Ladies and gentlemen, thank you for joining us, and welcome to Coursera's Third Quarter 2024 Earnings Call. All participants are in a listen-only mode and this call is being recorded. After the prepared remarks, there will be a question-and-answer session. I would like to turn the call over to Cam Carey, Head of Investor Relations. Mr. Carey, you may begin.

Hi, everyone, and thank you for joining us for Coursera's Q3 2024 Earnings Conference Call. Today, I'm joined by Jeff Maggioncalda, Coursera's Chief Executive Officer; and Ken Hahn, our Chief Financial Officer. Following their prepared remarks, we will open the call for questions. Our earnings press release, including financial tables, was issued after the market close and is available on our Investor Relations website located at investor.coursera.com. This call is being simultaneously webcast, and more versions of our prepared remarks and supplemental slides have been posted. During this call, we will present both GAAP and non-GAAP financial measures. A reconciliation of non-GAAP measures to the most directly comparable GAAP measure can be found in today's earnings press release and supplemental presentation on the Investor Relations website. Please note, all growth percentages refer to year-over-year change unless otherwise specified. Additionally, all statements made during this call relating to future results and events are forward-looking statements based on current expectations and beliefs. Actual results and events could differ materially from those expressed or implied in these forward-looking statements due to a number of risks and uncertainties, including those discussed in our earnings press release, supplemental presentation, and SEC filings. And with that, I'd like to turn it over to Jeff.

