Thank you for standing by and welcome to Udemy’s First Quarter 2022 Earnings Conference Call. [Operator Instructions] As a reminder, today's conference call is being recorded. I would now like to turn the conference to your host Ms. Stacey Zolt Hara, Senior Vice President Corporate Communications. Ma'am, you may begin.

Thank you. With me today are Gregg Coccari, Udemy's Chairman and Chief Executive Officer; and Sarah Blanchard, Udemy's Chief Financial Officer. Before we begin, 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 on 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 the 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 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. 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 at the Investor Relations section of our website. A replay of today's call will also be posted on the website. I will now turn the call over to Gregg.

Thank you, Stacey. Good afternoon, everyone, and thank you for joining us. We kicked off the year with a strong first quarter as businesses and consumers alike continue to choose Udemy to provide flexible, expansive and effective skill development to empower organizations and individuals. Our Q1 results demonstrate several of the large secular forces fueling our growth: hybrid and remote work driving learning on our online platform; accelerating digital transformation requiring massive upskill and reskill demands; and the ongoing great resignation, which has accelerated an urgent need to engage and support employees through ongoing career development paths. As a leading destination for learning and teaching online, Udemy is benefiting from the societal tailwinds. This quarter's numbers clearly speak to this momentum. We grew revenue by 22% year-over-year in Q1 bringing our total revenue to $152 million. This was driven by outstanding Udemy Business performance in Q1, which grew 77% versus the prior year with over 11,600 total Udemy Business customers and $280 million in ARR, up 80% from the prior year. In fact, we now expect the Udemy Business will eclipse our consumer business in Q3 2022 earlier than we previously projected. As I look ahead to the rest of the year, I'm excited to continue to grow our footprint internationally where we have an opportunity to further our tremendous momentum in Udemy Business. I'm also excited to further our innovation leadership in our platform and technology and continue investing in our marketplace by supporting instructors around the world as they produce roughly 5,000 new courses every month. Our Q1 results illustrate these themes at work. Let's dig a little deeper. I will cover 3 critical growth drivers of our Udemy Business and performance in Q1. First, I'll briefly talk about Udemy Business where we saw a very strong demand,…

Thank you, Gregg. As Gregg said, we had a great start to 2022 with very strong Udemy business growth. A recent Deloitte study concluded that organizations, which foster a learning culture, are 92% more likely to develop novel products and services, 17% more profitable and have as high as 50% greater employee engagement and retention rates than their peers. Our Udemy Business growth speaks to the fact that more and more organizations are increasing investment in employee skills acquisition because of the proven ROI. I'm especially encouraged by our exceptional Udemy Business ARR growth, up 80% versus the prior year as well as acceleration in Udemy Business customer growth, up 49% versus the prior year. Udemy Business continues to serve as a key growth lever for us as we see healthy new logos and expansion among existing customers, wins across a wide range of industry verticals and good momentum in international growth. Q1 revenue of $152.2 million was up 22% year-over-year and up 12% sequentially. Our net dollar retention rate was 120% this quarter, highlighting the continued success of our land-and-expand motion. Udemy Business revenue was $64.9 million, up 77% from the prior year, continuing to demonstrate our strong growth at this scale. Our consumer business delivered $87.3 million in revenue, down 1% from the prior year. Our consumer business is performing as we expected to, as we discussed on our last call. A healthy marketplace is one that is able to attract and retain instructors and that provides the incentives for those instructors to publish and update high-quality courses. The consumer marketplace is healthy. We are adding instructors and thousands of courses monthly, and it continues to serve as a vibrant engine that fuels Udemy business growth. The symbiotic system of these 2 parts of our business is a…

[Operator Instructions] Our first question comes from the line of Stephen Sheldon from William Blair.

Nice results here. Maybe just starting on the business side. You guys have rolled out a lot of new functionality there with assessments and labs, learnings paths, et cetera. I guess with all of these, what have you seen so far in terms of businesses actually utilizing some of the product improvements? Or maybe where are you expecting the biggest adoption when you think about the next few years?

Yes. Great. Thanks for the question. I think one of the things that we've spoken about is how we engage our customers and their employees through 2 different things. One is our customer success team. And upfront, we align with the customers to understand what it is that their business goals are. And so for some of these newer products like Udemy Pro that has the assessments and the labs, for those employees that want those, and we align with them, we have some preset ways that they can engage those teams. And so we're starting to gain traction with the new products that we're rolling out. The other thing that we've spoken about are those tools, those enterprise tools, to engage the teams in all of our offerings. And so those tools are -- they are very robust, and they're used by learning leaders and those who are buying the product. So we're happy with the engagement we're seeing. Obviously, there's always room for improvement, and so we never stop improving. But we're going to continue innovating and rolling out new features because of the response we're getting.

