We'll get started here. Thank you everyone for joining for the Udemy session. I'm Stephen Sheldon, I'm the research analyst at William Blair, in the tech group covering education technology, including Udemy. I'm required to inform you that a complete list of research disclosures and potential conflicts of interest are available at our website at williamblair.com. We are thrilled to have the Udemy team here, this year. I think this is their first time, at our conference in person, so we really appreciate you taking the time. From the company today, we have President and CEO Greg Brown. We have CFO Sarah Blanchard. We also have Dennis Walsh, in the audience over here. So Udemy is one of the largest and fastest-growing enterprise learning companies out there.
I think it's underappreciated that they continue to put up close to 20% growth in the core business segment, in an exceptionally challenging environment. Seems to be growing much faster than peers. We think it's a great time to be looking at the story, especially as the proliferation of AI, in our view, will require significant upskilling and reskilling activity over the next couple of years, and Udemy seems very well positioned to support that. So for today, we're gonna be doing more of a fireside chat format. We may have time for a couple quick questions from the audience at the end, we'll see. But with that quick intro, we'll jump in.
But maybe, yeah, just starting here, with this being more of a generalist conference and since some may be newer to the story, maybe Greg, can you start by just giving a high-level overview of the business, the solutions you provide to different types of learners?
Yeah, happy to do it, Stephen, and thanks again for having us here. Yeah, so as you, as Stephen mentioned, you know, we're an online skills development platform, and we've got content ranging from business skills, soft skills, power skills, and then technical skills, which has been a deep area of expertise for us for years now. We have a broad platform or marketplace that has over 220,000 courses on it, of which 26,000 of those courses are curated and delivered and presented to our corporate clients. We've got 60% of our revenue now is outside North America, so we're a very international business.
You know, I think in terms of what Stephen just mentioned, as far as, you know, the pace of change and AI, and this whole focus on skills development right now, it's at the forefront of the conversations we're having with our customers, and it's an area that we spend a lot of time and energy in, helping them develop the right strategies to transition to a skills development approach in terms of learning and development. And then generative AI, of course, is on everybody's mind right now. So we spend a lot of time and energy there. I know we're going to talk more about the impact of generative AI as we move along, but it's a little bit of background about the business and who we are and what we're up to.
Maybe talk a little bit about the business mix. You know, you're serving both consumers and businesses.
Yeah.
So can you talk about that mix, how it's evolved over time, and also kind of the U.S. versus international in each, each of those?
Yeah. Yeah, the evolution of the business is we started out broadly as a marketplace, and we really did not have a business component to the business. So we've been around for about 14 years. First 7 years was as a broad-based marketplace, and then, you know, we developed the content array that we now sell to organizations. Just to give you some context, when Sarah and I came into the business in 2022, it was we'd just crossed the $100 million threshold. You know, fast-forward, was it 2022?
'22.
It was before that, 2021.
You were here late 2020.
2020.
Yeah.
It's really 20... Yeah, late 2020-
2021.
2021.
Yeah.
So it was really 2021. So in about three years, we've grown from $100 million to $500 million in ARR. So it's been significant growth, top quartile SaaS business-like growth and, you know, international in complexion. Over 60% of our revenue is outside North America. We've got 16,000 corporate customers now on the platform, and our fastest-growing country at scale is Japan, which is very hard for North American software companies to execute against. And it largely has to do with the breadth and depth of the content library, and then the learning modalities that sit on our platform that enable learning to happen, from management and leadership development learning to soft skills and power skills development, as well as technical skills, which I mentioned earlier.
Then we have an additional product that enables deep expertise, you know, in skills development on the technical side. It's a product we call Udemy Business Pro. So, you know, we've evolved from what has been somewhat of a point solution to now a full platform of learning modalities and capabilities that sit on top of this content generation engine that is very unique, that has enabled us to grow, as Stephen mentioned, 20%+ this year, year over year. And historically, it's been much faster than that on the corporate side of the business, and that is the growth engine of our company.
Maybe for those who are less familiar, what does the competitive environment look like? Maybe talk about the difference between publisher models versus more marketplace models.
