Udemy, Inc. Q2 FY2024 earnings call

Management Statement and Operational Highlights

• Revenue and Milestones: Total revenue for Q2 2024 was $194 million, up 9% year-over-year (including a 2-percentage point negative FX impact). ARR grew to nearly $500 million, up 17% year-over-year. The company surpassed 1 billion course enrollments since inception.
• Market and Strategy: The global workforce skill gap is widening due to generative AI. Udemy is focusing on large enterprise customers, aiming to become a $1 billion industry powerhouse. Key initiatives include reallocating resources to large enterprise customers, increasing penetration in existing large customers, strategic partnerships (e.g., expanded with AWS), and operational efficiency initiatives.
• Partnerships and Products: Expanded partnership with AWS and launched branded content. Upcoming AI-powered capabilities include skills mapping and an AI learning assistant, which have received positive feedback from early testing.

Segment Performance

• Udemy business: Revenue for the quarter was $121 million, a 19% year-over-year increase, including a 2-percentage point headwind from FX rates. Annual recurring revenue (ARR) for Udemy business contributed to the overall $493 million ARR, which was up 17% year-over-year. Gross margin for the Udemy business segment was 72% in Q2, a 500 basis point improvement from the prior year, primarily due to the instructor revenue share change effective January 1.
• Consumer: Second quarter consumer revenue was $74 million, down 4% year-over-year, including a 3-percentage point negative impact from FX. Personal plan subscriptions contributed over 10% of the consumer segment's revenue for the first time.

Guidance

• Q2 2024: Revenue was at the high end of guidance range, and adjusted EBITDA margin exceeded the range.
• Full Year 2024: Revised revenue guidance to $776 million to $782 million (nearly 7% growth at midpoint, including a 2-percentage point negative FX impact). Adjusted EBITDA margin expected 250-350 basis points.
• 2026: Target adjusted EBITDA $130 million to $150 million. Long-term target 15%-20% adjusted EBITDA margin.
• Q3 2024: Expected revenue $191 million to $194 million (approx 4% growth at midpoint, 2-percentage point negative FX impact).

Risks

• Macro Environment: Challenging macroeconomic conditions affecting consumer revenue and enterprise deal closures.
• FX Impact: Currency fluctuations negatively impact year-over-year growth rates.
• Upsell Pressure: Upsells taking longer than historical norms, affecting net dollar retention.

Question and Answer

Q: Consumer weakness update?

A: Sarah Blanchard mentioned consumer vibrancy metrics with 5,000+ courses updated monthly, but soft conversion in Q2. Traffic up due to low-cost marketing, but overall softer conversion across regions.

Q: Enterprise focus decision?

A: Greg Brown stated the decision is based on macro conditions, unit economics, and strength in the enterprise segment, allowing better margin expansion.

Q: Instructor payouts update?

A: Greg Brown said no top instructors opted out, with constant communication with instructors and positive sentiment from recent meetings.

Q: APAC operations?

A: Greg Brown mentioned softness in APAC, shored up leadership, and Rob Rosenthal spent time in the region with optimism for upside.

Q: Margin expansion pathway?

A: Sarah Blanchard said significant margin expansion expected in 2025-2026, driven by gross margin improvement, operational efficiency, and OpEx leverage.