Udemy - Q1 2023

Transcript

Operator (participant)

Good afternoon, welcome to Udemy's first quarter 2023 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal the conference specialist by pressing the star key followed by 0. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. 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.

Dennis Walsh (VP of Investor Relations)

Thank you, and welcome to Udemy's first quarter 2023 earnings conference call. Joining me today are Udemy 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 law. 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 on 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.

Greg Brown (CEO)

Thank you, Dennis. Good afternoon to everyone on the call. Udemy started off the year strong as we meet 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, which saw revenue increase nearly 47% year-over-year, had 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 their 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 skills 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 is 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, since studies have shown 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 is an upskilled, loyal workforce that better meets the evolving needs of the business. Four, upskilling and reskilling employees generates a high long-term ROI. An economic downturn presents an opportunity to invest in learning programs that help companies stay competitive and agile. Some companies are taking advantage of this temporary slowdown to upskill and/or reskill employees to prepare for an eventual improvement in the macroeconomic environment. At Udemy, we provide CLOs and heads of learning with ongoing support for developing the skills necessary within their workforce to achieve desired organizational outcomes.

Empowering employees with platforms, capabilities, and learning content is now a strategic imperative for organizations to enable learning, growth, and development. This is essential not only to meet today's needs, but also to prepare for future needs as technology continues to evolve rapidly in an increasingly competitive environment. We hear this from existing and potential customers every day. Not only do we offer a learning platform that is fundamentally different from any other offering, but we also provide strategic support with our customer success organization to help customers establish and achieve their goals. This combination contributes to our strong win rates across all geographies and industries. During Q1, we welcome many new valued customers and expanded relationships with existing customers, including Cisco Systems, Ericsson, Procter & Gamble, and Stryker, to name a few.

Ultimately, we ended the quarter with nearly 14,400 global customers, or a 24% year-over-year increase. Macroeconomic conditions continue to present short-term headwinds. Like last quarter, we experienced longer sales cycles. For the first time, we saw upsell and expansion deals elongate in all geographies and with companies of all sizes as businesses closely evaluate their spend. During Q1, we continued to make progress on our international expansion through our partnership strategy, particularly in Asia Pacific region, where Udemy Business is gaining meaningful traction in Japan, South Korea, and Vietnam. For example, Udemy expanded its influence with LG Electronics through our strategic partnership with Woongjin ThinkBig in Korea. LG chose Udemy to empower its employees because it provides their organization with the most comprehensive learning platform to upskill their global workforce and stay competitive in the category.

It has become increasingly critical that companies offer an integrated approach to learning and professional skills development. Many forward-thinking companies are seeking more immersive learning modalities to promote greater employee engagement and to enhance the learning experience. In fact, during Q1, we won a seven-figure vendor consolidation deal with the Fortune 100 company. The organization selected Udemy to upskill and reskill their workforce based on the breadth and quality of our content catalog and for the technical immersive learning experiences we deliver with our UPro offering. UPro provides an immersive, personalized learning experience to accelerate skill development across key roles in IT, development, and data analytics. UPro enables technology professionals to achieve their learning outcomes for professional certifications more effectively through paths, assessments, workspaces, and labs. In the past year, customer adoption of UPro has increased nearly 6x.

Udemy's primary focus is skills development for professional learners and organizations across the globe. Customers come to Udemy because we provide a next-generation learning platform. We offer a vibrant marketplace that fuels the growth of Udemy Business. We measure that vibrancy in three ways: traffic, course creation, and instructor earnings. Traffic has held steady with approximately 34 million visitors coming to Udemy each month, even on significantly lower performance marketing spend. This provides a massive opportunity to drive engagement and increase conversion into individual course purchases, as well as personal and Udemy Business plan subscriptions, particularly as we increase our investment in generative AI and personalization. Course creation remains strong. Udemy instructors added more than 16,000 new courses to our marketplace during Q1. We also curated more than 1,900 highly rated courses into our Udemy Business catalog during the quarter.

