Okay, great. Let's get kicked off here. My name is Josh Baer, software analyst at Morgan Stanley. We have the pleasure of Greg Brown, CEO of Udemy, and Sarah Blanchard, CFO. First, some disclosures. For important disclosures, please see the Morgan Stanley Research Disclosure website at www.morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative. Wanted to ask Greg, you the first question, given your recent change in roles to take over as CEO. What are your key priorities looking ahead to this year? What are some things that you wanna keep the same and what are some changes that you wanna make?
Great. I appreciate the question, Josh, and appreciate the opportunity to be here with you. As far as the priorities for the year, Gregg Coccari and I, who was our prior CEO, worked very closely on the, you know, strategy as well as nearer term priorities for the company for 2023. As a result of that, there'll be no immediate changes with respect to, you know, what we are planning on executing against this year. That being said, you know, I'm very focused on continuous improvement, and at our last earnings call, we laid out our priorities for the year for 2023, which include continuing to ensure that Udemy is the platform of choice for professional skill development.
Validation of skills acquisition through the form of badges and certifications, which we're gonna come out with in the back half of the year. Continued investment in our international expansion, which is seeing explosive growth in some regions, and we'll talk about that. Our focus on continued expense management and driving the company to profitability in the back half of 2023.
Okay, that's a great overview, and we'll dig into all those areas. I also wanted to ask, I know that you've, you know, just stepped into the role, but thinking about the stock and the performance over the last year, I guess the question is, what do you think investors don't understand about the Udemy story?
That's a really good question. you know, our stock and really the entire category, has been, I think, you know, unduly punished, partly based on the macro, but also, you know, the EdTech category is a little bit out of favor right now. I think with respect to Udemy, you know, one of the, you know, the aspects of our business that, you know, we feel, you know, real strongly about is we really are a transformative company that is very different than any other platform or company that has been operating in the EdTech space. You know, we're very unique in that, you know, we've got this high-growth enterprise SaaS business that sits on top of this, what we believe is the world's most efficient content creation engine, which is our consumer marketplace.
This marketplace has massive scale. We've got 35 million users hitting the marketplace every month, and that provides tremendous value and benefit, you know, throughout the experience that our professional learners are able to take advantage of. I think one of the misconceptions is that, you know, that, you know, we're investing in equal portion of trying to grow that consumer business as well as the enterprise SaaS business. The reality is, our focus is running the consumer business at breakeven and continuing to optimize that experience, but the focus is vibrancy of the marketplace. It's not growth, because the growth and the value creation in our business is gonna come from the enterprise SaaS business. All right?
In terms of how we measure vibrancy and what we really measure ourselves against, it's traffic to the marketplace, consistent and healthy traffic, both new and existing. It's course creation, right? Critically important to us in terms of fueling the enterprise growth. Course creation, you know, we're seeing, you know, upwards of 5,000 courses being created on a monthly basis in the marketplace. Just last quarter alone, we brought 1,900 new courses into the Udemy Business collection, fueling that enterprise software growth. Again, vibrancy there. The last component of it for us is instructor payments.
As long as our instructors continue to, you know, have healthy growth in their share of wallet that they're taking home every year, and their payments and their revenue streams are growing on an annual basis, that's all the incentive in the world for them to continue to update their content and bring new content onto the platform to continue to take advantage of this very robust opportunity they have on our platform. I think that's the biggest, you know, point that I want folks to take away is that we're not optimizing this business. We're not investing in the business to grow the top line on the consumer side. It's about the vibrancy to grow the enterprise business, which we talked about in the last earnings call.
This last year came off of almost 70% year-over-year revenue growth at north of $300 million in revenue per year, which, you know, there's, you know, that's, you know, there's probably less than 10 SaaS, you know, public SaaS companies right now delivering that type of growth. We're seeing outscaled growth, you know, and really excited about, you know, the enterprise business sitting on top of this unique demand gen engine that is our marketplace.
