Udemy, Inc. Q1 FY2025 Earnings Call

Good day, and welcome to Udemy's First Quarter 2025 Conference Call. All participants will be in a listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note, today's event is being recorded. At this time, I'd like to turn the floor over to Udemy's Vice President for Investor Relations, Mr. Dennis Walsh. Please go ahead, sir.

Thank you. Joining me today are Udemy's Chief Executive Officer, Hugo Sarrazin; and Chief Financial Officer, Sarah Blanchard. During this conference call, we will make forward-looking statements within the meaning of Federal Securities Laws. These statements involve assumptions that are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those discussed or anticipated. For a complete discussion of risks associated with these forward-looking statements, we encourage you to refer to our most recent Form 10-K and Form 10-Q filings with the Securities and Exchange Commission. Our forward-looking statements are based upon information currently available to us. We caution you to not place undue reliance on forward-looking statements 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 that these non-GAAP financial measures support management and investors in evaluating our performance and comparing period-to-period results of operations in a more meaningful and consistent manner. A reconciliation of these non-GAAP measures to the most comparable GAAP financial measures is included in our earnings press release. These reconciliations, together with additional supplemental information are available on the investor relations section of our website. A replay of today's call will also be posted on the website. With that, I will now turn the call over to Hugo.

Thank you, Dennis, and good afternoon, everyone. I'm honored to be here today for my first earnings call as CEO of Udemy, and I would like to thank our Board, leadership team, and all our employees and instructors across the globe for their warm welcome. Looking at our results for Q1, I am very pleased that we have exceeded the high end of our guidance for both revenue and adjusted EBITDA, and I want to congratulate the Udemy team for delivering these results. I'll use this time to share a bit about myself, why I chose to join Udemy, my initial observations, and insight into my long-term vision. I have more than 30 years of experience working in tech. For more than two decades at McKinsey, I worked with some of the most iconic companies in Silicon Valley to innovate, scale, and globalize their business. During that time, I guided organizations through B2B and B2C commercial transformations and played a key role in strategy setting, product development, and large-scale M&A. I also worked extensively with private equity firms investing in tech, including many of the ed-tech and human capital management companies that transacted in the past decade. To give you a sense of the scale at which I have operated directly, I spent several years in leadership roles at UKG, a leading global HCM company, where I led product and technology teams of more than 6,000 employees globally, serving more than 80,000 organizations. In the first quarter of 2023, the last time UKG's results were disclosed, quarterly revenue surpassed $1 billion for the first time. During my time, I spent countless hours with HR and people leaders and developed an acute understanding of their needs and challenges, which will serve me well at Udemy. I successfully launched eight innovative AI products and led many strategic acquisitions, significantly scaling the business. As I reflect on what excites me about Udemy and its future, three things stand out. First, Udemy's mission deeply resonates with me. My father was the first person in his entire family to attend university, and through his relentless commitment to continuous learning, he ultimately became a university professor himself. This instilled in me a profound appreciation for accessible quality learning and how it can transform a person and a whole family's life. Second, the global opportunity for reskilling is massive and expanding. Businesses are spending billions on workforce training and individuals are investing in critical skill development to launch their careers and adapt to the evolving market. AI is accelerating the shift, and I want to be part of that. This brings me to the third reason. I'm excited to leverage my experience in delivering AI solutions to solve enterprise-wide challenges in what is the most significant technology inflection point in Udemy's history. We have an incredible opportunity right now to implement an AI roadmap that will supercharge our engine to drive the reskilling of the global workforce. Since joining Udemy, I have connected with our employees, many of our top instructors, more than 100 customers and prospects around the world, and many partners. It has been an incredible experience, and I'm even more excited by our scale, speed of content delivery, and the impact we provide. All these factors will enable us to both redefine and lead this category, and I see even more opportunity than I initially envisioned. Although it is premature for me to lay out the long-term plans, you can expect continuity where it matters and evolution where it is needed. Udemy is transforming from a content provider to an AI-powered reskilling platform that is business-critical, with every new product and feature evaluated through an AI lens for increased productivity, value, and time to market. This transformation leverages the core strengths that made us an industry leader. As it relates to continuity, we will continue to target large enterprises in key verticals as we have discussed previously. We are already seeing tremendous customer traction, including our largest deal of the quarter, which was a multi-year enterprise-wide expansion with one of the world's largest professional service firms. This was a high seven-figure total contract value deal. The customer selected Udemy as a preferred reskilling platform to support their transition to a skill-based organization. They cited our unique ability to deliver measurable business outcomes, including increasing consultants' billable hours. The second example is ConnectWise, a software company in the U.S. that empowers MSPs in IT service management. They selected Udemy as their skilling partner. They expanded licenses wall-to-wall to all employees to support upskilling in priority areas such as AI and automation integration, as well as technical upskilling for product innovation. A third example is ModelN, a U.S.-based revenue management software company that selected Udemy to support their organization-wide GenAI upskilling for individuals and all functions. Udemy's GenAI Skill Packs, Skills Mapping, and advanced technical content were the key differentiators that led them to select us. Finally, a large robotic process automation leader consolidated their learning ecosystem from three vendors to Udemy for their reskilling platform. The consolidation stemmed from our ability to deliver a breadth of cutting-edge content and measurable outcomes. As you can see, the common theme these examples share is that the customer has a strategy in place to drive tangible business outcomes, and the Udemy platform is purpose-built to deliver those results. As we continue to make progress moving up-market and focusing on key verticals, we will also continue to grow our bottom line. The cost initiatives we put in place over the past two quarters and the ship-on-market will allow us to deliver meaningful margin expansion this year and in 2026. While our foundation is sound, the pace and scale of our execution haven't always matched the rapidly evolving market opportunity. In today's dynamic environment, we need to accelerate innovation, particularly in AI. We need to tighten our execution and sharpen our focus on enterprise value creation. My experience transforming and scaling