business segment came in at 69% for the fourth quarter, up 200 basis points from the prior year. Total operating expense was $114 million, or 60% of revenue and 1,200 basis points lower than Q4 of last year, thanks to our focus on company-wide cost efficiency. Sales and marketing expense represented 40% of revenue, down 700 basis points.

R&D expense was 12%, down 200 basis points and G&A expense was 8%, down 300 basis points. On the bottom line, we delivered net income of approximately $4 million, or 2% of revenue. Adjusted EBITDA was positive for the third consecutive quarter at approximately $4 million, or 2% of revenue, representing a 1,400 basis point expansion year-over-year, and 100 basis points above the high end of our guidance range. The better-than-expected adjusted EBITDA result was primarily 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 $481 million of cash, cash equivalents, restricted cash, and marketable securities.

Free cash flow for the quarter was negative $11 million, driven by timing related to bookings and collections. Now, to introduce our outlook for Q1 and full year 2024; we are cautiously optimistic about 2024, given the lingering uncertain macroeconomic conditions. While the environment is beginning to show early signs of stabilization, our approach is unchanged. We are monitoring the environment closely and are taking prudent steps to position ourselves to move fast once green shoots start to materialize. On our last call, we shared that 2024 will be a heavier investment year than future periods. We have aligned our strategy, as well as our investments in product innovation, brand and go-to-market, to capture the increasing global demand for skills development.

For modelling purposes, we anticipate that OpEx as a percent of revenue will be greater in the first half of the year. We expect our strategic investments in brand and product to begin delivering returns in the back half of the year, which we are confident will result in reacceleration of ARR growth, followed by Udemy business revenue growth. With that, we expect Q1 revenue to be between $193 and $196 million. Assuming foreign currency exchange rates remain constant, OpEx is not expected to meaningfully impact Q1 revenue growth. On the bottom line, we are targeting breakeven for Q1 adjusted EBITDA margins. For the full year, we expect revenue to be within a range of $795 and $810 million, or 10% year-over-year growth at the midpoint, including an estimated three-percentage point negative impact from FX, assuming no further changes in rates.

Further, we expect Udemy business revenue will account for more than 60% of total revenue for the full year. On the consumer side, we remain focused on maintaining a vibrant marketplace in 2024, which will continue to fuel the flywheel that powers Udemy businesses’ growth. As a reminder, we are not currently investing behind consumer revenue growth. Therefore, we anticipate it to be down 3% to 5% year-over-year in Q1, and on a full-year basis. On the bottom line, we expect full-year adjusted EBITDA margin of 150 basis points to 200 basis points. Going forward, we will continue executing on our strategic initiatives as we progress toward our long-term financial targets. Although it won’t be a straight line, we are confident that we will achieve our adjusted EBITDA margin target of 15% to 20% by 2027, driven by the revenue share change, continued revenue mix shift to Udemy business, and FX leverage, primarily from sales and marketing, as we scale globally.

We plan to make significant investments in brand and product innovation, while also focusing on expanding operating and free cash flow margins. With the introduction of our share repurchase program, we can opportunistically return capital to our shareholders throughout the year. As we execute on our long-term initiatives, and as the macroeconomic environment improves, we are well positioned to create significant shareholder value. In closing, 2023 was a transformative year for us, and we are proud of the milestones we achieved. Our outlook for 2024 does reflect challenges we experienced in Q4 that flow into the first half of this year. However, the long-term growth opportunities in this space are significant. Udemy provides a comprehensive solution that addresses increasing demand to support companies as they transition to becoming skills-based organizations and develop strategies around generative AI.

With all of that in mind, we are as excited as ever about the future, 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] Today’s first question comes from Stephen Sheldon with William Blair. Please go ahead.

Stephen Sheldon: First, here, just on the revenue guidance, it’d be great to get some color on the growth assumptions you’ve made between consumer and Udemy business and then just generally, I guess the high level, how you factored in broader macro trends in your guidance. Seems like you maybe have taken a conservative approach there, but are you kind of assuming that the budgetary pressure from organizations continues throughout the year on the business side? Just approximate detail there.