Yeah, I'll start with the latter, and then I'll get to the competition. You know, the, the fundamental difference between our marketplace model and all of the folks we compete with, which are, publishers of content, is that, you know, they have contracts with an individual instructor or two, if it's a topic like AWS or Google Cloud, and they'll ask that instructor to develop a course that, that will take, you know, a number of months. They fly that instructor in, they film the instructor, and then they edit, you know, and produce and publish.
Our dynamic is very different in that we've got 70,000 creators on our platform around the world that develop content on their own at the pace of change and then publish that content into the marketplace, and then we bring the best of the best content that's curated and that's fit for purpose for the enterprise, and we bring that into our enterprise collection. A brief example of how different our models are: when ChatGPT was launched, it hit the market in November 2022. 2 months after that, we had an earnings announcement, and I asked Dennis, "How many courses do we have on our platform on ChatGPT versus our competitors?" And it was so compelling, I mentioned it in the earnings announcement.
Across all of our competitors, only one course had been released. At that time, we had 125 courses in the marketplace that had already been published, and 25 had been curated into our enterprise collection, against just one course across the entire competitive set. So we're able to move at a much faster pace, and not just domestically, but internationally, in terms of localized content. So it's a very different model, and it provides some very distinct and sustainable competitive advantages for us. In terms of the competitive set, you know, in the enterprise, it's companies like LinkedIn, Skillsoft, Pluralsight, Coursera, from time to time in various pockets. And those are some of the usual suspects we see in the enterprise, opportunities that we compete in and serve.
Down market, those are a whole different cast of characters. As you can imagine, serving the SMB, it's a much broader, more fragmented, competitive set. But, and the majority of our revenue, 80% of our revenue, comes from our enterprise segment, which is above 1,000 employees. So that's where we spend the majority of our time, making sure that we've got, you know, product, platform, and capability fit for purpose for us to serve and provide really unique value in that segment.
You talked about the curation process. How do you ensure content quality with the courses that you have? What does that curation process actually look like?
Yeah, that's a good question. The curation process, you know, starts with the fact that every course, all 220,000 courses that are in our general marketplace, are rated and reviewed, if you will, by our learners. And so in order for a course to even, you know, qualify for review and consideration into our enterprise collection, on a scale of 1-5, you've got to have at least a 4.5 rating, you've got to have at least 100 reviews, and then you've got to be in a, you know, area or class of courses to where we know there's demand in our enterprise customer set. So anyway, nonetheless, that's the minimum bar.
And then we have a whole team that will then take it from there and go through and make sure we apply ML and AI to make sure there's no bad verbiage, that you know, the form factor is appropriate for enterprise consumption and to meet the needs of our large multinational enterprises. And then we actually have folks who go in and listen to the courses and make sure that you know, the quality in terms of the experience that the instructors provided is fit for purpose and meets our minimum standards. We do all of this because, you know, again, I mentioned earlier, we're very focused on large enterprises.
You know, we're in over 50% of the Fortune 500, over 70% of the Nikkei 225, so our quality bar has to be very, very high for us to operate in these companies and have, you know, multinational global deployments with organizations of that footprint. So, yeah.
That's helpful. Maybe on the Gen AI topic, you know, I think some might see your model and consider it potentially at risk of disruption from generative AI. I think you talk about it as a big opportunity. So maybe talk about why you think it's a big opportunity for Udemy.
Yeah, look, we're really, really excited about the product development that we have in flight right now around skills mapping and AI learning assistant. We've got a number of capabilities that are in alpha, moving to beta in the second half of the year, that we're going to be releasing into our customers shortly thereafter, and we believe are going to transform learning. And so we absolutely believe that generative AI is going to continue to be an accelerant for our business.
In terms of the risk, there's a lot been written about this, and Sam Altman recently was in a video with Reid Hoffman not too long ago, talking about this, and I share his point of view on this: is that what makes learning very unique today with, you know, on our platform, but, you know, in a course when you're engaged with an instructor, is how they bring that content to life, the stories, the experiences, the examples, the unique way by which world-class instructors bring content to life, bring a lecture to life and personalize it, and that level of engagement that they provide. We've all gone to a university. Most of us gone to university.