Good afternoon, everyone. It's great to be with you all. We had a solid third quarter. Our operating and financial results emphasize the focus and execution we're driving across the organization, including content, product, and marketing in order to deliver on our most important long-term growth initiatives. Last month, we showcased our progress at our annual Coursera Connect Conference, which brings together our globally connected ecosystem of learners, educators, and institutions to collaborate on the future of learning and work. We showcased a more personalized, relevant, and engaging learning experience with rapidly expanding Coursera Coach features. We demonstrated new capabilities like Course Builder and academic integrity tools for the world's best educators and corporate authors to move quickly to create and scale high-quality content that is increasingly modular and interactive. And we helped forge stronger connections between university and industry to ensure education is able to keep pace with emerging technologies and a fast-changing global labor market. Before discussing the slate of announcements we made across our unified platform, I'd like to provide a brief update on how industry micro-credentials are increasingly addressing the needs of digital transformation and skills development and reshaping global higher education in the process. In September, we published a new Coursera survey of more than 1,000 higher education leaders, including Deans, Provosts, and Chancellors, representing more than 850 institutions across nearly 90 countries. The survey’s findings were consistent. Interest in micro-credentials is growing. Among higher education leaders, our survey found that 94% believe micro-credentials can strengthen students' long-term career outcomes. Half of the leaders surveyed said that their institutions currently offer micro-credentials, and those that don't, over two-thirds plan to adopt them in the next five years. They were also clear about the factors driving their support. Seventy-five percent said that students are more likely to enroll in programs that offer micro-credentials for academic credit, and over 90% believe that micro-credentials can strengthen long-term career outcomes for students and enable their institutions to provide the job-related skills demanded by employers. Despite the conviction in these findings, the pace of progress has been inconsistent, with obstacles to widespread adoption. Leaders cited challenges around awareness, integration with existing curriculum, and uncertainty about quality, all of which have been headwinds for our industry. But one of our key differentiators is our credit recognition initiative. Previously, I've mentioned our ongoing efforts to secure credit recommendations for industry micro-credentials from the American Council on Education, as well as the European Credit Transfer and Accumulation System, or ECTS, which now recognize up to 15 of our most popular entry-level professional certificates. Today, I'm pleased to share that we recently expanded our efforts to India, our second-largest country of registered learners. Coursera has achieved India's National Skills Qualification Framework or NSQF alignment for 10 professional certificates from Google and IBM. When paired with our growing suite of academic integrity tools, these advancements significantly enhance the credibility and recognition of online learning, helping to facilitate their acceptance by universities and employers for academic credit and professional qualifications. It's one of the reasons we believe India will be a critical market for Coursera for Campus, and we're seeing these trends occur at varying paces across countries and universities as they determine how to evolve their higher education offerings. One of the best examples continues to be our partnership with the University of Texas System. The Texas credentials for the Future program, a partnership between the University of Texas and Coursera, is one of the country's most extensive industry-recognized micro-credential programs, and it continues to deepen and scale. Students across UT's nine academic institutions have access to our professional certificates, equipping them with job-ready skills in a variety of fields. To date, more than 10,000 students have enrolled in one or more professional certificates, earning more than 25,000 certificates of completion. This fall, we announced the program will expand to include nearly 15,000 students enrolled at UT's five health institutions. Texas is home to one of the country's largest workforces of healthcare professionals. The healthcare industry, like many others, is becoming increasingly digital, and this trend is evolving the career path and skill requirements of the healthcare workforce even for advanced professionals. As role requirements change, micro-credentials in data, technology, and business are vital to supplementing healthcare qualifications. Software and IT skills are increasingly relevant to activities like managing patient portals, telehealth platforms, and mobile apps, along with the early stages of integrating AI into various administrative diagnostic and treatment processes. We are inspired by the innovation the UT System is demonstrating in enriching their broad-based curriculum and preparing graduates for the future workforce, and I am proud of the important role that our platform is playing in the process. And now I'd like to discuss updates across our three platform advantages. First, educator partners and our content catalog. Coursera's first advantage is our 350 educator partners and the high-quality courses and credentials that they create. We recently welcomed 10 new partners to the Coursera ecosystem, including leading universities like Said Business School from the University of Oxford, Dubai College of Tourism, IMD Business School, and Real Madrid Graduate School Universidad Europea. We are also rapidly broadening our partnerships with industry experts in fields like business, data science, technology, and health, including Adobe, Airbus, Amazon, Johns Hopkins Medicine, Liberty Mutual, and Xbox. Together with our trusted educators, we are establishing Coursera as the global destination for individuals and institutions seeking high-quality education and in-demand skills and credentials for the rapidly changing economy. For today's update, I'll focus on two key categories: entry-level professional certificates and generative AI content and credentials. Our entry-level professional certificates can create pathways to well-paying digital jobs, as well as earn credit towards a college degree. Our recent study suggests industry micro-credentials are poised to play an increasingly prominent role in the transformation of higher education, which is why we've been rapidly expanding this catalog with new partners, job roles, languages, and credit recommendations. At the start of this year, we had 45 entry-level professional certificates live on the platform, and we've added more than 25 in 2024 so far. This includes nine recent launches from new and existing partners, including Adobe, ADP, Amazon, Epic Games, IBM, and Microsoft, many of which are expanding the selection of careers on Coursera with new roles in game design, graphic design, sales, and more. Now turning to my second catalog update. Let's discuss our growing selection of generative AI courses and credentials. We now have over 500 generative AI courses and projects with more than three million cumulative enrollments to date, and we're seeing the pace of these enrollments accelerate in 2024 with six every minute. Although