Good day, and welcome to the Udemy Second Quarter 2023 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Dennis Walsh, Vice President of Investor Relations. Please go ahead.

Thank you, and welcome to Udemy's Second Quarter 2023 Earnings Conference Call. 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 assist management and investors in evaluating our performance in 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 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.

Thank you, Dennis, and good afternoon to everyone on the call. Udemy delivered strong second quarter results. Revenue came in at more than $178 million, or a 16% year-over-year increase, and exceeded the high end of our guidance range. That growth was driven by a 36% year-over-year increase in Udemy Business revenue. On the bottom line we delivered our first quarter of positive adjusted EBITDA as a public company, thanks to our continued focus on operational efficiencies and prudent expense management. We are proud of our team for their commitment and continued execution against our strategic initiatives, particularly as we navigate this unpredictable macroeconomic environment. While the current backdrop presents some near-term challenges Udemy is well positioned to capitalize on meaningful long-term tailwinds for our business that are shaping the future of work. First, there is a profound transformation happening right now that impacts every industry: the rise of the skills-based organization; and second is the continued interest and application of generative AI across customers of all sizes. I'd like to take a few moments today to provide color on those trend, In conversations with enterprise customers across all industries and regions the number teheme --theme we hear from C EOs is that ensuring their workforce has the skills required to achieve their strategic objectives as a top priority. This represents a massive opportunity for Udemy to provide the necessary reskilling and upskilling that companies around the world will require for their workforce and that individuals need to stand out in the hypercompetitive job market. In addition the accelerating pace of innovation means that organizations require support to establish learning strategies and objectives for their teams and also a way to measure and validate skills acquisition. While degrees will always have relevance they do not validate the practical skills the…

Thank you, Greg. I'll focus my comments on the key financial highlights and then provide our outlook for Q3 and full year 2023. You can find the complete set of financial tables in our news release, which is available on our Investor Relations website. As Greg mentioned at the outset, we delivered solid Q2 results. Revenue increased 16% year-over-year to $178 million and exceeded the high end of our guidance range by $4 million. The year-over-year growth included a negative impact from foreign exchange or FX of 3 percentage points. Our Enterprise segment or Udemy Business drove our total revenue growth, delivering revenue of $102 million or an increase of 36% year-over-year. Included in the growth was a 3 percentage point headwind from changes in FX rates. This is a major milestone for Udemy, as it was our first quarter delivering more than $100 million in Udemy Business revenue. We ended the quarter with annual recurring revenue or ARR of $420 million, up 33% from a year ago. Our consolidated net dollar retention rate for Q2 was 108%. The rate was 115% for large customers or those with 1,000 or more employees. Gross dollar retention remained stable, large customer churn was minimal and growth in multiyear contracts continued during the quarter. This is a testament to the strength of our customer relationships, driven by the clear value and impact that Udemy provides to help them achieve their strategic outcomes. However, we do expect some pressure to continue on net dollar retention, as some companies remain hesitant to move forward with expansions and upsells during this unpredictable macroeconomic environment. The strong Udemy Business growth was slightly offset by a 2% year-over-year decline in Consumer segment revenue, which included a negative 3 percentage point impact from FX. We continue to be encouraged…

We will now begin the question-and-answer session. [Operator Instructions] First question today comes from Ryan MacDonald with Needham. Please go ahead.

Hi. Thanks for taking my question and congrats on a nice quarter. Maybe just starting on the guidance you just provided especially as we think about fiscal 2024. As you think about what type of investments might need to be made to reinvigorate the growth rate in UB going into next year. How do you factor that? And I guess, around the targets for still being adjusted EBITDA breakeven into next year? Do you feel like the run rate of where you're investing there right now is enough to sort of help drive that growth as the market recovers, or do you feel like new investments will be required?

Hi, Ryan, thanks for the question. So as you can see like many companies we are currently adapting to a very dynamic environment. That being said, we feel good about the investments that we've made to-date in our go-to-market team and also in our product. And we're committed to delivering an EBITDA positive full 2024, and that takes into consideration a range of outcomes based on what the macro does and the investment that we would need to make from a go-to-market perspective in order to achieve those outcomes.

I'll add Ryan…

All right. That's clear. Maybe…

I'll add Ryan real quick that, as soon as we see the macroeconomic environment improving and the impact on our sales cycle elongation coming back to a more normal cycle times we absolutely are going to lean in and start investing in go-to-market growth. And so as soon as that happens, we will trigger that. And as you just alluded to whether it be the back half of this year or next year we're not sure when that's going to happen. But when it does we will absolutely move.

