Good afternoon, and welcome to Udemy's First Quarter 2023 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Dennis Walsh, Vice President, Investor Relations. Please go ahead.

Thank you, and welcome to Udemy's first quarter 2023 earnings conference call. Joining me today are Udemy's Chief Executive Officer, Greg Brown; and Chief Financial Officer, Sarah Blanchard. During this conference call, we will make forward-looking statements within the meaning of federal securities laws. These statements involve assumptions and are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those discussed or anticipated. For a complete discussion of 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. We do not undertake and expressly disclaim any duty or obligation to update or alter our forward-looking statements, except as required by applicable law. In addition, during this call, certain financial performance measures may be discussed that differ from comparable measures contained in our financial statements prepared in accordance with U.S. generally accepted accounting principles referred to by the Securities and Exchange Commission as non-GAAP financial measures. We believe that 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 measure is included in our earnings press release. These reconciliations, together with additional supplemental information, are available on the Investor Relations section of our website. A replay of today's call will also be posted to the website. With that, I will now turn the call over to Greg.

Thank you, Dennis, and good afternoon to everyone on the call. Udemy started off the year strong as we beat expectations on both top and bottom line. Total revenue of 176 million was up approximately 16% year-over-year and surpassed the high-end of our guidance range by $4 million. We also demonstrated progress toward achieving profitability on an adjusted EBITDA basis. The Udemy Business segment, we saw revenue increase nearly 47% year-over-year on another solid quarter. I'm proud of our team for their dedication and for delivering such strong results, particularly in this environment. In the current backdrop, organizations increasingly recognize that they must prioritize investment in learning and development to fully optimize the most valuable resource, their talent. There are a number of reasons for this that I wanted to highlight. First, organizations need to bridge skill gaps with fewer available resources. A study from McKinsey found that nearly 90% of CEOs have identified a skill gap in their workforce. It has become a critical priority to have a strategy to bridge that gap. By building integrated company-wide learning programs, organizations can upskill and reskill their talent to better position the businesses for long-term success. Second, learning drives engagement and productivity. A study from Gallup found that the cost of disengaged employees reached nearly $8 trillion in 2021. That's a staggering amount which has accelerated in recent years. If employees don't feel engaged, they'll be less productive, making it more difficult for organizations to grow or achieve goals. Third, these investments increase employee retention, which translates into significant cost savings. There's study that shows it can cost 1.5x to 2x annual salary to replace a skilled employee. When companies invest in career development, employees are likely to be happier in their role, be more productive, and stay longer. The result…

Thank you, Greg. I'll focus on [indiscernible] and the key financial highlights and then provide our outlook for Q2 fiscal year 2023. You can find the complete stack of financial tables in our news release, which is available on our Investor Relations website. Udemy delivered Q1 results that exceeded the outlook that we provided for both revenue and adjusted EBITDA margin. Total first quarter revenue increased 16% year-over-year to $176 million, including a negative impact from foreign exchange or FX of 5 percentage points. The revenue growth was driven by our Enterprise segment, or Udemy Business, which delivered Q1 revenue of 95 million or an increase of 47% year-over-year. Included in this growth was a 3 percentage points headwind from changes in FX rates. The year-over-year growth was driven by an increase in Udemy Business customers and expansion activity, compared with the same period last year as organizations around the world continue to recognize the value of investing in their talent through integrated learning and skills development programs. This is also reflected in our annual recurring revenue, or ARR, which was $396 million at quarter end, up 42% on the year ago. We ended Q1 with a consolidated net dollar retention rate of 112%. The rate was 120% of large customers are those with 1,000 or more employees. While we did see some pressure on net dollar retention, we continue to see stable growth dollar retention overall and low churn in our large accounts. We anticipate that our net dollar retention rate will remain pressured as companies continue to navigate economic challenges and closely scrutinize every dollar spent. The strong Udemy Business growth was somewhat offset by a 7% year-over-year decline in Consumer segment revenue, which included a negative 6 percentage points impact from FX. As we move down the…

[Operator Instructions] Our first question is from Ryan MacDonald with Needham. Please go ahead.