complex global businesses has prepared me to lead through this type of inflection point. A few initial areas where we will be taking action in the near term include; first, increasing our emphasis on consumer subscription, which saw revenue rise nearly 40% year-over-year in Q1. This shift represents a fundamental evolution of our business model towards more predictable, high-quality recurring revenue. Professionals are increasingly embracing continuous career-focused skill development to be successful in today's rapidly evolving environment. Second, we will be expanding our partnership ecosystem. Partners will be able to leverage Udemy's global reach and technology infrastructure to create, distribute, and monetize specialized content and experiences while Udemy generates revenue through both content sales and platform fees. Third, we are executing comprehensive global market activations. With over 60% of our revenue coming from outside of the U.S., Udemy is truly a global company, but there is more we can do. We will be implementing a full-stack localization strategy across high-potential markets. This means developing market-specific product experiences, creating culturally relevant campaigns, building a localized web and mobile interface, and developing tailored go-to-market approaches. Finally, we will pursue strategic growth opportunities. While historically we primarily relied on organic growth, there are opportunities to explore broader strategic initiatives that could deepen our impact. As we assess these opportunities, we will remain highly disciplined in ensuring that any actions we take align with our mission, amplify our competitive advantage, and create value for all stakeholders. Now, let me dive into the AI trends, which are a huge opportunity for Udemy. As everybody knows, AI is already disrupting learning in the ed-tech market. While some may believe that this disruption is simply about AI-generated content creation, it is much more. It enhances the value of a platform player like Udemy. AI enables us to augment the value we deliver to learners and creators alike. First, AI is creating a need for new types of skills that didn't exist before. This means increased re-skilling demand in an expanded addressable market, and Udemy intends to take advantage of that. Second, AI removes the constraint of traditional linear video learning and enables us to make the experience more personalized and therefore more effective. For example, historically we did not tailor courses to someone's starting point beyond choosing a beginner's course, an intermediate course, or an advanced course. With AI, we can evaluate the learner's knowledge with AI-generated assessments, leveraging our deep body of content and engagement for millions of learners. Then we can tailor the curriculum and the learning path to a learner's needs. We can modify the modality, such as a short form, a role play, and a lab, and then use feedback loops to confirm skill mastery and retention. This approach leads to significantly better outcomes and therefore better ROI. Third, Udemy is a two-sided AI platform. AI also enables our content creators to use new modalities more easily. It can repurpose content, deliver more engaging re-skilling experiences, and provide AI coaches that complement the instructors. We have many exciting examples of AI-powered capabilities that are now part of our re-skilling platform. Thousands of enterprise customers are already using our skill mapping and AI-driven learning paths to measure, manage, and maximize their re-skilling investment. Our AI innovations are reducing program creation time by 80% on average, while enabling L&D teams to deliver targeted, high-impact development journeys that align with strategic business outcomes. We also introduced Career Accelerators this week. These curated, role-specific learning paths built on Udemy's skilled marketplace support more personalized learning experiences by guiding learners towards career outcomes. The first set of accelerators, which includes AI Focus Module, are now live with many more launching this year. Before the end of Q2, Udemy's highly anticipated AI-assisted role play will be available across the Udemy business platform. This will empower our instructors to create custom content that is truly engaging. We are confident that our approach will unleash significant innovation at a scale that publisher models cannot match. From a demand perspective, we have the opportunity to be the essential AI re-skilling partner across the enterprise, as well as for individuals. Udemy has an unmatched combination of content breadth, learner engagement, and structured learning paths. We currently have nearly 1,700 AI and machine learning courses available on Udemy Business, including more than 900 on GenAI and approximately 4,000 GenAI courses on our marketplace. Our AI content drives exceptional engagement, generating 10 million course enrollments to date and adding new enrollments at a rate of 10 per minute. In a fast-moving category like AI, the marketplace model of Udemy provides us with a significant advantage. Beyond raw content volume, we've developed many curated GenAI skill packs tailored to specific roles in the AI foundation, providing the structured re-skilling experience that enterprises need for systematic workforce transformation. Companies that aim to build a thriving organization that fully leverages the power of AI will need to enable seamless collaboration, not only between agents and people but between agents themselves. They will also need to learn how to manage and train agents, turn agents into cultural ambassadors, and ensure agents uphold the company values. We are positioning Udemy at the forefront of the AI revolution by becoming one of the first learning platforms to integrate two groundbreaking AI protocols, Google's agent-to-agent protocol and Anthropic model context protocol. The model context protocol transforms how learning leaders interact with our platform, allowing them to use natural language to design, deploy, and measure learning programs, ultimately reducing what used to take weeks to literally minutes. Meanwhile, the agent-to-agent protocol enables AI systems to collaborate seamlessly, creating powerful workflows where specialized AI assistants can work together to support both learners and administrators. By providing structured, role-specific AI training for all employees and embedding these protocols, we are creating significantly deeper integration with our customer strategic objectives. This approach dramatically enhances our platform's stickiness, and we become embedded in their AI transformation strategy. While Udemy has established a foundation in the AI-powered workforce upskilling space, we have work to do in order to fully capture that opportunity. We need to significantly enhance how we market our platform and AI capabilities, clearly articulating our differentiated value proposition to both individuals and enterprises. I'm also driving a company-wide mobilization around the subscription-first priority, and we will transform our digital experience to better serve the distinct needs of our customers. We expect these initiatives will unlock growth in 2026 and beyond. This is why we are continuing to invest strategically in our platform, AI capabilities, and enterprise solutions. We are positioning Udemy to thrive in any environment, including the next wave of workplace transformation that will define organizational success for years to come. Bottom line, we have an opportunity to fundamentally reshape the reskilling industry in a way that no other player can match, and that is what has me so excited about being in this role. Thank you for the opportunity to earn your trust, to lead this company, and to achieve that goal. I look forward to getting to know you all and appreciate you being with us on this exciting journey. With that, I'll now turn it to Sarah.