a broad selection of content is essential, we believe that achieving the innovation unlock and productivity gains that employers are looking for requires generative AI training that is specific to a job role or function. IBM and Microsoft recently introduced over a dozen new generative AI specializations in functions such as cybersecurity, data science, HR, marketing, and more, with instruction that was designed to help learners integrate the latest AI tools into their day-to-day work. However, our efforts extend beyond new content. We have continued to work with our partners to enhance our existing portfolio of certificates with generative AI content. Google has created several of the most popular courses and credentials on Coursera. Their AI Essentials course, launched earlier this year, has accumulated nearly 700,000 enrollments in a matter of months. Recently, they enhanced each of their six entry-level professional certificates with refreshed curriculum, including activities, readings, and videos that feature practical field-specific AI training directly from Google's industry experts. Our industry partners are at the forefront of emerging technologies. As they create the next generation of technology, tools, and services that will fundamentally reshape work and the labor market more broadly, we are proud of how our partnership is making education and skilling equally accessible on a global scale. This brings me to our second major advantage, the global reach of our platform. This quarter, we added more than seven million new registered learners, growing our global base to 162 million by the end of September. Additionally, we grew the number of paid enterprise customers by 19% to over 1,560 institutions with recent additions spanning all verticals. To create more value for our rapidly expanding ecosystem, we continue to invest in our platform's third advantage, which is product innovation. Our innovation efforts are focused in areas where we can uniquely leverage generative AI across our platform, including content, data, technology, and marketing, to redefine the experience of our learners, educators, and institutional customers on Coursera. The advancements we are making with Coursera Coach give an early indication of how AI will transform both learning and teaching. Since Coach launched as a learning assistant, it has supported over one million learners, leading to higher quiz pass rates, faster grading, with more personalized feedback and more lessons completed per hour. And we're rapidly building on the initial Coach use case with three new enhancements. First, Coach-procured guidance will help learners explore career paths and identify transferable skills, recommending tailored learning paths based on their experience and goals. We expect it to launch later this year and be an important complement to our career-based discovery experience currently rolling out in the consumer segment. Second, Course Builder, our generative AI-powered authoring tool, will begin piloting the integration of Coach for instructional design support in the coming months. Coach will act as a thought partner for the course-building authoring experience, giving educators and authors a personal instructional designer to help in designing and refining course content, suggesting course modifications, and upholding Coursera's pedagogical best practices. Since launching in March, Course Builder has been used to create more than 700 new custom courses, which have logged over 135,000 learner enrollments. With the coming Coach capabilities, we're excited to see how our customers and partners will use Course Builder to further accelerate course customization and personalization at scale. The last enhancement is Coach for interactive instruction. In the earliest days of online learning, learning was passive, simply sitting back and watching a video. Coursera and the launch of MOOCs in 2012 advanced us from passive learning to active learning, where learners would watch videos and then write reflections and take assessments. With AI, online learning is now entering its third stage, advancing us from active learning to interactive learning, and a new Coach capability is now live in the hands of instructors to do this. We've just launched a new capability that makes Coach an extension of the instructor. The feature allows an educator to give Coach custom instructions and knowledge, which Coach then uses to deliver personalized interactive instructions to students on a scale that was unimaginable before generative AI. We started with text-based Coach dialogues. In the coming months, we'll also add other interaction types, including modalities like audio. Educator partners like DeepLearning.AI, Google, the University of Michigan, Vanderbilt University, and others have already started integrating these new teaching methods into their courses and credentials. And I'm pleased to share that Google Gemini is the large language model that is powering interactive Coach dialogues on Coursera. To wrap up my opening remarks, I want to provide an update on our efforts to reignite the next chapter of growth, innovation, and agility as we better position Coursera for long-term sustainable growth. One of the most significant technology shifts of our lifetime is underway. Navigating the near-term environment requires an organization that is focused and nimble. As we discussed earlier this spring, I have flattened my leadership team structure to spur faster decision-making and foster increased collaboration across our platform, including product, content, and marketing. As you can see in the nearly 700 basis points of adjusted EBITDA margin we intend to deliver this year, we have been disciplined about pacing our expense structure to ensure we build a viable long-term business. Going forward, we are committed to undertaking a broader expense reduction initiative. This includes a reduction in our global workforce of about 10%, which will allow us to better prioritize existing resources on core capabilities and create the capacity for future investments that are aligned with our three most important growth initiatives. First, expanding access to affordable, flexible, and job-relevant credentials that could help millions of learners discover, unlock, or advance their careers through our consumer segment; second, supporting our Coursera for business customers as they navigate a new era of skilling imperatives, helping them harness the potential of emerging technologies and ensure their talent is prepared to keep pace with our evolving economy; and third, growing our Coursera for Campus vertical, which continues to demonstrate a more scalable approach to supporting academic institutions looking to transform higher education and modernize the college degree, particularly in international markets. We have a clear strategy with distinct assets, and we're operating from a position of financial strength, including a healthy balance sheet and a consistent track record of delivering growth with increased profitability every year as a public company. In 2024, we made important strides in strengthening our competitive advantages, accelerating the pace of our content engine and product innovation, and driving productivity improvements that position us for long-term profitable growth. Looking to 2025, we expect to build on this momentum, focusing our resources on the opportunities where we can further differentiate and enhance the value of Coursera's platform for the millions of learners, educators, and institutions that we serve. I'd like to now turn it over to Ken. Ken, please go ahead.

