Udemy, Inc. Q3 FY2024 Earnings Call

Good day and welcome to Udemy's Third Quarter 2024 Conference Call. All participants will be in listen-only mode. Please note this event is being recorded. I would now like to turn the conference over to Dennis Walsh, Vice President of Investor Relations. Please go ahead.

Thank you, David. 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 risk associated with these forward-looking statements, we encourage you to refer to our most recent Form 10-K and Form 10-Q filings with the Securities and Exchange Commission. Our forward-looking statements are based upon information currently available to us. We caution you to not place undue reliance on forward-looking statements, and we do not undertake and expressly disclaim any duty or obligation to update or alter our forward-looking statements except as required by applicable law. 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 SEC as non-GAAP financial measures. We believe these non-GAAP financial measures support management and investors in evaluating our performance in comparing period-to-period results of operation in a more meaningful and consistent manner. A reconciliation of these non-GAAP measures to the most comparable GAAP financial measures is included in our earnings press release. These reconciliations, together with additional supplemental information, are available on the Investor Relations section of our website. Please note we have provided a supplemental deck that can be found for download on the Quarterly Results section of our Investor Relations 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. We delivered a strong Q3 with revenue and adjusted EBITDA margin exceeding the high end of our guidance ranges. Revenue grew 6% year-over-year, including a two-point headwind from foreign exchange, and profitability reached a new record with adjusted EBITDA coming in significantly higher than anticipated. This was a direct result of our disciplined approach to driving operational efficiency throughout the business. We also achieved a new milestone of over $500 million in Udemy business annual recurring revenue. I'm immensely proud of our entire Udemy team and thankful for their unwavering commitment to our business and delivering on our mission. We have a lot to be excited about as we look toward the future for Udemy, and I'm eager to provide an update on some of the strategic actions we've taken, as well as some of the other exciting developments, including the launch of our AI-powered skills mapping and AI assistant. As a reminder, on our last call, we announced the strategic decision to deliver a more balanced mix of growth and profitability, while reallocating resources toward our highest return opportunity, the large enterprise customer cohort within Udemy business. This transition is both timely and necessary as we look to deliver long-term sustainable value for all stakeholders, particularly in an environment that remains stable but subdued. Over the past several years, we've successfully built a strong foundation for our enterprise business and our consumer marketplace. We've also expanded our global footprint to support nearly 17,000 Udemy business customers and 75 million learners across 180 countries, which represents one of the leading market positions globally. Given the solid foundation we have in place, now is the right time to focus on operational efficiency. The opportunity in this category is massive and growing, so we're capitalizing on it to create a more resilient business model capable of delivering sustainable financial performance in any market environment. Since our Q2 call in July, we moved quickly to optimize our cost structure to align with our more focused strategy. Ultimately, we were able to achieve over $50 million of cost savings against our initial target of $25 million. Our outperformance on these efficiency initiatives increases our confidence in our ability to deliver our target of adjusted EBITDA of $130 million to $150 million in 2026. As you can see from the Q3 results, these actions are already impacting Udemy's profitability. We are significantly increasing our flexibility to allow us to operate from a position of strength and enabling us to deliver value to our customers and shareholders. We're confident this approach will position us as a stronger, more competitive company well into the future. Turning specifically to Udemy business, with our new Chief Revenue Officer, Rob Rosenthal in place, we're aggressively capitalizing on our category leadership and realigning our resources upmarket and into key verticals that we believe will drive the highest returns. With the world of work expected to undergo rapid transformation fueled by the widespread adoption of generative AI, Udemy is the company that will help organizations bridge the growing skills gap. A cornerstone of our strategy is our decision to focus on large enterprise customers, which we define as organizations with over 1,000 or more employees and represents approximately 75% of our Udemy business revenue. These companies have a more strategic approach to learning and development, move fast to adopt AI and other new technologies, and are increasingly turning to Udemy to support their skills development initiatives. By prioritizing large customers and de-emphasizing the SMB segment, we're optimizing our resource allocation toward higher growth, higher margin opportunities. Today, this cohort of customers has the highest retention, win rates, and upsell rates. Historically, we've been most successful generating high-quality pipeline from customers in this category, resulting in the majority of bookings coming from this cohort. Importantly, we will still support the SMB market, but we'll be addressing new opportunities through more efficient channels such as self-service over time. Although reallocating resources to focus upmarket will create temporary headwinds to the SMB and consumer portions of our business, these actions will create a stronger company and will enable long-term profitable growth for Udemy. As we navigate an era of unprecedented technological transformation, the importance of preparing organizations for the future has never been more clear. With rapid advancements in generative AI and other emerging technologies, we're witnessing the beginning of a seismic shift in how businesses operate. In this context, enterprise learning and development has become a strategic necessity for future-proofing workforces and ensuring long-term business success. Recent research underscores the urgency of this moment. A recent report from BCG found that only 6% of companies