Udemy - Earnings Call - Q3 2025

Executive Summary

• Udemy delivered Q3 2025 revenue of $195.68M, above S&P Global consensus $193.08M* and above the company’s $190–$195M guidance; non-GAAP diluted EPS was $0.13, beating the $0.094* Street consensus. Consolidated subscription revenue grew 8% YoY and reached 74% of total, reflecting the subscription-first pivot.*
• Adjusted EBITDA was $24.27M (12% margin), up 110% YoY, but down sequentially vs Q2 ($28.40M; 14% margin); gross margin improved 300 bps YoY to 66% on higher-margin mix.
• Udemy raised full-year adjusted EBITDA guidance to $92–$94M (prior $84–$89M), while Q4 revenue guidance of $191–$194M brackets S&P revenue consensus $193.31M*.*
• Key narrative drivers: consumer subscription acceleration (paid subscribers 294K vs 250K target), enterprise ARR momentum ($527.2M), and NDRR stabilization expectations as COVID-era contract downsell headwinds abate; management emphasized AI-enabled role plays, certification and career journeys, and stronger unit economics (LTV/CAC >3x for subscriptions vs ~1x transactional).

What Went Well and What Went Wrong

What Went Well

• Subscription mix shift: consolidated subscription revenue up 8% YoY; subscription now 74% of total; consumer subscription revenue up 43% YoY with paid consumer subscribers reaching 294K, ahead of the 2025 target.
• Profitability and cash generation: GAAP net income of $1.64M (vs loss of $25.27M YoY), adjusted EBITDA $24.27M (+110% YoY), and free cash flow $12.09M; gross margin expanded 300 bps YoY to 66%.
• Enterprise resilience: UB ARR reached $527.2M (+4% YoY) with 17,111 customers (+2% YoY), and large-customer NDRR at 97%; pipeline strength noted in technology, manufacturing, and financial services sectors amid AI-driven upskilling demand.

Management quotes:

• “Consolidated subscription revenue grew 8% year over year and now makes up 74% of total… For Q3, we beat our revenue guidance and delivered on our 15th consecutive quarter of better-than-expected adjusted EBITDA” — CEO Hugo Sarrazin.
• “We… generated $7 million of net new ARR… These results exceeded our expectation and signal the underlying strength of our enterprise business” — CEO Hugo Sarrazin.

What Went Wrong

• Top-line growth flat YoY and down QoQ: total revenue was essentially flat YoY ($195.68M vs $195.42M) and declined ~2% sequentially from Q2 ($199.88M), reflecting the consumer pivot away from transactional sales and deferral dynamics of annual subscriptions.
• Net dollar retention pressure: UB NDRR 93% (down from 95% in Q2 and 96% in Q1), impacted by COVID-era contract downsells and prior go-to-market transitions; management expects stabilization in Q4.
• Consumer segment revenue down 9% YoY, and monthly average buyers fell to 1.20 from 1.31; deliberate reduction in transactional course sales to push annual subscription products, creating near-term headwinds.

Transcript

Speaker 2

Today, and welcome to Udemy's third quarter 2025 earnings call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on a touch-tone phone. 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.

Speaker 5

Thank you. Joining me today are Udemy's Chief Executive Officer, Hugo Sarrazin, 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 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.

During this call, certain financial performance measures may be discussed that differ from comparable measures contained in our financial statements, which are prepared in accordance with U.S. generally accepted accounting principles referred to by the SEC as non-GAAP financial measures. We believe that these non-GAAP financial measures support management and investors in evaluating our performance and comparing period-to-period results of operations in a more meaningful and consistent manner. 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 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 Hugo.

Speaker 6

Thank you, Dennis. I'm proud of the Udemy team for making solid progress during the quarter on our priority to accelerate subscription revenue growth across the entire business. As a result, consolidated subscription revenue grew 8% year over year and now makes up 74% of total. We are building a more durable business that delivers predictable and recurring revenue that creates more value for all stakeholders. For Q3, we beat our revenue guidance and delivered on our 15th consecutive quarter of better-than-expected adjusted EBITDA. Our team continues to execute with discipline while we make investment in our future growth. Udemy Business segment revenue increased 5% year over year, and we generated $7 million of net new ARR. These results exceeded our expectation and signal our underlying strength of our enterprise business.

In our consumer segment, we surpassed our full-year paid subscribers' target and revenue from subscription increased an impressive 43% year over year. When people subscribe instead of just purchasing one course, they engage more, learn more, and realize better career outcomes. Bottom line, subscription customers are our best customers. That's why growing that piece of our business faster is our top priority, and we are seeing strong momentum across both segments. Our market position is built on a unique strategic foundation of two businesses, each independently compelling and highly complementary. We combine the depth and stickiness of enterprise relationships with the breadth and innovation velocity of a global consumer marketplace. On the enterprise side, companies are heavily invested in AI transformation. However, they are struggling to demonstrate ROI because many haven't developed the core workforce capabilities required to extract value from their investments.