Super helpful color. Greg, maybe just to follow up with you, I appreciate the comments about sort of this evolving environment within the enterprise around a shift towards skills-based learning. I'm curious, what you think the impact or how will -- what the impact will be in terms of how enterprise organizations choose to allocate spend in that environment? Do you think that this shift to skills-based learning accelerates the consolidation trend or creates sort of a new maybe funding environment or sort of reinvigorates the funding environment around L&D spending, for the skills-based learning?

It's a good question, Ryan. And we're already seeing that play out now. And I'll give you a couple of examples Unilever gracious enough to let us talk about it. Significant expansion with Unilever this past quarter driven by their intent to re-skill and up-skill their entire workforce to "future-fit" their organization with the skills necessary for them to achieve their organizational objectives. They want to get this done by 2025. In addition to that they've selected us to support their digital university program, which they've just launched this past year in accordance with their focus around skills development. And so this is real, it's happening in real-time. And we're seeing examples of this and wins reflected in the commitment organizations have and shifting from long-form learning and degrees to skills that can be applied now to get work done. And in fact interestingly enough as we're preparing for the call the White House this week came out with a report on a National Cyber Workforce and Education Strategy. And I'm just going to read a couple of lines that are relevant here, a skills-based approach is critical to connect more Americans to good careers. They should compete for jobs based on what they can do rather than merely credentials. So we're seeing it pretty much from all sectors; federal government, we're seeing it from customers, we're hearing it from employees. And so this is a massive secular shift that we're seeing that we're on the front-end of that is not only going to drive -- that plays to our favor and it's going to drive organizations to us based on our marketplace and our unique position that we have to keep up with the pace of change and aid them in developing the skills necessary for them to stay up with the technological advancements that are coming at us in real-time. We, obviously, know what's going on with generative AI. And we saw a couple of key wins just to add briefly -- just to add a couple of key wins this last quarter from large multinational enterprises that told us they selected us because of the breadth and depth in our marketplace around AI. These organizations are focused on upping the digital literacy across the organizations but specific to AI. And they need investments in our platform and us as a long-term strategic partner as a result. So it's playing out right now Ryan and we're on the front end of a big trend.

Thanks for taking the time. I’ll hop back in the queue.

The next question comes from Terry Tillman with Truist. Please go ahead.

Great. Good afternoon. This is Connor Passarella on for Terry. First question maybe a little bit more high level just on the recent executive hires, Chief Product Officer, Chief Marketing Officer. I guess, how do you see the evolution of the platform from a product and messaging standpoint evolving as you continue to position yourself to take a skills-based platform approach to learning with these executives?

Yeah, it's a good question. Thank you for it. Without question that is the case. And we saw an opportunity as we're looking forward and projecting from a strategic perspective, the capability we need to have in our business to deliver the value and impact to our customers and that really led us to bring on Genefa and Prasad. Prasad to help us -- Prasad comes with a tremendous amount of depth and capability around AI. The company he was just with he rearchitected their entire platform founded based on generative AI in terms of the rearchitecturing of that. And without question bringing him in to help do the same thing here both in terms of how we get operational leverage and embedding AI in how we run our business, as well as how we develop products and the value that that product is going to have externally on customers as we move forward and better understand how we can leverage AI to improve the overall learning experience. And then on the marketing side, we really have not invested historically in building Udemy into a global brand that everybody is well-aware of and understand how we can help them as an individual, a team or an organization transform lives through learning whether it be their life or the lives of the individuals in their organization. And Genefa got just tremendous relevant background and experience that we can't be more excited to have in our business now to help carry us forward, not only helping to build the brand but to optimize our go-to-market motion as we come out of this economic downturn, step on the gas and really start scaling on a global basis. So both executives are going to have a significant impact on our ability to take the next step in our evolution of realizing our vision to transform lives through learning.

Great. That's really helpful. Appreciate the color. Maybe just as a quick follow-up just wanted to touch on immersive learning and UPro. So, I guess, how's the adoption of UPro continue to trend this quarter? And then maybe what kind of additional immersive learning capabilities are you looking to maybe layer into the platform? Thank you.

Yeah. Thanks for the question. Really happy with the continued adoption and growth of UPro within our global customer base. And we're really starting to see that global expansion happen with respect to UPro. And just last quarter talking about global nature, a large Latin American bank came inbound and had a bake-off, which is usual competitive bake-off and selected us for two primary reasons; the immersive learning capability that we provide with UPro and the badging capability that we're launching that we've already launched the first phase of and we're -- Phase II is in flight. And their focus at that point in time is consolidation. They want to consolidate to one platform that they believe was going to be the right platform and company to help lead them forward in their digital transformation and they selected us to do that. And their quote to us was, you've saved us months of work by being able to consolidate onto one platform and do all of the work with one partner that we were doing with multiple. So really excited about the impact UPro is having and expect that to continue. What was the second part of the question? I lost that.