have trained more than 25% of their workforce on generative AI tools. Further, an astounding 46% of employees will require upskilling within the next three years regardless of the impact of generative AI. As the shelf life of skills shortens driven by digital transformation, a versatile and future-ready workforce is essential and the focus on upskilling helps businesses stay competitive. This reality presents a massive opportunity and a critical responsibility for organizations to invest in upskilling and reskilling their talent. For example, Udemy helped a customer overcome this challenge, Old Mutual, a South African financial services company, engage with Udemy business in 2021 to address their upskilling needs. Since the beginning of our relationship, Old Mutual has seen more than 18,000 employees adopt licenses and averaged approximately 47 hours of learning per user per year, which is nearly double the industry average. Of the course enrollments, nearly 60% relate to developing digital and data capability skills. Organizations that prioritize skills are seeing tangible benefits such as improved retention, innovation, and business growth. Millennials and Gen Z employees who now form a significant portion of the workforce value autonomy, internal mobility, and opportunities to learn new skills. Organizations that can provide these opportunities through robust learning and development programs are best positioned to attract and retain top-tier talent. By investing in learning and development, companies enhance their talent pool but also reduce turnover, improve employee engagement, and build long-term resilience. A couple of great examples of organizations that are prioritizing skills development are Udemy customers, U.S. Steel and Calybre. U.S. Steel is a manufacturing company with a workforce of more than 20,000 employees and has been a Udemy customer since 2020. U.S. Steel provides access to Udemy business courses to all non-represented employees as a way to foster a culture of continuous learning and support internal mobility. This strategic approach to learning and development also ensures U.S. Steel employees stay current on important business, technology, and leadership skills. In the past year, employees utilized 100% of licenses, and 85% of employees who claimed licenses were actively taking courses on the platform. Calybre, a U.K.-based data technology consultancy, has been a Udemy customer for two years and has made Udemy business its primary learning and development platform. Udemy plays a critical role in helping Calybre ensure its teams are certified in core technologies, have the foundational skills required to serve clients, and possess the soft skills needed to deliver exceptional service. Since partnering with Udemy, Calybre employees adopted 93% of the assigned licenses and logged an astounding 300 learning hours per person. Another one of our customers, Mphasis, an Indian multinational technology company that offers business consulting, IT, and outsourcing services, has partnered with Udemy on a corporate social responsibility initiative that recognizes the importance of skills development and is extending access to Udemy beyond its own workforce to the broader community. In one of our largest deals of the quarter, Mphasis expanded its partnership with Udemy to 150,000 licenses as part of its Mphasis Springboard initiative, a digital learning platform providing free access to educational resources, skill-building courses, and certifications. The program focuses on enhancing employability through digital literacy, technology, and soft skills, empowering students, women, and professionals in the community to become lifelong learners. We are honored to have been selected by Mphasis as a partner to foster continuous learning and drive societal progress, equipping individuals with the tools needed to thrive in an evolving digital economy. This brings us to an exciting product update. By offering our enterprise customers access to innovative learning tools on our intelligent skills platform, such as our recently launched AI Assistant, skills mapping, and AI-powered learning paths, we're helping organizations build a workforce that is not only ready for today's challenges, but also capable of adapting to tomorrow's. This major product launch will provide significant value to our customers and has been met with much enthusiasm. Specifically, with the introduction of skills mapping and AI-powered learning paths, we're helping leaders identify the critical skills needed for their organizations. With this capability, we're enabling customers to create a skills framework or skills tree that provides a clear, logical structure for skills development, and ultimately match skills to top-rated courses from the Udemy Business Collection. With the use of AI, we can now bring personalization and guided learning to organizations at scale. In addition, the AI Assistant will help transform the experience for individuals, helping them more easily discover and engage with relevant learning content. The Assistant will guide the learner and will provide course and lecture summaries to help learners understand key concepts and navigate to the most relevant content. The Assistant will also help answer course and career-related questions with step-by-step advice and simplified explanations of complex topics. Ultimately, early indications show that the Assistant and the more personalized experience it creates will lead to more learner consumption and engagement on our platform. We're thrilled to introduce these innovative products to our customers, but this is only the beginning. In August, we welcomed Udemy's founder, Eren Bali, back to the leadership team as our Chief Technology Officer. Eren is excited to return to an operating role where he will drive our product strategy forward. Together, we will deliver cutting-edge solutions that empower learners worldwide to achieve their career goals and better business outcomes for enterprises. With the major launches of our AI Assistant and skills mapping behind us, now is a natural time to further streamline responsibilities on our leadership team, including consolidating the Chief Technology and Chief Product Officer roles. We're expanding Eren's role, and he will now lead both product and engineering teams. Our focus on operational efficiency allows us to prioritize investments in innovative, high-impact products, like the ones I just described, that are tailored to meet customers' needs. We believe that by empowering enterprises and individuals with tools to meet their learning needs, we can unlock significant value for stakeholders.