Great. Wanted to ask, one follow-up on something you mentioned around operating the consumer segment at breakeven.
Yeah.
Is that, is that a goal? Is that where we are now? You know, thinking about, like-
I'll speak to that. It's a goal, and we're pretty close. I was gonna say very close. As you know, you know, we spoke about profitability in the second half of the year across the business, but definitely, the consumer business. We're close. We've been shifting investment away from consumer over the past 18 months really, in order to invest more and more in the Udemy Business side. Just keeping that marketplace vibrancy top of mind.
Perfect. I wanna talk for a minute about this theme of consolidation and consolidating vendor and consolidating spend of learning and development budgets in this macro environment. The question is Udemy, you know, holding? Are companies kicking out other vendors and Udemy is holding onto its existing footprint, so sort of like a relative strength scenario? Or are you actually seeing an incremental benefit, like a real opportunity, customers choosing Udemy and going, you know, expanding, going wall to wall? Like, how should we think about that consolidation theme?
I can take-
Go for it. Yeah.
I'll take that first and you can add to it, Sarah.
Yep.
We're seeing both, right? We are seeing organizations looking to consolidate from two, three, sometimes four vendors down to one platform. You know, they really are looking at a couple different factors when they're making these decisions. Number 1, it's the quality of the content, first and foremost, which really impacts the learning experience. It's the breadth of the platforms that enable learning to happen, that they care a lot about. It really is the reason why we went out and bought a company to help, you know, really address an opportunity for us in leadership development 'cause we didn't have an answer for that. We went and bought a company, a cohort-based, leadership development company to address, you know, an acute need that we were seeing.
As well as, you know, we've got immersive learning or deep learning experiences on the IT side, where certifications and validation is really important. Organizations really are looking, if they're gonna consolidate down to one platform, they're looking for the platform that's got the quality and the breadth to serve their needs, not just today, but tomorrow, right? Because again, they're making multi-year investments in these platform partners. For us, it's also, you know, critically important that we're bringing a level of service to that relationship in the form of our customer success organization that really serves to be a strategic partner in not just the selection of the vendor, but, you know, more importantly, I think for the customer, to help them shape what their skill-based strategy should look like.
How are they gonna think about upskilling and reskilling their employees? Not only what's the strategy look like, but the execution and the route to achieve the outcomes they're trying to achieve at a corporate level, mapped to the skills that they need to achieve those outcomes. That's an area that we invest heavily in, and we're a little bit different and unique in the, in the, you know, amount, quality of the resources we bring to bear to help organizations with that. That's, you know, I think the first part of the answer. You wanna take the second part?
Yeah. I think it's really important to understand that, you know, where Udemy plays is really about value and delivering value to our customers. It's not, you know, the low price. The quality of the content that we get and the freshness and the localized language from our marketplace is exceptional, it's extraordinary. You pair that with the customer success and the partnership that we build with our customers, that really is the differentiator that I think is allowing us to be on the, on the, you know, winning side in these consolidation plays.
Great. Really helpful. I wanna start with Udemy Business and dig in a little bit, and start with the macro and what you're seeing in the environment. Thinking to last quarter relative strength, with customers that had over 1,000 employees, pretty durable trends, a little bit more weakness, in SMB. What's the update there as we're several months into 2023?
Go ahead.
I mean, similar to what we've, you know, said on our last call, which is we continue to see strength on the enterprise side of things. SMB, it's been a little bit soft for a few quarters, which we've spoken about. We anticipate that to continue to be soft, but from an enterprise side, you know, companies still need to execute on their strategic initiatives, and in order to do that, they need skills, and the skills they need is changing at a faster and faster pace. I think that really speaks to, you know, our ability to kind of continue along. Even if the sales cycles are a bit longer, they were longer in Q4. We saw some deals slip out of the quarter into the first quarter. We expect that to continue. The pipeline remains robust. Those deals did not disappear.
