Welcome to Udemy's Third Quarter 2022 Earnings Conference Call. There will be an opportunity to ask questions after the prepared remarks. [Operator Instructions] Now I'd like to turn the call over to Udemy’s Vice President of Investor Relations, Dennis Walsh.

Thank you, and welcome to Udemy's third quarter 2022 earnings conference call. Joining me today are Udemy's Chairman and Chief Executive Officer, Gregg Coccari; Chief Financial Officer, Sarah Blanchard; and President of Udemy business, Greg Brown. 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 paired in accordance with US 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 measure 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 Gregg.

Thank you, Dennis and good afternoon to everyone on the call. Udemy delivered another strong, quarter as we beat expectations on both top and bottom-line. Total Q3 revenue came in at $158 million up 22% year-over-year driven by solid execution and healthy customer demand. Udemy Business had another impressive quarterly performance and continued to serve as our leading growth engine as revenue and ARR grew 67% and 59% year-over-year, respectively. On the consumer side we continue to see encouraging signs of resilience as both our traffic and monthly average buyers increased on a year-over-year basis, despite the challenging macro environment. It's clear that customers across the globe are seeing the value of Udemy's platform for their upskilling and reskilling needs. I'd like to take a slightly different approach for our call today. It's been one year since Udemy's IPO and in celebration of this milestone I want to reflect on some of our major business achievements. Our team has a lot to be proud of including: first, we've made significant progress towards establishing Udemy as a leading global provider for high-quality learning. As of Q3, we have more than 70,000 courses rated four stars or higher out of five stars. Second, we continue to recruit expert instructors to produce best-in-class and relevant courses and practice exercises. Udemy is home to nearly 74,000 instructors that produce the high-quality courses that Udemy has become known for. Our instructors added an average of almost 5,000 new courses each month and even more updates to each existing content current. Third, we are attracting and retaining a growing community of learners worldwide to our platform. Since our IPO, we've added more than 13 million new consumer and business learners bringing our total learner base to 57 million globally. Fourth, we have dramatically expanded our international…

Thank you, Gregg. Udemy had a strong first quarter and we exceeded expectations for revenue and adjusted EBITDA margin. Total Q3 revenue of $158 million came in above the high end of our guidance range of $153 million to $157 million. The 22% year-over-year increase was driven by continued momentum and execution in our Udemy Business segment which consistently performs well across a broad array of verticals and geographies. The recent strength of the US dollar against major international currencies has reached levels we've not seen in decades and our diverse geographic footprint exposes us to foreign exchange or FX headwinds. As a result, the year-over-year increase in total revenue includes a negative impact of 5 percentage points from changes in FX rates. As we move down the P&L, note that all financial metrics are non-GAAP, unless stated otherwise. Q3 gross profit was $92 million, up 27% year-over-year. Gross margin was 58% or an approximately 220 basis point improvement from Q3 of 2021. This margin expansion resulted from the continued revenue mix shift to Udemy business, since content cost as a percent of revenue are lower for that segment. Given this shift, we also experienced an increase in customer success costs to support our growing roster of Udemy business customers. Total operating expense was $109 million, or 69% of revenue, compared to 57% in Q3 of last year. During the quarter, we continued to invest in key focus areas, as planned, while further in operational efficiencies. We are employing a disciplined approach to managing costs across the entire business, while keep an eye towards achieving profitability. Sales and marketing expenses were 43% of total revenue, compared to 39% for the same quarter last year. During Q3, we continued to shift our marketing investments to Udemy Business, where we are experiencing…

[Operator Instructions] Our first question comes from the line of Rob Oliver of Baird. Please go ahead.

Great. Thank you, guys, very much for taking my question, and good afternoon. I had two. My first was for Greg Brown. Greg continued really strong performance on UB. And just curious, obviously, a couple of big countervailing trends here on the one hand economic headwinds, which you guys have mentioned. I think Sarah mentioned, you guys are not immune to. On the other hand, really seems like companies are buying into the value proposition of UB. So, I was wondering if you could talk a little bit about those two trends, what you're seeing in the macro, if there was any change in linearity throughout the quarter, particularly towards the end of the quarter? And then, I had a quick follow-up for Sarah.

