Good day and welcome to the Udemy's Third Quarter 2024 Conference Call. All participants will be in 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, David. 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 risk 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 SEC as non-GAAP financial measures. We believe that these non-GAAP financial measures support management and investors in evaluating our performance in comparing period-to-period results of operation in a more meaningful and consistent manner. 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. Please note we have provided a supplemental deck that can be found for download on the Quarterly Results section of our Investor Relations 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. We delivered a strong Q3 with revenue and adjusted EBITDA margin exceeding the high end of our guidance ranges. Revenue grew 6% year-over-year, including a two-point headwind from FX, and profitability reached a new record with adjusted EBITDA coming in significantly higher than anticipated. This was a direct result of our disciplined approach to driving operational efficiency throughout the business. We also achieved a new milestone of over $500 million in Udemy business ARR. I'm immensely proud of our entire Udemy team and thankful for their unwavering commitment to our business and delivering on our mission. We have a lot to be excited about as we look toward the future for Udemy, and I'm eager to provide an update on some of the strategic actions we've taken, as well as some of the other exciting developments, including the launch of our AI-powered skills mapping and AI assistant. As a reminder, on our last call, we announced the strategic decision to deliver a more balanced mix of growth and profitability, while reallocating resources toward our highest return opportunity, the large enterprise customer cohort within Udemy business. This transition is both timely and necessary as we look to deliver long-term sustainable value for all stakeholders, particularly in an environment that remains stable but subdued. Over the past several years, we've successfully built a strong foundation for our enterprise business and our consumer marketplace. We've also expanded our global footprint to support nearly 17,000 Udemy business customers and 75 million learners across 180 countries, which represents one of the leading market positions globally. Given the solid foundation we have in place, now is the right time to focus on operational efficiency. The opportunity in this category is massive and growing, so we're…

Thank you, Greg. I'll cover the key financial highlights in our outlook today. You can find the complete set of financial tables in our news release, which is available on our Investor Relations website. Third quarter revenue increased 6% year-over-year to $195 million. With more than 60% of our total revenue coming from outside of the U.S., we had a negative impact from FX to our year-over-year growth rate of 2 percentage points. Udemy business revenue for the quarter was $126 million, an increase of 16% year-over-year, including a 2-percentage point headwind from changes in FX rates. As Greg mentioned, we ended the quarter with annual recurring revenue, or ARR, of $505 million, up 14% from a year ago, a significant milestone for the business. Within that, ARR from large customers, or those with 1,000 or more employees, increased 15% year-over-year, while SMB ARR grew 11% year-over-year. Professional services, financial services, manufacturing, tech, and retail are the strongest verticals contributing to ARR growth. We will continue focusing on driving further penetration in those sectors, where we see a vast array of use cases and significant long-term opportunity to capture market share. Our consolidated net dollar retention rate, or NDRR, at quarter end was 99%. The rate was 104% for large customers. We continue to see pressure on net dollar retention driven by upsells taking longer than historical norms in this environment. In the quarter, we added more than 250 net new Udemy business customers, increasing our global customer base by 10% year-over-year to more than 16,800. Within that, our base of large customers increased by 11% to more than 5,000. Gross margin for our Udemy business segment came in at 74% for the third quarter, up 600 basis points from the prior year, primarily due to the instructor revenue share…

We will now begin the question-and-answer session. [Operator Instructions]. Our first question comes from Jason Tilchen with Canaccord Genuity. Please go ahead.

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

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

And the next question comes from Stephen Sheldon with William Blair. Please go ahead.

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

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

Got it. Yes, that's helpful. And then just a quick follow-up. Appreciate the early color on 2025. I didn't hear anything about UB growth expectations. So, and if you did, I missed it. Is there any way to frame the potential, what a growth range could look like for UB as we think about 2025?

Yes. So, we really right now are in the midst of our 2025 planning. But we did want to help align expectations around a few discrete headwinds that we have during this transition year, some of which really pertain to the UB side of things. In going through this restructuring to align our business to the current conditions and really focus on the strong opportunity that we see in enterprise, we have reduced our SMB capacity by about 20 million. And we do continue to see weakness in EMEA. And so, the combination of those is going to cause multiple points of overall headwinds and overall growth on the revenue side and more impact on the UB side. And then just to round it out, on the consumer side, we are expecting high single-digit decline conservatively, which is another three points of overall revenue headwind. So, just taking those two into consideration, that gives you some insight into how we're thinking about next year, which is a transition year as we're executing against this restructuring and getting those resources focused upmarket. But despite those headwinds, we're excited about where we are. We've done a lot of work that sets us up to deliver the bottom line that we shared at $70 million in 2025 and a clear path to our 2026 target of 130 to 150. So, again, we're in the midst of planning, but that's how we're thinking about 2025.