It's just gonna take a little bit longer to get them done.
Okay. That's helpful. You mentioned the rapid growth in Udemy Business, you know, since as long as we have numbers for. The forward guidance or the guidance for this year calls for a deceleration, I believe, to the mid-30s. Wanted to ask, what are some of the main forces that are driving that significant deceleration? Essentially, what is embedded in your guidance from a macro perspective?
Listen, I think it's prudent right now to expect it to continue to be bumpy out there. We expect that to continue certainly through the first half, probably through the remainder of the year, kind of remains to be seen, but I think that's the biggest factor is continued lengthening of the sales cycles like that continue to say. At the same time, you know, there are companies that are they've been reducing their headcount. Sometimes that means that has a little bit of an impact on us. Sometimes that means licenses are reallocated. We do expect it to be bumpy. We've taken that into consideration, but we expect continued strength on the enterprise side.
If you have a business in this environment that's, you know, growing at mid-30s at this scale, I think, you know, that says something, and it's a testament to the value that we're providing these customers. Listen, more to be seen. We'll have to see how the year plays out, but we do expect it to be bumpy, and we took that into consideration.
Great.
Anything you wanna add, Greg?
I'll just add that, you know, we talked about the fact that we throttled the growth of our sales organization, which is a big factor and has been a big factor in our ability to continue to sustain outsized growth like we delivered last year. You know, that's one aspect of, you know, I think the plan for this year that absolutely has to be factored in and considered is, you know, we're not scaling our sales organization at the rate we were. We're fully prepared when we start to see green shoots and, you know, the macro, you know, start to turn in a, in a more positive direction, we're fully prepared to start, you know, throttling that growth back up.
You know, the other thing I would say is last quarter, you know, we delivered our Net Dollar Retention on the enterprise segment was 123%, which was flat from Q3, and within a couple points of, you know, our highest quarter. You know, we continue to be very encouraged and bullish about our ability to continue to build relationships and see those relationships grow in our enterprise segment, which gives us a lot of confidence that we're gonna, you know, we're gonna fare just fine through the, you know, whatever macro turbulence we see this year.
Great. You talked about the potential for slower headcount growth and some customers to weigh on some seat expansion, but wanted to ask about another lever of growth for you on the business side, Udemy Pro, and just wanted to ask about what does that bring from a feature perspective, and what does it do from an economic perspective?
Sure
... for you?
Yeah. Udemy Pro, I touched on this already a little bit, but it's an add-on for us to our core on-demand subscription offering. It's an immersive learning product. Really what that means, and it's tailored to the needs of those IT professionals that are looking to get badges and/or certifications in anything from Amazon, you know, Azure, and, you know, those dense, meaty, you know, technical certifications that are so important for most of the companies that we do business with. You know, the product really entails tailored and personalized learning paths, assessments, labs, and workspaces.
It provides for that full immersive experience, so you can practically apply, you know, the learning as you go through a course or a series of courses to ensure that, you know, you're actually absorbing and learning the content because it is dense and rich. Then there's opportunity to assess at the end and then certify and/or badge based on skills acquisition. You know, the product right now, we couldn't be more excited about the impact we're seeing as far as in our enterprise customers that initially started with pilots, which makes sense and when a new product's released, and we're seeing, you know, those expansions happening in real time right now.
There's real value for customers both in being able to validate the skills that have been acquired in the organization and through those assessment, what skills they do have in that side of the house, on the IT side of the house. For learners to be able to validate that they've acquired those skills really does add to employee satisfaction, employee retention, and then, you know, overall value and impact within the organization of their ability to apply those skills forward to strategic initiatives.
When a customer adopts Udemy Pro, is there any context or guidelines for what happens from a financial perspective?
If you wanna add anything.