It's no different than going into a course and that being one experience that one instructor provides, and you go into another course where the instructor's just reading out of the book. Well, effectively, if generative AI was just, you know, generating a script, if you will, that's what it would be like. Versus that instructor bringing that content to life with all of the personalization that I just mentioned. And so, you know, we are working very diligently, we will be over the next couple, two, three years, to enable our instructors with tools like an avatar that looks like them, that has voice, voice recognition that sounds like them, so they can spend even more of their time on the, the script, if you will, on the lecture, and bringing that content to life in ways that we know, we know only world-class instructors can do.
But Altman commented on this, and I, and as I just did, that we believe that in the short to mid-term, there's no way that generative AI is going to, to be able to deliver learning at the standard that the world-class instructors that we all have on, that we engage with and that we have on our platform do. And so I'm, I'm not worried about it from a risk perspective. For us, really, it's all upside.
That's helpful. Maybe then just sticking with the Gen AI topic, you've talked about a roadmap of capabilities that you plan to implement. So where are you at with the rollout of some of these capabilities? You know, as you've tested them with customers, what has the feedback been?
Yeah, we're testing right now. We're in alpha, as I mentioned, with skills mapping and our AI learning assistant, and the feedback in alpha has been tremendous. It's what we hoped it would be, which is affirmation, a lot of good feedback around how we can tweak and tune some things, which is really why you do the alpha phase. And we've seen no major issues or hiccups in terms of our ability to move to beta in the second half of the year, which we're on track to do, and then move to GA shortly thereafter. So feedback has been tremendous. We are going to expand the customer set in beta, and we're gonna actually, you know, in beta, they'll be piloting and running the product in live environments and what have you.
So all things considered, we couldn't be happier with the progress we're making there.
... Got it. Maybe then on the UB side, Udemy Business, you've made a leadership change recently.
Yeah.
Maybe talk about what led to that, and you also announced a CRO hire recently. So maybe just talk about the leadership change in UB.
Yeah, that leadership change was the CRO. Yeah, a little bit as to what I alluded to earlier in that, you know, three years ago, when I came in, we were primarily a point solution selling almost exclusively direct into customers. At that point in time, North America was a heavier weight. We had more revenue in North America, so we were not as international. We were single channel through our own direct sales team, and a point solution meaning just content. So you move to where we are today. We've got a platform of products and services that now is being sold into an international customer base that is much more expansive and heavier weight outside North America. And we have a multi-channel, multi-threaded go-to-market strategy that we're executing against.
That includes AWS, a partnership, and we have an announcement coming out tomorrow on this, but a partnership we developed with AWS that we believe has the ability to be a force multiplier. ServiceNow, and we made a number of announcements and strategic partnerships that we've developed. India and Brazil are massive opportunities where we have significant brand awareness, higher than in North America, that we need to be able to take advantage of. And so really, what we're looking for as we take this big next step in the maturation and growth of Udemy Business, is a leader that has seen the movie before and done exactly what we're embarking on doing, which is scaled a multinational, multi-channel distribution business that has a significant revenue stream outside North America.
It has, again, gone through a lot of the learnings that come from running an organization of that size and scale and that complexity. That's what we found in Rob. I couldn't be happier with Rob Rosen- Rob Rosenthal. Rob started with us on Monday, and he has tremendous experience at Adobe, responsible for a $2 billion revenue stream. He was a senior vice president and general manager at SAP in one of their large divisions for a period of time, and then most recently at Bloomreach, and he brings the breadth of experience and the DNA and really the culture fit we were looking for.
Yeah, that's helpful. Maybe on the macro environment, you know, I think for a lot of edtech companies out there, the macro environment's been at least a little bit of a headwind. What are you seeing there? Where is it hitting the business the hardest? Are you seeing any signs of improvement, you know, as you think about the macro background, backdrop?