On the consumer side, we're addressing a different but complementary need. Individual learners must become AI-native and require comprehensive support that leads to career advancement. In order to meet the needs of both organizations and individuals, a skill acceleration platform must deliver measurable outcomes. There are four critical pillars of Udemy's platform, which bring the best of AI and humans together to deliver impactful results. These include, first, skill acquisition through course collection tailored for specific roles. That's the traditional Udemy value prop. Skill mastery through hands-on practice using lab, workspace, and role-play experiences. Third, skill validation through assessment and certification. Fourth, skill amplification through human connection and expert guidance. Our integrated approach is transforming learning from a one-time event into a continuous skill-building engine that delivers strong ROI and learner outcomes. Our platform features AI-driven learning paths, learning assistant, AI-generated assessment, AI-assisted content creation, and MCP capabilities.

Udemy enables organizations to build their own content and custom paths, develop their own AI role plays, and deliver just-in-time reskilling through integration with their existing LLM, their LMS, and their LXP system, creating stickiness. We are in the midst of the most important workforce evolution in a generation, with nearly 60% of global professionals needing new skills by 2030. Udemy is aiming to be the natural extension to traditional education, bridging the gap from what a learner already knows to the new skills the market demands. While LLMs excel at answering questions, Udemy excels at changing behaviors and building skills that drive real impact. We do this through structured career journeys with measurable progress, human expertise, and community support that learners cannot get from AI alone.

We are building an enterprise-grade workflow integration that embeds seamlessly into how an organization actually operates, which translates into business outcomes and career development. Our comprehensive platform also enables organizations to manage their talent development strategies, track progress against their strategies, and validate company-wide skill proficiency with proprietary data to support meaningful outcomes. For consumers, we are embedding personalized learning experiences into subscription offerings to support career transformations. We will enable skill acquisition through engaging experiences and validation through assessments and other services that lead to mastery and ultimately better career outcomes. The future of work requires continuous skill development, and AI makes that need more urgent, not less relevant. We are empowering all customers to stay ahead of rapidly evolving skills demand through adaptive, just-in-time learning.

We are positioning Udemy to be an essential lifelong learning solution for professionals that drives career advancement with the structure, support, and validation that LLM alone cannot deliver. What is uniquely powerful about our platform is the combination of creating a more human-centric experience of our more than 85,000 expert instructors with AI. Instructors leverage our AI to develop assessment, labs, and role play that adapts in real time as each person is progressing. Innovations like our role play technology are opening entirely new markets in sales enablement and customer support by allowing them to build custom training experiences. Our AI can create realistic and bespoke practice environments tailored to our customers' business. This can include practicing a company sales methodology, rehearsing difficult client conversations, or working through a unique compliance scenario.

Building on our proven success in skill acquisition and skill mastery, we are evolving the platform to deliver even more robust and personalized experiences that amplify skills development. This is about human connection that delivers through learning comprehension and retention. Instructors can now offer live individual coaching sessions to millions of learners around the world. Soon, we will be launching virtual instructor-led training to allow learners to participate in structured, cohort-based experiences. At the same time, this gives instructors the ability to engage with groups of learners simultaneously. These offerings strengthen the stickiness of our platform by creating meaningful engagement for both instructors and learners. They also ensure learners receive the guidance and support that transform knowledge into real-world capabilities. One example of our four pillars in practice is Centific, a leader in advanced AI solutions. Centific is leveraging Udemy to build workforce fluent collaboration with AI systems.

By aligning training and strategic technologies like Snowflake, Microsoft, and NVIDIA with business priorities, Centific significantly accelerated value creation. The results are impressive. Centific reduced AI project onboarding time by 20%, increased AI-driven innovation by 40%, and enabled content creation to 70% faster with generative AI. This skill-based approach underscores Centific's commitment to continuous learning, operational efficiency, and sustainable competitive advantage. We're evolving our consumer business from selling courses to enabling careers. Our subscription model creates ongoing relationships where invested in the learner's success, not just course completion. This aligns our business model with learner outcome. To do this effectively, we are launching a career-focused subscription offering that validates learners with two specific outcomes: first, certification journey, and second, career journey.

Let me start first with certification journeys, which will help people prepare for professional exams with personalized learning paths, practice tests, and exam vouchers in order to achieve universally recognized skill validation. When learners embark on the CompTIA certification journey, which we launched in August, the average revenue per learner increased by 4X. Building on this success, we are partnering with Pearson to create a seamless certification journey for learners. On career journeys, we will structure paths for job readiness that integrates all four pillars through curated courses, hands-on projects, and assessments tied to specific roles. Many of these will be co-branded with partners, directly connecting what skills people learn to career growth and higher earning potential. The majority of Udemy's learners come to the platform to advance their career.

Our partnership with Indeed is already proving the strength of this alignment, with learners showing materially higher consumer subscription start conversion rates. We are seeing an average monthly conversion rate of Indeed job seekers to subscription that's 16X better than the Udemy average. From our career and certification journeys to our comprehensive platform capability, everything we're building is designed with one clear goal in mind: supporting the complex needs of our customers and the modern workforce. While AI democratized access to information, Udemy democratized access to career transformation. We are the platform where ambition meets achievement that combines human support with structured learning that delivers validated skill mastery. Whether it is an individual professional seeking to advance their career or an enterprise looking to future-proof their talent, Udemy bridges that critical gap between where skills are today and where they need to be tomorrow.

