Udemy, Inc.

Thank you and welcome to Udemy's second quarter 2022 earnings conference call. With me today are Greg Kakari, Udemy's chairman and chief executive officer, and Sarah Blanchard, Udemy's chief financial officer. Before we begin, during this conference call, we will make forward-looking statements within the meaning of federal securities laws. These statements involve assumptions and are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those discussed or anticipated. For a complete discussion of risks associated with these forward-looking statements, we encourage you to refer to our most recent Form 10-K and Form 10-Q filings with the Securities and Exchange Commission. Our forward-looking statements are based upon information currently available to us. We caution you to not place undue reliance on forward-looking statements and we do not undertake and expressly disclaim any duty or obligation to update or alter our forward-looking statements except as required by applicable law. In addition, during this call, certain financial performance measures may be discussed that differ from comparable measures contained in our financial statements prepared in accordance with the U.S. generally accepted accounting principles referred to by the Securities and Exchange Commission as non-GAAP financial measures. We believe these non-GAAP financial measures assist management and investors in evaluating our performance and comparing period-to-period results of operations in a more meaningful and consistent manner, as discussed in greater detail in the supplemental schedules to our earnings release. A reconciliation of these non-GAAP measures to the most comparable GAAP financial measures is included in our earnings press release. These reconciliations, together with additional supplemental information, are available at the investor relations section of our website. A replay of today's call will also be posted on the website. I will now turn the call over to Greg.

Thank you, Stacey. Good afternoon, everyone, and thank you for joining us. Q2 was a very strong quarter for Udemy. Continuing our momentum as the platform with exceptional breadth, depth, and reach, for learners and instructors around the world who seek to improve lives and business outcomes through learning. In a changing labor market where highly skilled talent is both scarce and increasingly valuable, Udemy's platform for reskilling and upskilling has become mission critical for businesses and individuals. The added tailwinds of hybrid and remote work, as well as digital transformation, are further driving Udemy's adoption. But what makes Udemy truly unique is the unsurpassed quality of our content. Learners come to Udemy because that's where they learn best. That's why we win. We hear this directly from learners. For example, we were thrilled in June when Stack Overflow's annual survey of nearly 30,000 developers from around the world found that two-thirds of the respondents selected Udemy as the most popular online course or certification program for learning how to code. This truly incredible result reminds us of why we do what we do, how people learn valuable skills like coding so they can advance their careers, explore new opportunities, and ultimately change their lives. We saw strong execution this quarter with revenues of $153 million, up 21% year-over-year. We delivered another quarter of outstanding Udemy business performance with year-over-year revenue of 77% and ARR of $316 million, up 74% year-over-year. We now have over 12,000 Udemy business customers and for the first time, Udemy business revenue exceeded consumer revenue in June. As we've outlined on previous calls, our Udemy business learning platform has expanded beyond on-demand courses to also include additional learning methodologies to further engage the learner, help them interact with the instructor and their peers, and practice and test their knowledge. During the quarter, we signed our largest deal in Udemy history. a multi-year existing customer renewal deal with a large global professional services firm encompassing all three Udemy business learning methods. These included on-demand learning via our marketplace-driven curated course content, cohort-based learning via our Corp U offering, and immersive learning via our Udemy Business Pro offering with labs, workspaces, and assessments. We also saw some early but encouraging signs of stabilization in our consumer business in Q2. After adjusting for FX impact, consumer revenue declined by 2% year-over-year in the quarter. As I look ahead to the second half of the year, several key drivers will help position us for further growth and expansion. Our ability to grow at scale with a large market opportunity ahead of us as enterprises increasingly embrace upskilling and reskilling. Second, our expansion into larger enterprises as they tap into a broader set of Udemy's products and learning methods. And third, the customer-centric driven product innovation. that we're delivering to individuals and organizations as we continue to invest in our marketplace to support our 71,000 instructors around the world and the nearly 5,000 new courses they produce every month on Udemy. That said, we continue to see a more volatile and uncertain macroeconomic environment, which has already impacted our consumer business, as we've noted in previous quarters. While these are forces beyond our control, We believe that these macro factors will drive more organizations to prioritize cost-effective training, rescaling, and upscaling of their workforces. Additionally, the current economic environment positions us well. We have a high and measurable ROI and are also rapidly deployable. Our strong employee engagement also demonstrates the