Good day, and welcome to Udemy's Third Quarter 2023 Earnings Conference Call. All participants will be in a listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please also note that this event is being recorded today. I would now like to turn the conference over to Dennis Walsh, Vice President, Investor Relations. Please go ahead.

Thank you, Joe. Joining me today are Udemy's Chief Executive Officer, Greg Brown; and Chief Financial Officer, Sarah Blanchard. During this conference call, we will make forward-looking statements within the meaning of federal securities laws. These statements involve assumptions and are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those discussed or anticipated. For a complete discussion of risks associated with these forward-looking statements, we encourage you to refer to our most recent Form 10-K and Form 10-Q filings with the Securities and Exchange Commission. All forward-looking statements are based upon information currently available to us. We caution you not to place undue reliance on forward-looking statements, and we do not undertake or expressly disclaim any duty or obligation to update or alter our forward-looking statements, except as required by applicable law. In addition, during this call, certain financial performance measures may be discussed that differ from comparable measures contained in our financial statements prepared in accordance with U.S. Generally Accepted Accounting Principles, referred to by the Securities and Exchange Commission as non-GAAP financial measures. We believe these non-GAAP financial measures assist management and investors in evaluating our performance and comparing period-to-period results of operations in a more meaningful and consistent manner, as discussed in greater detail in the supplemental schedules in our financial earnings release. 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 on the website. With that, I will now turn the call over to Greg.