Thank you, Greg. I'll cover the key financial highlights in our outlook today. You can find the complete set of financial tables in our news release, which is available on our Investor Relations website. Third quarter revenue increased 6% year-over-year to $195 million. More than 60% of our total revenue comes from outside of the U.S., and we had a negative impact from foreign exchange on our year-over-year growth rate of 2 percentage points. Udemy business revenue for the quarter was $126 million, an increase of 16% year-over-year, including a 2-percentage point headwind from changes in foreign exchange rates. As Greg mentioned, we ended the quarter with annual recurring revenue, or ARR, of $505 million, up 14% from a year ago, a significant milestone for the business. Within that, ARR from large customers, or those with 1,000 or more employees, increased 15% year-over-year, while small and medium business (SMB) ARR grew 11% year-over-year. Professional services, financial services, manufacturing, tech, and retail are the strongest verticals contributing to ARR growth. We will continue focusing on driving further penetration in those sectors, where we see a vast array of use cases and significant long-term opportunity to capture market share. Our consolidated net dollar retention rate, or NDRR, at quarter end was 99%. The rate was 104% for large customers. We continue to see pressure on net dollar retention driven by upsells taking longer than historical norms in this environment. In the quarter, we added more than 250 net new Udemy business customers, increasing our global customer base by 10% year-over-year to more than 16,800. Within that, our base of large customers increased by 11% to more than 5,000. Gross margin for our Udemy business segment came in at 74% for the third quarter, up 600 basis points from the prior year, primarily due to the instructor revenue share change that went into effect on January 1 of this year. Third quarter consumer revenue of $69 million was down 8% on a year-over-year basis, including a negative three percentage point impact from foreign exchange. The year-over-year decline was primarily driven by lower individual course purchases and was somewhat offset by growth from our personal plan subscriptions. During Q3, average monthly visitors grew 14% year-over-year to more than 39 million. Although the marketplace remains vibrant with strong traffic growth and more than 5,000 courses being added each month, we are taking steps to strengthen our consumer offering. We are building on our marketplace experience and investing in skills-based career development that meets the needs of today's learners. Leveraging the depth and breadth of our marketplace, we now offer a comprehensive suite of 500 certification prep programs, and that number is continuing to grow. These courses are designed to equip learners with everything they need to pass their certification exams and have attracted more than 6 million enrollments to date. As we move down the P&L, note that all financial metrics are non-GAAP unless stated otherwise. Q3 total company gross margin was 64%, a 400-basis point improvement from Q3 2023. The improvement was driven by an instructor revenue share change, as well as a continued revenue mix shift to Udemy Business, which accounted for approximately 65% of total revenue in the quarter, an increase of 600 basis points year-over-year. As previously shared, we expect total company gross margins to increase to approximately 70% in 2026. Total operating expense was $119 million, or 61% of revenue. Foreign exchange for the quarter was approximately 1,200 basis points higher than Q3 of last year, primarily driven by higher personnel and marketing expenses. On the bottom line, we delivered net income of approximately $10 million, or 5% of revenue. Adjusted EBITDA was approximately $12 million, or 6% of revenue, representing nearly 200 basis point expansion year-over-year. The better-than-expected adjusted EBITDA result was driven by our ongoing focus on operational efficiency and the cost savings actions we began implementing during the quarter. We expect these actions to result in restructuring charges of approximately $18 million, which primarily consists of personnel expenses. Approximately $11 million was recognized during Q3. We expect to recognize another $6 million during Q4, and the final charge will be incurred during the first quarter of 2025. Cash payments related to these expenses will be spread across the next several quarters, which brings us to our key cash flow and balance sheet items. We ended the quarter with $358 million of cash, cash equivalents, restricted cash, and marketable securities. Free cash flow in the third quarter was negative $10 million, driven by collections, timing, and lower billings, but was positive $32 million on a year-to-date basis. During Q3, we used $51 million in cash to buy back 6.3 million shares through a repurchase program and are nearing completion of the $150 million authorization. We will continue to discuss with our board any plans for future capital return programs. Turning to our guidance, we