Sure Rob. Thanks for the question. So, as far as trends are concerned, I remain pretty consistent with respect to further consolidation of enterprise organizations moving more of their spend from offline to online. And we saw that again this quarter reflective in the performance -- at the net dollar retention we saw at 123% on the enterprise side of the business. And an example of that is, one of our large multinational financial services firms went through a consolidation effort and multiple vendors in different areas of the business. And they went through the consolidation effort in an effort to standardize on one platform to enable them to across both tech and business skills more efficiently at a more effective cost per learner drive upskilling and reskilling. And we were fortunately to come out on the right side of that and that netted out to a three-year contract of just under $1 million a year. And we're seeing more and more of this type of consolidation as we move further into the recession. And we do expect growth to remain durable across our enterprise business and that's just an example of.

Great. Yes, that's super helpful color. Thanks, Greg for that. And then Sarah, just a question for you. You guys outperformed again on the bottom line. So a really nice job on the cost side. I know last quarter you guys had also called out sort of a stabilization in the consumer business at a lower spend rate there in terms of marketing dollars. And is that consistent this quarter? I know more stabilization but have you guys found ways to drive that consumer business at a lower spend point in terms of marketing? Thank you.

Thanks for the question, Rob. Yes, so we're really pleased that we were able to exceed guidance again on adjusted EBITDA. A few things are going into that. Obviously, we're managing our expenses closely. But as you called out, we are being really careful with our marketing spend on the consumer side. We raised our ROI targets. And even in raising those targets and reducing spend we're really happy to see traffic up across the board. So just continue to see positive signals. We're really encouraged by the resilience and we're cautiously optimistic going into the fourth quarter.

Great. Thanks again, guys. Appreciate it.

Thanks, Rob.

Thanks, Rob.

Thank you. Our next question comes from Ryan MacDonald of Needham. Please go ahead.

Hi. Thanks for taking my questions and congrats on a nice quarter. First one for Gregg Coccari. Consumer, it's great to hear about the resiliency in the business. I'm curious as you look globally in areas or regions that are being maybe more significantly impacted by recessionary pressures, rising layoffs, et cetera. Are you seeing any pockets of strength or that resulting in learners coming back onto the platform to perhaps sort of create a bit of countercyclicality on the consumer side of the business so sort of driving more reskilling in that environment?

Yes Ryan, thank you for the questions. We've actually seen a lot of strength in every region in the world the traffic, which is our leading indicator, was up 7% but it varies by country. We have some pockets of it that look particularly good. Japan was very, very strong on the traffic side. The US was good. Germany was pretty good. The UK was down a little bit. So, it's a little bit mixed. But overall, we're very happy with what we see. And on the learner side, we've got growth overall growth in our monthly active learners but in both the new and existing. So, we're driving more new buyers or existing buyers and we're spending less money. So, we think it's -- we're showing some countercyclicality to the business.

Really helpful color there. Maybe my second one for Greg Brown. Greg, great to see the performance on Udemy Business in the enterprise. I'm curious clearly there's a nice seat-based expansion opportunity as customers consolidate around fewer vendors. But I'm curious to hear what impact the newer offerings like Udemy Business Pro, some of this enhanced functionality around skills assessment is having on whether that's creating a differentiation for you in that consolidation process. And then does that have any impact on price points per seat? Thanks.

Ryan, thanks for the question. Yeah. So, we really had a good solid quarter with respect to not only expansion of seats of our on-demand learning product, but new products, i.e. cohort learning, as well as UPro and I'll give you an example. One of our large multinational enterprises that we're currently working with from an on-demand learning perspective, we identified an opportunity to help them with their emerging leader segment and to give them a platform and leverage to be able to educate and upskill the 3,000 emerging leaders on an annual basis. And really what that netted out to was a two-year contract worth roughly 1.6 million a year on our cohort leadership platform in combination with our on-demand learning engagement that's already underway. So we are seeing a lot more interest and expansion in our additional products and that momentum continues to build. We really happy with the momentum.