Courses related to artificial intelligence and ChatGPT are in high demand from our Udemy Business customers. Our instructors were incentivized to create content to address those demands, which contributed to the strong course creation we saw this quarter. As engagement increases on our platform, so does instructor earning. Last year, we paid out close to $200 million to instructors. Instructors know they can build a great business on Udemy if they create compelling and in-demand content and are incentivized to update existing content often to optimize their traction with our massive global audience of learners. As you can tell, we are proud of the platform we built and are even more bullish about the future. We're excited about the possibilities for AI to transform the learning industry. We plan to be a leader in the category.

Udemy is harnessing the power of AI to supercharge how our instructors, learners, and organizations improve lives through learning. We are dedicated to providing high quality, relevant learning that is driven by the collective talent of our instructors and our ever-evolving learning ecosystem. Our network of nearly 75,000 instructors who share their expertise through our platform are the core of Udemy. Their expert guidance remains at the heart of our content model, and now with the support of AI, they can more quickly translate their unique knowledge and instructional style into effective learning. This year, we'll be launching in-platform tools to assist instructors with the creation of active learning experiences. For example, we just released a new AI-enabled tool to assist instructors of software development courses with creating Java, Python, and C++ coding exercises.

What used to take instructors an hour or more to create can now be done in just a few minutes. This is the first in a number of innovations that we'll be launching this year. In the second half of the year, we will bring AI-assisted active learning to topics beyond software development and introduce tools to help instructors create questions for assessments related to the content in their courses. There are more than 200,000 courses on Udemy representing over 1 million hours of content on thousands of topics. Udemy content discovery has traditionally focused on pointing learners to entire courses. Recently, we introduced a new AI capability that recommends specific video lectures within a course based on their occupational goals. We were excited to see that access to bite-sized learning led to meaningful increases in engagement.

In the next few months, we will roll out new smart search capability to make it even easier for subscription learners to locate specific learning content. Learners will be able to describe their goals or ask questions in simple language, this new smart search capability will display relevant courses and specific video lecture results that most directly address what the learner wants to learn. These new capabilities will enable learners to more effectively access the breadth of information within Udemy's course catalog. As change accelerates, organizations face an enormous challenge to identify and close skill gaps in their workforces. We're helping organizations understand the skill gaps within their workforce and growing their employees effectively and strategically. Recently, we partnered with the 1EdTech Consortium to bring Open Badges to the Udemy platform.

Open Badges, which are used by a number of popular industry certifications, provide a transparent, industry-accepted standard for representing the specific learning objectives that must be met for a learner to demonstrate proficiency in a skill. In the second half of this year, we will launch new capabilities to help learners self-assess their proficiency on skills and more easily find content to help close those gaps. These features will point learners to targeted learning content based on the results of assessments that measure preparedness for leading third-party industry certificates based on Open Badges. Giving managers a view into the badging and certifications within their organization will also help customers identify the skills available within their teams and address any gaps. AI is evolving, and the ways we use it to drive learning will evolve too.

As more people turn to Udemy to learn about AI, we're excited to use it to make learning more efficient, personalized, and powerful than ever before. Before I turn over to Sarah, I wanted to provide an update from my first few months in the CEO role. As I mentioned before, our long-term strategy is not changing. As we lead the transformation of the online learning category, we are taking action today on near-term priorities that we believe position us for long-term, sustainable, and profitable growth. For example, we are reinvigorating our internal operations and culture to drive our operating plan forward with greater speed and agility. This includes a heightened focus on accountability and results at every level in our organization as we work towards delivering exceptional performance and outcomes.

Specifically, we are ensuring that all teams are equipped with well-defined, tangible objectives and goals that are fully aligned with our broader corporate strategy. Next, our product team is prioritizing resources towards initiatives that will deliver the highest returns and have the most long-term value for our business. This includes launching skills validation later this year, as well as incorporating AI and deep learning throughout our platform. Finally, in order to achieve our profitability targets on an adjusted EBITDA basis while also driving top-line growth, we are laser-focused on efficiently managing our cost structure and maintaining flexibility to invest in high-return opportunities. Although the macroeconomic backdrop continues to present some uncertainties in the near term, our long-term tailwinds remain, including the shift from offline to online, renewed investments in L&D, and increasing prioritization of skill development.