Hi, thanks for taking my questions and congrats on a really nice quarter and start to the year. Maybe starting with Sarah, just given the outlook commentary and maybe a little bit for Greg as well. Just curious, as you look out through the rest of the year, obviously, cautiously optimistic, but macro environment is obviously still volatile. Maybe where do you see the most potential for variability as you look across UB versus the Consumer segment for the rest of the year?

Hey Ryan, thanks for the question. So listen, I think there's a few things. The first is the more our mix shift in revenue moves towards UB, the more visibility we have. And as you know, we're sitting on a pretty strong base of revenue from Udemy Business. So, I think there is some uncertainty just globally, especially around SMB. So, we're still seeing a lot of uncertainty in the smaller business from the macro. Enterprises continue buying, although at a slower pace. We do continue to see those elongated sales cycles. So, pipeline is strong. It's just the timing of when that comes in. On the Consumer side, as you know, we're not focused on the top line in Consumer. We're really focused on the marketplace vibrancy. So, while we're happy to see the way the Consumer business is performing, what we're really happy to see is all the new courses that were added and the concept that's coming on. So, I think, listen, we're going to continue to see macro pressure. We're feeling good about the guidance that we've put out and the work that the team is doing to deliver a strong 2023.

Ryan, let me add to that, just to add a little more color. As Sarah mentioned, our pipeline, it does remain strong. We're over 40% ahead of where we were last year with respect to our Q3 pipeline. So – and as she mentioned, we still have to convert, and the pressure on sales cycles, as you alluded to, it is going to be bumped throughout the year, but we're very encouraged by the top of the funnel feeling very, very strong and healthily. A couple of the other macro trends we talked about in prior calls are playing out in a significant way. One is consolidation. We just mentioned that we had a 7-figure consolidation with a large multinational. We're seeing a number of these across our customer base. And a couple of them I'll just highlight. One was a large financial services organization that went through a round layoffs. And subsequent to that round of layoffs, made the decision that they were going to lean into a wall-to-wall deployment with the focus on ensuring that they could bridge the skill gaps that they have as a result of the layoff, as well as ongoing pace of change, in addition to keeping engagement high across their employee base. We saw a similar one with a mid-sized software company, where they had two rounds of layoffs, and subsequently decided to go wall-to-wall and expand the relationship for similar reasons. And then we've also seen a lot of really strong momentum around our UPro product, which gives us a lot of confidence in the back half of the year that we're going to see continued expansion there. We have one of the large Fortune 100 multinational expand Udemy Pro from what was an initial deployment of 10,000 seats to 40,000 seats as a result of a validated pilot that we can significantly increase the pace by which technical certifications were being completed in the organization, which had a direct correlation to their ability to actually increase billings associated with those individuals acquiring those certifications. So, we're seeing some very strong, very positive trends amidst what is a choppy and still somewhat difficult macro environment. So, a lot of encouraging signs gives us confidence that the back half of the year is going to hold firm.

That's extremely helpful color. I appreciate that, Greg and Sarah. Maybe just given those comments, because it does sound like that the opportunity for additional expansions is pretty strong given the consolidation trend. When we look at the NDRR number at 112% and 120%, respectively, obviously, understandably coming down because of the elongations. But where would we expect that to stabilize or what are you seeing in terms of the trend line there?

Yes. So listen, we're proud of the 120% large customer net dollar retention in this environment. But as you just said, we are experiencing downward pressure, and we do expect to continue to see that. We don't give out guidance on net dollar retention. But the macro is impacting our overall booking. What we're happy to see is that the percentage of bookings that's coming from our existing customers that are upsells continues to grow, and it was the highest quarter ever in Q1. So, there's overall pressure, but we continue to expand with our customers, and that's because they really see the value of our product. Our gross dollar retention remains stable. We continue to have low churn with our larger customers, and there's a huge opportunity to expand with existing customers over time. We just think it's going to be a little harder this year and take a little longer. So, we do think there's going to be continued pressure on that. But long-term – the long-term forecast for that is good, and that's because the conversations we're having with our customers is that skilling and upskilling and partnering with someone like Udemy is it's not a benefit, it's a strategic imperative. It's how they are going to keep their employees with the – have the skills that they need to deliver and bare business outcomes.

