Earnings Labs

Udemy, Inc. (UDMY)

Q3 2021 Earnings Call· Thu, Dec 9, 2021

$5.09

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Transcript

Operator

Operator

Thank you for joining the Udemy Third Quarter Fiscal 2021 Earnings Conference Call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question-and-answer session. [Operator Instructions ]. As a reminder, today's conference call is being recorded. I will now turn the conference to your host, Joel, to cover the safe harbor.

Taylor Joel

Management

With me today are Gregg Coccari, Udemy CEO; and Sarah Blanchard, Udemy CFO. Before we begin, during this call, we may make forward-looking statements within the meaning of federal security 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 SEC filings, including our quarterly report from Form 10-Q for this quarter, which ended September 30th, 2021 filed with the SEC on December 8th, 2021. Our forward-looking statements are based upon information currently available to us. We caution you not to 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. These non-GAAP financial measures assist 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 release. The reconciliation of these non-GAAP measures to the most comparable GAAP financial measures is included in our earnings press release submitted to the SEC. These reconciliations, together with additional supplemental information, are available at the Investor Relations section of our website. A replay of today's call will also be posted on the website. During this call, we referenced an ESG risk rating developed by Sustainalytics. The use of the ESG risk rating and the information included therein is subject to limitations. For more information, see our earnings press release. I will now turn the call over to Gregg.

Gregg Coccari

Management

Thank you, Taylor. And thank you all for joining us, on our first call as a public company. It's been an exciting journey so far. We are grateful to our employees and instructors for their incredible commitment to our mission of connecting people everywhere to the knowledge and skills they need to succeed in a rapidly changing world. We're also grateful to Udemy Business customers and learners for trusting us as they up skill and reskill to meet the needs of the modern workplace. Thanks to them all, we had a successful IPO and a strong third quarter. As of the quarter-end, Udemy had over 46 million paid and free learners and over 9,500 customers subscribing to our Udemy Business offering. In the third quarter, we grew revenue to $129.6 million up 9 % year-over-year. Udemy Business grew 84 % year-over-year, with an ending ARR of $207 million. As expected, the consumer business was down 13 % year-over-year due to the extraordinary topline growth last year during the early waves of the pandemic. Driving Udemy Business ' strong year-to-year growth was increasing demand for our content; its quality, its depth, its breadth, its freshness, which is a direct result of our differentiated global knowledge marketplace. It provides both the content and significant leads that fuel our Udemy Business offering, which meet the specific needs of our Business users. For Udemy Business customers specifically, we've recently expanded our Udemy Business offering with new language collections in Italian and Russian, as well as immersive learning and cohort-based learning offerings. For those of you who are new at Udemy, I'd love to start with our founder's story because it reflects Udemy 's commitment to making education and knowledge accessible and attainable. Eren Bali grew up in a small village in rural Turkey, where…

Sarah Blanchard

Management

Thank you, Gregg. We're very pleased with the results in the quarter, particularly with the growth in Udemy Business, which we expect to continue to grow as a percentage of revenue over time, with strong unit economics. Before I lay out the quarter, let me briefly explain our revenue model. Our revenue comes from paid consumer learners and Udemy Business customers. As online learning has become more mainstream and organizations have realized its benefits. We have experienced rapid adoption of our solutions, and our revenue mix has been shifting toward Udemy Business. Consumer revenue was 61 % of our revenue versus 77% a year ago, while Udemy Business revenue has increased from 23 % a year ago to representing 39% of our revenue. Today, consumer revenue mainly consists of individual course purchases made by individual learners. We're also starting to generate revenue from our consumer subscriptions which were initially launched in Q2. Udemy Business revenue primarily relates to Udemy Business subscription contracts with annual or multiyear subscription terms. Udemy Business subscriptions are generally billed in advance on an annual basis. Before I jump into the numbers, it's important to mention that the majority of our consumer revenue is recognized ratably over 4 months, following the course purchased, while the majority of our consumer content costs are recognized in the same month as the course is purchased in line with net billing. As a result of this disconnected timing between consumer revenue and content costs, we typically see lower consumer gross margin in quarters with high consumer net billings. This is then followed by a quarter with higher consumer gross margin when their deferred revenue is being recognized with no associated content costs. With that said, third quarter revenue of $129.6 million was up 9 % year-over-year, driven by extremely strong…

Operator

Operator

Thank you. [Operator Instructions]. Our first question comes from Sterling Auty of JP Morgan. Your line is open.