Got it. That's good to hear. And then maybe just a follow-up on the consumer side. Consumer gross margins, nice step up there year-over-year and sequentially. I think you mentioned some benefit from content costs, but can you just give more detail behind that and how you're thinking about consumer gross margins over the rest of the year?

Sure. So 2 pieces. One is our revenue recognition. So as a reminder, we typically actually see an increase in consumer gross margin in the first quarter because we have a large Q4 promotion. And so we have a lot of buying that happens in Q4. The content costs are recorded in Q4. And then what you'll see in the first quarter is that revenue is coming in because it comes in over 4 months for the transactional revenue, and you don't have those instructor costs. The other piece of it is for the majority of our transactional revenue, the revenue share is 37%. For learners that come to us from the instructors, actually, they're paid a much higher rate. And what we're seeing actually is the number of learners coming from instructors decreasing as the things that we're doing in the market and our organic growth continues to increase as a percentage of the total. So for the year, we expect to see those, what I'll call, normal fluctuations in gross margin because of our promotion cycle, but we do anticipate a small step-up over the year.

Our next question comes from the line of Rob Oliver from Baird. Our next question comes from the line of Josh Baer from Morgan Stanley.

I want to focus on Udemy Business. We saw the acceleration in ARR and the improvement in the net retention rate, acceleration in customer count. Like so taking a step back, I mean, if you could provide any more context really on what's resonating on that side of the business? Anything to call out to start there?

Yes. Thanks for the question, Josh. I think the interesting thing about Udemy Business is just the breadth of what's going on there is that we are doing extremely well in all geographies and all segments of the business. And I think that's what's unique about it. We are doing well everywhere. And then we have these new partnerships that are starting off well with Korea. We started our first full quarter in Korea, and we did almost $500,000 ARR in our first full quarter. We're starting to sell in Mainland China. So it's just -- the business is just extraordinary. I think there's amazing market fit. I think our content is really superior to what's out in the marketplace. And so it's reflected in our business results, but it's very, very broad-based.

That's helpful. And then second, I wanted to just ask if we are headed into a tougher macro environment recession, where do you think Udemy Business falls on the priority list? I mean, are there certain use cases that hold up better? Does the land-and-expand model help you there? Just wondering how you'd expect that business to perform in a weaker macro environment?

Yes. We believe that the Udemy Business will do very well under any kind of circumstances just because of the massive tailwinds behind it. There's the digital transformation that's going on. The future of work has changed due to the pandemic. There's a skills-based economy, creator economy. So there's just massive tailwinds in this business. And so we believe that a tougher economic environment will not hurt us at all. In fact, employee retention becomes much more of an issue in that type of an area. And so there's a great resignation going on and people want to make sure that they engage their employees and they keep them longer. So all the trends are really tailwinds for us right now.

Our next question comes from the line of Brent Thill from Jefferies.

This is David Lustberg on for Brent. Two, if I may. On -- I guess, on the first one, is there any color you can provide as to what percent of company's enterprises are currently using an enterprise learning product like it was today? Like how much opportunity is there left? How much of this market remains completely unpenetrated? Any color there would be helpful. And then I have a follow-up.

It's very early days for this market. Two years ago, the majority of the learning in corporations were done in person. And those days are vastly changed because of the pandemic and hybrid work and the complete future of work has changed. So it's very early days. So we believe that we are very early innings in this business.

And just to add to that, we have a large number of customers, over 11,000 customers right now, but we're only 10% penetrated. We're in a land-and-expand situation. And so we have really strong net dollar retention that's 120% in total. And for our larger customers, those with over 1,000 employees, it's 127%. So with our existing -- even with just our existing customers, we've got a long runway. But like Gregg said, it's just early days across the board.

Understood. That's helpful. And then on the consumer business, just wanted to touch on the -- how many -- what percentage of buyers or if you can give like rough direction of how this has trended, but how will the buyers each quarter, like how many of them are returning buyers versus net new buyers? And just kind of the discussion around new buyers versus returning buyers and your ability to retain some of these consumers on the consumer side of the business would be helpful.

Yes. Great question. So a large amount of our buying on the transaction side actually comes from returning buyers. It's well north of 50%. We're also seeing some trends that we'd like to see where engagement is up this year compared to last year as we continue to invest in things that drive engagement and retention. The last thing I'll mention is we're in the early stages as we've spoken about for our consumer subscription business. And we are innovating there and really driving career guidance and learning paths and different ways to engage and retain our learners. So a lot of current buying that happens is from returning, but also we have a lot of work that we're doing there that we're excited about.

Our next question comes from the line of Terry Tillman from Truist.