Look, I think, you know, our perspective and comments on the macro are not a lot different or dissimilar than what you've heard from, you know, some of the Salesforce and some of the others more recently in that we don't feel like it's getting worse, but we don't feel like it's changing or getting materially better either in terms of, you know, the buying processes that we're seeing across not just North America, but globally. EMEA, we've called out for some time, has been soft for us and continues to stay pretty consistent with what we've seen. We're not seeing anything get materially better there. Asia-Pacific right now, outside of, you know, Korea and Vietnam, continue to stay encouraged by what we're seeing from Asia-Pacific.
For us, because the majority of our revenue is on the enterprise side, you know, continue to remain encouraged in terms of what we're seeing as far as pipeline development and pull-through in the enterprise pipeline. There's some bright spots, and there's some soft spots. You know, our view is that I think pretty consistent, that we expect the environment to stay pretty consistent with what we're seeing right now through the balance of the year. I mean, look, we're in fairly short order, we're gonna be into an election period, and that's gonna be an interesting one, to say the least, this year. But between now and then, I don't, I don't necessarily think we should expect to see a lot of improvement in the macro.
Got it. And maybe L&D budgets, what are you generally seeing there in terms of the budget allocation to L&D? I don't feel like you guys have seen much churn-
No
... so it doesn't seem like that's been an issue. But the deceleration has been more about new customer acquisition. So maybe just talk about L&D budgets and how you can maybe accelerate the customer acquisition.
Yeah, I'll start, and Sarah, you jump in.
Sure.
You're right. Our gross retention has held very strong and has been very durable, and we are very pleased by that. It speaks, you know, tremendously to the value of our platform and the impact that our customer success team and that our go-to-market teams are having on our customers being able to continue to extract and get value out of our partnership. That being said, yeah, I mean, I think, I'll, you know, I'll let Sarah comment specifically on some of the areas that we've been diving into, but, you know, it's a bit of a mixed bag. Why don't you go ahead and add?
Yeah, I think what, you know, we do still hear the heads of people and the heads of L&D saying, "The budgets aren't going away, but they're taking longer to get to," which is a very interesting perspective. They're figuring out how and when to make that call in an environment where their leaders, their CEO, their CFO, are doing exactly what we're doing, which is saying, "Hey, be really thoughtful. Dot each I, cross the Ts twice," that sort of thing. So it is taking us longer to buy. It's taking our customers longer to buy. Our expansions are happening a little slower, but they're still happening. Our Net Dollar Retention for our large customers is at 111%, and we're really happy to see that.
And that has really been, to date, all of our Net Dollar Retention has come from seat expansion. So I think something really important to understand about our business: we have 16,000 customers. We have a land and expand model. We're less than 10% penetrated within those accounts. There is massive opportunity within just our existing business, over $2 billion if we just get to 50% penetration, and we have many, many multinational wall-to-wall contracts. So seat expansion is an opportunity. We also have Udemy Business Pro, which is an immersive, hands-on learning experience with assessments, workspaces, and labs for technical folks. And as Greg alluded to, part of our platform now that we have is a cohort-based Udemy Leadership Academy. And so the opportunity within our existing accounts is big, but it's just taking longer right now.
We're taking longer to make decisions as well. Yep.
Makes sense. Maybe then for Sarah as well, like, you know, on the instructor, you guys made a change to the instructor revenue share model. Maybe talk about why you made that change. You know, how has instructor feedback been as you push that through?
Mm-hmm.
Maybe just talk about that change.
Sure. So really importantly, you know, instructors are the lifeblood of Udemy. They are the creators that are, you know, created our marketplace and that flywheel that we take the best of the best and put into Udemy Business. Really important that we are thoughtful in bringing them along this journey. Just to give you a level set, on the consumer marketplace, when people just purchase courses, they get 37% from an instructor revenue share. Our consumer subscription, our Udemy Business subscription, was at 25% revenue share. We announced late last year that that was gonna drop to 20% this year, 17.5% next year, 15% the next. Really importantly was what we are doing with that.
So this year, while that revenue share change and our continued mix shift toward Udemy Business, which has a higher gross margin because of the revenue share difference, was adding about 300 basis points of gross margin. Reinvesting a good portion of that back into the business to continue to allow us to take advantage of the opportunity and the growth in front of us, that benefits both the instructors and us. We are creating more tools for them, using AI to do things like the skills mapping and the learning assistant. So it's all about being very balanced, and next year we'll be looking to do more EBITDA margin expansion and the year behind beyond that because we are targeting 15%-20% by 2027.