Sterling Auty

Analyst

Yeah. Thanks. Hi, guys. So on the consumer business, you'd mentioned that you're starting to see a little bit of traction in the consumer subscription. Any more detail that you can give to that element in terms of where either geographically or what you're doing to kind of support the adoption on the subscription side?

Gregg Coccari

Management

Hey, Sterling. Thank you for the question. It's very much early days in our consumer subscription journey. We're really focused still on testing and learning, and we're doing it in about 5 countries right now. It's a very small percentage of our traffic. The -- we're just in the testing and learning phase. And then once we find the sweet spot of where we want to be, then we're -- then we will ramp it up, so -- but we're not there yet.

Sterling Auty

Analyst

Understood. And then one follow-up on the business side. Looking at the success that you're having in new customer adoption, if you could just talk to us around the ramp of some of your sales resources and effectiveness in the major regions of the world.

Gregg Coccari

Management

We're continuing to build out our go-to-market team. Our go-to-market team today, it's about 400 people. And so we're continuing to ramp it up. But there's still a lot of new people because we're continuing to hire. We're building it out across the globe. We started in North America then we went to EMEA, then we went to APAC, and we're building out all those areas, but then we just started building out Latin America. So we still have a lot of people ramping up while we're seeing -- with the established salespeople, we see very good trends, but there's also a lot of new ones coming in as we continue our global expansion.

Sterling Auty

Analyst

Understood. Thank you.

Operator

Operator

Thank you. Our next question comes from Josh Baer, Morgan Stanley. Your line is open.

Josh Baer

Analyst

Great. Thanks for the question and congrats on the first quarter. Question for Gregg. With pressures on enrollment in higher Ed that we've been hearing about this semester, one thesis is that individuals are choosing higher wages in the workforce over school. And so with that in mind, I'm just wondering if you're picking up any increase in demand on the consumer side related to individuals looking for skills for the workplace.

Gregg Coccari

Management

Yes. We're seeing those same trends in college enrollments in the U.S. specifically where they are down. And we actually think that for us is a headwind. There's a headwind for the schools, excuse me, but a tailwind for us. So we have -- we are in the skills-based economy, we're helping people up skill and reskill and get that first job. So this is something that's actually a good trend for us.

Josh Baer

Analyst

Great. That makes sense. And for Sarah, with your excellent international presence, was just hoping you could provide some context on overview for foreign currency exposure if there's a hedging program or if there's -- it was impacting the quarter. Any context for what constant currency growth was in 2020 or this quarter would be great. And thank you very much.

Sarah Blanchard

Management

Yeah, great question. So the biggest piece of cost for us is our content cost, and that is a natural hedge for us. We don't have a ton of other exposure from an FX perspective. Obviously, currency gains and losses and constant currency, there's different countries going different ways from an FX perspective, but we have that natural hedge built into our -- into our business.

Josh Baer

Analyst

Okay. Thank you. So it's impacting the top-line and as well as [Indiscernible].

Sarah Blanchard

Management

That's right. Impacts the top-line and the bottom-line together.

Josh Baer

Analyst

Okay.

Sarah Blanchard

Management

The top-line and then cost, yeah.

Josh Baer

Analyst

Okay.

Operator

Operator

Thank you. Our next question comes from Terry Tillman of Truist Securities. Your line is open.