It's still early days in this transformation of the online learning category, but I'm excited as ever about Udemy's future. Now, I'll turn it over to Sarah for our financial review.

Sarah Blanchard (CFO)

Thank you, Greg. I'll focus my comments on the key financial highlights and then provide our outlook for Q2 and full year 2023. You can find the complete set 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 15% year-over-year to $176 million, including a negative impact from foreign exchange, or FX, of five 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 three percentage point 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 skill development programs. This was also reflected in our annual recurring revenue, or ARR, which was $396 million at quarter end, up 42% from the year ago. We ended Q1 with a consolidated net dollar retention rate of 112%. The rate was 120% for large customers, or those with 1,000 or more employees. While we did see some pressure on net dollar retention, we continue to see stable gross 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 six percentage point impact from FX. As we move down the P&L, note that all financial metrics are non-GAAP unless stated otherwise. Q1 gross margin was 58%, a 100 basis point improvement from Q1 of 2022, driven by the continued revenue mix shift to UB Business, since content costs as a percent of revenue are lower for that segment. UB Business accounted for 54% of total revenue in Q1, which represents a meaningful mix shift from 43% a year ago.

Total operating expense was $113 million, or 64% of revenue, 100 basis points lower than Q1 of last year. Sales and marketing expense represented 41% of revenue, which was flat year-over-year. R&D expense was 14%, compared with 13% last year, and G&A expense was 9% compared with 11% of revenue a year ago. On the bottom line, net loss for the quarter was negative $8 million, or negative 4.7% of revenue. adjusted EBITDA loss was negative $6 million, or negative 4% of revenue, or 400 basis points better than the high end of our guidance range. This margin expansion demonstrates that our efforts to drive more efficiencies into our cost structure have been effective.

We're also maintaining the flexibility to make opportunistic investments that will help to accelerate our longer-term growth goals, including AI, credentials, and personalization. Moving on to key cash flow and balance sheet items. We ended the quarter with nearly $450 million of unrestricted cash equivalents, restricted cash, and marketable securities. Free cash flow for the quarter was negative $23 million due to increase in DSO and changes in working capital timing. Now turning to our outlook for Q2 and full year 2023. During the first quarter, the uncertain macro environment persisted. That uncertainty resulted in elongated sales cycles and additional layers for deal approval for many companies. We do not anticipate these trends will meaningfully change in the near term, and our guidance for the year assumes no material improvement or deterioration.

With that in mind, we expect Q2 revenue to be between $172 million and $174 million. Assuming foreign currency exchange rates remaining constant, FX is expected to negatively impact Q2 year-over-year total revenue growth by approximately four percentage points. As we shared on our Q4 call, we expect UB Business segment revenue will grow at a mid-teens rate year-over-year, and that Consumer segment revenue will decline sequentially from Q1. On the bottom line, we anticipate Q2 adjusted EBITDA margin of -5% to -3%. Looking further ahead considering the uncertain macro environment, we are cautiously optimistic about the rest of the year. Given the strong Q1 results, we're bringing up the low end of our revenue outlook.

We now expect full year revenue to be between $702 million and $730 million, or 14% year-over-year growth at the midpoint. Net growth includes an estimated 2 percentage point negative impact from FX, assuming no further changes in rates. Our outlook assumes that healthy demand and pipeline creation continues in UB Business. Our continued cost efficiency initiatives are expected to translate into a full year 2023 adjusted EBITDA margin between -3.5% and -1.5%, an improvement versus our previous guidance of -4% to -2% due to the adjusted EBITDA beat Q1. This beat also leads to full year margin improvement being more front-end loaded than we initially expected.

For back half adjusted EBITDA, we are now expecting modest improvement in Q3 to break even, and for Q4 to be slightly positive. In closing, UB's dedication to executing our strategic growth plan and our focus on efficient expense management in this challenging macro environment allowed us to deliver Q1 results that exceeded expectations. UB is well positioned to navigate near-term headwinds and emerge as a more durable business. We are excited for UB's next stage of growth as we continue to drive current profitability and build shareholder value. With that, we'll open up the call for any questions. Moderator?