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

I was hoping you could actually talk about the integration with Workday. Seems pretty interesting. Just wondering if it's similar to the typical integration with a learning platform or are there other elements of the partnership? And then just also wondering, to get all the advantage of that, do you have to be a Workday customer and a Udemy customer? Just any details on that would be pretty interesting. Thanks.

Yes, Josh. Good question. So, yes, we're excited about the partnership and relationship we have with Workday, as well as the new integration we just announced. And really what this is about is it maps our Udemy business content to the Workday skills cloud. And it's got a couple unique advantages, and that enables learners to display the skills that they've developed within the platform, within their environment. It also allows and provides admins the ability to view those employee skills that have been developed and actually that are in flight of being developed. And so, what they're excited about and we're equally excited about is it really promotes internal mobility. And that's something they care a lot about. That's one of the primary value propositions that they have and we jointly have. So, we've worked closely with Workday for some time, and this is just the next step in the evolution of our partnership. And do you need to be both a Udemy customer and a Workday customer to take advantage of the impact that I just mentioned? The answer is yes.

Okay. Got it. And, like, how do you, how should we think about, like, Workday's initiatives or any learning management system or HCM vendor and, like, their focus on skills and, like, developing their own skills cloud, like, versus Udemy's efforts to map everything out? And, like, which one does the customer tend to adopt or, like, looking to use from the platform, like, the learning platform or the content provider? And, like, how should we think about the different approaches there?

Yes, that's a good question as well. So, our strategy has been and will continue to be to integrate with all of the LMSs, the LXPs, the technologies that our customers use to deliver learning and provide a learning experience for their employees. All right, so that's, I think, something that is very unique and a little bit different. We integrate, actually, even with some folks that we view as competitors because they've got their own LXPs. All right, so that's, I guess, point one. And then, as far as what was the second, I lost the second part of the question.

Just wondering, like, the end customer, if they're going to really lean into the learning management system, like, the platforms, skills offerings, or are they going to look to the content, like, content provider for --

It's a good question. It really is on a case-by-case basis. If, for instance, in Workday's, in that example, if they've got the ability within their product, the Skills Cloud, to map skills to learning, we integrate and then the customer can choose, or we'll help them choose strategically because with all of our partners, we engage with our customers jointly. We'll provide insight into the optimal approach based on the outcomes they're trying to achieve. For other platforms that don't have the capability to map skills, to learning content and develop a personalized learning path, then we're going to be the optimal choice for that. So, it really is going to be on a case-by-case basis. And, again, we work very closely with all the partners we just mentioned, Degreed, Cornerstone, there's a number of folks out there that we work closely with, in market, and we'll continue to do so.

And the next question comes from Ryan MacDonald with Needham & Company. Please go ahead.

Greg, maybe first for you, you talked about having the benefits of having the new CRO in and sort of getting that motion going, recognizing that these budgets obviously don't turn on a dime, but can you talk about maybe some of the processes that, or new processes you've been putting in place as you've sort of focused up market on these larger customers, and then, how quickly might you'll see that kind of filter through into the pipeline conversion as we're going into next year?

Yes, that's a good question. Thank you, Ryan. So, Rob's been intently focused on developing sales capability across our sales organization and customer success to be very, very capable and strong at selling into the key verticals that we've highlighted that we have knocked lead bowling pins down in, that we have a leadership position in, and whether it be financial services, professional services, consulting, and so on and so forth. And really what that includes is account planning capability, sales enablement, and everything that goes along with developing a high-functioning, hyper-focused, hyper-capable sales organization selling not just to these enterprises. But, specifically to the buyers that we sell into, the chief learning officers, chief people officers, as well as the technical buyers that we've historically been very strong and capable of selling into. So, it's up-leveling the support and resources we're providing our sales organization, and in some cases, it's also up-leveling the sales organization itself, right? Making sure we have the right talent in the right roles for us to be successful as we move forward. So, a concerted effort there. Love what we're seeing in terms of the impact Rob's having and expect that to really start to have an impact next year into, I would say the numbers and what we're going to be delivering, but more to come on that.

Appreciate it, and maybe as a follow-up for Sarah, appreciate all the context for 2025 and how we're starting to frame that up. When you think about Udemy business in particular, can you just explain maybe a little bit more detail the environment you're sort of expecting relative this year as you're starting to build out that framework, and maybe it's on the point of sort of EMEA weakness, is that just a continued elongation of sales cycles, or are we seeing instances of heightened levels of churn in that region? Thanks.