Thanks and congrats again.

Got it.

Thank you. Our next question comes from the line of Stephen Sheldon of William Blair. Please go ahead.

…Pushing and incentivizing through slightly better pricing when going after new customers or to consolidate spend for existing customers like an example you gave Greg, or just generally what's driving that really notable growth in multiyear business yields?

Hey, Stephen, it's Dennis. I think you were muted at the beginning of that question. If you could just repeat it. Sorry.

Yeah. I was just saying great to see the growth in multiyear deals. So just more detail on that, is that -- are you incentivizing it through better pricing? Just more detail on that.

Yeah, Stephen. So the -- we've made a concerted focus to lead with multiyear deals as a result of the up-leveling both the product platform, as well as the sales motion, selling high to the C-suite and focusing on extended value that we're providing largely in partnership with our customer success team, which is really focused on driving outcomes. So really our entire sales motion has evolved and changed over the last year. And that really is indicative of and supports what you're seeing now, which is a significant increase in multiyear deals both of on-demand learning as well as across platform. And so we expect that to continue. And it's not happening as a result of price -- significant price incentives. It's much more around value and resources we're bringing to bear to act as a trusted adviser and long-term partner in support of the outcomes to customers trying to achieve.

Great. I appreciate that color. And then just as a follow-up, curious heading into the fourth quarter I know there's usually some moving pieces on the consumer gross profit or gross margin. And I think it's usually seasonally weaker given during some of the promotional activity. Can you just maybe provide any commentary on what we should be expecting on the gross margin side for consumer in the fourth quarter?

I'll take that question. Thanks for the question Stephen. So you're right, we do have our big a big promotion around Black Friday in the fourth quarter and that can put some pressure on our gross margin. So as we continue to see this resilience in the consumer business and as traffic is up and buying is up, we could see some pressure on it. And again that's a great signal for us, because that means we're selling a lot and we'll see the impact of that in the first quarter.

All right, great. Thank you.

Thank you. Our next question comes from Terry Tillman of Truist. Please go ahead.

Oh, great. Thanks. Hi, everyone. This is Connor Passarella on for Terry. Thanks for taking my question, and congrats on a great quarter. Just the first one digging into the demand internationally particularly in APAC. There's been some really good traction in Japan and South Korea. And I know you talked about last quarter, we've had a strong pipeline that was building in China. Just curious as to how that's developing and what maybe the key factors will be for determining success in this market? And then I have a follow-up.

Connor, thank you for the question. Yes, as we've talked about before we're building out APAC with a number of different partners. And Japan is a market that's doing particularly well for us. We've been working with Benesse for a number of years, and we're seeing high growth there. The other markets are relatively new. So in China we are -- we built out the collection. We have over 800 courses in Mandrin today, and so we built out the collection, we are hiring lots of salespeople and training them, its early days but we're seeing some nice traction. We've gotten a couple of nice deals already. So it's early days but it's ramping up. On Korea, the same thing has happened in Korea and then we signed a deal in Vietnam with FUNiX and they are -- and we've actually already closed a deal or two there and again are building out Udemy's collection and hiring and creating stuff for people.

Perfect. That's helpful color. And then just on a quick follow-up. So it sounds like another strong quarter for multi-year deals that are continually becoming a larger proportion of total ARR. So it sounds like a lot of multiyear deals are coming from existing customers. Just curious how the cyclical deal looks like for a new logo and maybe how that's evolved over the past few quarters if maybe you're landing more multi-year deals with new logos? Thanks guys.

Yeah. This is Greg. Look, we're having success across the board both with existing as well as new customers from a multiyear perspective largely for the reasons I mentioned earlier. The motion -- the sales motion that we're using now is much more orientated around outcomes that the organization is trying to drive aligned with strategic initiatives and strategic imperatives at a corporate level. So as a result of that, the relationships we're fostering by the nature of that are long-term relationships, long-term partnerships, trusted adviser type status. And that comes with the investment we're making early on from a customer success standpoint. So as a result of that customers are going into the projects with us with the multiyear horizon in mind. And we're starting to see that reflected in the numbers that we're putting out quarter-over-quarter. So you should expect that trend to continue and both on the new business side as well as the existing customer side.