Sarah Blanchard: Yes, thanks for the question, Stephen. So first, we’re very pleased with the quarter, delivering UB revenue up 27% year-over-year, and million-dollar-plus customers up 80% and our full-year EBITDA profitable ahead of schedule. But our guidance really took into consideration a few things. One is, there is still this macroeconomic volatility, and we expect that to continue for some period of time and as we spoke about, we did see some execution issues in the second half of Q4 and specifically, that was with some of our reseller partners in Korea and Vietnam and we saw extended software performance in EMEA. On the consumer side of things, the focus for us has been marketplace vibrancy and we are seeing an increase in customer acquisition cost, while at the same time, our ASPs are up, but putting those two things together, along with the pullback that we’ve had over the last two years in performance marketing spend, our focus really is on continuing to see 5,000 courses a month being published, and that constant stream of high-quality, fresh, broad content.

We are not going to be reinvesting behind consumer until we’re porting some of the UB capabilities for our learners over to our consumer side of things. What we’re looking at for the year is, we are in the process of taking some actions to address the performance and execution issues we saw in the back half of Q4 and so we’ve set prudent expectations for the first half, because those initiatives will take some time to take hold, but we do expect ARR growth, while it will be down a bit in the first half, to then accelerate in the back half.

Stephen Sheldon: Got it. And is there any way to, for Korea and Vietnam, I guess, is there any way to frame roughly how big those countries are in terms of the contribution to ARR?

Greg Brown: Hi, Stephen. Good question. So I won’t get into the specific numbers or economics around it, but we did get surprised and material enough for us to call it out to you and the actions we’re taking is we’re putting GMs in the process of, we’ve already got one of these hired in both countries, in Korea and Vietnam, to bolster leadership, as well as ensuring that, from an enablement perspective, we’re taking all the knowledge and best practice we’ve learned on a global basis, and then specifically in Japan, where we’ve seen continued growth and acceleration, and porting that over to Korea and Vietnam and that leadership is going to help with that. So those are the actions we’ve taken and Sarah also mentioned, it wasn’t just exclusive to Vietnam and Korea.

We did see execution issues in other segments and we’re taking similar action in those areas. So the net of it is we’re confident that we know what we need to do to address the execution issues. The plans are in flight and as Sarah mentioned, we are confident that we will see acceleration and ARR growth in the back half of the year.

Stephen Sheldon: Got it. That’s helpful. Just maybe then switching to the margin guidance, you’re not assuming much expansion relative to where you ended up in 2023, even with the upward trend in gross margins and you talked about that as being the right expectation last quarter. So not a big surprise. But it’d be great to get some detail. It seems like you’re maybe ramping the strategic investments. Just some more detail on specifically kind of where you’re making some of those investments.

Sarah Blanchard: Yes, that’s a great question. As you said, we have shared that this year is going to be an investment year for us. So while we expect about 300 basis points of expansion from a gross margin perspective, from both the instructor revenue share changes and from the continued mix shift to UB, we are reinvesting the majority of that back in the business such that this year we expect about 150 basis points to 200 basis points on the bottom line. Those investments are in three areas, mainly. The first is brand. Udemy historically has not invested in brand, and now is the time. The second is in product investment, specifically some AI-enabled capabilities that are going to be complete game changers for the value that we can deliver to our customers and I’ll let Greg share a little bit more on that. But the last thing is in specific areas where we did see great performance in certain segments, we will be continuing to expand the go-to-market teams there.

Greg Brown: I’ll just add, Stephen, that we could not be more excited about the investments we’re making and the impact these investments will have in terms of the intelligent skills platform. We just talked about it a little bit, but this is going to be a game changer for us, and most importantly for our customers, as we begin delivering skills mapping, which is going to save L&D teams hundreds of hours, and the learning assistant, which is going to deliver a personalized learning experience that is transformative, and something that we have not been able to accomplish without the addition of generative AI into our toolkit and then automated Q&A for instructors. Today, many of our instructors spend hours answering Q&A. This is going to enable us to answer those questions in seconds, and then instructors validate the answer, and then off it goes.