Thank you, Jeff, and good afternoon, everyone. In Q3, we generated total revenue of $176.1 million, which was up 6% from a year ago as we navigate slower top-line growth in the near term. Our results continue to demonstrate our commitment to driving sustainable growth targeting growth opportunities while also expanding financial and operating leverage, no matter the environment. This is highlighted by our strong bottom-line performance year-to-date, which is leading us to raise our adjusted EBITDA margin target by 170 basis points for the full year to 5.4%. Additionally, the expense reduction initiative Jeff outlined is intended to focus on our core capabilities while extending our track record of delivering consistently increasing leverage over the past several years as a public company, and prior. We expect this initiative to generate at least $30 million in annualized structural cost savings, creating capacity for targeted investments as well as incremental profitability that will be reflected in our full year 2025 financial outlook provided next quarter. As we navigate more constrained growth in the near term, we will ensure that the business remains fundamentally strong while we pursue efforts to return to a growth company revenue trajectory. Please note that for the remainder of this call, as I review our business performance and outlook, I will discuss our non-GAAP financial measures, unless otherwise noted. For the third quarter, gross profit was $98.1 million, a 56% gross margin, up from 51% in the prior year. Total operating expense was $89.6 million or 51% of revenue, an improvement of six percentage points from the prior year quarter on continued operating discipline across all functions. Net income was $16.6 million or 9.4% of revenue, and adjusted EBITDA was $13.3 million or 7.6% of revenue. Now let's discuss cash performance. We generated strong free cash flow of approximately $17 million, which is inclusive of $6 million in purchases of content assets. At the start of this year, we began treating these investments like other categories of capital expenditures, effectively lowering our free cash flow computation. In Q4, we expect our content production investments and the associated treatment of CapEx and free cash flow to be more pronounced as we target utilization of the full $20 million budgeted for this year. I've been well pleased with our substantial generation of free cash flow, inclusive of those content investments. Year-to-date, we've delivered more than $50 million in free cash flow further bolstering our strong balance sheet. We ended the quarter at approximately $719 million of unrestricted cash and cash equivalents with no debt. Now I'd like to discuss the performance of our segments, starting with Consumer. Consumer revenue was $102.3 million, up 3% from the prior year on growth in Coursera Plus, including recent certificate launches from industry partners. Revenue growth was in line with our expectations coming into the quarter, but we are seeing some softer signals in global consumer trends, specifically month-to-month retention, which are tempering our fourth quarter revenue expectations and factored into the outlook I'll discuss shortly. Segment gross profit was $55.3 million or 54% of consumer revenue, up from 52% in the prior year period. Top of funnel activity rang strong as Q3 is our seasonal peak for new learner additions. Consistent with the geographic trends we discussed in recent quarters, we once again saw a higher proportion of traffic coming from regions outside of North America, which, on average, correlates with the lower lifetime value. Moving to our Enterprise segment. Enterprise revenue was $60.4 million, up 10% from a year ago on growth in our business, campus, and government verticals. Segment gross margin was $42.3 million or 70% of Enterprise revenue compared to 68% a year ago. The total number of Paid Enterprise Customers increased to 1,564, up 19% from a year ago. Our net retention rate for Paid Enterprise Customers was 89% and a reflection of the transitory budget dynamics we've discussed in prior quarters. Despite that disappointment, we continue to see signs of stabilization in the corporate learning market in the third quarter, and we'll be closely monitoring the budgetary environment as we approach year-end. Finally, our Degree segment. Degrees revenue was $13.4 million, up 15% from a year ago on growth in new students and scaling of recent program launches. The total number of Degrees students grew 29% from a year ago, to 26,455 primarily due to some sizable new cohorts in more recently launched Indian programs. As a reminder, there are no content costs attributable to the Degrees segment. The Degrees segment gross margin was 100% of revenue. We expect the Degrees in broader market serving universities to continue to evolve, including opportunities like Coursera for Campus, and we intend to be highly targeted in the partnerships, programs, and capabilities that can be best served by our platform. Now on to our financial outlook, which reflects both our latest view of more muted consumer top line trends and the strong operating discipline demonstrated throughout the year. For Q4, we are expecting revenue to be in the range of $174 million to $178 million. For adjusted EBITDA, we're expecting a range of $4.5 million to $6.5 million. For the full year 2024, we anticipate revenue to be in the range of $690 million to $694 million. And as I highlighted earlier, for adjusted EBITDA, we are increasing our range to $36.5 million to $38.5 million and raising our annual adjusted EBITDA margin outlook by 170 basis points to 5.4%. We have a strong record of successfully managing our cost structure, including pacing our investments with the trajectory of our top line. As we navigate near-term trends to better position ourselves for future growth opportunities, I remain pleased that our disciplined historic growth and financial management creates strength, stability, and strategic optionality as we execute on our long-term strategy to lead our large, early, and dynamic markets. Ultimately, delivering growth and leadership in these substantial markets is how we intend to create value for shareholders and our learners, and we are operating with financial discipline and strength in order to enable and bolster our return to higher growth. I'll now turn the call back to Jeff for closing remarks.