Thank you, Hugo. I'll cover the key financial highlights and our outlook. Full financial tables are available on our Investor Relations website. As we move down the P&L, note that all financial metrics other than revenue are non-GAAP unless stated otherwise. Before I dive into the results, I want to remind everyone that we are in a transition year. We completed a restructuring in the back half of 2024, pulling significant capacity out of our SMB team. While that creates pressure on the top-line growth, we continue to deliver meaningful margin expansion. We had a strong Q1, and Q2 is also shaping up nicely. That being said, we do think it is prudent to be conservative in our outlook in the second half for the top line given the external uncertainty. We remain confident in our ability to execute against our key priorities through this transition while continuing our track record of delivering year-over-year adjusted EBITDA expansion, which we've done successfully for the past 10 quarters. Our focus on operational efficiency puts us in a position to raise our expectations for adjusted EBITDA for the year despite a more conservative top line. Starting with Q1, quarterly revenue surpassed $200 million for the first time, and adjusted EBITDA exceeded expectations. Udemy Business Annual Recurring Revenue, or ARR, was $519 million, up 8% from a year ago. ARR from large customers increased by 9%, and we closed over 40 new business deals during the quarter with over $100,000 in ARR as we continue to focus on the up-market. Udemy Business Revenue was $128 million, an increase of 9% year-over-year, including a one-percentage point headwind from changes in FX rates. The year-over-year growth was primarily driven by the increase in enterprise customers. New logo acquisition and net dollar retention experienced some pressure this quarter, as expected, primarily due to our strategic go-to-market shift and reduction in sales capacity. We had approximately 120 net new Udemy Business customers, increasing our global customer base by 7% year-over-year to more than 17,200, including 5,700 large customers, up 9%. Our consolidated net dollar retention at quarter end was 96%, while the rate was 100% for large customers. These metrics do not come close to reflecting the significant expansion opportunity that is embedded within our existing customer base. Udemy has penetrated less than 10% of available seats, giving us extraordinary headroom for growth with minimal incremental customer acquisition costs. We are doubling down on this opportunity, and earlier this week, we announced the appointment of our first-ever Chief Customer Experience Officer, Neeracha Taychakhoonavudh. Neeracha brings unparalleled expertise from customer success leadership roles at Asana and 14 years at Salesforce. She has a solid track record for building world-class expansion and retention engines. This is a strategic move that underscores our commitment to capturing that opportunity and increasing customer penetration. Turning back to the results, growth margin for our Udemy Business segment came in at 75% for the first quarter, up 300 basis points from the year prior. This improvement is primarily due to a reduction in content and customer success costs. For the consumer segment, revenue was in line with our expectations at $73 million, or down 8% on a year-over-year basis, including a negative three percentage point impact from FX. Despite the pressure, personal plan subscriptions continue to gain traction, and revenue from this offering has grown to approximately 13% of the segment's total revenue. Over the past few years, we've had a transformative shift in our revenue composition toward a more predictable subscription-based model. Subscription revenue across both segments now accounts for 68% of our total, representing a 500 basis point expansion year-over-year. When I joined Udemy just four years ago, that mix was only 29%. This significant growth in subscription revenue increases visibility and contributes to gross margin expansion and improved unit economics. In Q1, total company gross margin was 65%, a 300 basis point improvement from Q1 2024. The improvement was driven by the change to content costs, as well as a continued revenue mix shift to Udemy Business, which accounted for approximately 64% of total revenue in the quarter, an increase of 400 basis points year-over-year. Total operating expense was $116 million, or 58% of revenue, 400 basis points lower than Q1 of last year, driven primarily by our cost savings initiatives. On the bottom line, we delivered net income of approximately $18 million. Adjusted EBITDA was approximately $21 million, or 11% of revenue, representing a nearly 800 basis point expansion year-over-year. The better-than-expected result