So, a step function change you'll see on the bottom line over the next few years, but this year, investing so that we can bring those instructors along. We are very pleased with what we've seen. Not to say that we didn't get some feedback, and obviously it doesn't feel good, but we stay really close to our instructor partners. We've had a lot of meetings with them. We got some feedback from some of them ahead of time, obviously under NDA. Anything more you'd wanna share about that, Greg?
No, I think that's... It was well said. You know, I, we continue to stay very, very close to our instructor community, and I was on an event with our Chief Marketing Officer and Chief Product Officer—it's been a long day, two weeks ago, I should say. And we walked through in pretty good detail all the investments we're making to make their lives easier and to make them more productive, and the feedback was terrific. And, you know, they challenge us in some areas, as you would hope, and we take that feedback, and we continue to incorporate that feedback and message back to them how we're making improvements based off their feedback, as well as the feedback we get from customers and individual learners.
The relationship is strong, and we expect that to continue. But yeah, you know, it's something we stay very close to and focus on.
Have you seen any pickup in churn, instructor churn? You know, since they're-
Yeah
... getting a lower revenue share, have they?
Yeah, really happy to report, it's a good question, that across our top 1,000 instructors, which represent over 80% of the revenue that flows through our platform, we've had 0 instructors give us written notice that they are making a decision to leave the platform. And with just for context, for those of you that don't know, when we move content into the Udemy Business collection, a customer sign a 12-month exclusive arrangement, and they have to give us 12 months' notice if, in fact, they wanna pull their content out of the platform because we're serving large multinational enterprises, so we have to have some stability there. And anyway, we've had no request to remove. So, you know, feel really, really good about that and expect that to continue.
On the consumer side, growth there has been pretty flat, I think, as we look back over the last couple of quarters, and I think it's held up even as you cut back investments in that area. So maybe talk about the consumer business, you know, or is there anything that you're planning to do to try to accelerate the growth there? You know, just generally, how are you thinking about the outlook on the consumer segment?
I'll take that one. So yes, we have, over the last two years, dramatically pulled back our marketing investment behind consumer. What we are doing is, the majority of the learners, 80%-90% of learners that sit on consumer, are professional learners. The work that we are doing to improve the experience and the outcomes for learners on the Udemy Business side, we're gonna be porting those capabilities over to the consumer platform. Those are things like badging and certification. It's our personalized learning and our learning assistant. When that happens, those capabilities are most applicable really within the Personal Plan, our subscription side of things. And so at that point, the Personal Plan has an LTV that is 5-6 times higher than the consumer marketplace, where they're buying the transactions.
As we have that value differentiation sitting in the personal plan, we will very likely put some marketing dollars behind it because the LTV/CAC ratios will make a lot of sense. And so we like to think about it as invest once, build, build capabilities for learners. First launch in Udemy Business, 'cause that is our growth engine, but then spend some small amount of dollars porting that over to the consumer side and invest once, monetize twice. We think that'll get us back to, you know, modest growth over time.
Got it. The guidance, I think, for this year would imply consumer segment down just a little bit.
Mm-hmm.
I think would imply that the UB segment, comes in maybe just a touch below 20% growth-
Mm-hmm
... for this year. Where does growth in UB potentially bottom out? And I think you guys have been talking about acceleration maybe in the back half of the year. So what, what gives you the confidence in that potential reacceleration?
Yeah. So, from an ARR perspective, that trough should happen Q2, Q3. You know, revenue follows in an enterprise SaaS model. So Q2, Q3 on the ARR, seeing that acceleration in Q4 and beyond, there's a few things. First is we have been doing some very targeted investments, go-to-market on the enterprise and strategic side, where we continue to see strong demand. Those new AEs will be ramping and be fully quoted in the fourth quarter. We have UB Pro and UBLA, those additional products that are now a part of the team's quotas in the back half and, and like to, you know, liking the pipeline that we're starting to see grow there. We have a partnership with AWS, that we are—we've spent some time and a lot of investment kicking that off, and so that's starting to really ramp nicely.