Yeah, no. Just any additional immersive learning capabilities, maybe looking at as well, but not UPro, just in general?

It's a good question. Yes. We are looking at other immersive learning capabilities and modalities that we believe could be an extension of into -- of our platform nothing to speak of to date, in terms of new modalities that we're layering into the platform. But we are exploring, a number of different options. And for us, it's build partner buy. And as we've talked about on prior calls, we do have an opportunity and are sitting in a good position, to acquire capabilities that would potentially enable us to extend the modalities on our platform. And that's something that we'll talk about when the appropriate time comes.

Got it. Thanks, Greg

The next question comes from Brett Knoblauch with Cantor Fitzgerald. Please go ahead.

Hi. Thanks for taking my questions, So I guess, we're seeing kind of GDP growth accelerate in the US at least hold up a lot better than we all anticipated, I guess it's not really accelerating. And you combine that with seems like every company making AI their number one priority. So I guess like what specifically in macro is leading to the weakness? Is it just like L&D not being, as mission-critical as we thought, it was going to be in a post-pandemic world? So it seems like you guys are very well positioned to capture this unique moment in time where AI is just beginning to kind of reverberate through, enterprises and they need skills for that. So like there should be more I feel like a tailwind for you guys. And I know you talked about demand on the platform minutes for ChatGPT and AI. But I guess, how is that not translating into more kind of enterprise demand?

Hi, Brett, thanks for the question. We actually are seeing it translate into enterprise demand. We had a couple large wins, one in particular with the European engineering and technology firm that purchased our platform, if you will or selected us as their partner for -- specifically for upskilling across the organization, but embedding AI is a critical component of that buying decision based on the breadth and depth of the AI content that we have on platform. And there were a number of those. So we are seeing it impacting our ability to win in the enterprise. But now, let me just take a step back, and talk a little bit about, what's going on in the business that I believe will help answer this question. The top funnel for us is, extremely encouraging right in terms of pipe generation, lead generation into the top of the funnel. But what we are seeing is some sales cycle elongation that we alluded to just a few minutes ago. And that's a macro circumstance, if you will that we know is short-term, but it's impacting our ability to move deals through the pipeline and get those deals closed. And it is a timing situation. I want to make sure that everybody clearly hears that from us is that, we strongly believe that this is timing based on the fact that customers continue to tell us, that the importance of upskilling and reskilling has never been higher in the organizations. We're not seeing a material decrease in budget per head -- per employee, right, allocated to upskilling and reskilling. That may be happening with respect to broader education. We're not seeing that or hearing that with respect to upskilling and reskilling. But what is happening is, what CFOs around the world have been doing including our own, which is making sure that they're keeping a close watch on what's happening from a macro and geopolitical perspective and being more conservative than we've seen in the past, with respect to allocating spend. We know that's going to change at some point in time. We see the same indicators that everybody else is seeing, that we think this is going to be a soft landing, and that could start to have a positive impact sooner than later. But sales cycle elongation, and timing is really the reason why we're seeing a little bit of what we're seeing on the ARR side, but this -- we strongly believe this is short term and that it's going to change like you all are alluding to, as soon as the macroeconomic climate improves, which could be sooner than later.

Perfect. And if I could just add, maybe just one more on kind of net revenue retention. Is the decline there -- can you maybe just parse that through, what's coming from upsell -- or kind of fewer upsell or fewer expansion versus churn. Has churn kind of been, what you'd expected? Has churn picked up from what you'd expected, or is that kind of sequential decline mostly related to expansion?

Yes. Thanks, for the question. Our gross dollar retention has remained stable. And so really what you're seeing is the same thing that we're seeing kind of across the board which is these longer sales cycles are impacting the speed at which we're expanding and upselling. But again, the long-term opportunity it hasn't changed. When the macro improves we expect sales cycles to normalize and net dollar retention to return.

Perfect. Thank you guys.

The next question comes from Noah Herman with Oppenheimer. Please go ahead.

Hey guys. This is Noah from JPMorgan. Just a quick question with respect to the macro environment. Are you seeing did you see maybe like a sequential step-down in the macro environment potential incremental pressure? Just want to get a sense of whether or not the elongation of sales cycles is that increasing on a sequential basis? And maybe just what you've kind of seen through July? Thanks.