are raising our full year 2024 outlook. For revenue, we now expect to be in the range of $780 million to $783 million, or nearly 7% growth at the midpoint, including an expected negative two percentage point impact from foreign exchange. For modeling purposes, we expect Udemy business revenue growth to be up approximately 17%, while consumer revenue is expected to be down approximately 6% year-over-year. On the bottom line, we are increasing our outlook by approximately $12 million from the midpoint of our prior range, as we now expect to deliver full year adjusted EBITDA margin of approximately 4.5% of revenue. The overperformance from Q3 and additional cost savings that we are already beginning to realize from the operational efficiency actions are the primary drivers. With respect to the fourth quarter we expect revenue to be between $193 million and $196 million, or approximately 3% year-over-year growth at the midpoint. Assuming exchange rates remain constant, foreign exchange is expected to negatively impact Q4 revenue growth by two percentage points. On the bottom line, we are targeting an adjusted EBITDA margin of approximately 6% of revenue. Although we plan to provide our formal 2025 guidance on our Q4 call in February, today we wanted to provide some additional context for how our results may unfold next year. As Greg discussed, we are purposefully shifting our focus from aggressive growth to accelerating operational efficiencies to deliver profitability. In September, we completed a comprehensive review of our cost structure, and as a result, have identified over $50 million in annualized structural cost savings against our run rate. This represents an additional $25 million in savings from when we first outlined our plan on our Q2 earnings call. To break down the $50 million, approximately $40 million in cost savings are related to reducing organizational layers, relocating certain roles to lower-cost locations, and optimizing our go-to-market structure. We also identified an additional $10 million in cost savings related to other expenses, such as marketing spend, professional services, software, and travel and entertainment. These actions allow Udemy to be a more nimble organization and better serve our global customer base. In addition, we are optimizing our go-to-market strategy, focusing on regions and sectors that represent the most growth potential, specifically large enterprises, where we see stronger pipeline growth, larger deal sizes, and higher retention and upsell rates. By over-delivering on our expense reduction initiative, we have the flexibility to reinvest some of these savings back into high-impact growth areas and are in the process of hiring for key roles in lower-cost geographies such as Mexico, India, and Turkey. In 2025, we expect to deliver approximately $70 million in adjusted EBITDA, providing a clear path to achieving our 2026 target. As a reminder, beyond the structural cost and efficiency actions we have taken, we expect that 2025 adjusted EBITDA will also benefit from approximately 200 basis points of improvement to gross margin from our revenue mixed shift towards Udemy Business and our previously announced changes to instructor revenue share. On the top line, as we shift resources to focus most on the large enterprise opportunity in Udemy Business, we wanted to highlight a few discrete headwinds to revenue growth during the 2025 transition year. Specifically for Udemy Business, the combination of a $20 million reduction in quota capacity in SMB and the continued softness in EMEA is creating a few points of headwind to our overall revenue growth projections for 2025. While we are experiencing these headwinds in the near term as we focus resources on market and transition teams to the new structure, we expect large customers to continue to outperform the other cohorts. To highlight our progress and the effectiveness of our shift in focus on market, going forward we will provide additional insight into this cohort. On the consumer side, we expect that we will experience high single-digit revenue decline rates into next year. This represents approximately three points of headwind against our overall growth. Although we continue to be prudent with investments related to that segment, longer term we are investing in building a career-based development experience for learners across the globe. Looking ahead, we expect the work we've done to restructure the organization will help us navigate near-term market conditions, while setting the foundation for long-term success. Our goal is to deliver $130 million to $150 million in adjusted EBITDA by 2026 and continue expanding towards our target of a 20% adjusted EBITDA margin in 2027. In summary, the strategic shift we've made combined with our ongoing operational efficiency efforts are allowing us to focus on what matters most, capturing the massive opportunity in enterprise and individual skills development, particularly in the age of AI. We are confident that the work we are doing will further strengthen the foundation of our business and enhance our customer experience globally.