Thank you, Dennis, and good afternoon to everyone on the call. Udemy once again delivered results that exceeded our expectations for both revenue and adjusted EBITDA. On a year-over-year basis, Udemy Business revenue increased 30%, while consumer revenue increased 1%. We also raised our outlook, which now projects our first full year of positive adjusted EBITDA well ahead of plan. During the quarter, Udemy Business customers remained highly engaged with our platform, as demonstrated by the 14% year-over-year increase in logos and the 114% large customer net dollar retention rate. We added new or expanded existing relationships with global customers, including Assurant, Deutsche Telekom, Schlumberger USA, Shell, and Walmart Chile, to name a few. We closed many six-figure deals during the quarter, including three $1 million-plus deals, contributing to Udemy Business ARR growth of 26% year-over-year. Compared to the prior quarter, deal velocity improved, our win rates increased, and we're seeing higher average enterprise plan contract values. Given these results, we are very encouraged by the demand on both sides of our business. While still too soon to call a bottom, we are seeing customers beginning to ease their budgetary constraints, although still below historic norms. As customers plan for 2024, it is clear that investments in upskilling and reskilling are a key focus. Our conversations with CLOs across the globe suggest that developing skills-based practices will be a top priority for the foreseeable future. This gives us confidence in the significant opportunity for long-term growth. With that in mind, today, I wanted to share some insights into: first, what is driving the transformative shift that is reshaping companies' approach to skills-based practices; and second, the strategic investments Udemy is making now to capitalize on this opportunity and drive long-term profitable growth. Let's start with the market trends. The current environment is characterized by an accelerated pace of innovation, driven by digital transformation, the emergence of generative AI, and the widespread adoption of hybrid work. These profound forces are reshaping the way we work and redefining the skills needed to drive future growth and success. A study from McKinsey underscored the urgency of this situation, revealing that 87% of executives are already identifying skills gaps within their organizations. In addition, the World Economic Forum found that 60% of all workers will need retraining before 2027 as skills rapidly evolve or become obsolete due to automation. It is abundantly clear that we are in the early innings of a dramatic global transformation, one that businesses must fully embrace to enhance productivity, foster innovation, and create sustainable value. This new reality demands the immediate and ongoing attention of all organizations and workers. Many forward-thinking companies are already responding to this challenge by recognizing skills as the new currency within their organizations. Global enterprises such as IBM, Bank of America, Kellogg's, and Walmart, as well as multiple U.S. state governments, are leading the way by prioritizing skills proficiency, including implementing credentialing programs and easing degree requirements for certain roles. Having a clear skills-based transformation strategy is critical for a company's future success. It ensures talent decisions are based on what workers actually are capable of achieving. A study by Deloitte reinforces this, revealing that organizations embracing skills-first practices are 107% more likely to place talent effectively, 52% more likely to foster innovation, and 57% more adept at anticipating and navigating change. We firmly believe that companies aiming to stay ahead of the pace of change must invest in talent mobility to support career growth and attract and retain top-tier talent. In today's world, people are as vital as technology in creating sustainable differentiation. For example, a prominent global airline partnered with Udemy Business this quarter to enhance the digital skills of its employees. The company chose Udemy as its learning partner to increase digital literacy, improve productivity, bridge skills gaps, and retain talented staff. Udemy Business was chosen over an incumbent because of our demonstrated ability to develop and implement a skilling strategy, the breadth of our skills content, and skills validation capabilities. Layering on to that, AI continues to reshape industries across all geographies. Organizations and professionals must understand how generative AI will impact individual roles and how it can be integrated into transformation strategies to foster agility, resilience, and competitiveness. During the quarter, a large global pharmaceutical company doubled its seat count with us in a multiyear expansion deal to address the full extent of the AI opportunity. The CEO set a mandate for upskilling the entire workforce on this technology in order to increase the speed to market for its pipeline of drug candidates, drive efficiencies throughout the entire company, and protect its data with enhanced compliance. Udemy is supporting our customers' efforts to achieve these critical business objectives by providing its employees access to relevant AI content, curated learning paths, and certifications. The demand for generative AI-related content on the Udemy platform is remarkable. Currently, we offer an extensive selection of over 1,500 courses, which have collectively garnered more than 2.5 million learner enrollments. The organic creation of content in response to demand reaffirms the effectiveness of our marketplace model, which seamlessly adapts to evolving technology and learner needs. It's important to note that as technology continues to advance and new demands arise, our platform organically fosters the creation of fresh, relevant content. Generative AI is a prime example of this dynamic process. And looking ahead, with further technological advancements on the horizon, we are confident in Udemy's ability to lead by providing relevant, high-quality content that will continue to attract a growing number of learners and customers. As demand for creating skills in digital transformation strategies increases, we will align our own strategy as well as our investments in product innovation, brand, and go-to-market to capture that demand. Heading into the New Year, you can expect to hear more about our investments and new campaigns that we believe will have the potential to dramatically increase Udemy's brand awareness globally. As part of those efforts, we plan to bolster our go-to-market engine and lean into strategic partnerships that extend our reach more rapidly and into new markets. We recently announced a partnership with Docker, a leading provider of development tools, and have more exciting collaborations with technology leaders to announce over the next few months. These partnerships will allow us to expand and introduce Udemy to millions of new learners. For example, we are already seeing significant traction with our AWS partnership. During Q3, total contract value of bookings through AWS increased 214% quarter-over-quarter, and we grew the number of deals transacted by more than five times year-over-year. Over time, we anticipate our strategic partnerships will become even more impactful. In addition, we remain bullish on the opportunities that generative AI brings to our business and have built a robust product roadmap that will supercharge the Udemy experience. We are building highly relevant generative AI-enabled capabilities for three distinct personas: our enterprise customers, learners, and instructors. In response to the evolving needs of our enterprise customers, Udemy is committed to delivering tailored solutions. With industries undergoing rapid transformations, organizations are turning to Udemy to address their specific upskilling requirements. To serve them better, we're developing a cutting-edge generative AI-powered skills mapping system. This innovative solution, when integrated with our extensive course catalog of more than 210,000 courses, positions us at the forefront of addressing each customer's precise skills demands. Leveraging generative AI, we will automate the creation of personalized learning paths and guidance, ensuring that every professional skill development need is met. For learners, we are focused on enhancing the experience on our platform. We are harnessing the power of generative AI to guide learners directly to content that aligns precisely with their unique needs to optimize their personalized experience. For example, we recently introduced smart search capabilities that enable learners to access bite-sized microlearning opportunities within our vast course catalog. This not only streamlines the experience, but it also enhances engagement and optimizes time spent on our platform. Finally, we are committed to empowering instructors with tools that supercharge their ability to create high-quality content more efficiently and effectively. Instructors often spend substantial time responding to learner inquiries, with some even hiring teaching assistants. We will leverage AI to automate responses for learner questions, saving instructors' valuable time. Learners too will benefit from a more responsive and engaging experience. Instructors also dedicate significant time developing practice tests and quizzes. We will apply generative AI to automatically create interactive materials for instructors. These enhancements will be applicable to all new and existing courses and will be available to all 75,000 Udemy instructors. The synergy between generative AI, coupled with the depth and breadth of Udemy's content, will further enable us to deliver learning and skill development solutions to the market at scale. In order to properly fund these initiatives, we announced to our instructor partners today that we will be adjusting our instructor revenue share. Our plan is to gradually lower the rate for our subscription programs over the next few years, which will reduce costs as a percentage of revenue. We believe that our investments in brand and product will be a net positive over time for instructors. Sarah will share more details on this in a moment. Finally, our commitment to innovation extends beyond our customer offerings. We are actively leveraging the power of AI to transform our internal operations, ultimately enhancing the service we provide to our valued customers. Our recent investment in cutting-edge technology is leading to the launch of a generative AI-powered chatbot that can efficiently handle over 70% of our incoming requests, streamlining our support processes and providing quicker resolutions for our customers. We are committed to upskilling our customer support teams, underscoring our dedication to becoming a premier center for generative AI support. In conclusion, we are committed to helping individuals and organizations navigate this exciting period of rapid change. Udemy is prioritizing skills, embracing the potential of AI, adapting to the hybrid future of work, and fostering a culture of agility and resilience. These strategic pillars will guide us as we continue to lead the transformation to a skills-based economy and innovate in this ever-evolving landscape. Now I'll turn the call over to Sarah for a financial review.