Sounds great. Thank you.

Thank you. [Operator Instructions] Our next question comes from the line of Josh Baer of Morgan Stanley. Your question, please.

Thanks for the question. You mentioned the S&B impact to net dollar retention rate. I wanted to dig in there. What is the customer behavior? Is it churn or contraction or just less expansion?

Hi, Josh. Now what we're seeing is a slowdown in deals moving through the pipeline to closure. We're not seeing a significant departure in terms of the funnel -- the marketing funnel and/or opportunities that we have in pipe. So it really is just S&B organizations, scrutinizing spend and budget as they're going through their buying process. So we're still optimistic that we're going to have a very positive quarter on the S&B side, albeit, we do have some headwinds. We are seeing a little bit of a slowdown. But again it's not as a result of anything other than, I think, these organizations being prudent with their spend and ensuring that they're allocating their budget appropriately.

Okay. That's clear. And then just to round that back to the larger enterprises. So you're not seeing that same scrutiny or impact as far as slowdown in deals upmarket. Is that correct?

What we're seeing upmarket is CLOs in many cases they do have constricted budgets. The budget, you know, if they had a $10 million budget last year maybe $8 million this year, but they still have the same imperatives to upskill and reskill their employees to again drive towards strategic initiatives that these employees need to be prepared for. So the way they're doing that is moving more of their learning from off-line to online and leveraging platforms like ours to do so and we're well-positioned to take advantage of that trend. And that's what you're seeing right now in terms of the strength on the enterprise side, as I alluded to earlier that consolidation effect. And there's a few reasons why we're I think we're in a disproportionate amount of the opportunities we're in largely you guys are very well aware of the superior content we have both quality and quantity. In fact I think this was mentioned earlier, but this last quarter alone we added 1,900 new courses to the Udemy Business catalog and that is unparalleled. And it really does put us in a position of strength as we move forward. And 13 of those -- 1300 of those -- excuse me were non-English. So again, we're investing heavily in our international array of content that's all localized. It gives us a real strong position to develop to be the premier provider for many of these organizations that are looking to standardize on one platform.

Great color. Thank you.

Thank you. Our next question comes from Jason Celino of KeyBanc. Please go ahead.

Hi, Sarah. Hi, Gregg and Greg. This is actually Devin Au on for Jason tonight. Thanks for the questions here. First, one I have is on enterprise. I think you talked a little bit earlier, but I just want to get a little bit more color on your pipeline for fourth quarter in enterprise segment. Any indicators that you're looking at that's giving you that level of confidence and maybe are you seeing more robust pipeline development in certain geos or industries?

Hi, Devin, this is Greg Brown. We exited Q3 feeling very good about our Q4 pipeline in line in fact ahead of what we expected quite candidly based on the macroeconomic conditions. That being said, as was mentioned earlier we have seen some softness and some slowdown on the S&B side in terms of deal velocity. Enterprise business across all geos continues to remain robust, albeit, as mentioned earlier we're not immune to the macroeconomic conditions. So we're going to be paying close attention to the leading indicators in our business as we progress through the quarter and adjusting accordingly. But right now we feel good about the strength of not only the pipeline but the opportunities that are in flight in the sales organization today.

Great. That's good to hear. And then one more question I have is on EBITDA. EBITDA margin came in in the quarter meaningfully higher. And I know that you mentioned benefiting from the increasing mix shift towards enterprise, but were there any sort of dynamics in terms of investments being shifted towards fourth quarter that led to that outperformance? Any other commentary you can provide on that?

Thanks for the question. So as we spoke about we were -- we did pull back on our consumer marketing spend and we're happy to see that that business remains resilient even with that pullback in spend. It’s also have been shifting our spend to UB and that is our main growth engine. And so it wasn't really a shift of spend into the fourth quarter. We do tend to have some downward pressure in the fourth quarter because of our gross margin pressure we feel with our Black Friday, Cyber Monday promotion that happens. But it wasn't a shift in spend. It's just managing our spend carefully and just making sure we're investing in things that are going to have the most impact.