We generally have been doing. We hired some additional sales enablement people in the fourth quarter. We're really happy with what we're seeing, leading indicators. One of the biggest leading indicators of success for that sales enablement team is how our ramping reps, so our newer reps, are doing. They hit over 100% of their quota in Q1. That's up 40 points from where they were last year. A number of levers that we're pulling that give us confidence that even if this macro continues, that we will see that acceleration in the back half of the year.
That's helpful. Maybe then shifting to margins, you know, I think, maybe talk about the targets you set for 2027, the levers that you have to get there-
Mm-hmm.
And then, you know, what could it look like beyond 2027?
Mm-hmm. So I think really importantly, some of the, the instructor revenue share, that gross margin is going to be adding a significant amount of EBITDA margin over time, over the next few years. Again, that's going from 25% in Udemy Business down to 15% in 2026. So significant margin there. The other largest piece of leverage we're gonna get is from the sales and marketing team. So as we continue to invest in additional product and platform capabilities and get more leverage across the movement upmarket into enterprise, into strategic accounts, into penetrating our existing accounts, which is less expensive than adding new, we will see that leverage. Right now, we run our business about 40-50% of our net new ARR is coming in from new business, and the rest is coming in from upsell.
That will continue to shift over time toward upsell slowly, and that's a less expensive and more cost-efficient way to drive revenue.
That's helpful. We've got just a few more minutes, maybe then shifting to capital deployment. You've got very healthy cash position. How do you think about capital allocation? If you were gonna look at M&A, what types of opportunities would you look at?
Yeah. So, we are always looking at our capital allocation. We're always looking at the best place to invest and place our dollars. This year, making investments on the product capability side around some of those AI functionality, we've made some modest investments on the marketing side around brand and different things that we're doing there, and some go-to-market, team expansion, but very, very targeted in this macro. At the same time, we did announce a $100 million share buyback that we then expanded to a $150 million because we see a great, investment is our stock right now. We are, EBITDA profitable. We don't need cash for our operations, and so in sizing that share buyback, we did take into consideration the fact that, you know, we're in a really good place to think about add-ons to our platform.
We will have plenty of cash left after that share buyback to be very opportunistic. We are active, and I'll let Greg talk about, you know, what we're looking for from an M&A perspective.
Yeah, there's three primary areas that we consider, and we're actively, you know, exploring, I would say. One is geographic expansion, new international markets that we feel like we could penetrate, faster and more efficiently, more cost-effectively through expansion. The next would be, learning modalities on our platform, right? There's things like virtual instructor-led training and other learning modalities that, we're very interested in exploring the opportunity to bring those capabilities on platform, enable instructors to leverage, that technology versus them, in some cases, doing that off our platform. And then the third is Generative AI. We're very, very closely watching, the upstarts, the companies that are investing, leveraging Generative AI, to, you know, positively impact learning experiences in a variety of different form factors and, and manners.
So, you know, we're paying close attention in those three areas, and when we do find the right opportunity, we will strike. You know, Stephen, as you mentioned, you know, we're very fortunate right now that, you know, we have a war chest that we can put to good use, and we plan to put it to good use. But acquisitions are hard. You've got to make sure that, you know, that everything is lined up appropriately in tune, in terms of management and culture as well. So, you know, that's where things are at today, and we hope to have something more interesting to report on that front and in the next time we get together.
I would look forward to that. Maybe just lastly, if there's one key takeaway you wanted to leave people with, what would it be, as people think about Udemy as an investment idea?
I think pay attention to Udemy Business. You know, today, if you look at Udemy Business as a standalone, $500 million organization or company, if that was a standalone business growing at 20% year-over-year with, you know, Net Dollar Retention north of 110%, with 16,000 customers that are only 10% penetrated, with some of the largest multinational customers in the world on our platform and being strong advocates, you know, I think our value would be very different, right? So I think, you know, that's the orientation, that's where we're making our investments, and that's how we'd like everybody to start to think about Udemy as we move forward.
Well, thank you so much. Thank you, Greg. Thank you, Sarah, for being here and spending some time with us. Really appreciate it.