Thank you, Greg. I'll focus my comments on the key financial highlights and then provide our outlook for Q4 and full year 2023. You can find the complete set of financial tables in our news release, which is available on our Investor Relations website. We had a strong third quarter as we exceeded expectations on both the top and bottom line. Revenue increased 17% year-over-year to $185 million or nearly $5 million above the high end of our guidance range. The year-over-year growth included a negative impact from foreign exchange, or FX, of 1 percentage point. The contribution from regions outside of North America was 60% of total revenue and increased from 58% in Q3 of the prior year as we continue to expand our geographic footprint. Udemy Business revenue increased 30% year-over-year to $109 million. Included in net growth was a 2 percentage point headwind from changes in FX rates. We ended the quarter with annual recurring revenue, or ARR, of $443 million, up 26% from a year ago. Our consolidated net dollar retention rate for Q3 was 106%, a 2-point decrease from the prior quarter. The rate was 114% for large customers, or those with 1,000 or more employees, just 1 point lower than the prior quarter. It is encouraging to see the pressure on net dollar retention soften, which gives us confidence that we will continue to deliver net dollar retention above 100% as customers recognize the value of our platform. On top of that, gross dollar retention remains stable, which is impressive considering the current macroeconomic environment. In aggregate, we grew our customer base by 14% year-over-year or 432 net adds to more than 15,000 customers globally. The number of customers spending more than $100,000 in ARR is up 37% from a year ago. From a geographic perspective, the strongest demand during the quarter came from our North America and Asia Pacific regions. Our consumer marketplace continues to be vibrant. Although traffic was flat year-over-year at 34 million average monthly unique visitors, we added nearly 3 million learners to the platform, ending the quarter with 67 million, or an 18% year-over-year increase. Course creation and refresh are strong with more than 5,000 new courses added each month, and 60% of our top courses were updated in the past 90 days. This further demonstrates the power of the marketplace model to keep up with the pace of change. As a result, we were pleased to deliver year-over-year segment revenue growth for the first time in 6 quarters of more than 1%, including the negative impact of a 0.5 percentage point from FX. We also achieved an exciting milestone with our consumer subscription, which we call Personal Plan. We have been testing Personal Plan in several markets and now have more than 100,000 monthly and annual paid subscribers. Consumers are responding well to these plans, and we look forward to providing more updates as the program evolves. As we move down the P&L, note that all financial metrics are non-GAAP unless stated otherwise. Q3 gross margin was 60%, a 200 basis point improvement from Q3 2022, driven by the continued revenue mix shift to Udemy Business, which accounted for 59% of total revenue in Q3. Total operating expense was $107 million or 58% of revenue and 1,100 basis points lower than Q3 of last year thanks to our focus on company-wide cost efficiency. Sales and marketing expense represented 37% of revenue, down 600 basis points. R&D expense was 13%, down 100 basis points, and G&A expense was 8%, down 400 basis points. On the bottom line, we delivered positive net income of approximately $8 million or 4% of revenue. Adjusted EBITDA was positive for the second consecutive quarter at approximately $8 million or 4% of revenue, which represents a 1,200 basis point expansion year-over-year and nearly 300 basis points better than the high end of our guidance range. The better-than-expected adjusted EBITDA result was primarily driven by revenue outperformance and our disciplined approach to driving operational efficiency throughout the organization. Moving on to key cash flow and balance sheet items. We ended the quarter with $483 million of cash, cash equivalents, restricted cash, and marketable securities. Free cash flow for the quarter was positive $9 million, driven by collections timing and lower expenses. Now turning to our outlook for Q4 and full year 2023. We expect Q4 revenue to be between $184 million and $187 million. Assuming foreign currency exchange rates remain constant, FX is expected to negatively impact Q4 year-over-year total revenue growth by approximately 2 percentage points. On the bottom line, we anticipate Q4 adjusted EBITDA margin of breakeven to positive 1%. For the full year, we are raising our outlook. We now expect revenue to be within a range of $723 million and $726 million or 15% year-over-year growth at the midpoint, including an estimated 3 percentage point negative impact from FX, assuming no further changes in rates. On the bottom line, we are committing to our first full year of positive adjusted EBITDA, well ahead of plan. We expect full year 2023 adjusted EBITDA margin to be positive between 50 and 100 basis points, or a nearly 900 basis point expansion at the midpoint compared to 2022. Although we expect to end the year strong, we remain cautiously optimistic going into 2024. We've continued to see delays in decision-making from new and existing customers, the effects of which will flow into next year. We're also seeing some softness in EMEA as geopolitical tensions rise in that region. Therefore, we are exercising caution until we start to see green shoots materialize and have more visibility into next year. With that said, the long-term opportunity is significant. Given our efforts to focus on operational excellence through these turbulent times, we are well positioned to capitalize on the opportunity in front of us. Before taking questions, we wanted to address an update. Earlier today, we shared with Udemy's instructor partners that we will be adjusting our instructor revenue share. Under the current payment structure, instructors earn 37% of revenue for individual course purchases in Udemy's marketplace. Instructors earn 25% for Udemy Business in our Personal Plan subscription offerings, which is allocated pro rata based on the consumption of their content. Due to the rapid growth of Udemy Business, our instructor payment pool has grown at a significantly faster rate than our marketplace revenue since 2020, with the total instructor earnings expected to exceed $200 million for 2023. As we continue to scale, the cost of acquiring, onboarding, and servicing customers has risen as well. Now is the right time for Udemy to further lean into capitalizing on the massive long-term opportunity available to us as we lead the transformation to the skills-based economy. As Greg shared, we have an exciting product roadmap that leverages generative AI and will accelerate our growth. We believe that these new products will drive greater customer adoption and engagement, ultimately increasing LTV over time as customers grow with us. We also plan to invest in brand-building initiatives to increase awareness and expand our global customer base, which will help grow instructors' businesses by connecting them to more learners. Under the new structure, the revenue share for the marketplace will remain unchanged, but we will gradually reduce the instructor share of subscription revenue. Our first adjustment to 20% will be effective January 1, 2024, followed by 17.5% in 2025 and 15% in 2026. Considering the growth potential we see for our enterprise and subscription products, we will expand the instructor payment pool over time while optimizing the revenue share structure. The positive impact on gross margin from the revenue share adjustment is expected to be meaningful, allowing us to continue to grow sustainably, make the necessary investments to capitalize on the opportunity, and expand our bottom line. Let me take a minute to walk you through some of our preliminary assumptions to illustrate how we're thinking about margin expansion as we progress toward our long-term targets. Starting with the baseline estimated gross margin for 2023 of 50% to 59%, we expect an approximate 300 basis point improvement on average annually from 2024 to 2026. By the end of 2026, we expect gross margin to be approaching 70%, and for 2027, we expect to exceed 70%. The majority of gross margin expansion will be driven by the instructor revenue share change and, to a lesser extent, the continued mix shift to Udemy Business and other leverage as we scale the business globally. During that time, we will make opportunistic investments that will support the long-term growth of our business. As a result, while it won't be a straight line, we are confident that we will achieve our adjusted EBITDA target range of 15% to 20% by 2027. In closing, 2023 has so far been a transformative year for Udemy. We significantly strengthened our leadership team, strategically navigated a very challenging macroeconomic environment, and we delivered positive adjusted EBITDA well ahead of plan. As we approach the end of 2023, we remain focused on consistently balancing strong top-line growth and profitability on an annual basis. We look forward to keeping you updated as we progress toward that goal. So with that, we'll open up the call for your questions.