Super helpful. Thanks again for the great color and congrats.

Thank you.

The next question is from Rob Oliver with Baird. Please go ahead.

Great, thanks. Good evening. I had two questions. Greg, one for you first, and then Sarah, I had a follow-up for you. So Greg, I'm curious, I just wanted to ask about generative AI and ChatGPT. I mean you guys were really quick, and I think your model really demonstrated its strength and its ability to, kind of get these ChatGPT courses out into the hands of your UB customers really quickly. You said 1,900 new courses from UB in the quarter. I'd just be curious, of those like what you saw in ChatGPT and how that like drove utilization. I don't – we talk to a lot of software developers, and it's their number 1 focus times 10. And then also would love to know, bigger picture, what that's doing for the land and expand and cross-sell and upsell motion because I have to believe that this could serve as a catalyst for many enterprises that might have here the [indiscernible] but on the fence. And I'll have a follow-up after. Thanks.

Rob, thanks for the question. I'll answer the last one first. Our ability to leverage our marketplace, which, as you all know, is very unique, and that enables us to keep up with the pace of change in a very different way than anybody else in the category in that our instructors are developing content, in many cases, ahead of the releases of technologies along the likes of ChatGPT and others. And it really is why you see the breadth and depth of content on, in this instance, ChatGPT, both in our marketplace, as well as in our UB catalog. And we're winning business as a result of it. I'll give you an example. A large cryptocurrency company that, as you can imagine, the pace of change in that category is as high as any other category that we serve and after they did their analysis on us via the competition made the decision that we were the right platform for them based on that specific analysis, and they were looking at ChatGPT, generative AI, and insight that was going to give them confidence that we were going to be able to continue to upskill and reskill their employees at the pace of change of their business, while also being able to impact with the amount of folks that they're hiring in that organization, the learning experience of their emerging leaders. So, they went in and invested in our Leadership Academy to continue to evolve and develop the leaders and the emerging leaders in their organization, as well as to support innovation that was going to be needed along the lines of GPT and the pace of change. So – and we've got a number of these types of examples. And I'll just say, at the macro level, if you…

That's really helpful. Appreciate that, Greg. And hi Sarah, just a brief one for you. Just you guys, clearly, vendor consolidation is the theme. I know you guys have been calling that out. And it appears that it's been gaining traction. You're also doing well internationally with some really large global enterprises. I think in the past, you said that kind of deal – multi-year deals have been in the 40s as a percentage of revenue. I'm just curious if you're seeing any shift there as you move in this vendor consolidation phase and towards these larger international deals, if you're seeing more on the multiyear deal side? Thanks again.

Thanks for the question, Rob. We continue to see multi-year deals increase every quarter. This quarter is no exception. And so our customers really are across the globe leaning in and really looking to us as their long-term partner to keep their employees up to date to the skills that they need.

I'll just add briefly that in addition to having the strongest quarter we've had with respect to multiyear deals from new business, we also saw an 80% increase in deals over $100,000 in value and in recurring revenue value. So again, all trending in the right direction. A lot of strength in what our sales organization is delivering with respect to strategic relationships that are adding meaningful value to the learning experience within our customers. As a result of that, customers being confident in signing long-term strategic contracts with us on a large scale.

The next question is from Terry Tillman with Truist. Please go ahead.

Hi, good afternoon Greg, Sarah, and Dennis. Nice job on the results. And also, I think the investor engagement series is great. In fact, I think one of the ones you all talked about are that – you all had presented, it talked about the importance of L&D budgets, and then they popped in the press release today in terms of an important new customer expansion deals. So I like that series and looking forward to hearing more on that. Also, Greg, as I just go through my clumsy preamble, we've got good soundbites now for the e-mails we seemingly get every half hour on AI and how it's going to impact businesses such as yourself. So thanks for the, like, real-life data points to the contrary. Finally, to my question. The first question, Greg, for you is, as it relates to generative AI and ChatGPT, do you see more of a benefit, whether tactically or strategic or not, on the Consumer side or the UB side, kind of more on the near-term? And then the second part of that question is, do you think that generative AI actually, if we look out over the next 12 months, is more impactful to the revenue line in a good way or actually more operational excellence, whether it's helping your instructors, whether it's R&D, quicker pace or go-to-market optimization?