This is Connor Passarella on for Terry. I just wanted to start on one with international. So congrats on the deal in China. It's really great to hear. Just curious as to what you're seeing in terms of competitive pressure in some of these emerging regions like Japan, South Korea and China. And then also in terms of these emerging markets, maybe how does the land-and-expand dynamic change as you involve partners more heavily in these deals?

So as far as the competition in those markets, in the Asian markets, in Japan, we have very little competition. We have, by far, the largest local Japanese business catalog. And so there's very little competition there. So we're growing rapidly there. In Korea, there's actually -- there's not a lot of international competitors, but there are a number of local competitors. So we built out our Korean content and we started with a nice size, but we're building that. And as far as China goes, there's actually one of our competitors actually just pulled out a quarter or 2 ago. So there's less international competition, but there is some local competition, but not that much. So -- but as far as land-and-expand, it's very similar. We work with our partners. We work very closely with them. We work like we're one team. So they're using the same procedures, they're using the same marketing materials. And they tend to do very well. Like our actual net retention in Japan is higher than it is in other places. So it's actually going very well.

Perfect. Yes, that's really good color. Maybe just one quick follow-up. So on marketing, in addition to generating traffic organically through the consumer side of the business, I know that there are some marketing testing from different channels like affiliate networks, partnering to systems and television. I'm just curious if any takeaways at those different marketing channels, maybe where do you plan to continue to invest in lead gen.

Yes. So we're always testing in consumer marketing. So it's that kind of a business. So we are doing a lot of TV testing. We're testing TV in about 5 or 6 countries right now, but we're also testing YouTube and Facebook and on and on and on. TikTok is something that we're going to launch a test in the next quarter. So I just think it's a never-ending test and roll, test and roll, test and roll, and just looking for the most efficient way to acquire customers. You're looking for the most efficient way with the lowest cost of acquisition. So it's a never-ending story.

Our next question comes from the line of Rob Oliver from Baird.

Can you hear me okay?

Yes, we can.

Yes, we can.

Great. Okay. Awesome. And apologies for that before. So just a couple of questions, Gregg and Sarah, and I did miss one of the questions as I was even trying to get back in, so I apologize if this was asked already. But just clearly, really strong enterprise Udemy Business trends across the board. And I wanted to just dive into that a little bit more on a couple of fronts. One, are you seeing any change or variance in where the lands are? I know you guys have traditionally landed in both HR and in IT. And just would be curious for any color there. And then second part of that question is, I know you guys often will sort of in the first year of an engagement run side by side with, say, another competitor and some of your marquee customers are ones that you've won following that year period. And just curious with the tremendous momentum in the UB side whether some of those new wins were ones were those expansions, were ones where you had been kind of running side by side with the competitor. And then I had a quick follow-up as well.

Yes. I don't think there's anything really different with the lands today. I mean we are building out our go-to-market team. So there's more people in more countries. So the lands tend to be more diverse than they were before as far as geographies. We're building out Latin America now. And so we're getting more new customers there. And so it's very, very broad, and it continues to be very broad on the lands. And the same thing with the expansions. Now as far as the trials, we are in trials all the time. And we like the trial with our competitors because we believe we have the deepest content, the freshest content and that we do very well in trials. So a number of the lands are in trials. So we are in trials every single day. And so as I said, we're winning more than our fair share. And I think that's reflected in our growth rate. We're growing faster than the market is. And again, it's a lot to do with our marketplace and our business model. So we love to go into trials.

Got it. Okay. That's great, Gregg. I appreciate it. And then, Sarah, just a question for you just on the consumer subscription side. Obviously, a lot of variability in the consumer trends. And you guys have done a nice job modeling to that and getting us focused on kind of that kind of flattish area. But can you talk a little bit about consumer subscription? I realize it's still very early. It does seem like the content at least from my checks and observations is getting richer around consumer subscription? And just would wonder albeit recognizing that it's early, what kind of trends you're seeing there.

Yes. Great. Thanks for the question. So it is still early days. We are happy with what we're seeing there. But as we spoke about, we're still kind of in beta mode until the second half of the year. As we've said, there is some limited visibility on the consumer side, especially on the transaction side where we're seeing some conversion suppression. And we do anticipate our second quarter to be down year-over-year. But from a subscription perspective, that is starting to gain traction nicely in our beta test areas. And so we're going to continue innovating there. I love that you're seeing some of the new stuff that we're doing from a content and from a capability perspective. And we're going to continue doing that. And then when we're ready, we're going to start rolling out more broadly in the back half.

Our next question comes from the line of Brett Knoblauch from Cantor Fitzgerald.