was driven by our revenue outperformance and ongoing focus on operational efficiency. Now turning to our balance sheet and cash flow metrics. We ended the quarter with $358 million in cash, cash equivalents, restricted cash, and marketable securities, and free cash flow for the quarter was $7 million. Our free cash flow for the quarter was impacted by the timing of collections and payments associated with restructuring. We expect significantly higher free cash flow in the second quarter. Our solid balance sheet and cash flow allow us to maintain a long-term perspective and to make disciplined investments in areas that will drive sustainable growth and value for all stakeholders. Now for our outlook. Since the start of Q2, we've seen an increased level of uncertainty, particularly related to recent geopolitical developments. While we have not yet seen a material impact on pipeline build or conversions, it is prudent to expect that these dynamics may contribute to a more cautious spending environment and decreased consumer confidence. Therefore, our outlook bakes in a healthy degree of conservatism on the top line while raising our outlook on the bottom line. The primary factor contributing to our more conservative top-line guidance for the year is softer than expected performance in our consumer segment. We have already begun taking action to address consumer segment performance while simultaneously accelerating go-to-market initiatives. Within our Udemy Business segment, we are maintaining a cautious stance given the broader macroeconomic indicators. We are closely monitoring certain focus verticals that may experience greater spending caution, particularly IT consulting firms with exposure to federal government contracts and manufacturing organizations impacted by tariff-related uncertainties. We will strategically focus resources toward verticals showing the strongest demand signals, ensuring we optimize our growth potential. From a regional perspective, we expect potential headwinds in North America and EMEA, where economic signals are mixed, while maintaining a more optimistic outlook for APAC and Latin American markets, where we continue to see healthy growth opportunities. From an operational standpoint, we remain focused on what we can control, particularly our cost structure and capital allocation discipline. The $50 million in annualized cost savings we implemented over the past few quarters provides us with additional resilience to navigate any potential headwinds while continuing to make investments that advance our strategic priorities. With all of that in mind, we expect second-quarter revenue to be between $195 and $199 million, representing a 1% year-over-year increase at the midpoint. Assuming exchange rates remain constant, FX is expected to negatively impact Q2 revenue growth by 150 basis points. The midpoint of the guidance implies Udemy Business revenue increases approximately 6% year-over-year, including a negative impact of 50 basis points from FX, while consumer revenue would be down 7%, including a negative 300 basis point impact from FX. On the bottom line, we expect to deliver adjusted EBITDA of $22 to $24 million, or approximately 12% of revenue. For full-year 2025 revenue, we now expect to be in the range of $772 to $794 million, representing a slight 50 basis point year-over-year decline at the midpoint, including a 100 basis point headwind from FX. The midpoint of the guidance implies Udemy Business revenue increases approximately 5% year-over-year, including approximately 50 basis points of headwind from FX. For Consumer, the midpoint of guidance implies revenue for the year to be down approximately 9% year-over-year, including a negative 250 basis point impact from FX. On the bottom line, we increased our full-year adjusted EBITDA range, as we now expect to deliver $77 to $87 million, or approximately 10% of revenue at the midpoint. This guidance reflects our unwavering commitment to operational discipline. We have built multiple levers into our operating model that allow us to adjust as needed while protecting our investments in key growth initiatives. This balanced approach to financial management has consistently enabled us to meet or exceed our profitability targets, and we remain confident in our ability to continue delivering meaningful margin expansion. To summarize, we had a great start to 2025. Although we are being prudent about our outlook for the year, we remain as excited as ever about the long-term opportunity. Throughout 2025, we will focus on executing the strategic initiatives that will position Udemy to reaccelerate growth and drive further margin expansion. We look forward to keeping you updated on our progress. So, with that, we'll open up the call for your questions.