Let's do the last one first, Terry. Look, in terms of operational, I think it's both, as far as operational efficiency. I think it's going to enable us to enable our instructors to be a lot more efficient in developing the learning experience that they're delivering through the content that they're putting on the marketplace, that we're then extending into the UB catalog at they qualify that. So, the velocity there is going to enable us to be a lot more efficient, effective as partners with our instructors. And it's not only keeping up with the pace of change, but improving the overall experience for learners within corporations, large and small. So, we're excited about that. And from a revenue perspective, yes, absolutely, I believe it is going to have an impact. It is today, because customers now are paying a lot of attention to the vendor selection process with respect to the content that is enabling them to stay ahead of whatever innovation is coming out to stay ahead of – or us with the pace of change, I should say. And we're doing a great job of that. Our marketplace facilitates that in a way that's very difficult for those that are out there competing against us to match. So that does enable us to win more business, which affects our top line revenue. And so, we're seeing that today. And the expansion deals that I mentioned, some of the new business that I mentioned, as well as I'll give an example of what we call a boomerang. A customer that was working with multiple vendors, we were one of them, decided to go with the other vendor based on price. Quality was poor. Content wasn't delivering as expected. Came back to us and went wall to wall. And that's interestingly enough, with – through the partnership with Amazon. So, we talked about our relationship and growing partnership with Amazon. So, this was the largest partnership deal we've closed with Amazon, multi-six-figure deal. That deal got down as fast as a byproduct of that customer having that relationship with Amazon. And that was, again, coming back to us, paying more because of the quality of experience and our ability to keep up with the pace of change. So, I think AI is going to, without question, affect top line, is going to affect productivity of our instructors and affect our ability to deliver a higher quality experience in-market.

Appreciate the color. And I guess, Sarah, just a quick follow-up for you. I didn't write this down fast enough. For 2Q, did you say mid-30s for UB or Enterprise? And then what did you say sequentially? And what I'm curious, if you would, buy it on the full-year question anything directionally on both segments? Thank you.

Yes, yes, we did say UB mid-30s for growth for the second quarter, and that we expect Consumer with this typical seasonality to be down quarter-over-quarter. And for the year, we do anticipate that we're going to exit the year with UB growing in the mid-30s. And we saw that strong performance with Consumers. So, a little bit of a mix shift, but still plan exiting the year near – with UB near [60%] [ph].

Okay, great. Thanks.

The next question is from Brent Thill with Jefferies. Please go ahead.

Hi, guys. This is David on for Brent. Appreciate you taking the questions. Sorry to continue on the AI trend, but just wanted to follow up and clarify, and Greg, thanks for the color and you guys not seeing it as a threat in general. But I think a lot of folks out there are super curious. I was hoping we can dive in deeper after obviously another education tech company got cut in half off of AI fears. But as you think about AI, I know you said you think of it as a benefit, not a headwind. But curious how you think about the idea of potentially folks who might have used your platform to learn about something in the past, maybe they're using an AI tutor on the side. Is that something that you guys could see as a threat? Maybe is that something you guys are working on? It would just be great to kind of hammer home on the AI strategy. And then I have a follow-up. Thanks.