So with that, we'll open up the call for questions. Moderator?

I'm curious if you could share a little more detail around how some of these new AI-enabled capabilities are changing the conversations the sales teams are having with larger enterprises and when you may expect some of those conversations to lead to a more direct impact on growth going forward for the enterprise segment.

Yes, thanks for the question. So first, I'd say we're already seeing the impact on sales process, sales cycles, and our ability to establish value associated with these AI capabilities from the standpoint that organizations for some time now have been looking for a product capability like our skills mapping that enables them to assess skills, develop a hyper-personalized learning experience based on the skills gap, and then assess again to certify and then provide a badge or certificate associated with skills acquisition. Skills mapping brings that to life now, right? So we now have automated what has been primarily a manual process for most organizations. So there's a lot of excitement about that from the learning and development leadership perspective within the companies we serve. At the same time, the AI learning assistant, having an assistant along for the ride for individuals and within organizations, personalizes that learning experience but also allows individuals to ask questions and be engaged in that learning process throughout, which is what the AI assistant is. Overall, we are seeing, in early signals, both in the beta as well as live with customers, increases not only in adoption but more importantly, active usage and engagement on the platform. And we expect that to persist. We're really excited about the progress right now to date, and we're just getting going. Right now, we have about 1,000, a little over 1,000 enterprises that have implemented skills mapping and the AI assistant.

Just as we think about Udemy business, how would you characterize corporate learning and development, the spending environment there comparing this quarter to the first half of the year? Greg, I think you maybe noted that the environment is stable but subdued. So have you seen any early signs of a pickup? And if not, what do you think it will take for that to happen?