Ladies and gentlemen, we will now begin the question-and-answer session. Our first question today comes from Ryan MacDonald from Needham & Company. Please go ahead with your question.

All right. Thanks for taking my questions. And Hugo, welcome. Maybe to start with you, can you just perhaps delve deeper into some of the key observations you've had during your first 45 days of tenure here? And then, obviously, we're still assembling the long-term vision, but you talked about some priorities. But maybe just in the near term, over the next 90 days in the quarter here, you know, what are your main priorities? Thanks.

Thank you. Thank you, Ryan. As I've said, I could not be more excited. I was excited before joining. I'm excited now that I've spent time with our customers, our instructors, our partners, and our employees. And I'll give you a couple of examples. You know, I ended up spending three days in the UK at a power-up event. We had 100 customers, and I was just struck first by how much these customers and prospects are really keen on our success, are really deep in their understanding of what we can do but also seeking our help. In particular, one thing that has become very apparent, and was not apparent six months ago or a year ago, is yes, AI has been around for a while, but now every L&D leader, every Chief People Officer, every CHRO is being tapped on the shoulder by other members of the C-suite, their CEO, to say, like, we need an AI transformation. We need to be AI first, design a program to get us there. And it's not easy. It's not just turning ChatGPT on and hoping for the best. You need to design a program. I think here we're really well positioned. We've got a lot of content. What we haven't done, this talks a bit to the opportunity, is we haven't merchandised, packaged, and told the story effectively. So that's a near-term opportunity we have. We have more content, more experience, more proof points of value delivery. We just need to package it better. And we're pushing really hard to do that in earnest. Even as we speak right now, there's a full-blown initiative to try to do that better to seize the opportunity. So that's one example. The second one is the consumer learner is taking over a lot more ownership of their career. They see the uncertainty in the market, they see the impact of AI, and they want to be in charge. Coincidentally, we have these career accelerators that are appearing right at the right moment. So I'm very excited to see the impact that's going to have on our business moving forward. It gives us an opportunity to lean in more. This is a change. We're going to lean more on subscription. Our business on the consumer side has been very, very anchored in transactions. I think we now have an opportunity to be the companion, the coach, the tutor for our consumer and help them through these career transitions or growth. So a really nice opportunity. A third one is we have distribution. We serve 17,000 enterprises, almost 6,000 large enterprises. We have intimate relationships with many of them. We're helping them through their reskilling journey. We're providing them useful outcomes. But we haven't leveraged that to partner with others. So I think a big opportunity lies in third-party partnerships and bringing them along. That's going to take a bit longer to realize; this is not an easy lever to pull. But I'm excited by the power that this can bring to our platform and to our customer relationships, creating more stickiness. The fourth one, and sorry for the long answer, it’s such an important thing. I mean, our roadmap, when I was considering joining Udemy, I spent a lot of time trying to understand what we were doing. I looked under the hood. I was very impressed. We were already doing some really important pivots to bring a lot more AI and refresh our two-sided marketplace. Now that I'm here, I'm seeing it more closely, I'm even more excited. And then we've made some very strategic initiatives; one of them, the role play and the way we're doing the role play is going to be very revolutionary, very different than what others are doing. We're providing our instructors AI tools to create role play. Because we have this ecosystem of instructors, we can scale this fast. I want to give you an example. It's incredibly exciting. We've made this available yesterday. We pre-populated the role play with 32 examples, and 24 hours later, we received 200. That's the power of the ecosystem. That's the power of the instructor network at play who are seeing this as an opportunity for them to enhance the value they deliver to make their program, their classes, their reskilling journey more meaningful. I’m really excited to see what we’re going to be able to do. And we've got more of those along the way. So it's a long way of saying, I'm truly excited about the opportunity. We do have things that we need to change in the near term. You know, I've mentioned the merchandising and the packaging of our AI, our existing AI. I've mentioned subscription, putting more emphasis on that. I want to come back to something Sarah said; we have not fully captured the opportunity with our existing customers concerning the expansion. I'm extremely excited. I've worked with Neeracha in the past. She is incredibly strategic. She brings a wealth of experience. She's seen the movie at a different scale. I thought it was really important to make that happen immediately or as quickly as possible. I'm excited to see what we're going to end up doing throughout the rest of the year with her leadership.