Yes, I'll take that. So, we did see sales cycles further elongate in the second quarter and we do expect that to continue in the back half of this year and potentially into the first half. So, what we expect to see is from an ARR perspective growing at a fairly similar amount quarter-over-quarter until the macro starts to come back the sales cycles come back down and we'll start seeing increases in productivity from our sales team.

Okay, great. And then just a quick follow-up. Can you maybe just provide us an update on the international expansion as well as the partnership strategy there? And maybe just which regions you're sort of seeing the most traction with Udemy Business at this point? Thank you.

Yes, thanks for the question. On the international expansion side we continue to see our New Ventures division operate at a very high level. Japan continues to be one of our fastest-growing countries. Our partner Benesse there continues to perform at a very high level. And from a productivity standpoint, couldn't be happier with what we're seeing there. One data point that I think is relevant is we're now in over 60% of the NIKKEI 225. So we're seeing further expansion into the Japanese market. We had a major event there this last quarter. We had -- effectively, we oversold the event in terms of the interest in what we're doing as far as upskilling and reskilling and our ability to help organizations in country. So, again, very happy with what we're seeing there. And we've taken that model and we ported that model to Korea, Vietnam, and in China and we're seeing very similar traction and trajectory in Korea, Vietnam, and China much earlier. So, it's early days there. But Korea had a really nice quarter as well. So, I feel really good about the investments in Asia-Pacific on that front. Additional to that our partnership with AWS also had international impact. This last quarter we had multiple six-figure deals closed through the partnership with AWS. And we also saw something that was a bit of a surprise and -- a surprise obviously to the good when I explain what it is which is we had a number of deals that for a variety of different reasons were stalled. Budget potentially was being reevaluated. And when we introduced the AWS partnership and explained that their retained committed budget against the AWS partnership to be allocated towards Udemy it unlocked these deals and one of them was a $500,000 annual contract value deal with a large financial services organization and we saw a number of these. So, couldn't be more excited about the momentum we're starting to see with Amazon and their commitment to the partnership is equally exciting as the impact on customers and our ability to extend reach around the world. So -- and this is just one example of. So, yes, we're seeing meaningful traction in both areas. And Latin America as well. We continue to see our partners in both Brazil and Mexico expand and accelerate in market as we're fueling their growth. So, internationally, we feel good about what we're seeing.

[Operator Instructions] The next question comes from Stephen Sheldon with William Blair. Please go ahead.

Taking my questions. First one here wanted to dig in a little more on the Badging and specifically, how important it could be to enterprise customers to be able to provide skills badges to employees. And just thinking about it from an employer's perspective, you positively might get more visibility into skills within your organization, but it could also arguably make your employees to get badges more marketable if they wanted to move to another company. So just curious, if that's ever concern you here, or does it kind of seem like providing badges and these kind of skills pathways will become broadly accepted. If employers don't offer them, it could hurt their ability to recruit talent. Just curious, what you're hearing in conversations on this front although I know it's really early.

Yeah. Steve, thanks for the question. It is early. But I believe the short answer is I believe the latter is how it's going to play out that it's going to be more of a standard and that if employers and organizations don't offer validation in the form of badging and certifications, they're going to be a bit of an outlier. So I believe this soon is going to be a standard in most organizations. But as we talked about, we couldn't be more excited about the Integrated Skills Framework that we're bringing to market and the impact we're already starting to see it have on our ability to win deals. I just mentioned, we're winning business right now as a result of the initial capability that we've launched as well as what's to come. And what's to come is probably as if not more exciting than what we've already got out there. Right now, organizations have the ability with first phase to understand the skills that are being acquired and skills benchmarks, how their organization stacks up against other organizations in a particular marketplace or vertical. But what's coming is the ability to identify skills gaps within the organization and address those skills gaps with pre-built pass right, that are going to enable them. It's really kind of completing the circle if you will or the flywheel that they need to continue to accelerate as far as their ability to keep up with the pace of change and upskill and reskill their employees, to enable them to reach the outcomes they're trying to achieve as an organization. We've done a tremendous amount of work with our customers, advisory councils and the like. And we have a strong signal from our customers and everybody that we work with that this is exactly what they need in a hypercompetitive world, not just today but tomorrow to be able to execute their strategy. So I feel really good about the early impact. We feel really good about the response from the marketplace and feel even better about where we're going and what's to come.

Great to hear it. Yeah. That's really helpful. And then as a follow-up, just I think you maybe talked about still seeing some good growth in multi-year contracts. How -- what do you see in terms of willingness for enterprises to sign up for multi-year contracts in this environment? And within that, kind of how do you think about balancing pricing in order to secure these multi-year deals. And maybe the trade-off between the two is I'd assume you're giving up some to secure the longer commitments. How do you -- so yes demand what are you seeing in terms of the willingness to sign up? And how do you think about balancing pricing to secure it.