Operator (participant)

We will now begin the question-and-answer session. To ask a question, you may press star then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. Our first question is from Ryan MacDonald with Needham. Please go ahead.

Ryan MacDonald (Managing Director and Senior Equity Research Analyst)

Hi, thanks for taking my questions and congrats on a really nice quarter and start to the year. Maybe starting with Sarah, you know, just given the outlook commentary and maybe a little bit with Greg as well. You know, I'm just curious, as you look out through the rest of the year, obviously cautiously optimistic, but macro environment's obviously still volatile. You know, 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?

Sarah Blanchard (CFO)

Hey, Ryan, thanks for the question. 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. As you know, we're sitting on a, on a pretty strong base, of revenue from UB Business. I think there, you know, there is some uncertainty just globally, especially around SMBs, 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. You know, pipeline is strong. It's just the timing of when that comes in. On the consumer side, as you know, you know, we're not focused on the top line of consumer. We're really focused on the marketplace vibrancy.

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 content that's coming on. I think, listen, we're gonna continue to see macro pressure. We're feeling good about the guidance that we put out and the work that the team's doing to deliver a strong 2023.

Ryan MacDonald (Managing Director and Senior Equity Research Analyst)

Super helpful.

Greg Brown (CEO)

Ryan, I'll just add. Let me add to that a little bit, Ryan, just to provide 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. Now as she mentioned, you know, we still have to convert and the pressure on sales cycles, as you alluded to, you know, it is gonna be bumpy throughout the year, but we're very encouraged by the top of the funnel, feeling very, very strong and healthy. A couple of the other macro trends that we talked about for our calls are playing out, I think in a significant way. One is consolidation. We just mentioned that, you know, we had a seven-figure consolidation with a large multinational.

We're seeing a number of these across our customer base. You know, a couple of them I'll just highlight. You know, one was a large financial services organization that went through a round of layoffs, and subsequent to that round of layoffs, made the decision that they were gonna 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, you know, a mid-size software company where they had two rounds of layoffs and subsequently decided to go wall to wall and expand the relationship for similar reasons.

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 gonna see continued expansion there. We have one of our large Fortune 100 multinationals 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 could 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. We're seeing some very strong, very positive trends amidst, you know, what is a choppy and still somewhat difficult macro environment.

you know, a lot of encouraging signs to give us confidence that the back half of the year is gonna hold firm.

Ryan MacDonald (Managing Director and Senior Equity Research Analyst)

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

Sarah Blanchard (CFO)

Yeah. So, listen, we're proud of the 120% large customer net dollar retention in this environment. you know, as you just said, we are experiencing downward pressure, and we do expect to continue to see that. We don't, you know, we don't give out guidance on net dollar retention. you know, the macro is impacting our overall bookings. What we're happy to see is that the percentage of bookings that's coming from our existing customers that are upsells continue to grow, and it was the highest quarter ever in Q1. 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 gonna be a little harder this year and take a little longer. We do think there's gonna be continued pressure on that, but the long term, the long-term forecast for that is good, and that's because the conversations we're having with our customers is that feeling 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 have the skills that they need to deliver on their business outcomes.

Ryan MacDonald (Managing Director and Senior Equity Research Analyst)

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

Sarah Blanchard (CFO)

Thank you.

Greg Brown (CEO)

Thank you.

Operator (participant)

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

Rob Oliver (Managing Director and Senior Research Analyst)

Great, thanks. Good evening. I had two questions, Greg. One for you first, and then Sarah, I had a follow-up for you. Greg, I'm curious, I just wanted to ask about generative AI and ChatGPT. I mean, you guys were really, you know, quick, and I think your model really demonstrated its strengths and its ability to kinda get these ChatGPT courses, you know, out into the hands of your UB customers really quickly. You know, you said 1,900, you know, new courses from UB in the quarter. I'd just be curious of those, like, you know, what you saw in ChatGPT and how that, like, drove utilization. We talk to a lot of software developers, you know, and it's their number one focus, you know, times 10.

Also would love to know, bigger picture, what that's doing for the land and expand and cross-sell and upsell motion. I have to believe that this could serve as a catalyst for many enterprises that might have heretofore been on the fence. I'll have a follow-up after. Thanks.