Excellent. Excited to see how that all develops, and I appreciate all the color there. Sarah, maybe just one for you following up on the updated guidance. Certainly makes plenty of sense to be prudent given the market uncertainty right now. But as we look across the two segments, consumer and Udemy Business, on the consumer side, are you building in any assumptions for contribution from the new career accelerators? And then on Udemy Business, it seems that Udemy Business obviously does very well in these sort of content consolidation situations. Are you seeing any signs of a pickup in RFP activity looking for more consolidations? And what do win rates typically look like in those scenarios? Thanks.

Yes, thanks for the question, Ryan. So a few things. On the consumer side, we do expect the career accelerators to be very exciting for the learners out there. But we want to be prudent. The majority, as you know, of our consumer revenue today does come from the transaction side of things. We're making meaningful progress in subscription, and Hugo has kind of shifted our emphasis to subscription first. So that's really exciting. But the majority is still transactional. So just when we're thinking about the rest of the year, there is some macro uncertainty; consumer sentiment is weaker than it's been in a while. So there could be some spending impact that could offset what could come from those career accelerators. We're just getting started on those, and we are going to be releasing career accelerators throughout the year. So just being balanced with the pros and the cons of those two sides of the coin. On the Udemy Business side of things, we certainly are hearing and continuing to hear, I would say this is not necessarily new right now, but we have been hearing about consolidation. We have seen the RFP volume looking for one consolidated reskilling platform. We know that that is good for Udemy because of our breadth and because of our depth and what we can deliver. At the same time, you heard Hugo talking about, it's the consolidation. Now what we're hearing more and more is this strong need for AI skills so that companies can AI-enable their workforce and take advantage of what AI can do for them. So I'm very excited about what that means for us, and I think just being very balanced in how we view multiple scenarios that could play out in the back half of the year.

Let me add one more point. This comes from our conversations with customers. The current uncertainty is raising more questions and creating some pressure. A good question to ask L&D leaders is why they have so many providers with overlapping skills. I appreciate that question and would like to see it come up more often because it bodes well for us. We have a stronger model with greater breadth and freshness, and we will seize opportunities to promote consolidation and act as a thought partner. Our demonstrable ROI is also better. While I’m not pleased that decision-making may be stalling, I welcome the consideration of consolidation because it aligns with our strengths.

Our next question comes from Jason Tilchen from Canaccord Genuity. Please go ahead with your question.

Yes. Good afternoon. Thanks for taking the question. Just a little bit of a follow-up there. I'm wondering if you could share a little bit more about some of the conversations you've had with enterprise customers that are sort of in the pipeline already or customers that you're looking to sort of expand seats and licenses at. How those have evolved over the past few months and how those conversations have changed. That would be really helpful. Thanks.

Yes. Thanks, Jason. I have 45 days of history here. Obviously, prior to being here, I was still talking to roughly the same people. So I've got multiple years of experience with the space. A few things I'd call out. The first one I've already mentioned, there's a bit of uncertainty. It does lead to more question-aligned RFPs, and that's not surprising; that will happen in all categories. The second is there's a lot more question on consolidation, and I love that. Please keep asking those questions. The third one is I'm also observing that the question of ROI, what's the value we're getting from all this spend, is coming more and more often, and it's forcing L&D leaders, CPO and CHRO, to engage with the business around business outcomes. I think that plays really well to our platform, the type of classes, and types of reskilling that we're delivering. I'll give you one example of an incredibly large financial institution. We just closed an expanded deal. We tripled the size of the account. We cover 70% of the employees, and we were able to demonstrate that employees who followed certain learning paths, reskilling paths, had a 12% increase in retention. Imagine the value that you can articulate if you're an L&D leader or CPO to the business and say, hey, the fact that I'm spending this money on Udemy is leading to better retention. We don't lose the expertise. We don't need to go spend money on hiring. We don’t need to retrain them, yadi yadi yada. This environment gives us an opportunity to team up with our customers and connect the dots more clearly between attrition, onboarding, promotion rates, or specific business outcomes and the work that they do on our platform. At a macro level, those are the top three points, and then I’ll wrap up with the one I touched on very early on, is there is a real set of questions around helping me with AI fluency. It's not just the dev and the IT department; it's the whole organization. I need the frontline workers in a retail environment, I need the call center agents in a financial institution, and I need the legal department. That creates real opportunity because historically, Udemy was very strong in certain areas. Now we can go and surface the whole organization. To do that effectively, it’s not a question of content; it's a question of packaging and going to market in the right way. I'm very excited about that opportunity as well. It will take a bit of time as we retool some of our motion and our marketing and packaging, but that means going back to our existing customers that we already serve very well in certain areas and say we haven’t offered anything around AI fluency to the frontline workers, to the back office worker, to XYZ, and we now will have a much tighter story and a set of packages that meet those specific needs.