Yeah. It's an additional seat license fee on top of the Udemy Business. It applies just to the tech right now, just to the tech teams. You know, that'll expand over time, but for now, it's an additional license. You know, to date, all of our Net Dollar Retention has really come from seat expansion. We're just starting to see some movement in Net Dollar Retention from Udemy Business Pro and CorpU. We're in the really early days.
Okay. Great. Really helpful. You've mentioned some of the different pieces of the platform, from guided learning, immersive learning, cohort-based learning, on-demand learning. Are there still gaps or other areas that are missing from what seems like a pretty complete platform, but just thinking about, you know, future investments. How you think about those decisions, whether you go out and make an acquisition or if you build internally?
Yeah, that's a really good question. You know, we're continuing to lean into these investments. Some of them are earlier days for us, if you will, in terms of, for instance, our CorpU, which is our cohort-based learning leadership platform, continue to invest in bringing that into our core platform and building out the capabilities there, as well as in Udemy Pro, which we just talked about. There are additional learning modalities that we're hearing from our customers there's interest around, as well as instructors.
Really, for us, our focus is to continue to make investments in the tools and capabilities that we provide our instructors 'cause we've got 70,000 instructors around the world developing in many cases, the best content in their domain, and making sure they have all the tools necessary to provide a really rich and vibrant and expansive learning experience. The answer is yes. I mean, look, you could envision a world where coaching and mentorship and, you know, podcasts, there's a lot of different learning modalities and areas that, you know, we're interested in exploring, we are exploring.
How we get there from our standpoint, it's, you know, it's build, partner, buy, and we're gonna determine right the appropriate path based on the technology and the experience and, you know, and I think, you know, pace of our ability to get products to market and the cost associated with that. Nothing that's not standard in terms of how most companies look at it.
Great. You mentioned credentials. Wanna focus there for a second. You know, your content is so differentiated and valued in the way that it's practical, it's created by individual, I don't know, expert. Is there a way to keep that differentiation in the marketplace, that advantage, and, like, how do you weave in these branded credentials or certifications from other third-party institutions?
You want to take that? Yeah, I'm happy to answer that. Yeah. For us, it's very complementary. It's, it's additive, and in no way competitive with our core offering in that, you know, our customers have been asking for some time, for not just our ability to enable third-party display of badges and certifications, you know, via learners, i.e. third party being, you know, Amazon or Azure or whatever it happens to be, to allow their learners, you know, to display and promote those badges. Also for us to be able to, you know, deliver against unique Udemy branded badges and certifications. The feedback we've gotten from our customers is they really do believe our content is the best content in the industry.
Therefore, the associated badge or certification with our content would be treated equal if to not greater value than a badge or certification from a third party. Again, the quality of our content in their eyes is better. You know, it's a win-win for everybody involved. You know, the learner wins for the reasons I just mentioned. The organization wins because, again, they get access and visibility across the organization as to where those skills lie and where they have skills today and based off where they need skills for tomorrow. You know, we partner with them and to put learning paths and learning journeys in place for the acquisition of those skills to happen, to map against those outcomes that they're looking to achieve.
You know, right now the work for us is with instructors, making sure the instructors understand the value and impact, and us providing the tools for them to, you know, tailor their courses to a badging and certification experience. That's a little bit new. That's the work we're doing right now, and we're gonna be releasing this over the back half of this year and into next year. You know, we'll be talking more about it as we move forward.
Really interesting. Wanted to ask about the federal opportunity. Is that something that you're focused on? If so, you know, where are we in the process of addressing that market?
Yeah, happy to take that as well. More on the go-to-market side. Yeah, I mean, look, we've already made, you know, nice inroads into federal government and local and state government opportunities in the U.S. as well as around the world. You know, through our partner Benesse, we've got a nice relationship with, in Japan, with the Tokyo government. You know, we're expanding that as we speak this year. We're taking the key learnings, you know, from the various, you know, early engagements that we've had and taking those and expanding on those around the world as we're starting to get, you know, more penetration in state, local, and federal government. Massive opportunity. It's early days for us. Not a significant revenue generator today.