David, thanks for your question. We're looking at a number of different ways to leverage and integrate AI into our platform. And I'm not going to comment specifically on anything with respect to where we're at with tutors and coaching and what have you. But you could assume that all of those are areas that we're investing time, energy and resource to better understand how that could enhance the overall learning experience. And at the point in time we're ready to talk about it, we surely will. But I think all of us would say right now, we have a clear view on what we believe AI is going to enable us to do and I just highlighted that. But 6, 12, 18 months from now, we're all going to be learning as [we're going] [ph], right? And so, what's in our line of sight right now is all opportunity for us as we're looking how to better enable our instructors to deliver an enhanced experience. And we do feel strongly that the instructor experience matters a lot, right? We do not feel that at any point in time in the near future is they're going to be able to hit a button and generate content and experience that's going to mirror the experience that our instructors deliver through the years of honing their craft and understanding how to deliver information and assemble information in a way that's going to be best received and digested and learned by whoever is on the other side. There's art in there as well as science. And AI is all about science right now. And that's going to blow over time. We're going to adapt to it. And we're paying a lot of attention to that. But right now, the lens we're looking through, we view all this opportunity, and we are making investments to better understand how we can look at things like coaching and mentoring what have you, assistance, that would be additive to our platform. And more to come down the road when we were prepared to talk about it.

Yes. That's helpful. And I think the point on content was another one I was going to add, so I appreciate you clarifying on that. And then maybe for Sarah, I know you mentioned on the churn. I know you guys had historically very low churn, but just curious any color you can provide on how churn has trended? Obviously, you guys are benefiting from vendor consolidation. But curious if maybe the churn metric is seeing any headwinds from that same dynamic? Appreciate it guys. Thanks so much.

Yes. What we're seeing is a little bit of pressure on churn from the smaller businesses, the ones who are really struggling. But our gross dollar retention has remained stable for a long period of time within our large customers, and we continue to see low churn in that population.

The next question is from Josh Baer with Morgan Stanley. Please go ahead.

Great. Thank you for the question. I wanted to ask, one, on sort of top line and demand, what you're seeing and what you're expecting, and maybe do so in the context of the full-year guidance. I think full-year guidance range now 12% to 16%, but with Q1 in the books and kind of a tight range for Q2, that I think implies something like 9% growth in the back half at the low-end and 18% at the high-end. So, pretty different scenarios there. I was hoping you could provide some context or commentary on the assumptions behind what's at the low end and what's at the high end? What does that look like the rest of the year? Thanks.

Yes, thanks for the question. Listen, I think we're trying to really take into consideration the fact that we are in a tough macro environment. And that while we continue to see really strong demand, Greg spoke about our pipeline growth earlier on [indiscernible]. We know that closing those deals is going to take longer. There's some choppiness. Deals are going through more layers of approval than ever before. And everybody is looking at their budgets and revisiting them. So, it really is about us taking a look at all this demand, and knowing that our customers are looking to us to be this partner to them to upsell and resell, which is necessary in this world today and becomes more and more necessary each month that goes on and the pace of innovation continues to increase. And at the same time, it's just going to take time. And so for us, it's about just being realistic in an environment like this. You can have significant demand, but it's going to take longer potentially to get to that demand. We are assuming no material improvement or deterioration, and it's just going to, kind of remain to be seen.

Great. Thanks Sarah.

The next question is from Jason Celino with KeyBanc Capital Markets. Please go ahead.

Hey, it's Devin on for Jason today. Thanks for taking our questions. I want to ask about Consumer, just given the outperformance there in the quarter. Any additional context on, kind of the linearity of how conversion and overall demand has kind of trended throughout the quarter?

Devin, thanks for the question. Listen, we were happy to see that consumer remained really stable, especially given the last 6 quarters, we spent decreasing our investment, our marketing spend on the Consumer side. And so, it's been great to see. We're glad to see that the conversion is strong. And for us, we're not making any specific investments in Consumer. What we're doing is, we're making investments in our platform around the learning experience, around the things that Greg spoke about that is going to continue to impact the ability for us to deliver outcomes for our learners. And so, there may be some of that, that is within those numbers. There could be part cyclicality. It's too early to tell. We're just happy to see that stability, and we're happy to see the vibrancy in the marketplace, which is so important to us.

Got it. Thanks for the color. And just one more and sorry to ask another question on AI, but kind of just curious, just based on your observations, what specific AI-related courses are your learners taking on the platform? Just want to get a little color on what's driving that?