Our next question comes from Terry Tillman from Truist Securities. Please go ahead with your question.

Yes. Thanks, Hugo, Sarah. Well, first of all, welcome Hugo and hi, Sarah and Dennis. You know, it's interesting in terms of talking about the shift of focus to consumer subscriptions. You haven't been doing too badly without maybe not focusing on as much. I think it was up 40% year-over-year, and it's now 13% of that revenue segment. What I'm curious about is, Sarah, you talked about being prudent in terms of conservatism for the second half, but if you all do kind of shift the focus and focus more on consumer subscriptions, couldn't that have kind of a more immediate payback versus shifting focus on the enterprise side? I assume that's a quicker time to return on investment. I'm just curious how you think about the second half on the consumer subscription side, considering you're leaning in. Thank you.

Yes, it's a great question. Listen, it could. It could also have a little bit of an impact on GMV when you think about a lot of the learners who come on and purchase a few courses initially as part of the transactional model. Some of that GMV and some of that revenue could actually be delayed a little bit. So listen, we're hopeful. We're excited. There's a ton of opportunity, especially coupled with the career accelerators and the timing in which we're making this shift in focus to career. The push for subscription, it is the right time. I would add to that the capabilities and what we can deliver from a personalized learning experience. You can't really do that on the transactional side in the way we can on the subscription. So we have a lot of optimism. And at the same time, there is some uncertainty. We cannot control that external environment. Our heads are down. We're going to continue running hard. We're excited about the 40 percent subscription growth, but we want to keep driving that.

Our next question comes from Josh Baer from Morgan Stanley. Please go ahead with your question.

Great. Thanks for the question. Welcome and congrats, Hugo. I wanted to stick to consumer. Just wondering if you could expand a little bit on this push around consumer subscription. What changes should we expect to see? Is there changes in pricing, packaging, or marketing efforts? How do you go about the focus there?

Josh, thank you. Great question. It's yes on all of the above. I think that's kind of the main point. The ask, and this is already stuff that's in motion, is let's re-imagine the business as if this was the thing that we had. It doesn't mean that we don't do transactions. We don't do what we've historically done. I just want the organization to rethink and reimagine a world where this is the product. Lots of things we can do; the positioning on our website, the merchandising on our website, creating different subscription models, not just the one that we currently have, doing different marketing and different value proposition positioning. I think we've got a great story vis-à-vis some of others who do subscription. Our base subscription has three times more classes. That's really advantageous and exciting. We think we have a lot to offer. The answer is a lot of merchandising, blocking and tackling. There's going to be pricing changes that we're going to end up doing as well. All of that is on the way, because we're in the middle of that, but we're pretty excited. As Sarah has mentioned though, we're trying to be cautious because we do have a customer base that comes expecting transactions. They've been conditioned in a certain set of behavior. We need to be very thoughtful about how we migrate and make sure that we don't affect the top line too much. We know there's going to be puts and takes. We're going to do a lot of AB testing, a lot of experimentation, but we're going to push on that and see how far we can go.

Our next question comes from Yi Fu Lee from Cantor Fitzgerald. Please go ahead with your question.

Thank you for taking my question. Welcome, Hugo and hi, Sarah. My question revolves around AI. It sounds like Udemy is going full force with the AI opportunity. You guys know you have the content. I was wondering, Hugo and Sarah, how much of an upsell, cross-sell is the AI opportunity? When you go to a deal, how much contribution is coming from AI? How would you package that with the new Chief Customer Experience Officer now in place?

Great question. Everybody, not just in this industry but across industries, we're all learning our way through this AI. You've seen other players come with big price changes. I'm not going to claim that we've figured it out, but to answer more directly your question, we have, with our existing motion, with our existing customers, which is often targeted at certain types of persona, we have AI often at the center of the conversation, and it's included in Udemy Business Enterprise. Just to be very direct, that's an existing motion. What we’re going to end up now doing is packaging more targeted versions of this that don't have all the other content around certification and business leadership and say, 'Hey, here's a package that is AI-specific that you can offer to other personas in the organization at a different price.' What we're doing now is we're targeting different parts of the organization with very, very targeted packages of AI capabilities. That's one dimension of the play. The second is we're going to explore what we can and should do to enhance our pro offering and give certain types of AI content in one versus the other. Then we may have an AI premium version of Udemy Business Enterprise. Again, no decision has been made, but I’m giving you a sense of there are lots of different ways we can decide to monetize what we're doing. I’ll finish with the role play; we think it's pretty exciting. Right now, we're embedding it in Udemy Business Enterprise. There's no reason why in the future some of the role play may deliver sufficient value that on a standalone basis, it is also sufficient. We're going to keep our eyes open for monetization opportunities like this one.