In closing, we are leveraging AI to strengthen Udemy's competitive position and expand our market opportunity. The future of work requires continuous learning, and Udemy is building the infrastructure to power that transformation. The opportunity ahead of us is immense, and I'm incredibly excited about what we'll accomplish together. With that, I'll turn it over to Sarah.

Speaker 4

Thanks, Hugo. I'll cover the key financial highlights first and then our outlook. We have a complete set of financial tables available on our Investor Relations website. As we move down the P&L, note that all financial metrics other than revenue are non-GAAP unless stated otherwise. Our Q3 results demonstrate that our transformation is on track and that we're seeing great momentum across the business. I'm proud of the financial discipline the team has shown as we've made strategic investments, building a strong foundation for future growth. Net new ARR is increasing, total subscription revenue is growing as a percentage of overall revenue, and we continue to deliver meaningful additional adjusted EBITDA margin. Diving into the specifics, third quarter revenue of $196 million landed above the high end of our guidance range. As you know, we've pivoted to becoming subscription-first, and it's delivering better than expected results.

As this becomes a larger portion of our revenue, we'll be providing greater transparency into the metric going forward. For the third quarter, we delivered $144 million of consolidated subscription revenue, representing an 8% increase year over year. Subscription revenue now accounts for 74% of our total revenue, up 600 basis points from last year. This fundamental shift in revenue quality is a foundation that sets us up for accelerated growth. Udemy Business delivered $133 million in revenue, up 5% year over year. We generated $7 million in net new ARR during the quarter, ending with a total of $527 million in ARR. We expect to see net new ARR increase again in the fourth quarter and land in the high single digits. Udemy Business pipeline heading into Q4 and 2026 remains robust. The deal size opportunity and strategic importance of reskilling initiatives continue to grow.

We're seeing particular strength in technology, manufacturing, and financial services sectors. These industries are rapidly implementing AI solutions, which is driving urgent upskilling needs. Our total net dollar retention rate was 93%, while net dollar retention for large customers was 97%. There are two headwinds that were anticipated in this metric. First, we are still seeing some pressure from downsells from COVID-era contracts as we work through the rest of those this year. Second, we have been working through previously announced go-to-market team transitions, and that work is now behind us. In addition, as we shared last quarter, we have brought on an outside organization to efficiently address SMB churn. We continue to see stability in gross dollar retention, and given the early signals that indicate our go-to-market optimization is on track, we're optimistic that net dollar retention will stabilize in the fourth quarter.

On the consumer side, the segment generated $63 million in revenue this quarter. We ended the third quarter with nearly 295,000 paid subscribers, exceeding our year-end target of 250,000. Revenue from subscriptions was up 43% year over year and now accounts for 19% of the segment's revenue. This is a 400 basis point increase from the prior quarter. Our strategic pivot to subscription products is strongly supported by unit economics. Today, our transactional business operates at about a one-time LTV to CAC ratio. In contrast, our subscription products currently deliver an LTV to CAC that is well above three times. Given the compelling unit economics and strong demand signals we are seeing, we're accelerating our pivot to a subscription-first approach.

Not only is this a more financially sound business model, it also allows us to deliver a fundamentally better value to learners, as it encourages continuous engagement that is essential for achieving meaningful outcomes. Moving on, our total gross margin also continued to improve. It was 67% in Q3, up from 64% in the prior year. This 300 basis point improvement demonstrates the inherent leverage in our business model as we scale our higher margin revenue streams. Operating expenses were $112 million, or 57% of revenue, a 400 basis point improvement compared to the third quarter of 2024, reflecting our continued focus on operational efficiency. On the bottom line, we delivered GAAP net income of approximately $2 million. This is a meaningful improvement from a loss of $25 million in Q3 2024. Adjusted EBITDA was $24 million, or 12% margin compared to 6% in the prior year.

This 600 basis point improvement reflects execution on our strategy, the continued shift up market, evolution of our revenue mix, and our ongoing operational discipline. Our balance sheet remains strong with $372 million in cash and marketable securities at the end of the quarter. Free cash flow generation was $12 million, or 6% of revenue. We expect our cash generation to continue to improve as our subscription revenue base scales and provides enhanced working capital dynamics. Also, we bought back 4 million shares under our new $50 million stock repurchase program. Now for our outlook. As we execute on our strategic pivot, we expect our consolidated subscription revenue for 2025 will grow in the high single digits year over year. As mentioned, we are accelerating our consumer subscription-first approach due to compelling early signals, which is creating a short-term headwind for the consumer segment's revenue growth.