Yes, thanks for the question. So, we are expecting next year from an environmental perspective to be very similar to this year. Elongated sales cycles. You asked about churn. Our gross dollar retention remains, has remained stable. I think we've lost about a point and a half over the last six quarters, so, but the upselling, we expect it to continue to be pressured and the sales cycles to be longer. When we're thinking about UB growth overall, next year there is going to be an impact because we reduced some of our grower market team, particularly around SMB number one. And number two, there is some amount of movement happening even up market as we've taken some of our, star reps from SMB and moving them up market. So, that is going to impact the numbers, but from a long-term perspective, we do think UB is going to be a double-digit grower. So, it's just taking time to work through this transition year. And then, AI, sorry, organizations are going to have to AI enable their workforces over time. It is going to take time, but we're setting ourselves up to be the player that they partner with. So, a bit of a transition year for next year, both on the UB side and some impact on consumer, but really excited about the long-term opportunity there.

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

Sarah, just kind of following up to a couple of prior questions, you talked about a couple of points of impact, I think, to the business in '25. Was that for UB? Because my simple math would be if it's 16% to 18% growth this year, then it's kind of like 14% to 16% growth next year, also understanding there's some headwinds. Is that the right way to think about UB initially? And then add a follow-up.

Yes. So, the few points of headwind is across total growth, not just UB. So, the UB impact is going to be larger.

Okay. And then just a follow-up question on, the CRO has been in, and maybe this is for Craig, but the CRO has been in the spot for the seat for five months. I think there was an earlier question or a couple of questions. And we're all curious in terms of what kind of impact they can have on the business. But if you had to think about over the next 12 or so months, do you think dollar-wise, it would have more impact from you all just getting more out of your large customers or doing more with getting net new large customers? Thank you.

Yes. I think that's a fairly straightforward question from my standpoint, getting more out of our existing customers. We talked in the past that we're less than 10% penetrated in our enterprise customers, enterprise being those customers over 1,000 employees, and we've got over 5,000 of them. So, it really is about getting more efficient at selling through our existing customer base. And as I mentioned earlier, developing the capability to have strategic conversations with the chief heads of learning and the heads of people with respect to how you and we can and should be the partner they're turning to, to develop that skills-based organization capability as they're making that transition to a skills-based approach. And we see tremendous opportunity. Rob continues to signal back to us how encouraged he is based on the customer conversations he's having at the interest in us continuing to help them develop in the technical side of the house, but how massive the opportunity is on the business skill side. And we're investing into that from a product capability as well. But nonetheless, that's where we're going to see the biggest impact is in our existing customer base, especially in those five verticals where we've already knocked down the lead dominos. We already have a dominant position, and we're going to extend that.

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

Can you provide a little bit more color on the performance on a geographical basis? I think in your prepared remarks, you called out EMEA, but then you also mentioned that you're making a few key hires in other regions as well. So, it'd be great to just get more color around what areas are performing well and where you think there's room for improvement.

Yes. So, as we did share, the area that we are seeing the most kind of muted growth, if you will, is in the EMEA region. We have higher growth coming from APAC and LATAM, and that's where we're building out some of the teams and hiring some of these key leaders to help us take advantage. There's massive opportunity across the globe, but because we're such a global business with 60% of our revenue outside of North America, different regions move differently. And so, what we're seeing right now is more strength from a growth perspective in APAC and LATAM.

Got it. And then maybe just quickly on the net dollar retention, especially for the large customer cohort, can you just maybe unpack a little bit of the dynamics going on there? I think there was a sequential decrease of four points, slight uptick versus last quarter. Just anything you can maybe provide around seed growth, pricing, anything you can unpack there would be helpful.

Yes. So, we see continued lengthening, or it's not worse, but the continued long sales cycles around upsells and smaller deal sizes out of the gate. And so, what we're seeing is organizations are taking smaller bites at apple at a time and taking longer. And what we're focused on is really supporting these customers, helping them implement and drive adoption, engagement, and usage, and drive those business outcomes. We know when we do that, we are able to increase retentions, but it is just taking longer right now. Upskilling is such a critical need. It is accelerated by AI, but there is also the pressure of everybody really scrutinizing their budgets. And so, it's the balance of that is what you're seeing in net dollar retention. But we remain focused on ensuring that our customers are getting value out of what we're delivering to them so that we can continue to drive growth in those accounts.

[Operator Instructions]. The next question comes from Yi Fu Lee with Cantor Fitzgerald. Please go ahead.

Congrats on the strong set of results in light of the tough macro environment. I guess question for Greg or Sarah is, following from the previous question on net retention rate, understood the macro environment is crummy right now, but consider the macro environment stays the same. What are some of the drivers you could pull that can stop, I would say, stop the bleeding in the net retention rate? And when do you think it will bottom? And then I have a quick follow-up as well.