Thanks, Ken. We are proud of Coursera's role and especially the partners who join us in ensuring learners everywhere have access to the highest quality education. For many, belief in our collective responsibility is why they choose to join in our shared mission, and I'm excited that our educator community now includes Adobe. Last week, they launched their first entry-level professional certificates which were unveiled alongside an expansion of the Adobe Digital Academy, a program aimed at equipping next-generation learners and teachers with AI literacy, content creation, and digital marketing. Like many of our partners, Adobe recognizes that emerging technologies will fundamentally reshape the relevant training, skills, and credentials in their industry as well as the labor market more broadly, and we are thrilled that they have chosen to collaborate with Coursera in order to empower the next generation of creative talent. Now let's open up the call for questions. Thank you.

Your first question comes from the line of Stephen Sheldon with William Blair. Please go ahead.

Hey, thanks. First, is there a way to frame how much monetization in your consumer segment you're getting from AI-related courses? Is that becoming a notably bigger part of the mix? And then can you just give some more detail on where things have weakened in Consumer more recently?

Yes, thanks, Stephen. This is Jeff. Regarding AI monetization, we don't provide specific breakdowns. In the initial phases, much of the content generated with AI was in a course format, which takes longer to develop compared to long-form professional certificates and specializations. The courses aren't based on subscriptions, while the longer formats are. So at the beginning, the revenue was relatively minimal. However, as we've introduced more long-form content and upgraded several courses, we've seen growth. Still, it doesn't represent a significant portion of the overall revenue for the Consumer segment at this time. We're experiencing the highest demand for searches and enrollments in generative AI content compared to other types, with about six enrollments every minute in this area. We continue to focus heavily on the platform, and believe we are in the early stages of individuals and institutions recognizing the necessity for AI-related content and credentials. Our content creation process is becoming faster and more cost-effective. As for the consumer funnel, we need to attract many learners, convert them, and retain them. Looking at the top of the funnel, we've seen seven million new registered learners, which is a strong number for the quarter. However, there are some signs of softness in global consumer trends, particularly in retention. Conversion rates remain steady, but retention rates are under pressure. There might be macro factors influencing this, but it's difficult to pinpoint exactly what. Our focus has been on launching more content and credentials while enhancing both learning and authoring experiences. Historically, the consumer segment has been driven by job market changes, which create both opportunities and challenges due to technological shifts. We believe we are at the start of a significant wave of disruption where people will need to acquire new skills and demonstrate their capabilities through credentials to show they can be effective in a company. We think we have the content and products to support this shift, and we're at the beginning of this trend. Historically, disruptions like COVID have significantly impacted the consumer segment, and we're hopeful that we are at the early stages of a similar disruption.

Got it. That's helpful. And maybe just a follow-up, maybe just talk about the rationale for cutting more of the cost base now and at a very high level, kind of where you might be focusing those efforts?

Yes. So I'll start with sort of maybe thinking about it. Ken, I don't know if there's any numbers that you want to get into whatever, but when we really think about it, I mean, to a large degree, our strategy has been to leverage many of the key assets that we're investing in as possible. So one technology platform, one data capability, one platform of content and credentials, and then sell to consumers, sell to the institutions, sell different formats, including professional certificates and degrees. In the last many years, that very broad approach has given us huge top-line growth, and we've been able to amortize nicely these assets that we could sell across many segments. Where that has changed a little bit, I think, in the current environment is some of the use cases have very high product market fit, there's a very clear buyer, it's very clear content credentials are delivering a lot of value. It retains well. The use cases are changing a bit, and there are certain use cases where, for the time and money we spend winning that deal or creating that piece of content, it just isn't having the kind of financial impact. So we did a pretty simple analysis to say across regions and segments where we're seeing the biggest growth and where are we seeing the best leverage in terms of sales and marketing against revenue, R&D against revenue, and G&A is generally allocated, and we said, let's just put more resources against those places where we're seeing more growth with more leverage, and let's pull back on those places where we're seeing less growth and less leverage, and it really just comes down to, in my opinion, value delivery. Where are we delivering real differentiated value, that's where we're going to have the highest growth in NRRs. And so that's essentially what we did. We said, let's go after the higher growth, higher leverage opportunities and try to simplify and focus more of our efforts on those parts of the businesses that are working the best. Ken, I don't know if there's anything you'd want to add.

Yes. Stephen asked about the timing as well. And so the timing and, of course, exactly the way we approached it was to preserve the growth areas. The timing is setting us up as part of our planning for next year. This is about EBITDA for next year. We've been very disciplined as we discussed in the script as to always improving our leverage and our EBITDA margin to what rate we have allowed to vary. But this is setting up for 2025 from both an EBITDA perspective and to drive as much growth as we can within that context. I guess I'd say, and Jeff described broadly how we're doing it, emphasis one concept around focusing on growth is on the dev side, we'll plan to end next year with more headcount than we have ending this year. We're seeing right now a lot of opportunity on the product side on AI. I think it's early before we see the results, but I think that's one example specifically to illustrate how we've thought about it.

Your next question comes from the line of Ryan MacDonald with Needham. Please go ahead.

Thank you for taking my questions. To explore further on the Consumer comments, could you share any insights regarding the monetization life span of some of the content in Consumer? Additionally, how has this changed over time? Regarding the observed decline in retention internationally, are there particular subject areas or topics where retention has decreased more rapidly than you anticipated?

Yes. I'll start here, and then Ken, feel free to chime in. So on Useful Life, it really depends on the title. A lot of what we're doing now, we talked about a bit in the script, we're upgrading an awful lot of pieces of our more popular titles with our partners to include AI. Our ability to refresh content is getting better and better and to help our partners do that, and that being said, if you look at sort of the difference in ARR per month by title. Generally speaking, it declines over time. Some types of content seem to decline a little bit faster than others. We've said in the past, and so I'll just remind folks on the call here, these entry-level professional certificates have been really the engine of our consumer segment growth. They're for people generally who are thinking about starting or switching careers. They come from top branded companies, and they teach skills required to the portfolio skills required to do an entry-level job. It is really ideal when there are a lot of job openings that people want to go get, and they need to get the skills and the credentials to go do them. We have seen historically that the lifetime value of learners in these entry-level professional certificates has generally been higher than many other titles. The retention rate has been higher, is kind of what I'm saying. We have seen, especially in North America, some of the softness on month-to-month retention happening among these entry-level professional certificates. I cannot tell you exactly why, but macro factors are likely at play just as in years ago a lot of the macro factors were great tailwinds, we're thinking that there might be headwinds right now. But probably not at all times and not at all regions. But those are the titles that typically have the highest lifetime value, and we're seeing some of the fall in retention rates in those titles. Ken, anything you'd add to that?