Yes, thanks for the question. Yes, I did mention that we are seeing continued scrutiny on budgets within organizations as companies rationalize not only their learning and development spend, but they're rationalizing spend across the entire enterprise. I mean, and we're doing the same thing. We're no different. But this streamlining for us presents an opportunity in that we've talked for some time now about the opportunity for us to be a consolidator of learning and development content, more importantly, strategy, and to be the platform that organizations look to as they're thinking more strategically about developing a skills development capability. I'll give you an example. One of the largest tech companies in the world, a Fortune 100 tech company, made a decision to pivot and really start investing in developing a strategy with a more outcome-driven approach. As a result, we replaced our largest competitor in a 40,000-seat deal. The reason that they chose us was the breadth and depth of the content, the breadth of our platform, not just on the technical skills development side, but the business skills development side, and through the process, the adoption they saw in the organization of our platform versus our primary competitor. We see these types of examples manifest on a continuous basis. That being said, we're in the midst of two major transformations right now. One is the skills-based organization transformation, which I just alluded to. The other is AI, transforming organizations regarding how they leverage generative AI to streamline operations and improve their products and services. These transformations take time. While we see positive signs and examples like the ones I've shared, this transition period may continue for a bit. We can't predict exactly when the cycle will turn back up, but we note the strong demand for what we provide.

Yes, we are currently in the midst of our 2025 planning. We do want to help align expectations around a few discrete headwinds that we have during this transition year, particularly on the Udemy business side. In restructuring to align our business to the current conditions and focus on the strong opportunity we see in enterprise, we have reduced our SMB capacity by about $20 million. We also continue to see weakness in EMEA, leading to several points of headwind against our overall growth and more impact on Udemy business. Additionally, we are expecting high single-digit revenue decline rates on the consumer side next year, which tracks about three points of overall headwind. Although we are cautious regarding investments related to that segment, we are also excited about building a career-based development experience for learners globally.

I was hoping you could actually talk about the integration with Workday. Seems pretty interesting. Just wondering if it's similar to the typical integration with a learning platform or if there are other elements of the partnership? And also wondering, to get all the advantages of that, do you have to be a Workday customer and a Udemy customer? Just any details on that would be pretty interesting. Thanks.

Yes, Josh. Good question. Yes, we're excited about the partnership and relationship we have with Workday, as well as the new integration we just announced. This integration maps our Udemy business content to the Workday skills cloud. It has several unique advantages. It enables learners to display the skills they’ve developed within the platform within their environment. It also allows and provides administrators the ability to view those employee skills and track skills that are in development. Promoting internal mobility is something we care a lot about, and it's a primary value proposition that we share with Workday. We've worked closely with Workday for some time, and this is just the next step in the evolution of our partnership. To take full advantage, yes, you would need to be both a Udemy customer and a Workday customer.

Just wondering how we should think about Workday's initiatives. Are there any learning management systems or HCM vendors in their skills development approach versus Udemy's efforts? Which one do customers generally adopt? Should we see any differences between the learning platform or the content provider?

It's a good question. Our strategy has been and will continue to be to integrate with all LMS, LXPs, and technologies that our customers use to deliver learning and provide a learning experience for their employees. This is something that is unique. We integrate even with some folks that we view as competitors because they've got their own LXPs. On the customer side, it really varies on a case-by-case basis. For instance, in the Workday example, if they have the capability within their product, the Skills Cloud, to map skills to learning, we integrate, enabling the customer to choose the optimal approach based on the outcomes they seek to achieve.

Greg, maybe first for you, you talked about having the benefits of having the new CRO in, and while recognizing that these budgets obviously don't turn on a dime, can you talk about maybe some of the processes or new processes you've been implementing as you focus on larger customers, and how quickly you expect to see that impacting pipeline conversions as we go into next year?

Yes, that's a good question. Thank you, Ryan. Rob's been focused on developing sales capability across our organization and customer success to ensure we are very capable in selling into the key verticals that we've targeted. This includes account planning capability, sales enablement, and all elements required to create a high-functioning and hyper-focused sales organization selling not just to these enterprises, but specifically to chief learning officers and heads of people, as well as technical buyers. We're up-leveling the support and resources for our sales organization, as this will help us land larger deals and facilitate better relationships moving forward. We anticipate the results appearing in next year as we continue to develop our strategies and refine our approach.

Yes, so we're anticipating that the environment next year will mirror this year's, with elongated sales cycles. Regarding churn, our gross dollar retention has remained stable, with a decrease of about a point and a half over the past six quarters. However, upselling will be pressured, and we expect longer sales cycles. In terms of Udemy business growth overall next year, we'll see impacts due to our reduction in growth resources, particularly for SMBs. We are excited about UB’s long-term growth prospects and potential, reaching double-digit growth.