immediate impact of our learning. We believe these factors promote a certain level of resilience counter-cyclicality in our business and will help us weather the coming months as organizations prioritize their spend. Let's dig in a little deeper into three of our key performance areas this quarter. First, I'll speak to Udemy Business, where we saw very strong global and enterprise demand as well as solid go-to-market execution, and more importantly, significant ROI for our customers. Second, I'll discuss our ongoing work to promote a vibrant and healthy marketplace, including supporting our instructors. And third, I will detail the product innovation we are bringing to our customers and the workforces they support. Let's start with Udemy Business. Our record ARR of 316 million was up 74% year-over-year in Q2. driven by strength across all regions and multiple verticals, including professional services, technology, and manufacturing. Our Udemy business net dollar retention rate this quarter was 118%, as we continue to see success and growth in our land and expand strategy. We delivered 79% year-over-year growth in customers with over 100,000 in ARR and 60% year-over-year growth in customers that had over a million ARR, reflecting continued success in the enterprise. Multi-year deals now represent over 40% of total ARR, a strong signal of Udemy's mission critical value with larger organizations. As I noted earlier, Udemy signed our largest deal in company history in Q2. This record deal was a significant expansion with a global professional services company in a multi-year deal encompassing the full range of Udemy business products. On-demand, cohort, and immersive learning. The deployment of both cohort and immersive learning methods in tandem with on-demand learning demonstrates how Udemy serves as a learning partner with a comprehensive end-to-end learning platform that can be tailored to help achieve specific business goals. We're thrilled to work together with this customer to bring Udemy to even more employees in their organization. Just a couple of weeks after this deal closed, we signed our second largest deal in Udemy history. A competitive displacement and a multi-year deal with a large global services and consulting company who will deploy Udemy Learning to over 100,000 users, along with 25,000 Udemy Business Pro licenses. This company will use Udemy to help increase leadership, technology, and data science skills across their organization, with ample opportunity to scale even larger as they seek to deploy more Udemy learning methods, including cohort-based, tailored learning journeys to drive organizational change, and leadership excellence. Organizations are choosing Udemy Business because we show them tangible, measurable results. For example, Booth Allen Hamilton, a global firm providing world-class industry-leading expertise across industries, utilizes Udemy Business for their upskilling efforts. Using Udemy Business to power a program for thousands of data scientists, nearly 94% of Booth Allen Hamilton learners are now highly proficient in data science. And their Udemy-trained graduates now have a 93% employee retention rate. On top of that, Booz Allen has a 3% increase in consultant billability since beginning their work with Udemy Business. These measurable results are why customers continue to expand and grow their footprint with us, especially with highly technical content like data science. Further proving out our land and expand model, Other existing customers growing their Udemy offering this quarter include Colgate-Palmolive, Louvaman Athletica, Volkswagen Group China, TIBCO Software, Bosch Global Software Tech, and Globant. And new customers this quarter include Broadridge Financial Solutions, Samsung SDS, Vision US, Android Brazil, and Glambia. We continue to see strong uptake internationally across multiple regions, including APAC, where through our partner, Bensei, we support the Tokyo Metropolitan Government in their efforts to accelerate the digital transformation of small and medium-sized enterprises in Tokyo. By the end of March 2023, Yuzumi and Bensei will provide over 250 Tokyo-based SMEs with skills courses in Japanese to support digital transformation. Udemy's growth is also fueled by expanding partnerships. Our partners range from other businesses offering Udemy courses as an additional product to their customers, as well as other online learning platforms that use Udemy's course offerings as a way to up-level their content portfolio and further serve their learners. For example, we've partnered with SumTotal, a global leader in talent acquisition, onboarding, learning management, and talent management solutions, enabling them to sell Udemy business content through their learning management experience platform. This, coupled with our SumTotal and Udemy business integration, provides some total customers with a streamlined purchasing process, and access to Udemy courses. And in Latin America, we've partnered with eClass, an online learning platform in Chile, enabling them to resell Udemy business courses. As we look ahead to Q3, we believe that the global market and demand for online learning will help drive strong Udemy business growth over the long term. Since launching just seven years ago, Udemy Business has quickly scaled to over $300 million in ARR, with a revenue CAGR of 90% plus over the last three years as our marketplace content and instructor flywheel has provided a powerful foundation for organizations' learning and skilling. With Udemy Business' predictable revenue stream eclipsing our consumer business in June, We look forward to continuing to drive this momentum and expanding into larger global and domestic organizations. Let's move on to the second area