No.

Great. And then maybe following up on the enterprise segment. So obviously, a nice quarter in terms of accelerating growth in terms of logo additions, but NRR kind of continues to come down here. Can you just within the pieces of Enterprise talk about maybe where you're seeing the most softness on the spend that continues to kind of drive NRR down? And I guess, what level of visibility do we have going into the fourth quarter here on sort of the renewal business and sort of close rates there?

Yes. Well, I'll talk a little bit about NRR and closes as well, sort of what are people interested in. NRRs are clearly still under pressure. We mentioned last quarter and the quarter before, and I think in the script we talked about transitory budgets. A lot of these transitory budgets are sort of the pandemic dollars that a lot of governments had to spend to upskill and otherwise, try to help people remain productive during that period when they were locked at home. Some of those budgets are less durable, and that's where we have continued to see some of the weakness is in the government sector. But on the question of visibility, we are seeing in Coursera for Business among sort of the North American and EMEA regions, an awful lot of interest in generative AI. Certainly more in terms of pipeline development and bookings in North America and Europe, and we are seeing in other parts of the world, we are optimistic that we're seeing the beginnings of companies not just talking about AI, but getting strategies in place, realizing that you get a strategy, then you buy some of the technology, and then you train people on how to use it. Like with cloud computing, like with many of the other technologies, there is a bit of a sequencing here. As we think about demand and retention, generative AI in North America or Coursera for Business has definitely been one of the highlights. If this persists, we're feeling like we might be seeing some stabilization really supported by the interest in generative AI training. Ken, anything you would add to that?

Yes, Jeffrey, probably talked a little bit about it.

Yes, of course. Coursera for Campus, it's also interesting. I mean the number of universities recognizing that this technology is not just changing the demand from employers of what graduates they need in terms of skills. But students saying, do I want to get a college degree and what kind of programs I want to take and what do I need to learn in order to get a job? That is changing very rapidly, much faster than schools can keep up. In addition to the needs in terms of skilling students so they can get jobs, there's the whole teaching and learning experience that happens at school that is being fundamentally transformed by this technology. That's what we talk about Coach for the students and coaching course builder for the instructors. We are definitely seeing a lot of interest in generative AI and Coursera for Campus and in particular, we put this in the script quite a bit as well. When you integrate this cutting-edge technology and other job-relevant contents, especially generate in do college curricula where the student gets credit for the college degree, we see very strong NRR and good expansion. That's a use case that, again, kind of the early part of it, we think, a bigger wave of higher education, a $2 trillion market saying the only way to keep up is to integrate something like Coursera so that we can improve our curriculum and help attract students and health campus in general. So we are seeing some bright spots in NRR in that segment for Services.

Your next question comes from the line of Rishi Jaluria with RBC. Please go ahead.

Thank you for addressing my questions. I would like to further discuss the current growth rates and the factors contributing to the softness we are experiencing. You've provided some insights into the consumer segment and previously discussed the enterprise side. However, if we take a step back, there are several secular tailwinds in play, such as the evolving landscape of education, generative AI, and the increasing need for individuals to upskill and reskill, as well as some areas of economic softness we've observed over the last couple of years. Given these factors, why aren't we seeing higher growth rates? What do you think needs to occur, aside from a macroeconomic recovery, for those growth rates to trend back towards double digits? Could you help clarify these points? I also have a quick follow-up.

Thank you, Rishi. I'll provide a high-level overview as you requested. We strongly believe that the need for individuals to acquire new skills and credentials will create significant demand, enhancing their productivity in the workforce. I concur that we are poised to be leaders in AI, though it's still uncertain, as current growth rates do not reflect that optimism. I'm focused on both individual and institutional readiness, where much of it begins with institutions. Businesses, governments, and campuses face challenges; campuses, in particular, are quite rigid and currently experiencing unprecedented disruption in higher education. They are struggling to adapt quickly, which makes it hard for them to keep pace with rapid changes. Without our support, it's unlikely they'll manage this transition effectively. As a result, growth rates are slower than we would prefer, but I firmly believe this is a large market we are strategically positioned to tap into. Institutional readiness is crucial, and although it's not fully there yet, there's a growing recognition among university leaders that significant changes are looming due to this technology. On the business side, I must admit I misjudged the speed at which companies would adopt generative AI, expecting rapid take-up and productivity benefits to drive a stronger focus on learning and credentialing. However, we are now witnessing a shift from discussions to actions, especially in North America. I anticipate that as companies recognize productivity gains—estimated by McKinsey at $4.4 trillion—these benefits will not be uniform across job functions. Areas like customer support will see faster adoption compared to others. McKinsey highlights the expectation of major transformations in customer support, software engineering, research and development, as well as sales and marketing. I believe that as productivity improvements materialize through the use of these technologies, businesses will seek out employees who are adept at utilizing them, whether those individuals are already part of the company or new hires who may not even be in the same country. Surprisingly, employee sentiment about generative AI tends to be more optimistic in India than in the United States, where many are feeling apprehensive about job security. Although we haven't observed any immediate impact from this hesitation, I expect that businesses will motivate their employees to adapt to new methods of working and learning. I foresee that our current position puts us at the forefront of these developments. Furthermore, I want to highlight the value we have been generating through our partnerships and the content we’ve been creating for learning and teaching. Although this value has not yet translated into revenue, it positions us well for future growth, especially when institutional readiness aligns with the current opportunities. Ken, do you have anything to add?