Yeah. I'll start and Sarah, feel free to add. I feel really good about what we saw in terms of multi-year contracts come in this last quarter. We actually saw a slight bump, right? So we continue to execute very well in terms of our sales organization executing the play if you will. And that only happens, if the customer believes that there's value, strategic value which gives them the confidence and willingness to sign a multi-year contract. So I believe again, we're executing well in market. The other thing I think that's important to note is our competitive win rate actually increased this quarter, right as a result of a lot of what we're doing from a product perspective as well as the adjustments we've made to our go-to-market motion and the way that we're approaching customers and how we can add value and impact in the environment we're operating. So I think from that standpoint, our teams are doing a nice job of adapting and adjusting to the conditions we're operating in. Sarah, I don't know if there's anything you'd like to add.

Yeah. I'll just add from a pricing perspective, we have a very typical enterprise SaaS multi-year discount model and that has not changed. And like Greg said, the percent of ARR coming from multi-year deals is up quarter-over-quarter. We saw a little bit of pressure on multi-year deals in new business, but still we're able to sell a number of multi-year deals and certainly within our upsells and expansions as well.

Good to hear. Thank you.

Thank you.

The next question comes from Josh Baer with Morgan Stanley. Please go ahead.

Great. Thanks for the question. Apologies if this was asked already, but was hoping you could give an update on your federal business. And then also, I was wondering if there's an opportunity to take these new badging initiatives and initiatives around skilling into schools like into the academic world in addition to just the business world. Is that something on the radar? Like schools acknowledging that there might be learning gaps in preparing their students for jobs or careers could bring Udemy and this new offering to its students.

Hi, Josh. Thanks for the question. I'll start with the last one first. With respect to schools and the opportunity there, I very much agree that there is an opportunity for us to explore. We have not done that to-date in terms of doing the diligence and spending the time to understand how we could best serve schools in this capacity. Not to say that, it's not an opportunity for us going forward and something we may look at. We just haven't -- we haven't made it a focus to-date. So, no progress to report on that. As far as government business we did -- and we continue to invest on -- in the government sector there's no doubt. Can't talk about a lot of what we're doing there but we did have a significant win in this last quarter with a branch of the US government that is very focused on skilling. I mean just coming back to skilling. And we have got a large contingent of folks in the organization that are contractors in addition to the folks that are government employed. And we're doing some very interesting things there. I just can't talk a lot about it for probably obvious reasons. But we continue to invest in the government segment and we continue to see steady progress there. And Sarah, I don't know if there's anything you want to add?

No, that sounds good. Thanks Josh.

Great. Thank you.

[Operator Instructions] The next question comes from Devin Au with KeyBanc Capital Markets. Please go ahead.

Great. Thanks for taking our question. I have another question on badging. Greg, wanted to get your thoughts on just the adoption pace of this product. I know the macro currently isn't the most favorable but just given how in-demand skills are and the increasing need for learners to validate and showcase their skills do you foresee like a faster adoption of this product versus your other modules that you have? Just curious on your thoughts there.

Yes, we do. Thanks for the question. We are already seeing that now, because there's pent-up demand candidly for validation in the form of badging and certification. It's a concept that's been out in market for some time now. We strongly believe that our approach is the right approach to enabling organizations to understand how they need to be executing against the skills-based economy opportunity. And yes, fully expect the adoption to be faster than what we've seen in some of our other products for those reasons.

Great. That's good to hear and really helpful details. Maybe my follow-up for Sarah. I don't know if my math is correct seems like the implied 4Q guidance is kind of baking in some step-up in operating expenses. Any notable expenses may be done -- pushed out into 4Q or any seasonality one-time items that we should be mindful of? Thank you.

Yes, thanks for the question. The one normal seasonality step-up that we see from an OpEx perspective, it's in the fourth quarter around our biggest promotion cycle in the marketplace, so for Black Friday, Cyber Monday. The other thing that's happening is if you're referring to our Q3 EBITDA being higher than our Q4 that is due to the overperformance of our Consumer business in the second quarter that a lot of that revenue gets recorded in the third quarter. And so where previously we'd expected EBITDA to grow, we expect it to actually, on a sequential basis, decrease slightly, but we will be profitable for the back half.

Great. Thank you so much.

Thanks for the question.

This concludes our question-and-answer session. I would like to turn the conference back over to Greg Brown for any closing remarks.

I'd just like to thank everybody for joining the call, and we look forward to speaking with you again in November. Have a great rest of the day.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.