We will now begin the question-and-answer session. At this time, we will take our first question, which will come from Ryan MacDonald with Needham. Please go ahead.

Hi, thanks for taking my question and congratulations on a great quarter. To start with the instructor revenue share adjustments, will this rollout on January 1 apply to all Udemy Business consumer subscription content or just new content created after January 1? Also, regarding the savings expected from the gross margin and revenue costs, how much do you plan to reinvest below the gross margin line, and how much do you anticipate will contribute to the bottom line over the next couple of years?

Hi, Ryan. Thanks for the question. I'll answer the first part and then turn it over to Sarah to answer the second. Yeah, as of January 1, the changes in instructor payment fees will apply to all courses that are subscription-based, Personal Plan as well as Team Plan and Enterprise Plan. And we surely are going to be reinvesting these funds to grow the business in significant ways. But I'll let Sarah add a little bit more color in terms of the balance between gross margin impact and bottom line EBITDA margin.

Yeah, hi, Ryan. Thanks for the question. So from a gross margin perspective, as we talked about, we expect about 300 basis points expansion on average, which is a combination of the instructor revenue share, which starts impacting immediately. As Greg just spoke about, we are making that change effective January 1 for all of our subscription courses. And then in addition to that, the revenue mix shift to Udemy Business over time also contributes to that gross margin expansion. From an EBITDA perspective, for next year, we expect just modest expansion because we are going to be reinvesting some of those dollars in some of the things you heard us talking about, around brand, around product, and around go-to-market as we see green shoots in different areas. We're really focused on capturing this massive opportunity that is in front of us. So from a longer-term perspective, that means we expect to deliver meaningful bottom line expansion in 2025 and 2026 as a result of these investments.

Excellent. Thanks for color and really appreciate it. Maybe just one more, Greg, for you on just the environment within B2B. We've seen recently from one of the largest HCM surveys in the industry that net new dollars in sort of HR broadly are expected to be down, I think, 10%, 11% next year, but learning remains and training remains the top spend priority. So I'm curious, given the sort of shift towards skills-based training within enterprises, how are those conversations? And where are you seeing the most demand? Are you seeing a healthy mix of net new versus existing? Or is it more weighted towards existing customers? Thanks.