For the quarter, we expect total revenue of $191 to $194 million. This brings our full year 2025 range to $787 to $790 million. The midpoint of the full year guidance implies Udemy Business revenue will increase approximately 6% year over year, an improvement from our prior guidance, while consumer revenue will decline about 9%. On the bottom line, Q4 adjusted EBITDA is expected to be $18 to $20 million, or 9% margin at the midpoint. We are therefore raising our full year 2025 adjusted EBITDA guidance to a range of $92 to $94 million, or 12% margin at the midpoint. Looking ahead to 2026, while we are not ready to issue formal guidance, we'd like to provide some directional insight on how our strategy will impact our outlook for next year.

Ultimately, with our pivot to accelerate recurring revenue, we believe the consolidated subscription revenue growth in 2026 will be closer to double digits and will account for approximately three quarters of total revenue. The momentum in consumer subscriptions is strong, so we are accelerating that push. This means we are intentionally reducing transactional core sales in favor of recurring subscription revenue, which will slow near-term segment growth. In addition, as we direct more customers toward annual subscription products, a meaningful portion of that revenue will be deferred to future periods. We believe this short-term impact is the right trade-off for building a more predictable, higher-value business that better serves our learners' long-term success. Finally, we are updating our profitability targets to reflect increased strategic investments in our transformation. At the same time, we are focused on maintaining strong cash generation and operational discipline.

We have been significantly increasing adjusted EBITDA margin over the past three years and believe we have achieved a margin that is sustainable and provides the right balance between a strong bottom line and reinvesting in growth. We are on track to deliver more than $90 million in adjusted EBITDA this year and expect to deliver at least that amount in 2026, even with the additional investments. In summary, Q3 demonstrates the progress we're making in our strategic pivot toward higher quality, more predictable recurring revenue streams. We continue to execute a transformation that will create significant value for all stakeholders. The underlying fundamentals of our business are strengthening, and we have the flexibility to invest in strategic opportunities that will drive our future growth and ability to capture the massive AI skills opportunity ahead. With that, we'll open up the call for your questions. Moderator?

Speaker 2

Thank you. We will now begin the question and answer session. To ask a question, you may press star, then one on your touch-tone phone. If you are using a speaker phone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star and then two. At this time, we will pause momentarily to assemble our roster. Your first question today will come from Ryan MacDonald with Needham & Company. Please go ahead.

Thanks for taking my questions and congrats on a nice quarter. Sarah and Hugo, maybe to start in the consumer segment, can you just add a little more color onto what the initiatives you're taking as you're accelerating the transition to consumer subscription? How are you looking to incentivize existing transactional customers to convert to the subscription? Any update or are you still focused on finding other ways to monetize that consumer revenue stream in terms of advertising? I think that was talked about last quarter as well, maybe just updates on that consumer segment strategy a bit more. Thanks.

Speaker 6

Perfect. Ryan, thank you for the question. As stated, we're really pleased with the 43% year-over-year growth of subscription. It is pretty comprehensive. Ranjit and team are really looking at where we are gathering customers, so changing the strategy from acquisition all the way to retention. We're changing call to action. We're changing the positioning when we bring potential customers to the website, what they see, how they see. We've changed the way the shopping cart is optimized. We've changed the ways we are reactivating existing customers. We're expanding the number of established customers. You get the idea. A lot of things that are classic digital marketing strategy are being used to transform the efficiency of the engine end-to-end. That's kind of one part of the answer. The second, we've pushed to diversify the sources of customers. The Indeed partnership is a really, really interesting example.

We are capturing people at the moment of need. That's why we're seeing the conversion be so great. We think with the economy where it is, there's going to be a lot of transition, and that will play very, very nicely, and there's more partnerships to be announced. On the ad programs, we're very pleased with the progress today. We're in 170 countries. As we discussed last time, in our first step, we went for the freemium courses and inserted ads in the video, and now we're in the process of optimizing that. We're going to move to phase two very soon, where we're going to monetize different parts of the experience. Next year, we'll be into the sponsorship, which we've alluded to. A lot of good progress on that. There is also really good news on our desire to create subscriptions that are targeted to specific outcomes.

I'll just lean in on the one with certification. It is really, really exciting in August when we launched the CompTIA example partnership. It's the first one. We've mentioned four times the kind of monetization versus the non-integrated offer. We're about to do something similar with Pearson across more certification opportunities, and we think that's going to continue to accelerate this transition.

Excellent. Appreciate the color there. Maybe a follow-up on Udemy Business. I know there was a lot of excitement last quarter in terms of the state of the net new pipeline. It sounds like there's still that excitement there. While you're managing through the renewal process with some of the COVID contracts, can you just provide an update on how you're feeling about the balance of net new pipeline progression as we're heading into Q4 and into next year here, and how the rate of renewal is trending on those renewals relative to your expectations in the fourth quarter thus far? Thanks.

Speaker 4

Thanks for the question, Ryan. I'll take that one. On net dollar retention, we saw what was expected in the third quarter as we continued to move through. We're getting to the tail end of these COVID-era contracts. We are seeing stable gross dollar retention, which we have seen quarter after quarter after quarter. That is great. We are seeing that pipeline build continue. Importantly, what we're seeing is the % of that pipe that is expansion deals within our existing customers that has meaningfully improved over the past quarter, and that continues. We do still have that pressure from some of these COVID contracts, but we're getting to the back of that. We have a lot of confidence in the fourth quarter and seeing that stabilization of net dollar retention as expected.