Greg Brown (CEO)

Hey, 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 release of technologies along the lines of ChatGPT and others. It really is why, you know, 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 their category is high as any other category, you know, that we serve. You know, 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. They were looking at ChatGPT, generative AI, and insight that was gonna give them confidence that we were gonna enable to continue to upskill and reskill their employees at the pace of change of their business, you know, 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.

They went in and invested in our Leadership Academy, to, you know, continue to evolve and develop the, you know, the leaders and emerging leaders in their organization as well as support innovation, that was gonna be needed, you know, along the lines of, GPT and the pace of change. You know, we've got a number of these types of examples. And I'll just say at the, at the macro level, if you wouldn't mind just let me comment on AI in general and how we view AI. You know, we view AI as not only not a threat, but we view it as a massive opportunity for our business. We just talked quite a bit about that. Learners come to us to acquire critical skills necessary to be successful in their careers in an ever-changing environment.

We're harnessing the power of AI to redefine the next generation of learning, and we couldn't be more excited about it. We touched on some of those examples, and I'll hit on 'em briefly in terms of what we're doing now to have significant impact. You know, for instructors, you know, we're building tools and amplifying capabilities on our platform that enable them to develop content faster, more efficiently and deliver a more effective learning experience overall. For learners, you know, we're making that experience more personalized and engaging through AI, and we're gonna be talking more about that in quarters to come.

For customers, we're providing data and insights to enable them to identify and address skill gaps that, you know, without question are apparent today, and they're gonna be more apparent as AI continues to disrupt, you know, the many jobs and, you know, kind of career trajectories that are currently in flux today in organizations, including ours. We're rethinking that as well. Look, we're gonna be able to affect, you know, instructors, learners, and customers in a significant way going forward. You know, the coding exercise tool we highlighted as well as Smart Search are just the first of many capabilities we're gonna be releasing this year that are gonna enable us to again, redefine the next generation of what learning looks like in corporations.

Rob Oliver (Managing Director and Senior Research Analyst)

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

Sarah Blanchard (CFO)

Thanks for the question, Rob. You know, we continue to see multi-year deals increase every quarter. This quarter is no exception. 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 with the skills that they need.

Greg Brown (CEO)

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

Operator (participant)

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

Terry Tillman (Managing Director and Senior Equity Research Analyst)

Yeah. Hi, good afternoon, Greg, Sarah, and Dennis. Nice job on the results. I think the investor engagement series is great. In fact, I think one of the ones you all talked about or that you all had present, it talked about the importance of L&D budgets, they plop in the press release today in terms of an important new customer expansion deal. I like that series, and I'm looking forward to hearing more on that. Also, Greg, as I just go through my clumsy preamble, we've got good sound bites now for the emails we seemingly get every, you know, half hour on AI and how it's gonna impact businesses such as yourself. Thanks for the, like, real-life data points to the contrary. Finally to my questions.

The first question, Greg, for you is, as it relates to generative AI and ChatGPT, do you see more of a benefit, whether it's tactically or strategic or not, on the consumer side or the UB side, kind of more on the near term? 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?

Greg Brown (CEO)

I'll do the last one first, Terry. In terms of, you know, 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 as it qualifies up. You know, the velocity there is going to enable us to be a lot more efficient and effective as partners with our instructors. You know, it's not only keeping up with the pace of change, but improving the overall experience for learners within corporations large and small. You know, we're excited about that. From a revenue perspective, yeah, I absolutely believe it is going to have an impact.

It is today because customers now are paying a lot of attention to, you know, the vendor selection process with respect to the content that is enabling them to stay ahead of, you know, whatever innovation is coming out and stay ahead of, you know, or up with the pace of change, I should say. We're doing a great job of that. Our marketplace facilitates that in a way that's very difficult for, you know, for those that are out there competing against us to match. You know, that does enable us to win more business, which affects our top line revenue. You know, we're seeing that today in the expansion deals that I mentioned, some of the new business that I mentioned, as well as I'll give you an example of a, what we call a boomerang.