That's a great question, Ryan. We have observed improvements in several key areas, such as sales cycle speed, win rates, average deal sizes, and an increase in deals exceeding $100,000. These leading indicators give us confidence in our current and future opportunities. We're optimistic about our momentum and our team's capability to execute. We're achieving a strong balance between acquiring new customers and upselling to existing ones. For instance, we recently signed a $2 million three-year contract with a major Fortune 500 financial services firm, focused on developing a skills-based organization across their workforce. They are utilizing all our products, including Udemy Business Pro, professional services, and certification offerings. The nature of our discussions with them was particularly promising because they view us as a strategic partner in achieving their goals of increasing revenue, cutting costs, enhancing productivity, and better supporting their business community through upskilling initiatives. We've noted that the shift towards a skills-based organization and economy is accelerating and is now translating into significant multi-year contracts and the acquisition of new customers, in addition to ongoing expansions. Recently, I traveled to Europe and India, where I met with several of our major clients. The conversations with their CLOs and HR heads revealed significant pressure from their CEOs to develop strategies and capabilities for upskilling, especially regarding AI. They are focused on how to implement this transformative technology to improve their operations and incorporate AI into their product and service offerings for a competitive edge. This is a consistent theme across all our discussions; every customer we engaged with prioritized this topic. We are positioned as a key strategic partner to help them not only transition to a skills-based organization but also to effectively utilize AI for internal efficiencies and external initiatives. We are at the beginning of a transformative shift, and we expect to see an increase in this trend moving forward.

Appreciate the color. Congrats again.

And our next question will come from Stephen Sheldon with William Blair. Please go ahead.

Hey, thanks. Really, really helpful commentary, Sarah, on the margin progression, which I'm sure a lot of investors appreciate. It seems like you're targeting to hit that long-term EBITDA margin target of 15% to 20% by 2027. Just curious, does this change impact your view of what longer-term margins beyond 2027 could look like?

That's a great question, Stephen. With this change, we are confident that over time we will be able to reach the high end of our target. The industry is undergoing a significant transformation, similar to the transition to the cloud that we haven't witnessed in a decade or two. Many developments are occurring, and we will invest in building the necessary capabilities to support customers who are struggling to upskill their teams and adapt to AI to maintain competitiveness. Therefore, we plan to increase our investments next year, making it a more substantial investment year compared to future periods as we seek to capitalize on these positive trends.

Got it. That's helpful. And then maybe in UB and just thinking about the expansion, I think you talked historically with current UB customers only having 10% of current employees covered under a license. Curious if that's moved any higher over the last year or so, especially with consolidation of L&D spend that might be going on right now? And is there anything that you need, such as even more content breadth, to be able to push that metric higher on the expansion side?

That's a really good question, a really good question. The acceleration of consolidation continues to happen. And we're seeing it accelerate as a result of this massive trend, which we just talked about, to a skills-based organization. And in fact, I'll talk briefly about two of our larger global financial services customers. One, one of the largest banks in all of APAC made a decision to consolidate from four vendors, of which we were one, to one vendor and standardize on a strategic approach to developing AI skills across the organization. Fortunately, we ended up being their selected partner, right? So they doubled the size of the contract. We're now in the process of developing a multiyear strategy to develop AI skills across the organization in a number of capacities, adding on Udemy Business Pro to help them on the technical side of the house. And in addition to that - we talked about our AWS partnership. They were an AWS customer. And that partnership enables us to move through the procurement process in an accelerated pace and benefited everybody involved for us to do this deal through AWS. So the consolidation trend continues. The focus on the transition to a skills-based organization continues. And in terms of our penetration north of 10%, we haven't seen significant movement in that. I would say modest, right, a modest movement. But in our larger customers, especially in the financial services vertical, we're seeing significant movement in Fiserv right now. And what we are seeing is we now have this last year over 100% year-over-year growth in our Fortune 100 financial services customers, of which, by the way, we're now over 70% penetrated into the Fortune 100 Fiserv sector. So we, for all intents and purposes, locked up that segment of customers, and they're investing heavily to upskill and reskill both to develop AI capability and skills development, specifically around cybersecurity and areas that are critical for their compliance and very unique circumstances in that financial sector. So anyway, nonetheless, we're seeing some vertical momentum as far as expansion as well as we're seeing a continued trend toward building out that skills-based organization capability. And so that deal sizes for us are getting larger. I mentioned the deal was over $100,000. It was our biggest quarter ever in terms of percentage of deals over $100,000. So there's good momentum for us there.

Great to hear. Congrats on the results. Thank you.

And our next question will come from Jeffrey Meuler with Baird. Please go ahead.

Thank you. It appears we've experienced several consecutive quarters with stronger consumer performance than anticipated. I'm curious about how much of this can be attributed to an improved demand environment. If this trend continues, will it prompt you to reconsider your approach to managing profitability in the consumer segment, assuming the marketplace remains robust in terms of content creation?