We've got the new approach that our Customer Success team has brought into our customers to make sure that we're doing those implementations right, that we are aligning their outcomes that they're looking for with their business priorities with our implementation. We also announced that on the SMB side, we are working now with an outside business process optimization firm. I would say we've made progress across all fronts. We're happy with where we are. As we look into next year, the go-to-market team transition is complete. We have the new approach in place. The BPO will be fully ramped. We will work through the COVID deals. We're optimistic for next year.

Appreciate the color. Thanks.

Thanks for the question.

Speaker 2

Your next question today will come from Yi Fu Lee with Cantor Fitzgerald. Please go ahead.

Thank you for taking my question, Hugo and Sarah. Congrats on a productive Q3 and strong pace consumer subscriber acceleration. Hugo, maybe if I could kindly start with you on a macro high-level question. Can you kindly comment on the L&D budgets you are seeing in the field? We see all the innovations Udemy is upgrading across the platform. In the beginning of the prepared remarks, you mentioned organizations invested heavily into AI, but ROI has not materialized yet. How has this dynamic impacted Udemy and other edtech peers? I guess the question I'm asking is, what needs to happen to sort of cross the chasm to double down for both enterprise and consumer spending to accelerate this? I also have a follow-up for Sarah later.

Speaker 6

Okay. Thank you. Thank you for the question, Hugo. You heard me the last two quarters. I love to be in the field. I love to go in all our territories, spend a lot of time with customers. I'm back from last week at Unleashed. I went across Europe. It's an interesting dichotomy. It is a moment in time where the L&D teams are being asked to do more. All this AI transformation, they're asked to respond to a lot of uncertainty. At the same time, they're being told to do with less. There is pressure. There's real pressure. This is a group that's very anxious. At the same time, I like what is happening because we have a solution, an end-to-end solution that is broader than others. We do the technical stuff, and we do the non-technical stuff. We have a catalog that is way broader.

We do things like the mastery with AI role play. We do the things with assessment and validations. We've got more to offer. Our ROI is better. Therefore, when they need to consolidate, our win rate goes up. I am liking that dynamic macro. It's going to help us in general. The second thing I'll say is we've been on this go-to-market transformation to move up market. As part of that, there are some bullets under the heading. One of them is more value engineering so that we pitch the ROI case. The second is you need to pursue economic buyers in L&D and outside of L&D. We've done a lot of training around that.

What we're seeing, and one of the reasons we have more $100,000 deals than in the past, and you see it in the economic buyer data that we have, is we're now also doing a good job outside of L&D. We're diversifying, and that's really good. I'll give you, just to bring this to life, an example from Europe, a leading retailer. Six vendors, six L&D vendors. They did a consolidation, and we increased our number of seats three times. That's the kind of stuff.

Could you give us more color on what are the type of L&D vendors you're consolidating? When you say outside of L&D budget, right, who are you taking? Are these like the business lines you're taking the budgets from, the extra budget piece?

Yeah. Let me hit the second one. It is IT leader, engineering leader, marketing leader, sales leader, enablement leader. It's all of the above. We need to have conversation with people who have business issues and be able to articulate our value in terms of the business outcome. Let me kind of give you an example. When we talk to a sales leader, we can say, by taking the following sets of learning paths and learning programs on Udemy, your ramp to have a salesperson productive is shortened in half, and this is how much it's worth to you. When we call to a call center, you've got attrition. You've got all these people that you need to train up on new accounts and on new policies.

We can speed the time it takes for you to have these agents be more productive, or we can reduce the average handle time. That's what I mean by going outside of L&D. It's real business cases.

That makes sense. Thank you for the extra color, Hugo, on that. Let me move on to Sarah before I pass on the call. Hey, Sarah, on the economics financial side, should we, you know, obviously outperforming on the GAAP net income, EBITDA, free cash flow possibility. Should we, Sarah, going forward, get used to this trend, growing at a profitable growth rate? The second part of the question, Sarah, is you've mentioned, you sound very confident, net new ARR, we're going to return to high single digits the final quarter. What gives you confidence? I think you kind of hit on it from the last caller. Can you reiterate what are the things that give you confidence that by year end, it's going to reaccelerate and it's even better in 2026? That's it for me. Thank you, Hugo and Sarah.

Speaker 4

Yeah. Thanks for the questions. Let's start with our bottom line. We have continued to outperform in the bottom line. That's a huge testament to the partnership across the business and really driving operational discipline. As we look into 2026, it's a great moment. You heard Hugo talking about these companies are really undergoing these AI transformations. L&D leaders are under pressure, but business leaders are under pressure to ensure that their teams are adapting AI. We are going to invest on the back of that. We will deliver. We're on pace to deliver about $93 million for 2025. We will deliver more than that next year. We are investing in really further differentiating our offering in the world of AI and LLMs.