Sarah, just following up on a couple of prior questions, you mentioned some points of impact on the business in '25. Was that specifically for Udemy business? My math suggests a growth range could be 14% to 16% next year accounting for headwinds. Is that the right way to approach it?

Yes, the headwinds I referred to apply to total growth, not just to Udemy business. The impact on Udemy business growth will indeed be larger, but overall the growth will be negatively affected by the existing conditions.

Yes, that's a straightforward question. From my perspective, the biggest impact will come from better serving our existing customers. We previously mentioned we’re less than 10% penetrated in our enterprise customers, and we've got over 5,000 such clients. Therefore, enhancing efficiency in selling to our existing customer base is vital. Moreover, our focus on developing skills-based organization capabilities and strategic partnerships positions us to overcome the challenges we face in the next year.

Can you provide a bit more detail on the performance on a geographical basis? I believe you mentioned EMEA. Additionally, which regions are performing well, and where do you believe there's room for improvement?

Yes, we see muted growth primarily in the EMEA region. In contrast, APAC and LATAM are performing well, and that’s where we are building some of our teams and hiring key leaders to leverage opportunities. We have a global presence with 60% of our revenue coming from overseas, which results in different growth trajectories across regions. Regarding net dollar retention, we have experienced continued elongation of sales cycles, resulting in organizations taking smaller bites at the apple over longer periods. While gross dollar retention remains stable, the complexity of upselling is taking longer due to budget scrutiny in this current environment. Our focus continues to be ensuring customers derive value from our offerings to stimulate growth in these accounts.

Congrats on the solid results despite the tough macro environment. I have a question for Greg or Sarah regarding the net retention rate. Considering the current macro conditions, what are some of the measures you could take to stabilize the net retention rate? When do you believe it will bottom? I also have a quick follow-up.

There are two focuses here. First, our priority is maintaining a strong retention number by delivering more value to customers. On growth, we are building out our capabilities for business skills and soft skills that will lead to expanded opportunities. This is part of a transition year where we must navigate sales cycles extending from nine to 12 months. Although it will take time to adjust, we expect our initiatives to yield positive results moving forward.

I'll add to that. As mentioned earlier, the introduction of our AI products and Assistant is expected to enhance customer engagement significantly. We anticipate, as these tools roll out to our entire customer base of 17,000, they will significantly increase adoption, which will positively impact net dollar retention and opportunities for upselling. We're very enthusiastic about our product developments and the impact they will have on our future growth.

Thanks for your insights. What product developments or roadmaps should we expect from Eren Bali upon his return as CTO, specifically outside of the AI topic?

I’m incredibly excited about Eren’s return to the business. Eren has been on the board since he stepped away from his operating role years ago. With his passion and commitment to innovation, we believe he will greatly influence the next phase of our growth. While we can't disclose specific product roadmap capabilities at this moment, his return enables us to expedite innovation and delivery on various fronts, and we will share more details in upcoming announcements.

I wanted to focus a little on expansion within Udemy Business. You’ve expanded your product portfolio with AI capabilities. Could you share more on your go-to-market strategies to encourage further expansion or product upselling?

As I mentioned earlier, Rob's focus is on enabling our organization, now that we have a broader platform of capabilities, to effectively engage with senior leaders in organizations around the world. We need to demonstrate how our offerings can impact developing skills throughout the enterprise, and that requires high-level conversations. With our new capabilities, we can also be competitive at a much larger deal size that emphasizes both tech and business skills development.

The decline in net new customer additions this quarter is primarily due to the impact of reallocating resources from SMB to larger enterprise customers. As we focus on larger segments, we anticipate a moderation in our overall net customer additions, especially given the changing dynamics in sales patterns and long-term customer relationships.

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

Yes. I'd just like to thank everyone for joining today, and we look forward to updating you on our Q4 call in February. Take care.

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