Yes. It's not just theoretical anymore, at least in terms of learner experience. I mean, we launched Coach in May of last year. So we've been in market with generative AI on many products. We've now had over one million people using Coach. We see how they're using it. They really like it. They are learning faster. That's one of the things putting pressure on our retention rates as people are finishing courses and specializations faster, but they really like it, the translations have been helping. And on the Course Builder side, we're seeing a lot of institutions saying I can take these world-class courses and tailor them just to my company's needs. So it's no longer for us theoretical that there's a lot of value there and customers see the value and benefit from it. It's still early, and we have not seen that show up in revenue. But our rate of progress is high. As we think about where we're going to focus our resources and where we're focused on the cost reductions, we're going to continue to push hard on value delivery from the content engine and value delivered from product innovation.

Got it. Okay. That's super helpful. Maybe just a very quick follow-up because that was a very thorough answer. But just how should we be thinking about capital deployment? You've got nearly $0.75 billion of cash net cash on the balance sheet. Stock is trading at multiples that are below 1x revenue, approaching 0.5x revenue. If you are, in fact, so optimistic about the business and all these different growth drivers and the path ahead, I guess, why not take the opportunity to buy back shares at these incredibly low levels?

So Rishi, this is Ken. That's a fair question and certainly one we've thought about. Overall, considering our position in the market and the cash we have, we are generating a significant amount of free cash flow, which adds more weight to that question. We don't require a specific trigger. At this moment, where growth has slowed somewhat, maintaining financial stability is important for our customers. Furthermore, we still see strategic opportunities ahead. It has been challenging across the sector, but we don't believe that just because others aren't growing, we shouldn't aim to grow either. We should be growing faster and working towards returning to double-digit growth. We believe there are strategic opportunities, and even though we haven't capitalized on them yet, we plan to remain active. You might recall that last quarter we faced some notable deal expenses due to not finalizing a deal. We are going to continue to look for active opportunities, and if we ever felt that pursuing stock buybacks was the best course, we would certainly consider it at these low price levels.

And if we did, it wouldn't be the first time. We did complete some share repurchases, and not with...

Just this year, right, we've maintained this cash balance we bought back $40 million worth of stock this year. So spot on. So the concept isn't foreign to us, and it's a good question, and we'll continue to monitor. But also hopefully look for us to be more active strategically.

Your next question comes from the line of Joshua Baer with Morgan Stanley. Please go ahead.

Great. Thanks for the question. A lot of the prepared remarks were more around the consumer as far as weakness. On the Q&A, definitely, we got into enterprise. So I want to make sure I understand the different business far as the change from the prior guidance. So maybe like focusing on Q4, what was implied before to what it is now, it's like $11 million or $12 million lower. Like how does that get split up between the different businesses? I guess part of the question, this will be my follow-up is on the enterprise, like was there incremental churn? Or was this some of those government contracts that you had previously talked about churning? Just wondering around that drop in net retention rate, like what was incremental versus last quarter?

Yes, it's a good question, Josh. The reason we focused on the prepared remarks on the consumer business is because that is where the vast majority of the weakness occurred. On the enterprise side, just the business model from a revenue perspective, it's relatively predictable in the near term, certainly. A lot of that revenue is from historic contracts a year plus on a year-plus previous. The only thing that does affect it on the margin is the renewals. The renewals were slightly weaker than last quarter, but not materially. So the miss is primarily consumer.

And on the NRR, it is mostly persistence of things that we had talked about last time in terms of what's dragging on the NRR.

Your next question comes from the line of Taylor McGinnis with UBS. Please go ahead.

Thank you for taking my questions. My first question is about the consumer side. I believe that part of the implied acceleration in the previous guidance was influenced by the rollout of some recent content launches that were mentioned in the prepared remarks. Are you experiencing the traction that you expected since those launches went live? Is there any indication of softness related to conversion rates? If so, could you provide insight on why that might be, including any delays or other factors we should consider?