You can expect to continue to see a robust roadmap and some really exciting things coming out from us that will allow us to continue delivering growth on both Udemy Business and consumer subscriptions. From a net new ARR perspective, we delivered two in the first quarter, one in the second quarter, and seven this quarter, a huge testament to the work to transform that go-to-market team. Very, very happy with the progress that team has made. We continue to see our pipeline grow, the pipeline for $100,000-plus deals grow. Our deal sizes are up. When we look into next year, that really gives us the confidence that we're through that transformation and that we're bringing some really exciting capabilities to market at a time when the market is looking for them.

Thanks again, Sarah. Thanks again, Hugo. I'll get back on the queue.

Speaker 6

Hey, Yi Fu, I want to just, I didn't answer your question. When we do consolidation play, you know from who and how does it look? There are two types of vendors we consolidate. Often, there are smaller vendors that are local and niche. The real plays, and that's how you get the example I gave you, three times increase in seats, is when we take out our major competitors. Because we're both technical and non-technical, we have a good value proposition against the folks who are purely or mostly technical. We also have a good value proposition vis-à-vis people who are mostly business or more broad. We can come in and offer more specific technical expertise. By the way, in the world of AI, this is a super, super, super, super important point. All the leaders I've spoken to tell me versions of this.

We've gone beyond turning ChatGPT and Claude and Copilot on and doing a bunch of experiments. They want to scale. The only way you scale is if you can package the technical training around AI. We have 4,000 classes. It's more than anybody else with the adaptive skills. If you combine the two, you can scale. If you're only doing prompt engineering and the very specific technical things, you're going to remain in purgatory hell of these little pilots.

That makes sense. Thank you. Thank you again, Hugo, for the extra color.

Speaker 2

Your next question today will come from Josh Baer with Morgan Stanley. Please go ahead.

Great. Thanks for the question and congrats on some really strong subscription revenue numbers. I wanted to ask on the EBITDA side, you know we have seen really strong performance this year, guidance raised for the year. When thinking about 2026 now, we're kind of anchored toward where you're going to end up for this year. Not too long ago, we were looking for $130 million to $150 million. A big change there. I was hoping you could provide any sort of context or a bridge. Just wondering how much is from the transition to consumer subscription, like within the consumer, some impacts from that versus other top-line headwinds versus increased investments? The follow-up would be, you know where specifically are those investments going?

Speaker 4

Yeah, great question. Thanks, Josh. A lot has happened in the past, let's say, 12 months that puts us in a place where we are laying out next year being more EBITDA than we're delivering this year, but really shifting away from the continued very significant margin expansion quarter after quarter after quarter to doing some more investments. We have a new CEO. We have a new strategy, and we've gone through a go-to-market team transition. There's a lot within that 2026 expectation of the bottom line. You're right that we do have some headwinds that we're speaking about because we've pivoted very quickly to subscriptions first. Because it's going so well, we're accelerating that. That is a few points of growth on the consumer side that we're giving up.

What we expect to see is towards the middle of next year, that inflection point where the subscription revenue growth will start to outpace that decline we're seeing on the transactional side. That did impact our top line, that subscription first, and the go-to-market team transition. When it comes to our investment priorities, like I said, really further differentiating in a world now that is AI and LLM and is very different than it was 18 months ago and 24 months ago, as we all know. Some of those things that we are looking to invest in first is this platform that we're talking about that's end-to-end delivering skills acquisition, mastery, and validation, and allowing organizations to monitor the progress of their teams across the skills that they need to hit their business priorities, deliver even more ROI, and create that stickiness.

We're investing in the personalization engine that you heard us talking about. We have AI tools and role-playing assessments, and there's more that we can do to really bring to life this personalized journey to help individuals hit their career goals, get their certifications, and then amplify that with the human plus AI. Bringing our instructors across the globe closer to the learners allows not only better learning outcomes, but those instructors to monetize in new ways across our platform. The last thing I'll say is you've heard us talking about partnerships over the last few quarters, investing in building out that ecosystem on both the Udemy Business side and the Udemy consumer side. Hugo, anything you'd want to add on the partnership side?

Speaker 6

Thank you, Sarah. In general, I'll make a point before I go on the partnership. We also are making a deliberate EBITDA versus growth trade-off right now. We see a very big market opportunity around reskilling the whole workforce. We need to be playing offense, and we need to be growing the business really fast. That's just kind of a macro theme. We're using the opportunity to build our moat. Our moat is this platform end-to-end in a way that no other online catalog has today. We think it's really, really important to do that. To do that, we'll need some investment. We've done some already. We'll do more. In terms of partnerships, there's some really exciting stuff that's happening. You've heard me mention Pearson, which helps deliver some of these end-to-end validation as part of the platform and some of these new subscriptions.

We have things with Workera around assessment, Glean around enterprise AI. We've also done a partnership to expand the reach of our offering with M-Trains. We offer compliance now, so we become a one-stop shop on some of the things. In some cases, it creates a nice defensive play for us. We're tweaking, adapting. We're going to be smart about it. That's why we're signaling that no less than is what you heard. We're being smart about it.