Got it. Got it. No, that’s really helpful color. Thank you.

Thanks. Devin.

Thank you. [Operator Instructions] Our next question comes from the line of Brett Knoblauch of Cantor Fitzgerald. Please go ahead.

Hi, guys. It's Alex on for Brett. Congrats on the quarter. I was just wondering maybe on the consumer side has the strength in Udemy Business helped fuel some of the consumer strength you saw this quarter past maybe people learning using Udemy Business and then going home and getting their own personal account.

Hi, Alex. This is Sarah. Thanks for the question. There's no way for us to really track that but certainly the more access exposure that individuals have to Udemy Business or to you to Udemy -- through Udemy Business certainly that probably does have some spill over impact on the consumer side of things. I think as you've heard us say the product is really engaging. And so you can imagine individuals having access to it at work and then going home. Greg, anything more?

Yes. It also works both ways that we can get a large number of leads for Udemy Business off our consumer -- our consumer platform also. So yes there's cross-fertilization of both of our businesses. And now that we have two scaled businesses it works even better.

Got you. Thanks a lot. And congrats again on the great quarter.

Thank you. Our next question comes from the line of Brent Thill of Jefferies. Your question, please

Thanks. Just on UB the resiliency in a tougher macro downturn assuming the macro economists are right and this gets even stiffer into 2023 with the headwinds. Can you just walk through how you're feeling about managing, during this downturn? And what is giving you that strength? And then also if you, could just touch briefly on the consumer subscription business and how that's doing and what you're seeing any trends there? Thank you .

Hi, Brent, thanks for the question. This is Greg Brown. Yes. So, we spend a lot of time with the CLOs within our customer base. And right now, what we're seeing is consistent thread of continued investment through the downturn albeit budgets will get compressed as I mentioned earlier, but the need to invest in your employees when you're going through a downturn like this when organizations are potentially going flat or even maybe doing some rightsizing is, it's a strategic imperative. You've got to be able to continue to develop the talent that you have, to sustain you through a downturn. And we're hearing that message consistently across our CLOs. So the point is, we expect further consolidation of platforms. We expect more budget to continue to move off-line to online. And as a result of, that in our enterprise business we do feel that we're well positioned to help organizations, as they're going through this transition and are well positioned to take advantage of the opportunity especially, now with a portfolio of products that is unique and differentiated with our on-demand learning, we now have immersive learning and we have core-based leadership development capability that is unique. And it does give us an opportunity to serve organizations in a way that, we haven't necessarily in past years and then other organizations don't necessarily have. And the last thing, I'll mention is the partner ecosystem that we're developing with the relationships with Amazon and others continues to gain momentum and strength. And with the continued investments, as we move into next year, we expect these investments to give us continued leverage. So we do feel really good about our business proposition and the viability of us continuing to move into next year, and beyond in a position of strength.

Yes. And I'd like to just add to that, when times get tough one of the things that companies do is they really focus on operational efficiencies. And what that means is digital transformation efforts, that are underway or about to be underway people are continuing to invest in those to drive those operational efficiencies. And because our content is so fresh, and it's able to keep up with the pace of change of technology, that gives us an additional advantage in a market like this. Gregg, do you want to talk about subscriptions?

Yes. You asked about subscriptions. And as we've discussed before, we think subscriptions are a very attractive product opportunity for us. Today, we're live in eight countries. We're actually turning on India, in the next two weeks. So we'll be in -- country. There's lots of testing. We're testing our annual plan, we're testing local pricing. We're taking a very -- we're doing -- it's a very complex process, and just taking our time and doing it very methodically. And we have to be very careful that our instructors are being taken care of that they're making more money along the way, and making sure that our that we continue to get all the UB leads. And really the goal is to make sure that we have a look [ph] value for our learners. So it's proceeding well and our expectations is to open up all through 2023.

Thank you.

Thank you. At this time, I'd like to turn the call back over to Gregg Coccari for closing remarks. Sir?

I appreciate everybody's time today and thank you for your time and I look forward to talking to you in three months.

Good bye.

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