Thanks for the question, Jeff. So consumer, we have been really pleased with the stability of the marketplace. And as you saw, unique visitors were stable, monthly average buyers were up. We do, though, know that there are some other things that are happening with consumers, like credit card debt has now crept up to a high in comparison to where it's been. And so when you look at, as an example, forecast for Black Friday promotions and that sort of thing, spending is actually expected to be muted. And so in the short term, there continues to be volatility. We think that the consumer business is going to be flat, maybe down a few points. We're all going to just have to wait and see what that looks like. But longer term, there are some things that are really exciting that we are building out for learners generally. But first, we build for our Udemy Business learners. And over time, we will be rolling those out onto our consumer platform. And so some of those capabilities, we believe, could start to drive more interest in our consumer. An example of that is the badging and certification. So that ability to take these classes and go out and get that certification and actually share that on the Udemy platform, that capability is coming to the platform. And so things like that help us really shape how we see consumer as over time being an area that we're going to keep an eye on. Some growth could happen, we don't think in the near term. It's a little bit of a wait-and-see still. But that stability has been great for us.

Great. And then just anything you can say about the initial instructor response to receiving the letter and the changed payout plans? And just anything else you're doing to manage that, including to maybe better inform them on how it can be a net benefit to them beyond the letter that you sent out? Thank you.

That's a great question. We communicated directly with our instructors this morning about the changes. I’m also hosting a webinar with them tomorrow where we will discuss more details. We have been closely monitoring our instructor feedback today. One key point to emphasize is that our instructors are essential to our business; we wouldn't exist without them. We carefully evaluated the impact of this change, considering our past experience from 2019, when we reduced instructor payments for our subscription service from 50% to 25% in one go. An instructor who was with us back then noted that, while they faced a short-term setback at that time, they ultimately experienced significant growth in their revenues due to the investments we made in marketing and technology to enhance Udemy Business. I have faith in our team to replicate these results. There have been mixed reactions; some newer instructors have reacted emotionally, while others, with more experience, have a better understanding of the long-term benefits. We acknowledge all feedback because our instructor community is vital to us. To ease the transition this time, we have planned a three-year adjustment instead of implementing the change all at once. Our projections indicate that if we achieve our growth goals, we will actually increase the number of instructors during this transition period. After that, we expect to accelerate our growth. We've done extensive work and modeling, and I will provide more details to our instructors tomorrow. I'm encouraged by the positive feedback from many long-time instructors about our track record and our capacity to achieve similar success again.

Helpful detail. Thank you.

And our next question will come from Noah Herman with JPMorgan. Please go ahead.

Thank you for the opportunity to ask questions and congratulations on a strong quarter. I'd like to discuss the linearity you've experienced in the context of the prolonged sales cycles. It seems like there has been some improvement, so I'm curious about how the third quarter compared to the second quarter and what you are observing in October. Thank you.

What we are observing is a good question. Thank you. In certain sectors and segments, we are noticing an improvement in sales cycle velocity. We mentioned this in our opening remarks. Overall, this is the trend. However, the SMB business continues to be significantly affected by macroeconomic conditions. Regionally, EMEA is experiencing challenges due to the geopolitical situation that was previously discussed. Without a doubt, these factors are present. We are not ready to declare that we have reached a bottom, but we are encouraged by the improving sales velocity, particularly in enterprise segments and Asia Pacific, as well as in North America and through our channel programs. It is currently a mixed situation, and we are closely monitoring it. Looking ahead to next year, we hope that the geopolitical concerns will begin to subside, allowing us to experience a different year in terms of macroeconomic impacts.

Got it. And then just a quick follow-up. I realize some of the comments made around EMEA, but in the quarter, it actually looks like across each region internationally, the growth actually accelerated a bit. So I just wanted to double click and see what's really driving that, if you can maybe provide a brief breakdown you're seeing in each region? Thanks.

I think what you're looking at is the overall growth numbers by region. We observed that EMEA grew by about 20%. As Greg mentioned, while there's pressure on the Udemy Business side, we're experiencing some strength on the consumer side. Both factors contribute to the current situation. The North America enterprise business, as Greg noted, performed strongly, and we also saw a slight improvement in the sales cycle velocity there and in APAC. However, these sales cycles remain longer than historical trends. So, the regional mix reflects the dynamics of Udemy Business and consumer segments.

Got it. Thank you.

Thanks for the question.

And our next question will come from Josh Baer with Morgan Stanley. Please go ahead.

Great. Thank you for the question. Wanted to just confirm, is it correct that this content revenue share change, it was not contemplated or needed to get to that 15% to 20% EBITDA margin guidance originally?

Yeah, Josh, thanks for the question. It was not originally anticipated. But we do believe that we're going to get to that target sooner and to the high end of the range and over in the years beyond that. So this change really is to allow us right now to really invest in these things that are continue to drive that sustained growth that you see in Udemy Business. And while you base on the macro, we think when that macro starts to clear up, we'll see a reacceleration again because we are in a really great position to capitalize on that opportunity.

Great. Really clear. I have a question about using Gen AI for translations in your courses. I'm curious about how beneficial that is for you, especially since there's a strong emphasis on providing content in local languages. Is this area a potential cost saver for you, or is it not particularly relevant? Thank you.