Yes, so there's two things. The first, again, which I just spoke about, is focusing on retention, delivering more value to our customers such that we maintain a strong retention number and grow that over time. On the growth side, you heard Greg talking about we're really strong on the tech side, but what we've been building out is our capabilities around the business skills and the soft skills. And so that's going to lead to more opportunity to expand over time. And so we're in a transition year. We've got some teams transitioning, Q4, Q1, Q2. And as you focus up market, the sales cycles are longer. As you know, they're nine to 12 months. And so it's going to take some time to work through all of this, but our strategy of ensuring that we are creating the capabilities that are most important for enterprise customers and for especially within our key verticals, that is going to play itself out very well in the upcoming years.

And I'll just add that, look, I talked earlier about the AI products, AI assistant, and skills mapping. Once we get our customer base, all 17,000 strong, enabled with these capabilities, we're already seeing, as I mentioned earlier, strong signals of not only increased adoption, but active usage and engagement on the platform, right? And engagement will without question positively impact net dollar retention and provide more opportunity to upsell. So, really excited about these capabilities for that reason as well, right? And there's more coming, right? As we flow through the year, we're going to be developing more capabilities that are going to have a similar type impact. So, look, we're encouraged, but we've got some work to do and we'll continue to share those developments as they progress.

Thanks for the honest feedback, Eren, and sorry, Greg and Sarah. And my follow-up question is about Eren Bali, the return of the CTO. I understand, AI is a hot topic right now. What are some of the other product roadmaps like you think he is going to look into beyond the AI, hot topic right now?

Yes, thanks for the question. So, first I'll say I couldn't be more excited to have Eren come back into the business. Eren's been on the board since, he left his operating role years ago. And to have Eren come back with that founder passion and sense of commitment and optimism for what we can build and what he believes is going to be the next phase of growth and innovation from a product perspective, it's just great to have Eren in the building and in the company. With respect to our product roadmap, we're not prepared to go through product roadmap capabilities specifically, but I can tell you by bringing the product and development organizations together, it's going to enable us to move faster and more nimbly with respect to the innovation that we're going to bring to life and how we deliver that in a variety of form factors. So, and I know that's fairly general right now, it needs to be, Eren's only been back in the business for a few weeks now, but we're moving fast and in upcoming announcements and calls, we'll be able to share more, but there's a lot of excitement in the business to have Eren back in the company.

Thanks for that, Greg, and keep up the good work.

The next question comes from Devin Au with KeyBanc. Please go ahead.

I wanted to focus on just the expansion piece within UB. Obviously, you've expanded your product portfolio quite a bit now with AI capabilities, so I'm just kind of curious if you can provide more details on exactly what you have done and what you plan to do among your go-to-market to drive more expansion or product upsell moving forward.

Yes. I mentioned a little bit earlier what Rob's focused on is enabling our organization, now that we have a broader platform of capabilities, to effectively engage with the senior leaders and organizations around the world in, let's just say, a more efficient high-impact way. And being able to share case studies, I'll give you another example. I mean, these are the types of stories and the types of case studies that really do change the conversation. We had this last quarter, we had a South African mining company end up coming to our platform and choosing us for the breadth and depth of our content. And what they saw in the first six months of deployment was a 10% increase in internal mobility. And they're able to immediately tie that to bottom-line impact. It's being able to have those kinds of conversations at the right level within organizations about how we can impact their ability to develop skills across the enterprise, right? Again, where historically we've been primarily focused on the tech side of skills development, now with the breadth of our platform, we can have a very different conversation than we had in the past, especially now that we have the AI capabilities, obviously online and rolling out. So again, it's about changing the narrative and changing the conversation and having it with the right level so we can actually start to see first-time deals sizes increase, right? We see those expansions expand to, as I mentioned earlier, that organization, 40,000 seats, versus historically, our motion has been more land and then small expansions over a period of time. We believe now that with the breadth of our platform, we can go to land or initially we can close those big deals up front for organizations that are looking to be strategic about skills development. So we now have the platform to be able to actually have that conversation in the first dialogue with an organization, whereas in the past, it wasn't quite there yet.

I appreciate the additional color here, Greg. Just one quick follow-up. Looking at the sequential net add and UB customers, it seems like that has stepped down a bit this quarter. Could you just unpack that a little bit? Is the step down there mainly just driven by some of the strategic reallocation of resources from SMB to large enterprise, or could that be macro-driven? Any color that would be helpful. Thank you.

Yes, it's a great question. The majority of that was definitely the SMB impact where we pulled back on those resources. So we did expect to see a step down in the number of net adds from a logo perspective. Going forward, what you'll expect is that we'll moderate over time as we are focused up market, and so we will have less net customer adds in total, over time with less SMB sellers out there.

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

Yes. I'd just like to thank you all for joining today, and we look forward to updating you all again on our Q4 call in February. Take care.

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