of focus in my remarks today. Our work to support our instructors and learners in building and growing our vibrant and healthy marketplace. Instructors are the foundation of everything we do here at Udemy. They power our marketplace with dynamic content that helps grow careers and enable unique learning paths for over 54 million learners at Udemy. Our instructors also encompass a truly global footprint, spanning learning across over 75 languages. Udemy and its instructors succeed together. Our team takes an active role in partnering with instructors to help them broaden their global reach and impact, as well as their earnings. For example, Ranga Karanam is the India-based web developer instructor on Udemy who helps prepare students in over 200 countries to succeed in AWS, Google Cloud, and other certification exams. In June, Ranga surpassed 1 million Udemy students worldwide. He credited the support he received from Udemy's instructor partner team with helping him reach this incredible milestone. Our instructors' success is our success, and we know it is vital for us to nurture these relationships so the highest quality instructors continue to choose Udemy as their teaching platform. It's not just the quality of our instructors that matter. It's their ability to rapidly produce high-quality content. For example, a new version of the AWS Certified Solutions Architect Associate Exam will replace the current exam this month. To help employees and individual learners around the globe successfully prepare to achieve the certification, Udemy instructor Chandra Lingam has had a 4.6 rated Udemy course available on this updated certification since April, showcasing the freshness and relevance of our content offering. More than 10,000 learners have taken this course to date. And speaking of content, According to our Q2 Global Workplace Learning Index, courses to help individuals improve their test-taking skills saw a nearly 300% increase in course consumption in the US compared to the previous quarter, signaling the importance professionals place in preparing for certification exams and providing their knowledge of various software skills. We are proud of Udemy's role in helping individuals prepare for these important milestones in their careers. Now let's move on to the third area of my remarks today, Udemy's continued product innovation. This quarter, we saw this in action with Udemy Business. We rolled out our Skills Insights Dashboard, enabling customers to unlock learning insights within their organization. We also introduced 18 new labs, four in-course workshops, and six updated Udemy paths in Udemy Business Pro. These new rollouts were implemented in response to direct consumer feedback and reflect the wider customer-centric approach to our product development. This approach is a large factor in why new customers come to Udemy and why existing customers expand their relationships with us. And in our marketplace, we're driving higher conversions with five new payment methods in Belgium, Malaysia, Singapore, and Philippines, improved search ranking for our users, and algorithm-optimized personalized discount promotions. We're also expanding our subscriptions footprint with personal plan subscriptions now available in 100% of users in the US, Great Britain, Australia, and South Africa. Lastly, we launched a bulk coupon creation tool that enables instructors to market their courses more effectively across our global community of learners. Together, we're continuing to build the best and most innovative learning company in the world so that our customers realize the best possible outcomes and ROI from learning through Unity. Our customer-centric approach to product development aims to provide the best experience for learners the highest monetization opportunities for our instructors, and the most flexible and effective way to upskill and reskill employees for organizations. Before I conclude, I'd like to cover two important areas of investment for us at Unity. First, our ESG goals and partnerships, and second, our equity and inclusion initiatives to help anchor our company mission and workforce culture. Turning first to ESG, where we're currently rated in the first percentile for ESG risk ratings in our industry category last year by the ESG research firm, Sustainalytics. I'm excited to announce that we recently launched our first ESG impact report in Q2, highlighting our ESG efforts and spotlighting how we support our learners, instructors, customers, and communities. You can find the report on our ESG website, and I encourage you all to take a look. This impact report marks the first major step in telling our ESG story to our larger audience, and we look forward to expanding our dialogue with relevant investors, partners, and nonprofits in the coming months. I'd like to share with you the incredible impact we've seen with one of our nonprofit partners, The Last Mile. an organization that provides incarcerated and formerly incarcerated individuals access to resources to thrive in today's rapidly evolving job market. Since 2019, The Last Mile has used Udemy to set up learning paths with specific objectives and groups and successfully helped over 150 program participants learn coding and workplace skills for successful reentry into the workforce. Talisa Howell, who had served a prison sentence from 2018 to 2020, signed up for Udemy business courses through the last mile program to learn coding and open doors to a new career. Fast forward two years, Talisa now teaches others from her community how to code and has used the skills she learned on Udemy to secure a role as the lead web designer at the Indiana Department of Corrections. We're also excited to continue our partnership with Upwardly Global. Upwardly