Terry Tillman

Analyst

Yeah. Thanks for taking my questions, and congrats, as well. For me, Gregg and Sarah, on the IPO -- the successful IPO. I just had 2 questions. One is, given the timing of your IPO and then we launched coverage and just -- you've got well over a month of the fourth quarter under your belt. I'm curious on the consumer side, I do think, if I'm not mistaken, you do some promotions and kind of that Cyber week is pretty important. Anything you can share at all in terms of just consumer engagement. Maybe over kind of that Black Friday or Cyber Monday, or just what you've seen so far, quarter-to-date are around kind of seasonal buying. And then I have a follow-up.

Gregg Coccari

Management

Thank you. This -- the fourth quarter is one of our big quarters. The -- we are -- in the consumer business, the fourth quarter and the first quarter of next year are 2 big quarters. And so we came in and we saw Black Friday and we do a lot of promotions and a lot of marketing and we're very happy with what we saw. Our traffic is holding up. The things that -- the early indicators for us is our traffic, and our traffic has been consistently over 30 million unique visitors and it's up over 50 % year-over-year versus first -- not year-over-year, versus 2019. So our traffic is holding up and we're seeing good trends. And so even though Black Friday, overall, for the consumers was off a little bit, we had a very solid performance.

Terry Tillman

Analyst

That's great to hear, Gregg. And then my follow-up for either you or Sarah, is just on the Udemy Business side. What I'm curious about is, some of the initiatives you have to just further strength en engagement, it just drive better outcomes for the business customers, like, immersive learning, UB Pro. What do you think from some of those initiatives? And could they have potentially a positive development on the dollar base net revenue retention? Thank you.

Sarah Blanchard

Management

Thanks for the question. We're in the early stages of what we are building out for immersive learning, and the response from customers is very positive. So I think it will help not just a net dollar retention, because I think having more products to sell into our customer base will obviously help by net dollar retention, but also in just new logos. There's a lot of excitement about hands-on and community workspaces assessments. And so we're very excited to continue the progress there.

Terry Tillman

Analyst

Thank you.

Operator

Operator

Thank you. Our next question comes from Rob Oliver of Baird. Your line is open.

Rob Oliver

Analyst

Great. Good evening. Can you guys hear me okay?

Sarah Blanchard

Management

Yes.

Gregg Coccari

Management

Yes.

Rob Oliver

Analyst

Okay. Great. Thanks. Thanks. My first question, Gregg, is for you on the Udemy Business side. Obviously, very strong and it seems like a nice expansion with Citi, which was already a pretty large deployment. Just curious what you're seeing there in terms of the mix and type of lands that you're seeing with UB, whether it's mostly large enterprise, whether it's commercial. And then if you can just remind us -- I know you guys just called out the seasonality on the consumer side of the business, which makes perfect sense with Q4 and Q1. Is there also that a similar seasonality with the enterprise buying that we can expect in Q4 on the UB side of the business? And then I had a quick follow-up for you, Sarah.

Gregg Coccari

Management

Yes. So yes, there is a seasonality in Udemy Business side and its fourth-quarters. So December is always our biggest month for landing. And as far as the type of accounts that we're seeing, it's very, very broad-based. We're seeing small, we're seeing medium, we're seeing enterprise. So we're seeing everything. And we have a land-and-expand strategy as we've talked about before. We're only in about 10 % of the seats in our current customers. So we have the ability to expand for many, many years. And so -- and the market is very good. The HR people are investing in retention skills and are investing in re skilling and up skilling. So the market's particularly good.

Rob Oliver

Analyst

Thanks, Gregg, appreciate it. And, Sarah, maybe it's a little early to call this out and maybe its next fiscal year. But when you guys have been just paying the tape with partnerships and global partnerships and deals and -- just wondering, it will be just, for example, on MultiChoice, Gregg talked about the advertising element there. Are there any economics that we should bear in mind as these partnerships start to ramp any economic implications, whether it be revshare or impact on margins or is it just too early to discuss that? Thank you, guys, very much.