Hey, Josh, thanks for the question. It is not as relevant for us because we do have the advantage on a global basis, our instructors developing localized content and local language, local tone, local context that we package and make available to our enterprise customers around the globe. So not relevant to us because it's not needed. And the second thing I would say is leveraging generative AI for language translation is a fairly basic capability. And we're really focused on developing next-generation learning experiences as a result of the investments we talked about in the learner experience, capabilities we're providing our structures as well as organizations. And you're going to hear a lot more from us around our ability to deliver skills mapping capability and mapping that the content learning path and tailored learning path in product to truly transform how organizations develop skills as a result of getting more systematic access to personalized learning experiences through our platform. And that's really where our energy is focused on these types of investments.

And our next question will come from Brent Thill with Jefferies. Please go ahead.

Hey, guys. This is Dave Lustberg on for Brent. I have two, if I may. Maybe to start, I wanted to ask on the consumer subscription, nice to hear, I think, 100,000 subs passed. Maybe how long has that been rolled out? I guess if there's like a data point on the quarterly growth? And where do you guys see that getting to over time?

Hi, Dave, thanks for the question. So we really started rolling out in small test markets almost two years ago with our subscription. It's been a while. But part of that rollout was really taking into consideration bringing our instructors along because, again, the consumer marketplace, they are the consumer transactional marketplace, they received 37% at the time subscriptions were up 25%. And as we know now, the 25% is going to be going to 15% over time. And so just bringing them along and making sure that we are gradually rolling that out to really be thoughtful about the earnings was important to us. Where this goes over time, we think it's reasonable that this becomes a meaningful portion of our consumer revenue. And at the same time, that marketplace, that transactional marketplace is where new courses are tested, it's where they get feedback and it's where we are able to see the quality and applicability of those courses so that then we can put them over in our subscription product. So hard to say exactly where that's going to go. We do think a lot of the features and functionality that we're building out for learners on the Udemy Business side first. Those are most applicable to the personal plan our subscription plan. And so we're going to continue to update you as that program rolls out. What I will say is what we started first in the U.S. and about 50% of our stops are our subscribers are in the U.S. still to date. We have added on a number of markets over 10 additional markets slowly over time. And right now, what we're seeing is the fastest growth in India. So more to come on that, but we're really excited about the response that we've seen from consumers with respect to our personal plan.

Got it. That's helpful. And then maybe just a quick follow-up. Interesting to hear your comments on certifications and credentialing. I think it's a very topical topic in the industry now. I'm sure many of you saw another company in the space acquired a sizable company around just that credentialing and whatnot. So curious where you guys think you sit today as it relates to those credentialing capabilities? And how hard are you guys going to lean into this? How important is it for you? It would be helpful to hear your thoughts on that. Thanks so much, guys.

Thank you for the question. It's very important to us. I'm thrilled with the momentum and interest we're experiencing in badging and credentialing. For example, one of our larger Fortune 500 financial services customers deployed an initial phase with 5,000 seats, which resulted in a 13-day faster certification completion and a 20% higher first-time pass rate compared to their previous vendor. Consequently, we've increased from 4,000 to 30,000 seats this past quarter due to that expansion. This trend seems consistent across the board because with the badging and certification capabilities now integrated into our platform, combined with Udemy Business Pro layered on our core content, we are providing an immersive learning experience. This approach not only accelerates the learning process but also improves the completion rates and first-time pass rates. Another large Fortune 500 customer in the APAC region, who has been with us for a while, also standardized on our platform about a year and a half ago and recently added 10,000 seats of Udemy Pro for their tech department. They cited the badging and certification capabilities as a key reason for this addition. We're very pleased with the momentum we have right now and expect it to continue. Validation is crucial for learners and customers, supporting the transition to a skills-based economy. We are heavily investing in this area and have made it possible for learners to display their badges on our platform and external social platforms, with more investments planned. Overall, it's great momentum for us, helping us secure more deals and expand quickly with existing customers, and we anticipate this trend will continue.

Our next question will come from Brett Knoblauch with Cantor Fitzgerald. Please go ahead.

Hi, guys. Thanks for the question. Congrats on the quarter. I guess one for me. If we kind of look at average ACVs, I mean, the customers added over the last year, it's up 33% and accelerated. So I guess my question is, what's really driving the ACV growth of, call it, the more recently added customers? Is it really just the makeup of the customers you're adding in this tough macro environment? Anything else to help us understand what's driving that?

Yeah. I'll take that, and Greg can chime in here. What we are seeing is the deal sizes increase because enterprises are having a little bit easier time navigating this tough macro than the smaller businesses. And so as that business has shifted toward enterprise, you'll see that. Also, I believe the clarity in which we are sharing with them how AI impacts our business and how we can help them close the gaps that they're looking at. These customers, they really are struggling with 5,000, 10,000, 20,000, you name employees, all of whom have different skill needs, and those skill needs are changing. They're not static. And so they're looking for a solution that they can partner with not just now but into the future. And I think the roadmap that we've laid out and what we are doing and the product innovation really speaks to the problem that they have and helping them solve that in a very automated and effective, cost-effective way.