Global helps eliminate employment barriers among skilled immigrants and refugees as they integrate with the U.S. workforce. Udemy has partnered with Upwardly Global since 2020 to provide access to resources that can help individuals prepare to pass industry recognized certifications and secure new jobs. Take Maria, a business analytics professional originally from Jamaica. Following her upwardly global job coach recommendation, Maria completed several data analytics courses through the Udemy Business Platform, including Microsoft Excel, Business Intelligence with Power Query and DAX, and Machine Learning for Data Analysis, Regression and Forecasting. Soon after adding her new skills and course certificates to her LinkedIn profile, a hiring manager reached out to her to schedule an interview. Maria passed the interview and was offered a business analyst role at the company. These are just a few examples of the way Udemy is improving lives through learning. Growing a successful business always comes down to talent and culture. And at Udemy, I'm proud to say that we continue to attract and retain our valuable employees. As we move forward, we continue to fuel Udemy business growth with targeted talent investments, particularly in sales and customer success. Though we remain confident about our business trajectory and continue to hire to support growth, we are also honing our resource allocation to remain strategically efficient against the macroeconomic environment. It is a balance we take seriously. Our unique culture, our diversity, equity, and inclusion commitments, and our company's mission to impact careers and lives for the better help us hire and retain a truly passionate and talented team of Unimates. And we continue to be recognized as a top employer. I'm proud to share that this quarter, Great Place to Work Ireland honored Udemy on its 2022 list of Ireland's Best Workplaces in Tech, a wonderful build upon our Great Places to Work award in Ireland's last quarter. We're also excited to share that Fair Pay Workplace has certified Udemy as a company achieving pay equity. This important certification means that we are committed to using the most trusted and transparent methods to analyze pay equity. by race, gender, and their intersection to ensure ongoing pay equity for our employees. To conclude, Q2 continues to demonstrate that our symbiotic model is working, growing and supporting our content on the Udemy marketplace benefits learners and instructors alike, and drives high-quality global and broad content for Udemy business customers and organizations. The strong top line growth of Udemy business in turn helps fuel further investment and growth in our marketplace content creators. This ecosystem is not only unique to the industry, but it's helped us surpass over $300 million in recurring revenue in Q2 with an enterprise scale and recurring revenue business model that is firing on all cylinders. Udemy is disrupting learning through our unparalleled platform and rapidly scaling SaaS business. Improving lives through learning is our mission, and we are proud to bring together our 71,000 instructors, over 12,000 customers, and growing roster of strategic partners to deliver it worldwide. Together, united in our commitment to upskilling and reskilling, we are activating positive outcomes for businesses and individuals, even in the face of economic uncertainty. With that, I'll turn the call over to Sarah to dive into the numbers.

Thank you, Greg. As Greg said, we had a very strong second quarter driven by continued momentum and execution in our Udemy business segment. This is evident in our exceptional Udemy business ARR growth in Q2 of 74% versus the prior year, with Udemy business customer growth of 44% versus the prior year. Udemy business continues to perform well across a broad array of verticals and geographies. C2 total revenue of $153.1 million was up 21% year over year and up 1% sequentially. Our Udemy business net dollar retention rate was 118% this quarter within our expected quarter to quarter range, highlighting the continued success of our land and expand strategy. Udemy business revenue was $74.6 million, up 77% in the prior year, demonstrating our consistent and sustained growth at this scale. Our consumer business delivered 78.5 million in revenue, down 7% from the prior year. As Greg noted earlier, we found encouraging, though early, signs of stability in our consumer business, which was down 2% year-over-year when excluding the impact of FX. While macro uncertainty still presents some degree of volatility in our consumer business and outlook, it's important to note that we continue to view the consumer marketplace as fundamentally healthy, And we're encouraged by the stabilization of top line performance that we saw in Q2. We continue to add instructors and thousands of courses monthly. And our marketplace serves as a vibrant engine that fuels Udemy business growth. The symbiotic system of these two parts of our business is a unique and differentiated model that we believe will continue to drive Udemy business top line growth over the long term. For the remainder of this call, all financial metrics are non-GAAP unless stated otherwise. Q2 gross profit was $89 million, up 27% year-over-year, driven by Udemy Business. Gross margin was 58% of revenue, up from 56% in Q2 of 2021. This margin expansion was a result of the continued revenue mix shift to Udemy Business from consumer. Moving to APEX, Total operating expense was $101.7 million, or 66% of revenue, compared to 60% in Q2 of last year. Sales and marketing expenses represented 41% of total revenue, compared to 39% this quarter last year, as we continue to invest in the strong growth and clear ROI in U2E business by expanding