You know, a customer that was working with multiple vendors, we were one of them, decided to go with, you know, the other vendor based on price. Quality was poor, content it wasn't, you know, delivering as expected. Came back to us and went wall to wall. That, interestingly enough, was through a partnership with Amazon. We talked about our relationship and growing partnership with Amazon. This was the largest partnership deal we closed with Amazon, multi-six-figure deal. That deal got done fast as a by-product of that customer having that relationship with Amazon. That was, again, coming back to us, paying more because of the quality of the experience and our ability to keep up with the pace of change.

I think AI is gonna, without question, affect top line, it's gonna affect productivity of our instructors, it's gonna affect our ability to deliver a higher quality experience in market.

Terry Tillman (Managing Director and Senior Equity Research Analyst)

I appreciate the color. 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? What did you say sequentially? What I'm curious if you would bite on the full year question, anything directionally on both segments? Thank you.

Sarah Blanchard (CFO)

Yeah. Thanks. Yes, we did say UB mid-thirties for growth for the second quarter, and that we expect consumer, which is typical seasonality, to be down quarter-over-quarter. For the year, you know, we do anticipate that we're gonna exit the year with UB growing in the mid-thirties. You know, we saw that strong performance with consumer. A little bit of a mix shift, but still plan exiting the year with UB near 60%.

Terry Tillman (Managing Director and Senior Equity Research Analyst)

Okay. Great. Thanks.

Sarah Blanchard (CFO)

Yeah.

Operator (participant)

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

David Lustberg (Equity Research Associate)

Hey, guys, this is David on for Brent. I appreciate you taking the questions. Sorry to continue on the AI trend, just wanted to follow up and clarify and, you know, Greg, thanks for the color and, you know, you guys not seeing it as a threat in general. You know, I think a lot of folks out there are super curious, was hoping we could dive in deeper after obviously, you know, another education tech company got cut in half off of AI fears. As you think about AI, you know, I know you said you think of it as a benefit, not a headwind. Curious how you think about the idea of, you know, 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? Would just be great to kinda hammer home on the AI strategy. I have a follow-up. Thanks.

Greg Brown (CEO)

Yeah, thanks for your question. You know, we're looking at a number of different ways to leverage and integrate AI into our platform. You know, I'm not gonna comment specifically on anything with respect to where we're at with tutors and coaching and what have you. You could assume that all of those are areas that we're investing time and energy and resource to better understand how that could enhance the overall learning experience. At the point in time where we're ready to talk about it, we surely will. You know, I think all of us would say right now, you know, we have a clear view on what we believe AI is going to enable us to do, and I just highlighted that.

You know, six, 12, 18 months from now, you know, there's, we're all gonna be learning as we're going, right? You know, 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. You know, 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, that you're gonna be able to hit a button and generate content and an experience that's gonna mirror the experience that our instructors deliver, you know, through the years of honing their craft and understanding how to deliver information and assemble information in a way that's gonna be best received and digested and learned by learners on the other side.

There's a, there's art in there as well as science, and AI is all around science right now, and that's gonna evolve over time, and we're gonna adapt with it. We're paying a lot of attention to that. You know, right now, the, you know, the lens we're looking through, we view it as all as opportunity, and we are making investments to better understand how we can look at things like coaching and mentoring and what have you, assistance that would be added to our platform. More to come down the road when we were prepared to talk about it.

David Lustberg (Equity Research Associate)

Yeah, that's helpful. I think the point on content was another one that was good around, so appreciate you clarifying on that. Then maybe for Sarah, I know you mentioned on the churn.

I know you guys said historically very low churn, but just curious any color you can provide on how churn has trended. Now, 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.

Sarah Blanchard (CFO)

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

Operator (participant)

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

Josh Baer (Executive Director and Software Equity Research Analyst)

Great. Thank you for the question. 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%-16%. 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. 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.

Sarah Blanchard (CFO)

Yeah, good question. Listen, I think we're trying to really take into consideration the fact that we are in a tough macro environment, that while we continue to see really strong demand, Greg spoke about our pipeline growth earlier on the health trend that is, we know that, you know, closing those deals is gonna take longer. There's some choppiness. Deals are going through more layers of approval than ever before, everybody's looking at their budgets and revisiting them. 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 upskill and reskill, 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. At the same time, it's just gonna take time.