Great. Thank you for the answers.

Speaker 2

Your next question today will come from Steven Sheldon with William Blair. Please go ahead.

Hey, thanks. I just want to start within Udemy Business and just a clarification. Just wanted to clarify the fourth quarter ARR comments that you made, Sarah, for the high single-digit increase. I'm assuming based upon a prior answer that that's a sequential ARR dollar increase, or was that a year-over-year growth expectation?

Speaker 4

That's right. That's net new ARR, so sequential dollar increase.

Okay. Perfect. On consumer, great to see the traction on subscription. I just wanted to ask how long it might take before you see overall consumer revenue stabilization and a return to growth. Based on a prior answer, it sounded like you could potentially hit that inflection in 2026 in consumer where subscription revenue more than offsets the non-sub revenue. Was that more for the total company, including Udemy Business? High level, when could we expect a potential return to consumer revenue growth overall? Is that next year? Is it still a couple of years out? Any detail there?

Yeah. We are expecting to see the decrease in transactional be overtaken by the increase in subscription mid-next year sometime. We are still optimizing as we are building out this subscription first. You heard Hugo talk about all the things we're doing in the subscription side of things. That is impacting. The unit economics of that business are so much more compelling. In addition to that, the learner journey and the experience for those learners is going to be so much stickier as we really look to build this continuous skill-building engine and this companion for our learners. That's the trade-off we're making.

Would that imply a return to consumer growth at some point next year?

We're not ready to put an exact date on that yet, but we'll be getting close.

Got it. Thank you.

Speaker 2

Your next question today will come from Jason Tilchen with Canaccord Genuity. Please go ahead.

Good afternoon. Thanks for taking my question. I'm wondering, in the deck, you referenced the hundreds of enterprise customers that have started adopting the AI role plays. Hoping you could just talk a little bit about both some of the unique use cases where this is being deployed, and also how this is translating into greater wallet share at some of these customers. Thanks.

Speaker 6

Yeah. Why don't I get us started? The imagination of people never ceases to amaze me, is kind of like my starting point. We have more than 10,000 role plays. I don't claim to say that these are all unique. There's a lot of overlap. We've also provided the ability for enterprise to build their own unique role plays. Some of them will be a variation of the out-of-the-box ones. Let me give you a couple of examples. The first one is performance reviews, practice difficult conversations during performance reviews. There's the out-of-the-box version, or if you're PepsiCo, you can load the policy document of PepsiCo, and the role play will be done in a way that is consistent with the language used and the grid used at PepsiCo. That counts as two, just as you know to help with the 10,000.

We have an example where you have, I'll give you an example of a consulting company that is building with their own internal LLM, their decks, their customer-facing PowerPoint documents, and they're loading that up in AI role play to do a practice in advance of going to a customer. Again, very, very specific, very in the moment, very valuable to them to have a rehearsal in advance of a difficult or challenging customer. That's the range of things. I can keep going, but I'll answer the second part of your question. Right now, what we have done is we've made this available to our customer as part of these different offerings. We will next year have a tiered offer where we're going to monetize different behavior.

I'm not going to go into too much what it is, but you can imagine a typical SaaS model where there's a minimum that you can do without more, and then you get to pay if you use it more. It's going to allow us to monetize this more with the usage and the value that the customer is going to get. The last thing I'll say is we are building a specific version of AI role play that can be offered standalone, targeted at different non-L&D buyers because it is solving a very specific use case. The pricing of that will be matched to the value that is being delivered to that economic buyer.

Great. That's really helpful. One quick follow-up for Sarah. In terms of the increased investments that you referenced, I just want to make sure I sort of understand it. Is this primarily focused on product, or are there any other areas where there's going to be some incremental investments as we head into next year?

Speaker 4

Yeah. It's a great question. It's primarily focused on product. There will be some investments on the partnership side, although those do pale in comparison to the product investments.

Great. Thank you.

Speaker 2

If you have a question, please press star and then one. Your next question today will come from Nafeesa Gupta with Bank of America. Please go ahead.

Hi. Thank you. Hi, Sarah and Hugo. My first question is, with this focus on subscriptions and Udemy Business, but there is also lower revenue share for instructors in both of them, and it will further go down to 15% next year. Are you seeing any kind of increased churn amongst instructors because of your focus on these two?

Speaker 6

Thank you for the question. Our strategy is very, very, very focused on human plus AI. We remain committed to the instructor community. We've engaged them in very constructive conversations. They understand that the world around them is also changing. They're feeling it from their business point of view. What we're doing is a few things. One, we're working with them to create new sources of revenue monetization. Some of it is taking stuff that they do off-platform and moving it to Udemy. That's why you heard a reference to one-on-one coaching, some of the cohort work. Those are going to be done at a different revenue share than the one that you referenced. That's kind of one thing.

The second thing is we've introduced a new production hub, a series of tools and services to make their lives easier in this AI world where they can participate and get some efficiencies. We have more to come on that front. There are a few other conversations. They're very active. They're very clear about their needs, their desire, and you know we want to grow the business with them.