Yes, happy to answer. I can't really be more specific, Devin, there's over 1,000 on our platform right now. And we've got well over – I think, well over – it's approaching 50 now. And it's gone beyond that in our UB collection. It's everything from introduction to AI. A lot of it is early days with introduction. So, folks could really start to understand what this concept around AI and deep learning is and understand a little bit more around ChatGPT and then GPT4 now, which has evolved from 3, and a little bit of just, again, context around how it all works to developers and folks on the tech side of the house looking to acquire skills that they can now use to enable AI in their organization. So, next level training, next level development. And all of this is rapidly being deployed on our platform as the market continues to roll, the pace is moving, folks understand it. They have an opportunity to monetize on our marketplace, as well as within UB and are developing content literally at a pace we've never seen before, right? So, it really is changing day-by-day, week-by-week in terms of the quality, the quantity as well as topics, and then the evolution of those topics in terms of who's engaging and what are they looking to learn. But everything from introduction to deep learning on how to apply the AI in specific businesses.

Great. Appreciate the color.

[Operator Instructions] The next question is from Stephen Sheldon with William Blair. Please go ahead.

Hi. You've got [indiscernible] on for Stephen. First, so clearly, it sounds like vendor consolidation has continued to serve to your advantage. And I just wanted to ask if you've seen any notable change in strategy from any of your peers, your competitors in terms of maybe specifically pricing or anything in general?

Yes. Thanks for the question. I wouldn't say anything that I would consider material. Without question, the market is competitive, and the way that our peers and competitors are approaching that in one hand is via price. But we're reacting to that the way our team always has, which is selling on value. And I mentioned that boomerang deal. Price without quality end up doing exactly that, right? Boomerang is back to the company or the series of companies that can actually deliver against the outcomes that an organization is looking to achieve. And so, we are continuing to stay the course, selling on value. We're competing very, very effectively as a result of the numbers that you're seeing our team is delivering. And we're not going to be deviating from that. And as pricing pressure comes down from competition, we're going to be really leaning into the value and impact we can and will have as a long-term partner in helping an organization truly reshape the learning experience they're delivering as a result of the capability we're bringing to market via AI, as well as the partnership of our customer success team delivers in terms of strategy and delivery against that strategy. So, no change in terms of our path and focus on execution. But yes, we are seeing a little bit of pricing pressure, but not materially different.

Got it. That's clear. Thanks Greg. And then given some of the weakness you've seen in your UBN market, I just wanted to quickly ask how you're thinking about investing in sales capacity there in terms of maybe more heavily leveraging partners internationally, and I guess, in general, just maintaining capacity for a potential recovery?

Yes. Happy to answer that. We're investing heavily on a global basis in our partnerships, be it new ventures, as well as [Technical Difficulty] and really around the world, Latin America, Asia Pacific, EMEA. This is an area that we have been investing and are continuing to lean into those investments. And we're very encouraged by the results we're seeing and the impact our teams are having through these partnerships. And that will continue. I'm sorry, what was the second part of the question?

Just the rest of go-to-market theme and...

Go-to-market theme. Yes, as far as go to market, look, Sarah, I think, has done a really nice job of highlighting our approach on this, which is, it's a little bit of wait and see. As soon as we see green shoots and opportunities to start scaling our global sales organization again, we are going to do so. Our hope is that's going to be in the back half of this year. But the macro is going to have a large determining factor on if and when that happens this year. Our hope is it, without question, it does. But again, there are some things that are out of our control, and we're going to continue to closely monitor that and we act accordingly. Sarah, I don't know if there's anything you want to add to that.

No, that's exactly right. There are areas that we are still leaning in a little bit where we continue to see overperformance. As we talked about before, we look by segment, by region, and that's how we make our decision. And we just keep a close eye, and we'll put our foot on the gas at the appropriate time in the right area.

Got it. That’s very helpful. Thank you both.

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

Yes, I'd just like to thank everybody for joining us on the call, and look forward to speaking with you again in August. Have a great rest of the day.

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