For us, it's about just being realistic that in an environment like this, you can have significant demand, but it's gonna take longer potentially to get to that demand. We are assuming no, you know, material improvement or deterioration, and it's just gonna kind of remain to be seen.

Josh Baer (Executive Director and Software Equity Research Analyst)

Great. Thanks, Sarah.

Operator (participant)

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

Devin Au (AVP and Associate Analyst)

Hey, it's, Devin on for Jason today. Thanks for taking our questions. Wanna 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 kinda trended throughout the quarter?

Sarah Blanchard (CFO)

Hi, Devin. Thanks for the question. Listen, we were happy to see that consumer remained really stable, especially given, you know, the last six quarters we spent decreasing our investment and our marketing spend on the consumer side. You know, it's been great to see. You know, we're glad to see that, you know, the conversion is strong. 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. You know, there may be some of that that is within those numbers. There could be some cyclicality. It's too early to tell.

We're just happy to see that stability. We're happy to see the vibrancy in the marketplace, which is so important to us.

Devin Au (AVP and Associate Analyst)

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

Greg Brown (CEO)

Yeah, happy to answer that. I wish I could be more specific as there's over 1,000 on our platform right now, and, you know, we've got, you know, well over, you know, it's approaching 50 now. It's not beyond that in our UB collection. It's everything from introduction to AI. A lot of it in the early days is with introduction, so folks can really start to understand what this concept around AI and deep learning is and understand a little bit more around ChatGPT and then GPT-4 now, which is evolved from three. 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. Next level training, next level development.

All of this is rapidly being deployed on our platform as, you know, the market continues to evolve at the pace it's moving. Folks, you know, understand that they have an opportunity to monetize on our marketplace as well as within UB and our developing content literally at a pace we've never seen before, right? You know, it really is changing, you know, 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. Everything from introduction to deep learning around how to apply AI in specific businesses.

Devin Au (AVP and Associate Analyst)

Great. Appreciate the color.

Operator (participant)

Again, if you have a question, please press star then one. The next question is from Stephen Sheldon with William Blair. Please go ahead.

Patrick McIlwee (Equity Research Analyst)

Hi. You've got Patrick McIlwee on for Stephen. First, 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?

Greg Brown (CEO)

Yeah, 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, you know, peers or competitors are approaching that in one hand is via price. We're reacting to that the way our team always has, which is selling on value. As I mentioned that boomerang deal, you know, price without quality ends up doing exactly that, right? Boomeranging back to, you know, the company or the, you know, the series of companies that can actually deliver against the outcomes that an organization is looking to achieve. We are continuing to stay the course and selling on value. We're competing very effectively as a result of the numbers that you're seeing our team delivering.

We're not gonna be deviating from that. You know, as pricing pressure, you know, comes at us from competition, we're gonna be really leaning into the value and impact we can and will have as a long-term partner in helping an organization, you know, 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 our customer success team delivers in terms of strategy and delivery against that strategy. No change in terms of our path and focus on execution. Yeah, we are seeing a little bit of pricing pressure, but nothing materially different.

Patrick McIlwee (Equity Research Analyst)

Got it. That's clear. Thanks, Greg. Given some of the weakness you've seen in your SMB markets, 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 potential recovery?

Greg Brown (CEO)

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

Sarah Blanchard (CFO)

just the rest of the go-to-market team and

Greg Brown (CEO)

Go-to-market team. Yeah, as far as go-to-market, look, you know, Sarah's, I think, 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 gonna be in the back half of this year. You know, the macro is gonna, you know, have a large, you know, determining factor on if and when that happens this year. Our hope is it, without question it does. You know, again, there's some things that are out of our control, and we're gonna continue to closely monitor that and react accordingly. Sarah, I don't know if there's anything you wanna add to that.

Sarah Blanchard (CFO)

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

Patrick McIlwee (Equity Research Analyst)

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

Sarah Blanchard (CFO)

Thank you for the question.

Operator (participant)

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

Greg Brown (CEO)

Yeah. 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.

Operator (participant)

The conference is now concluded. Thank you for attending.

... today's presentation. You may now disconnect.