our go-to-market and enterprise marketing teams. R&D expense was 13% of revenue, up 234 basis points year over year. We are continuing to invest in building out our comprehensive learning platform that sits on top of our marketplace content engine. Our focus is on building out the set of capabilities that allow our learners to achieve their professional goals in the way that works best for them. This includes continuing to build out immersive learning experiences like labs and assessments but also investing in the ability to more clearly align the skills needed to achieve professional aspirations with the capabilities to guide learners through their journey. These investments include three core areas of innovation. First, a proprietary skill craft that matches courses and skills to realize professional aspirations. We will first launch these on Udemy Business, and then we will launch them as a part of our consumer offerings. Second, we are fueling these skills graphs with sophisticated machine learning and AI models that can personalize the learning experience for each individual. Finally, we launched career guides as part of our consumer subscription offering. We expect these investments to improve learner experiences, provide more tangible outcomes for learners and customers, and increase LTV over time. Rounding out our discussion of operating expenses, G&A expense was 12% of revenue versus 10% a year ago. Net loss in the quarter was negative 13.6 million or negative 9% of revenue. Adjusted EBITDA was negative 8.6 million or negative 6% of revenue. In Q2, we made a decision to pull back a bit on our direct response marketing spend, which positively impacted our adjusted EBITDA. As always, we continue to be disciplined on the efficiency of our marketing spend while also investing where we see clear and worthwhile growth opportunities. Free cash flows with negative 6.5 million versus positive 2.7 million a year ago. Moving on to the balance sheet, we ended the quarter with 512 million of unrestricted cash, cash equivalents, and marketable securities. By segment, free cash flows with negative 6.5 million versus positive 2.7 million a year ago. Moving on to the balance sheet, we ended the quarter with 512 million of unrestricted cash, cash equivalent, and marketable securities. By segment, consumer revenue was 78.5 million, down 7% year over year. In the second quarter, we had approximately 1.3 million monthly average buyers, which was down 2% versus a year ago. Consumer gross profit was 42.3 million, or 54% of consumer revenue, approximately 20 basis points higher than in Q2 2021. Gross margin expansion was driven by lower consumer GMV in the quarter as a percentage of revenue. As a reminder, in our consumer transaction business, instructor costs are recorded immediately, but their revenue is recognized over a four-month period. We also added 2 million new consumer and business learners, bringing our total learner base to 54 million. As a reminder, we define a learner as someone who is involved and spent time learning on the platform. Udemy Business continues its robust growth with Q2 revenue of 74.6 million of 77% year over year. We ended the quarter with over 12,500 Udemy Business customers of 44% from a year ago. Udemy Business also crossed the $300 million ARR mark in Q2, ending the quarter at $316.1 million, of 74% as compared to a year ago. Udemy Business gross profit was $49.9 million, or 67% of Udemy Business revenue, which represents a roughly 120 basis point increase year over year. The improvement was primarily driven by a decrease in Udemy business content costs as a percentage of Udemy business revenue. Let's now turn to guidance. Looking ahead to the third quarter of fiscal 2022, we expect revenues to be between 153 million and 157 million. As mentioned earlier, we continue to expect Udemy business to experience strong growth, becoming the majority of our revenue in Q3 of this year. I want to provide a little more color on our Q3 guidance. While we are encouraged by the stabilization of our Q2 consumer performance, our consumer business continues to be affected by some of the larger macroeconomic factors that have impacted our consumer growth over the last several quarters. We believe these headwinds remain heading into Q3 and will continue to put some pressure on consumer growth in the near term. We do expect our marketplace to continue to be healthy and to further fuel Udemy business. Growth in Udemy business remains strong, and we remain very excited and encouraged by the rapid revenue expansion and strong net dollar retention. For the third quarter, we expect an adjusted EBITDA margin of negative 14% to negative 12%. Given the growth and opportunity we see in the business, we are continuing to make targeted investments in R&D and go-to-market initiatives, which are factored into our Q3 operating expenses. Turning to our full-year 2022 guidance, we expect full-year revenue to now be between $615 million and $640 million, compared to a range of $610 to $640 million previously. Our full-year adjusted EBITDA margin guidance remains unchanged, and we expect a range of negative 12% to negative 10%. Before I wrap up, I'd also like to announce that we'll be holding our first Investor Analyst Day on November 16th. We'll be hosting it virtually and hope you all will join us. Please save the date. To conclude, our Q2 performance demonstrated the strong growth and momentum of Udemy business and the symbiotic relationship with our marketplace. The continued growth and recurring revenue, coupled with strong net dollar expansion, underscores the massive opportunity in front of us to help organizations and people change lives through learning. So with that, we'll open up the call for Q&A. Operator?