Sarah Blanchard

Management

Sure. Some of them too early, some of the partnerships that are more similar to our existing partnership in Japan, they're structured very similarly. So you shouldn't see a difference from an economic perspective.

Rob Oliver

Analyst

Thanks again, guys.

Operator

Operator

Thank you. Our next question comes from Stephen Sheldon of William Blair. Your line is open.

Stephen Sheldon

Analyst

Hey, good afternoon, and thanks for taking my questions. I wanted -- first question I just want to ask about the fourth-quarter guidance. It looks like, at least relative to my model, revenue has coming in a little better than expected, but spending is also -- it looks a little elevated relative to what we'd modeled. So I guess, are you making any incremental growth investments relative to what you would have previously expected? And is there anything related to the continued success with the fourth quarter promotional activity, given that there's some revenue and expense time in mismatch, worse on that expense, or all that expense would hit 4Q, but the revenue would be spread out over into early 2022?

Sarah Blanchard

Management

Yeah, great. Thanks for the question. There's a few initiatives that we have increased expenses on. The first is top of the funnel and doing some TV advertising are really building out our brand internationally and in the U.S. We are obviously -- we've experienced an increase in cost associated with being a public company. But mostly, we really are investing in the global go-to-market team and the immersive learning, so increasing investments on the sales and marketing side and on the R&D side to build out some of these capabilities.

Stephen Sheldon

Analyst

Okay, got it. And then you have really, really strong growth, I guess on the business side of new customers and seems like some sizable customers, too. Curious if you're seeing any changes in the breadth of initial deployments across the employee basis with these new customers. I think you mentioned, Gregg, you're only covering about 10 % of total employee so clearly a lot of upselling opportunities, but are you at least starting to see bigger initial wins that cover a bigger percentage of the employee base than you've seen historically? How about any color on that.

Gregg Coccari

Management

The initial sales are getting bigger and bigger over time. In fact, we had our first million-dollar land -- million-dollar-plus land. So we've never done that before. We built million-dollar customers, but we've never land in one and we did in this quarter. So we are seeing that over time, get bigger and bigger.

Stephen Sheldon

Analyst

Okay. Thank you.

Operator

Operator

Thank you. Our next question comes from Nat Schindler of Bank of America. Your line is open.

Nat Schindler

Analyst

Great. Thank you. And just actually to follow up on that last question, and actually see if you can go into more detail. Can you walk us through the basic sales cycle that you've had with large enterprises on your business side? How long it takes, how long -- and then to land, and then what the process is to expand within and what's typical?

Gregg Coccari

Management

On the sales cycle, enterprise can be 3 to 9 months, as we have some that have taken 2 years. So it can be very large. But typically, I think 9 months would be a good average. And as far as the expansion, again, it's all different, but we -- the process is we have is a sales and customer success team that work together with executives in the company to understand what outcomes that they're trying to drive. And we work with them to drive those outcomes, we use playbooks and help them achieve whatever their goals are. And then the expansion works over time.

Nat Schindler

Analyst

Do they start with particular groups within the organization and expand out from there? Or do they just look for -- how did the [Indiscernible] most organizations look at using your service on the business?

Gregg Coccari

Management

We come in from usually either one or two sides. We are coming from the technology side, and that's where we started when we were smaller. And now we're coming in more in -- probably at 50-50 in the technology side and the HR side. So we'll go in any way that we can get in. But it tends to be both those -- both that way.

Sarah Blanchard

Management

I think one of the trends that we're seeing that is a benefit to us is the HR and the learning budgets are increasing as customers -- as employees -- employers are thinking about retained their employees, up skilling, re skilling all the needs of being an employer today. And so we have seen that trend, as Gregg said, shift more and more [Indiscernible] HR. And then at the same time, those budgets are becoming larger and larger as teams are focused on how do we retain our employees? How do -- are they keeping up with the digital transformation and they accelerated pace of change? And it's difficult to hire the skills they want right now. So it's really about up skilling and reskilling their teams to the extent possible.