Yes, Taylor, this is Jeff. We have been actively working on expanding our content offerings. We introduced 10 entry-level professional certificates, which are significant contributors to our consumer segment. These certifications come from leading brands like Adobe, Amazon, Epic, IBM, and Microsoft, along with 20 new and improved generative AI certificates. We are entering the next phase of our generative AI strategy, which we refer to as the Gen AI Academy Strategy, consisting of three main components. We launched an AI Academy last November starting with Generative AI for Everyone. These are general-purpose courses focused on understanding AI, its functionality, and responsible use. The second component is Generative AI for Executives, and the third is Generative AI for Teams, which focuses on job-specific generative AI titles. Our partners have begun to create more of these targeted generative AI titles. While we have launched a handful, we expect these role-specific titles to be vital in enhancing productivity and improving work quality. We are enthusiastic about these developments, though we are still in the early stages. In response to your question about performance, it’s still too soon to gauge. We have increased our production rate, but the traffic for the new titles has not matched the high engagement seen with major launches like those from Google in previous years. Conversion rates have remained stable, which is encouraging. However, as we discussed in relation to a previous question, our overall consumer retention is slightly lower than before, affecting both existing and new certificates. This seems to be influenced by broader market factors rather than the quality of the new titles. We anticipate that the third component of our Generative AI Academy will gain traction as more companies emphasize the necessity for employees to learn these skills to achieve productivity improvements. In summary, our content creation is strong, conversion is solid, but overall growth in user numbers is lacking, and retention rates are down. Consequently, we're generating less revenue from these new titles than we initially expected in the first half of the year.

That's very insightful. My final question is about the $30 million in cost savings you mentioned. It seems there will be areas where you're planning to scale back, which could lead to lower growth and less leverage. As we consider the implications of that change, are there any potential revenue challenges we should be aware of in any segments? Also, how should we view the various segments overall in light of this initiative?

At a high level, I'll outline the guiding principles. We won't be sharing all the details, but we analyzed growth and leverage to identify where we're seeing the most growth relative to our spending. Our initial focus was on sales and marketing leverage, followed by some examination of R&D, as we have dedicated resources allocated to specific markets and segments. We believe that the recent cost reductions will not significantly affect our growth rate. We continue to invest in content and product innovations like Coach and Course Builder. Our aim is to reduce spending in ways that minimally impact our growth. In fact, I believe the value we're delivering in terms of content and products surpasses where many of our customers currently stand. Many of the titles and product features are new to them, and they will ultimately recognize their value. Therefore, we do not intend to reduce the delivery of value. We are looking to scale back mainly in sales and marketing in certain market segments where we aren't seeing sufficient traction, as we don't want to allocate resources in those areas. Ken, do you have anything to add?

Yes. Broadly, just to acknowledge that anytime there's a change like this, it creates risk on the revenue line items and just described well how we thought about the approach. I guess the one thing I'd say is where we started, the process was we started by looking at the growth areas and what we are going to support. So again, with the emphasis on where we're going to grow in 2025 and beyond, and from there, we paired around that in areas that weren't required to get us there.

Yes. One final thing I want to mention is that whenever new technology emerges or significant changes occur, organizations respond at different rates. We frequently refer to pacing our investments in line with our growth rate. There's also another aspect of pacing, which involves aligning our investments with the market's readiness to adopt new innovations. I believe we are at the forefront of this, but we need to be cautious not to move ahead too quickly compared to the market's preparedness. The value we are delivering far exceeds the incremental revenue we are receiving, so we want to ensure we don't introduce too much before the market is ready to take it in. Additionally, we are considering where on the product side we see the most immediate need for value adoption and the potential to monetize the features we are providing. Thus, we are pacing our efforts according to market adoption, not solely based on our internal growth rates and leverage.

Your next question comes from the line of Jeffrey Silber with BMO Capital Markets.

Okay. So I know it's late, so I'll just ask one. You had a pretty sizable adjusted EBITDA beat in the third quarter. I guess the implied guidance for the fourth quarter looks like you might be coming in a little bit below that. Were there any timing of expenses potentially that benefited the third quarter that you might shift into the fourth quarter?

No, Jeff. It's Ken. There was nothing specific. What we do is we pick a target EBITDA margin for the year and then try to grow as much as we can within that. We're attempting to invest for growth wherever possible. In Q4, we'll see some increased expenses because we didn't spend enough. We do not aim to meet an EBITDA target; we try to come in where we commit. We haven't been able to spend enough in the last couple of quarters, which is why we increased our guidance for EBITDA. We have had a bit more opportunity for spending in areas that should contribute to long-term growth, which we can address in Q4. There will be some additional spending, but no delays from quarter to quarter.

That wraps today's Q&A session. A replay of this webcast will be available on our Investor Relations website. Thank you for joining us. Take care.

Ladies and gentlemen, that does conclude today's conference call. Thank you for your participation, and you may now disconnect.