Udemy, Inc. Q3 FY2024 earnings call

• Delivered strong Q3 with revenue and adjusted EBITDA margin exceeding guidance ranges. Revenue grew 6% y/y, including a 2-point FX headwind. Adjusted EBITDA reached a new record.
• Achieved over $500 million in Udemy business ARR. Focused on operational efficiency, achieving over $50 million in cost savings against initial target of $25 million.
• Udemy business is prioritizing large enterprise customers (over 1,000 employees, ~75% of Udemy business revenue), reallocating resources from SMB. Launched AI-powered skills mapping and AI assistant to help organizations bridge skills gaps.
• Highlighted customer examples like Old Mutual, U.S. Steel, Calybre, and Mphasis showcasing successful partnerships. Return of Eren Bali as CTO to lead product and engineering teams, consolidating roles to drive innovative products.

Third quarter revenue increased 6% year-over-year to $195 million. Udemy business revenue for the quarter was $126 million, an increase of 16% year-over-year, including a 2-percentage point headwind from changes in FX rates. Consumer revenue was $69 million, down 8% year-over-year. Udemy ended the quarter with annual recurring revenue (ARR) of $505 million, up 14% from a year ago. Udemy business ARR from large customers (over 1,000 employees) increased 15% year-over-year, while SMB ARR grew 11% year-over-year. Gross margin for the Udemy business segment was 74% for the third quarter, up 600 basis points from the prior year. Total company gross margin was 64%, a 400-basis point improvement from Q3 2023.

• Raised full-year 2024 revenue outlook to $780-783 million (6% y/y growth, ~4.5% adjusted EBITDA margin). Q4 revenue expected $193-196 million.
• 2025 adjusted EBITDA target $70 million, with a clear path to 2026 target of $130-150 million.
• Structural cost savings of over $50 million, focusing on large enterprise. Headwinds in 2025 include $20 million reduction in SMB quota capacity and softness in EMEA.

• Subdued corporate L&D spending environment with elongated sales cycles.
• Pressure on net dollar retention due to budget scrutiny and AI transition.
• Headwinds in 2025 from SMB reallocation and EMEA softness affecting revenue growth.

Q: Curious if you could share a little more detail around how some of these new AI-enabled capabilities are changing the conversations the sales team's having with larger enterprises and when you may expect some of those conversations to lead to a more direct impact on growth going forward for the enterprise segment.

A: Yes, thanks for the question. So first I'd say we're already seeing the impact on sales process, sales cycles, and our ability to establish value associated with these AI capabilities from the standpoint that organizations for some time now have been looking for a product capability like our skills mapping that enables them to assess skills, develop a hyper-personalized learning experience based on the skills gap, and then assess again to certify and then provide a badge or certificate associated with skills acquisition. Skills mapping brings that to life now, right? So we now have automated what has been primarily a manual process for most organizations. So there's a lot of excitement about that from L&D leadership perspective within the companies we serve. At the same time, the AI learning assistant, having an assistant along for the ride for individuals and within organizations to again personalize that learning experience but also to have the ability to ask questions and be engaged in that learning process throughout, which is what the AI assistant is. All of it really what we're seeing in early signals, both in the beta as well as live with customers, increase not only adoption, but more importantly, active usage and engagement on the platform. And we expect that to persist. We're really excited about the progress right now to date, and we're just getting going. Right now, we have about 1,000, a little over 1,000 enterprises that have lit up skills mapping and AI assistant, and we're ramping in. So early days, but early signals are very positive.

Q: Just as we think about Udemy business, I guess, how would you characterize corporate L&D, the spending environment there comparing this quarter to the first half of the year? Greg, I think you maybe noted that the environment is stable but subdued. So have you seen any early signs of a pickup? And if not, what do you think it will take for that to happen?

A: Yes, thanks for the question. Yes, I did mention that we are seeing continued scrutiny on budgets within organizations as companies rationalize not only their L&D spend, but their rationalizing spend across the entire enterprise. I mean, and we're doing the same thing. We're no different. But this streamlining for us presents an opportunity in that we've talked for some time now about the opportunity for us to be a consolidator of L&D content, more importantly, strategy, and to be the platform that organizations look to as they're thinking more strategically about developing a skills development capability. And I'll give you an example. One of the largest tech companies in the world, Fortune 100 tech company this last quarter, made a decision to pivot and really start investing in developing a strategy with a more outcome-driven approach. And as a result of that, we replaced our largest competitor. And this is a 40,000-seat deal. And the reason that they chose us in terms of the platform was the breadth and depth of the content, the breadth of our platform, not just on the technical skills development side, but the business skills development side, and through the process, the adoption they saw in the organization of our platform vis-à-vis our primary competitor. And we're seeing these types of examples manifest on a continuous basis. That being said, we're in the midst of two major transformations right now. One is the skills-based organization transformation, which I just alluded to. And the other one's AI, this transformation to organizations really on the front end of determining how they're going to leverage generative AI to transform how they operate internally, as well as into the products and services that they deliver. And these transformations take time. And we're seeing that. So, in terms of the market being subdued, although we're seeing positive signs and have more examples like the ones I just shared with you, this transformation that we're going through in both endeavors is on the front end of the cycle, and it's going to take some time. So, that's what we're seeing. And we expect that to continue for a bit. Don't know necessarily when the cycle's going to turn back up, but we know that there's strong demand for what we provide for learning and development organizations have a strategic need for platforms like ours.