Nat Schindler

Analyst

And finally, can you talk just a little bit on how you competitively are situated against other guys who are coming in the online learning space? Are they -- for example, Coursera. Are the businesses who are using you seeing you as a replacement or their similar offerings or are they using you for different things?

Gregg Coccari

Management

That's a good question. It's almost everything you can pick up. We -- the bigger the enterprise, they tend to have more than 1 different content provider. So we'll sit alongside our competitor s, and while we [Indiscernible] we'll do all those things. So it just depends by customer. The competitors in our enterprise business are Skill Soft, LinkedIn Learning, Plural Sight, and Coursera. Those are the big ones. We have advantages, though, that we believe in. We have a marketplace. Our marketplace is an advantage. We are much more global, we can develop content much faster than everybody else can. But again, people have different strengths and weaknesses and we will sit alongside them.

Nat Schindler

Analyst

Great. Thank you.

Operator

Operator

Thank you. Our next question comes from Jason Celino of KeyBanc Capital. Your line is open.

Jason Celino

Analyst

Great. Thanks, Gregg. Thanks, Sarah, for taking my questions. Maybe my first one. I think at beginning, you mentioned the new AI engines and improved conversion on the consumer side. Maybe can we talk about some of these initiatives? Has this engine already been implemented? Thanks.

Gregg Coccari

Management

Yes. Thank you. Thanks for the question. We use AI and machine learning in a number of different places on our platform. We built a pricing engine that allows us to price individually course per country. We use it for matching. We use it for recommendations. We use it to acquire learners. We use it for skills tagging and assessments. And so yes, we are using it in all those places, but it's constantly being tested. You're constantly upgrading the algorithms and testing there. So we're getting wins there all the time, especially in the search and recommendations area.

Jason Celino

Analyst

Perfect. And then you mentioned some new language collections in Italian, Russian, and expansion in the Korea and Sub-Sahara Africa. How do you decide which countries or languages that you want to focus into next? And then what levers do you have in building content in these areas?

Gregg Coccari

Management

Yes. It just really depends on what we're hearing from our enterprise. Enterprise is the languages that they're looking for. So the beginning ones are obvious. We are getting into some that are less obvious, but it's the market that we want to build. For Korea, for example, we're building out our Korean collection right now. We did a deal with a partner, Woongjin ThinkBig, and the 2 of us are working together to build our Korean collection for Udemy Business, and for our consumer side. So we're building out our collections in a number of different places in the world, and we're just going from one country to the next.

Jason Celino

Analyst

Perfect. Thank you.

Operator

Operator

Thank you. Our next question comes from Ryan MacDonald, Needham. Your line is open.

Ryan Macdonald

Analyst

Hi Gregg and Sarah. Thanks for taking my questions and congrats on a nice quarter. I wanted to first start with the CorpU acquisition, just to understand how that's going to be integrated in the platform and what the go-to-market is going to look like there. And then as we think about the fourth-quarter guide, what should we be assuming in terms of contribution from CorpU? Thanks.

Gregg Coccari

Management

We purchased CorpU a few months ago, and the business is leadership training for top universities. They have -- we have faculty from -- and top professors from Harvard, MIT, Wharton, and Stanford that are teaching leadership courses. It's our first foray into cohort-based learning, and our plan is to start with leadership, but then work across in Udemy Business into other verticals, cohort-based learning, and then eventually take cohort-based and bring it onto our consumer marketplace.

Sarah Blanchard

Management

And from a Q4 perspective, the CorpU acquisition was really about the technology, the capabilities, and the skill set that that team had. And so we don't anticipate it having a huge impact on the fourth quarter. We are integrating that into our go-to-market team. And so it’ll be sold alongside Udemy Business and Udemy Business Pro, but it'll take some time for that to get into the pipeline.