I would like to emphasize that two significant trends are emerging: the shift toward a skills-based organization and the necessity for AI literacy. I was taken aback by the intensity of the pressure on Chief Learning Officers to address these issues, as there is a strong sense of urgency to seize the opportunity to upskill their workforce in AI literacy. Conversations reveal that CEOs are aware that failing to act promptly could result in falling behind their competition. There is a palpable fear of missing out on advancements and the risks of not educating employees on how to effectively implement AI within their operations, as well as integrating AI capabilities into their products and services to enhance value for customers. With nearly 30 years in enterprise software, I can attest that this situation is more pressing than any other transition I've experienced, including during the dot-com era, as evidenced by the discussions we're having and the investments being made. We've mentioned several substantial multi-year contracts being finalized as organizations expedite their evolution into skills-based entities and increase their investments in AI. We genuinely believe we are at the beginning of this trend. The majority of organizations still lack clarity on how to navigate the AI landscape or how to establish a skills-based organization. This challenge is likely to persist for years, highlighting our role in assisting organizations in adapting. This urgency is one factor contributing to the larger deal sizes and the overall acceleration we observe in our enterprise business, even as we continue to see some challenges on the small to medium business side. However, across our global, large multinational clients, there is a notable surge in activity related to these key trends.

And our next question will come from Tom Singlehurst with Citi. Please go ahead.

Hi, thank you for taking my question and for the presentation. I have a couple of questions. First, I want to clarify something. Based on your comments regarding the trajectory of revenue share and the hope that instructors won't face any congestion, am I correct in interpreting that to mean at least 25% revenue growth next year and around 20% compound revenue growth as a lower base through to 2026? I just want to confirm that I have the math correct and that I didn't overlook anything.

Tom, thanks for the question. So that response was overall that, that will grow, not necessarily that Udemy Business is 25% next year. But what we do think is we are going to be exiting Q4 on the Udemy Business side in the mid-20s. And we do think, plus or as a few points, but that's a reasonable range in this continued tough macro environment. We think that we'll accelerate when the macro softens. But right now, it doesn't look like that's going to be anytime soon. And so really, what we're focused on is a stable instructor pool and growing over time and investing in the things that will allow that to grow at a greater rate over time than it could have without those investments.

That's very clear. Regarding cash usage, we're currently generating better EBITDA than we anticipated for positive free cash flow, which is encouraging. Given your significant cash balance, I'm curious if there's anything else to share about cash usage, especially in light of your accelerated progress towards the 15% to 20% EBITDA range and your increasing comfort with the higher end of that. Should we anticipate any changes in cash usage, whether related to mergers and acquisitions or capital returns?

Thank you for the question. We are actively pursuing opportunities in corporate development and M&A, as we have discussed in previous calls. However, we have high standards when it comes to these initiatives. We will invest capital when we identify the right opportunity, which could involve leveraging another organization's technical capabilities to enhance our AI strategy or overall platform strategy. Geographic expansion could also be a factor. Currently, we have not identified a suitable company that aligns with our goals in these areas, but we will continue our search. It is indeed a priority for us to invest that capital, and we will keep you updated on any developments.

Our next question will come from Terrell Tillman with Truist Securities.

Great. Thank you. This is Connor Passarella on for Terrell. Appreciate you taking the question. I just wanted to ask one around the Docker partnership. If there's any revenue minimums or financial impact from the partnership. And maybe if you could speak to the greater opportunity around expanding your leadership position in educating developers? Thank you.

That's a good question. There are no revenue minimums. This is a revenue share, typical of reseller partnerships. I'm very pleased with the co-marketing capability, which will be our main focus moving forward. Both Docker and Udemy have agreed to invest in this effort. It's still early, but our ability to assist them with certification and skill development is significant, which is a key reason they chose to partner with us. I want to clarify that, as I consider your question, this is largely about co-marketing at this stage. Over time, we will explore opportunities to create revenue-generating or revenue-sharing initiatives. However, for now, the initial phase of this relationship is mainly focused on co-marketing. We'll keep you updated on developments.

Our next question will come from Devin Au with KeyBanc. Please go ahead.

Hi, Greg. Hi, Sarah. Thanks for filling me in. Just one question, and also I just want to ask about the instructor revenue share. With that structure kind of going from 25% down to 15% over the years, how does the revised structure maybe stack up against kind of the other players in the industry? Just any color you can provide on that? Thanks.

It's a great question. I want to highlight that we not only have the instructor revenue share on the Udemy Business side, but all instructors participating in our subscription business also belong to our marketplace, where they can earn significantly above the market average of 37%. When considering these factors together, the revenue share remains very strong. Additionally, instructors benefit from access to 67 million learners and growing worldwide, as well as our Udemy Business platform. Despite the challenging macro environment, we are gaining market share and feel positive about our position. Overall, these elements make our platform a very appealing option for instructors to showcase their expertise.

And this concludes our question-and-answer session. I'd like to turn the conference back over to Greg Brown for any closing remarks.

I'd just like to thank everybody for joining us on the call and appreciate all of the feedback and questions. And look forward to seeing you again in February.

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