We surely expect the opportunity to continue to grow and for us to, you know, to be able to take advantage of it. We're excited about it.
Great. You mentioned sort of the around the world. Wanted to ask about the international playbook. I think that's a key area of differentiation besides the content and sort of highlights the importance of both the consumer and the business side of the platforms. Could you lay out sort of the international playbook and where some of the biggest opportunities are around the world?
Happy to. You know, we're right now experiencing explosive growth in Asia-Pacific in our new ventures partner programs. You know, we've talked a bit about this, but you know, our new ventures for us is where we've developed OEM-like relationships with in specific countries where we've been able to identify the right partner to effectively take our product and services to market on our behalf. That started in Japan, and we've had, you know, wonderful success and accelerated growth in Japan, and we've now extended that to China, Korea, and Vietnam.
Really excited about, you know, these partnership opportunities because what we've learned in Japan, Last year was the first year we were live in these new markets, and we're seeing a very similar growth trajectory in these markets that we saw early days in Japan, which gives us a lot of confidence that we're gonna see accelerated growth for years to come. I couldn't be more excited about that. You know, in other regions, we're taking a more traditional reseller approach, i.e. in Latin America.
For instance, in Brazil and Mexico, I'm really happy with, you know, the partnerships that we have in process of developing and that are developing and investing in, and we're gonna continue to lean into these investments this year as far as feet on the ground, partner management to ensure they've got all the sales enablement and field enablement and resources they need to be successful, as well as identifying new countries and opportunities for us to enter. EMEA we're a bit more mature than we have been, and we've got strong reseller relationships in our core markets in EMEA, which are the U.K., Germany, and France.
Great. How should we balance some of these international investments with the push toward profitability? If you could talk about the economics or the payback period on some of these international investments.
You know, on the, on the partnership and the new venture side of things, a lot of the investment actually happens with our partners. We, you know, have an enablement team. It's a pretty small but mighty team that actually can really help them get going. The payback on that happens pretty quickly. On the other side of things, you know, where we're building out our own direct sales team, especially, you know, LATAM was later, EMEA, that productivity trajectory is kind of exactly what you'd expect from an enterprise SaaS business, which is you make the investment, it takes some time. For the most part, you know, when you think about North America or you think about EMEA, you know, those engines are really humming. APAC is humming. LATAM's probably the last.
The, the investment is coming and listen, we're gonna be profitable in the back half, so we're in pretty good shape. We're pretty far along the trajectory on some of these. I think also importantly, we are only in 10% of the seats within our customer base. When you think about expansion opportunities, you think about the fact that we have now over 40% of our revenue comes from multi-year deals, you know, it becomes more and more efficient to kind of continue to generate that top line.
Let me just add a couple thoughts that I think are important on the international conversation, which is, you know, one of the unique aspects of our marketplace is this marketplace allows us to deliver localized content in all these countries around the world that we operate in. We're very unique in that none of our content's dubbed and subtitled. It's local content developed by local instructors, local language, tone, and context, and then delivered at scale. All of that content for our Udemy Business customers is curated with the same ratings and reviews and high standards that we have for the content in North America, so those standards remain around the world. That is a unique differentiator for us. We are the only platform that's delivering that type of local experience.
The other thing I would mention is, you know, we've talked a little bit about this prior as well, is that, you know, we made and are making significant investments with the SuperScalers. First is Amazon. We're making really good progress and have great traction both internally within Amazon, upskilling and reskilling their development teams, as well as on the go-to-market side. You know, that gives us an opportunity to do some very interesting things in terms of the channel investments on a global basis to generate leverage that we currently take do not have from an organic standpoint. In terms of envision the massive sales organization that Amazon has and us being a premier partner going to market with that sales organization, that's a force multiplier. We're leaning in heavily into these types of relationships.
Great. I have a few more questions on consumer and margins, but do wanna poll the audience. I know there's a question back there.