Ryan Macdonald

Analyst

Excellent. Thanks for the color on that. And then when we think about this partnership model as you continue the international expansion, are these partnerships exclusive in each country or are there opportunities to multi-source some of those partnerships? Thanks.

Gregg Coccari

Management

They are exclusive. We just -- we did a partnership in Korea, in China, and in Sub-Sahara Africa with MultiChoice Group. And those are all specific to those countries, they're unique.

Operator

Operator

Q - David Hager

Analyst

Hi, guys. This is David on for Brent. Thanks for taking the questions, and congrats on the IPO. 2, if I may. The first 1, can you maybe talk a little bit about your strategy to go after instructors? I guess, specifically some of the top instructors. How are you acquiring instructors? Is there any sort of secret sauce that you guys are doing?

Gregg Coccari

Management

At this point, because of our scale of our marketplace and that we spent $161 million last year in instructor payments, the instructors tend to come to us. So we get the top instructors because we monetize better than any other place that they can. And so we don't have to spend a lot of time doing that. We did in the early phases of our business to build our marketplace in the beginning, but now we don't have to spend as much time. Now when we go into a new country, we do it -- we go into a new country and we want to build the local content, which we're doing in a place like Indonesia right now. We put somebody into the marketplace. And we have that work with local instructors to bring the content online. So it really is more starting to flywheel. Once we get the first 500 to 1000 customer -- instructors in a local language, then the flywheel takes off and then we don't have to get involved. For example, we have 12,000 Portuguese courses today. We have not had to get involved in that in many, many years.

David Hager

Analyst

Got it. Thanks for the color. And a follow-up on the consumer business. Obviously, tough comps against last year. But going forward, how should we be thinking about the growth rate for this business over the next few years? And is growth going to be driven by new customers or increasing monetization of existing customers? Thanks.

Sarah Blanchard

Management

Yes. I think, a few things on the consumer business. The first is, COVID really accelerated trends that we're already seeing. And we really -- we got 2 years of growth in 2020. Q3 2021, their biggest quarter as we are recognizing revenue from the peak by what happened in Q2 2020. So while we are working through some tough year-over-year comps, it really feels like things are stabilizing. The pandemic isn't over and no one can really see perfectly into the future here. But our business is significantly bigger than pre -pandemic. Our traffic is significantly higher. And when we think about where the growth as we are getting back to growth, there is a few levers. There's, obviously, there's an enormous count. At the levels where -- we are just scratching the surface of the consumer markets and learning that it's going to happen. We are -- we've recently launched, in Q2, our consumer subscription business. And that is not only going to increase the LTV of the consumer themselves, but it's actually going to open up new consumers that we can bring onto our platform. So I think while we're still working through what is hopefully the tail-end of pandemic behavior and getting back to some modest growth in the near-term, the bigger levers are out in the future with the subscriptions in building that out, as well as immersive learning capabilities, which we're launching initially in Udemy Business with Udemy Business Pro, but then we'll be putting that over to our consumer side as well.

David Hager

Analyst

Great. Thanks, guys.

Operator

Operator

Thank you. So no further questions at this time. I'd like to turn the call back over to Gregg Coccari for any closing remarks.

Gregg Coccari

Management

I want to thank you for your questions and your interest in Udemy. Over the last 11 years, we built a global platform to meet the needs of learners, instructors, and organizations everywhere. Our mission is to democratize learning, and the affordability, accessibility, and high quality of our content make that possible. The Udemy marketplace is disrupting corporate learning, as we're able to keep pace with the ever-changing needs of companies and up skilling and re skilling their employees. Whether we're talking about teams of corporate learners or an instructor according their first course on Udemy, but creating new possibilities for people everywhere, every day. Thank you.

Operator

Operator

Ladies and gentlemen, that concludes today's conference. Thank you-all for participating. You may now disconnect. Have a great day.