Got it. I have a follow-up. Any thoughts on acquiring traffic through AI platforms? I mean, a couple of your competitors and peers are integrating with large platforms to acquire more traffic. Any thoughts you have on that?

Yeah, that's a great question. Thank you. Let me first say this is a validation of our strategy. We were very excited to see that move. For two quarters in a row, we've been very clear that an online catalog is not sufficient in this world, and we were moving to move into these different ways of competing, which included AI and then being an AI platform. We've initially focused on the B2B space, which is a place to our strength where we already have moat, and that's why we've introduced the MCP. The good news is, given that we've got all the MCP, we've got the ability now, if we want to, on the consumer side, to also be part of ChatGPT or Perplexity or Claude. We need to step back a bit and think about what is happening.

Every technology evolution, whether it's the internet, mobile, social, introduced not only a set of new technology and new protocols, but just a new set of distribution platforms. For search, it was Google. For mobile, it was Apple, which created the Apple Store. We need to kind of make sure that we are very thoughtful in how we're going to play. Nobody remembers who was the first one on the Apple Store. Not relevant. There will be choices. What we're focused on is on building a really, really, really distinctive experience on that chat consumer experience that plays to our consumer strategy. Again, we're very happy. We're growing 43% year over year. We're focused on careers and certification. We're linking this to job outcomes. We want to make sure that, you know, beyond top of the funnel, name recognition, and branding, which we are clear on the monetization.

Right now, nobody has a monetization answer, so we don't feel the rush to kind of put ourselves in the middle of that.

Thank you.

Speaker 2

Your next question today will come from Devin Au with KeyBanc Capital Markets. Please go ahead.

Hey, thank you. Thanks for taking my question. Maybe just one quick one on UB. The commentary around the large customer pipeline sounded encouraging. I think you mentioned the pipeline for that segment is up quarter over quarter. When I look at kind of the net add for that customer segment, it has stepped down quite a bit from last quarter. Is that just like a timing thing? Perhaps maybe deals shifting out, or did you see perhaps increased churn? Maybe just help us reconcile the strong commentary versus the step down in that add. Thank you.

Speaker 4

Yeah, it's a great question. I did also mention that the portion of that pipeline growing is on the expansion side. There's a combination of adding new logos and expansion. We are so excited when we continue to build on the value that we're already delivering with existing customers. What you're seeing there is the expansion dynamic that's happening.

Speaker 6

Yeah, the consolidation.

Great. Thank you.

Speaker 4

Thanks for the question.

Speaker 2

Your final question today is a follow-up from Yi Fu Lee of Cantor Fitzgerald. Please go ahead.

Thanks. Hey, Hugo and Sarah, just one quick follow-up on the subscription. When you mentioned subscription online to learn the outcomes, there are two products, right? I know it's still new. You're still going through it: certification journey and career journey. Can you tease us a little bit more? What are you thinking in terms of partnership with educational institutions, university, etc.? Are you going with, let's say, partnership with leading institutions like in America, etc.? In the career journey, are you partnership with large tech firms like, let's just say, Google, Microsoft of the world for the certification? Just want to get some understanding on that. I know it's still new.

Speaker 6

Yeah. Let me take that. On certification, the big unlock is historically, players like Udemy have worked on certification prep. You get, you know, millions of people getting into our platform to do certification prep. The process of getting certified was a different process, a disconnected process. What we are now doing is we're connecting the two in a very, very, very tight way. We're embedding it in the process of taking a class to kind of bring you along and encourage you to get to that certification. Instead of having 1 out of 10 learners really completing, we have a much higher number. This is a big pain point, not only on the consumer side, but on the enterprise. The number of L&D leaders who have told me, "It's great.

I get all these wonderful numbers that XYZ did the certification prep, but I have no data to confirm." You would think the learner, the employees, would be incented to tell their employer that they completed an AWS architect certification. It doesn't happen all the time. We're closing the loop and we're validating the outcome. This is what they wanted to see. That's an example of why we're kind of like trying to align ourselves more closely to close the loop and make it clear. On the career outcome, you know, in the past, we would create, you know, quasi bundle, and others do the same of like, "These are the classes that you need to take to become a data scientist." That's cool, interesting.

Now, if we can link it to the coaching you need to be able to become a great data scientist, if we introduce you to a community of other peers, if we link you to jobs offered from different sources to get to the outcome that you're looking, we can more credibly say that our product has a better ROI. That's the direction of travel. That's why we think also we're going to create some moat in a very, very, very interesting way because we're helping solve people's problems. At this moment in time, you're seeing all these new grads that are finishing university, not getting jobs. We're seeing a lot of them come to our platform, you know, almost as a finishing school. They're like they're building their portfolio of projects.

They're getting the coaching that they need to get the outcomes that they're hoping, which is a job and be part of the workforce. We want to be that solution.

Speaker 2

That concludes our question and answer session. I would like to turn the conference back over to Hugo Sarrazin for any closing remarks.

Speaker 6

I just want to say thank you, and see you next quarter.

Speaker 2

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