My question is actually on consumer and margins. On the consumer front, how do you get confidence that you're investing the right amount into that business? As we understand it's still a really important and attractive market for instructors to come and produce their content. It's higher margin for instructors. How do you make sure that you continue to invest in that to bring instructors into the Udemy network?
I think there's a few things that are really important. We call it marketplace vibrancy. What's important? That we're able to attract new instructors, that our instructor fees are growing overall, not just within consumer, right? Most of our top instructors, they're sitting in Udemy Business, their businesses are growing by virtue of Udemy Business. Courses and publishing are happening. With over, you know, with nearly 5,000 courses a month being published, that allows us to get the content that we need to curate input into Udemy Business. We're really watching. We watch traffic, we watch instructor payments, and we're watching the course publications.
Any other questions? On the consumer topic, for 2023, you are looking for declines this year, I think high single digits. What's driving that? I know we talked about consumer and how it fits in before, with sort of declines expecting this year, like, how should investors think about the growth profile around consumers?
Yeah, it's a great question. A few things. Like first, you know, the macro is tough. We expect it to continue to be. We still, especially in the first half, have some FX headwinds. I think really importantly, it has been an investment shift for us. Over the last 18 months, we've been shifting investment, you know, towards Udemy Business away from consumer. To see that our traffic is still 35 million uniques, it was up 6% last quarter, and we continue to see all the publishing and the vibrancy there, it feels like we're in a really good place. We're not trying to grow that. It can be plus or minus some. That's okay. It is this content engine that uniquely allows us to have the offering that we have for Udemy Business.
Okay, that's clear. On, let's talk about margins and profitability and some of the levers to get there, to some of your longer-term targets. Guess the first question I have is just around content costs. As you scale, can we expect the, content cost as a % of revenue to decline? Your instructors can still make more money, but, you know, i s there a leverage there for you?
It's a great question. I think, first of all, as Udemy Business becomes a bigger portion, that has a lower content cost profile, that will naturally shift our content cost as a percentage of revenue down. I think very importantly, the reason that our marketplace is so vibrant and it gives us this quality content is because our instructors do continue to make more and more money.
You know, our eyes are not on any sort of decrease in our existing products and the revenue share, but what we are thinking about in the early stages of are products that we will be adding onto our platform that will be, you know, built by Udemy that won't require the same sort of content and investment from our instructors, that will be higher margin products, but always with an eye on our instructors continuing to grow their businesses, because that is, you know, the competitive differentiator that's giving us the Udemy Business strength.
Okay, that's helpful. Maybe the last question, wanna ask about those long-term targets, I believe 15%-20% EBITDA margin w ith a growth attached to it, in the low 20s%, I believe. How do you get confidence in achieving that type of margin while still growing that rapidly?
There's a number of things. I think the first is, again, you know, we are in the early stages, not just from a customer acquisition perspective, but within those customers. You know, we laid out if we're at 10% seat penetration. If we get to 50%, that's a $2 billion opportunity. And we have many multinational wall-to-wall contracts. We think, you know, getting to 50% seat penetration makes sense. We've got additional products that we've recently, in the last two years, kind of added onto our platform that we'll be selling into. Lots of sales and marketing productivity. Our gross margin expansion is a piece of it. Obviously, leverage on your G&A team, that happens over time.
From an R&D perspective, if you look at what our product and our platform really consists of, you know, we will be getting additional leverage on R&D because a lot of the costs actually come from the content cost side of things. That's almost its own, like, R&D. Very unique engine. When we think about technology and development, it's to enable the now 70,000 and growing instructors across the world and really harnessing that creator economy. You know, the sustainable growth is there. We're in the early days. Greg, you know, feel free to add on to that. We're in the early days there, just lots of leverage off of our investments. We, you know, we're always building for the long term, for the leverage with really efficient expense management.
Yeah. Perfect. Good place to stop. Greg, Sarah, thank you very much for the conversation.