Our next question comes from Nafeesa Gupta from Bank of America. Please go ahead with your question.

Thank you. First, regarding the consumer softness that you mentioned, is this more geography-specific, more in North America, the U.S., or do you see that across regions? This pertains to revenue per your MAU going down versus your MAU going up. Will we continue to see that?

Yes, great question. There are two aspects. One is we did see some price sensitivity in North America and in EMEA, which contributes to the ASPs for those learners. Also, continued mixed shift toward lower ASP regions within the consumer base is also contributing to that. There is a geographical mix, and there is also some price sensitivity. Looking at the back half, we think that could continue, particularly in North America.

Our next question comes from Noah Herman from JPMorgan. Please go ahead with your question.

Okay. Thanks so much for taking the questions, and congrats to you in the new role. Obviously, Udemy has put in motion a lot of change on the sales side. Could you maybe talk about what portion of the changes that are already rolled out in the last couple of quarters are starting to take hold now, and which specific areas do you think you might need incremental changes in your term? Thank you.

Thank you, Noah. At the macro level, I just want to reiterate that we're going to continue with the strategy as is, because it is a good strategy. If I had joined six months earlier, I would have recommended this strategy. I'm very excited by our focus on the large enterprises, our focus on the five verticals, our focus on value selling, and our focus on the land and expand set of motions. I think that's all good. A lot of it takes time. When we move to the large enterprise segment, selling cycles are longer. We also needed to change some of the players that were not necessarily equipped to operate at a large enterprise level. We've done all of that, and we're seeing some early benefits. There are some things we can point to, like some of the productivity measures. We're pretty excited about that. This is going to play out throughout the year. I thought the team was appropriately conservative in setting up that part of the business. I think where the difference can be improved in the near term and those are the tweaks. It's the same frame, but the way we execute, there are even more opportunities. I've touched on a few of them. One is the packaging, the pricing, the merchandising. I think there are real opportunities there that are very good. The second one is bringing in Neeracha and helping us again on the expansion motion. There are nuances there that we haven't gotten to yet. I just wanted to pull that forward. We don't need to wait for an 18-month transformation. I want to make it happen sooner. She's seen the movie. She's got a wealth of experience. We're going to try to put in place some of these capabilities immediately so that we can reap the benefits sooner.

Our next question comes from Jeff Meuler from Baird. Please go ahead with your question.

Yes, thank you. On the partner talk, given the background, how are you thinking about, I guess, HCM SaaS partner opportunities, or is there another broad category of partner opportunity that you think the company's historically underexploited? Thank you.

Thank you for your question. The definition of partners we consider is quite broad, which encompasses HCM and other categories as well. I typically think of a more comprehensive ecosystem of partners that contribute to our sales efforts, enhance value for our customers, and foster greater loyalty. We need to evaluate all potential partners through whom we can collaborate and develop mutual value propositions. This includes independent software vendors and others. I believe there is a significant opportunity here; while we have made some progress, there is still much more to explore, and I'm enthusiastic about starting this journey. I cannot guarantee immediate results, as it will require time to implement these changes effectively. However, I am genuinely optimistic about the potential outcomes we can achieve by 2026.

Our next question comes from Devin Au from Keybanc Capital Markets. Please go ahead with your question.

Hi. Just one quick clarification question. I want to ask about net dollar retention with the new B. I think Sarah, you mentioned SMB has kind of dragged the overall NRR down-ticking quarter over quarter, but if I'm looking at the large customer net dollar retention, I think that might have down-ticked a little bit more so than the overall average. I'm just kind of curious if you can share more color on what's driving that. Have you seen increased churn, greater down-sell pressure, or is this expansion activity continuing to be subdued in that category? Thanks.

Yes. Thanks for the question. So there are two parts to it. One is we did see a one-point drop in gross dollar retention that we were not expecting. The other side of it is on the upsell. The upsell is impacted by the changes to the sales organization that we spoke about, as well as ramping those reps up as we moved them around or brought in new folks. Both of those are contributing to it. We're super excited to have Neeracha on board; she's in the office this week because we have such a massive opportunity within our 17,000 customers being less than 10% penetrated. Having her to help us unlock that, coupled with what we're doing around AI, merchandising, pricing, and packaging, offers us lots of opportunities to improve net dollar retention.

And ladies and gentlemen, with that, we'll be concluding today's question-and-answer session. I'd like to turn the floor back over to Mr. Sarrazin for any closing remarks.

Well, first of all, thank you for joining today. I'm excited to be on the journey with you. We look forward to connecting again for our Q2 call in August.

Ladies and gentlemen, the conference has now concluded. We do thank you for attending today's presentation. You may now disconnect your lines.