Could you maybe just go into a bit more detail on your full year guidance? It seems like enterprise momentum is really just picking up steam. I mean $40 million of net new ARR in the quarter is quite spectacular. I guess as you break out the segment guide for the full year, should we be expecting kind of enterprise to be closer to the top end of that range and maybe consumer now, I guess, a bit closer to the bottom of the range? Or is it still too early to tell given how early we are in the year, particularly for the consumer segment?

It's a great question. So I think we do anticipate Udemy Business to continue to have strong growth. I was really pleased with what we're seeing there. As Gregg mentioned, we're not just building out the team, but the team is ramping really nicely across all segments and all regions. And our land-and-expand motion is working well. From a consumer perspective, as I said, we do expect Q2 to be down year-over-year. We don't have visibility into growth in the back half right now. Like you're hearing from all the consumer [indiscernible] like we're also seeing conversion suppression at the top of the funnel, but we're kind of waiting to see. We do think that there's some countercyclicality that we have. So depending on what happens, as unemployment increases, we think that benefit could be a benefit to the consumer business. So we're reiterating guidance, but I think your instincts on UB continue to be really strong, are right.

Perfect. And then maybe from a seasonality perspective, as you may be landing with larger customers, are you seeing any shift in seasonality from the business side maybe towards a more traditional kind of software purchasing cycle or it's Q4 heavy?

We've always been very Q4 heavy like everybody else. But if anything, it's actually less so. The first 1, 2 -- quarters 1, 2, 3 tend to be -- are stronger, I think, than they were a little bit historically. But part of that is we're building on our go-to-market team, and we're just getting much better at what we're doing. But it's still going to be very fourth quarter heavy because that tends to be the business.

Okay. And maybe just one last one on FX. I know you guys are really global and the dollar has appreciated pretty significantly against pretty much every currency out there. Are you guys contracting with enterprises outside of the U.S. in local currencies? Or is it in U.S. dollar? Was there any FX impact on the quarter?

Yes. So the vast majority of our Udemy Business contracts are in U.S. dollars. And so as Udemy Business grows as a percentage of our revenue, the FX risk actually decreases. So we saw a very small amount of impact for the first quarter. And for the year, we think we have about 1% to 2% at the very outside risk to the top line.

Our next question comes from the line of Jason Celino from KeyBanc Capital.

This is actually Devin on for Jason today. Maybe just one, and I also want to double-click on Udemy Business, just given the strong growth there. You mentioned sales execution in that segment remains strong. But can you comment on maybe sales cycle, close rates, admin rates? Are you also seeing those metrics improving in the past quarter?

Yes. So sales cycles continue to be what you typically see there about 9 to 12 months for the larger enterprises faster for the commercial segments. Close rates are strong. They've gone up a little bit, but they've always been strong. And like Gregg said, our favorite thing to do is actually trial, and that's where we really see we win more than our fair share.

Our next question comes from the line of Ryan MacDonald from Needham.

This is Matt Shea on for Ryan. I wanted to touch on China a little bit more. Curious with the recent partnership and expansion. What kind of trends you guys have seen there, especially in terms of usage, given the lockdowns during Q1? And then any color on the contribution that China contributed in the quarter?

It's very early days in China. So it's not material at all at this point. We just opened it up. We just launched the app and we closed a few contracts. So it's really, really early days for us to really have enough data to really understand all that. But we like what we're doing. We're building a nice pipeline. We're building out our sales organization there, and our partners are very excited about what they're seeing. One of the interesting trends is we're getting a lot of pipeline from some of the European countries that have offices in China. So we -- and we actually have a bunch of existing Udemy customers that have offices in China. So we think there's a nice runway for us.

Got it. That's helpful. And then keeping in mind that it's still early, you noted the loss of a competitor pulling out of the Chinese market. Have you seen that kind of impacting your ability to build a pipeline more quickly or any opportunities that you're already seeing that create?

Yes, it's absolutely helping us build our pipeline. So there is certain -- we had one large European multinational who was looking for a replacement. And now that they know we're in the marketplace, they contacted us. So yes, we are seeing it will make it easier to build our pipeline in China, for sure. Less competition.

There are no further questions. We will now turn the call back to Gregg Coccari for closing remarks.

I want to thank everyone. I appreciate all your questions. To summarize, our strong Q1 results illustrate 3 themes driving Udemy's strong performance: first, strong demand, solid execution and continued top line growth; second, unprecedented tailwinds accelerating the workplace shift to digital upskiling and learning that drive our TAM; and third, the continued health of Udemy's consumer marketplace, which fuels the growth of Udemy Business. Simply stated, Udemy has the broadest and most relevant skill-building content in what is a very large and underpenetrated market. We're just getting started, and I'm excited for the opportunity ahead. I appreciate your time.

This concludes today's conference call. Thank you for participating. You may now disconnect.