Earnings Call Transcript - UDMY Q3 2021

Operator, Operator

Thank you for joining the Udemy Third Quarter Fiscal 2021 Earnings Conference Call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question-and-answer session. As a reminder, today's conference call is being recorded. I will now turn the conference to your host, Joel, to cover the safe harbor. With me today are Gregg Coccari, Udemy CEO; and Sarah Blanchard, Udemy CFO. Before we begin, during this call, we may make forward-looking statements within the meaning of federal security 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 SEC filings, including our quarterly report from Form 10-Q for this quarter, which ended September 30th, 2021 filed with the SEC on December 8th, 2021. Our 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 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 Securities and Exchange Commission as non-GAAP financial measures. 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 to our earnings release. The reconciliation of these non-GAAP measures to the most comparable GAAP financial measures is included in our earnings press release submitted to the SEC. These reconciliations, together with additional supplemental information, are available at the Investor Relations section of our website. A replay of today's call will also be posted on the website. During this call, we referenced an ESG risk rating developed by Sustainalytics. The use of the ESG risk rating and the information included therein is subject to limitations. For more information, see our earnings press release. I will now turn the call over to Gregg.

Gregg Coccari, CEO

Thank you, Taylor. And thank you all for joining us on our first call as a public company. It's been an exciting journey so far. We are grateful to our employees and instructors for their incredible commitment to our mission of connecting people everywhere to the knowledge and skills they need to succeed in a rapidly changing world. We're also grateful to Udemy Business customers and learners for trusting us as they upskill and reskill to meet the needs of the modern workplace. Thanks to them all, we had a successful IPO and a strong third quarter. As of the quarter-end, Udemy had over 46 million paid and free learners and over 9,500 customers subscribing to our Udemy Business offering. In the third quarter, we grew revenue to $129.6 million, up 9% year-over-year. Udemy Business grew 84% year-over-year, with an ending ARR of $207 million. As expected, the consumer business was down 13% year-over-year due to the extraordinary top-line growth last year during the early waves of the pandemic. Driving Udemy Business's strong year-to-year growth was increasing demand for our content; its quality, its depth, its breadth, its freshness, which is a direct result of our differentiated global knowledge marketplace. It provides both the content and significant leads that fuel our Udemy Business offering, which meet the specific needs of our Business users. For Udemy Business customers specifically, we've recently expanded our Udemy Business offering with new language collections in Italian and Russian, as well as immersive learning and cohort-based learning offerings. For those of you who are new at Udemy, I'd love to start with our founder's story because it reflects Udemy's commitment to making education and knowledge accessible and attainable. Eren Bali grew up in a small village in rural Turkey, where he attended a one-room schoolhouse, far from any city or university. He had an early interest in math and chess, but no one nearby to mentor him. Then his parents bought the family a used computer and Internet access. And everything changed for Eren. Suddenly, he could tap into the world outside his village, and soon he was searching for math problems online and learning from experts in the field. Eventually, he would win a national mathematics competition, move to the U.S., and become a serial entrepreneur. Online learning changed Eren's life, and he founded Udemy so that people everywhere could access the world's knowledge and pursue their dreams. But Eren did more than simply launch an online learning platform. By using a marketplace approach that allows experts anywhere to share what they know with learners anywhere, Udemy disrupts the way knowledge is shared and learned across the globe. Our marketplace serves as an ideal platform for the continuous upskilling and reskilling necessary in a changing world. Those training in education solutions, whether online or not, rely on an outdated publisher model. This legacy model hinders the speed of course development, limits the pool of potential instructors and their creativity. And it makes it difficult to localize globally at scale. The publisher model is simply too slow for the kind of rapid, continuous content creation necessary today. And it's not built to leverage user feedback to improve content quality in any timely manner. By contrast, Udemy's dynamic two-sided marketplace model allows instructors to quickly develop and update content to meet learner demand. Our consumer and business learners provide social proof and feedback at scale through enrollments, ratings, and reviews, which in turn give instructors the information they need to continuously improve their offerings. We also offer instructors comprehensive analytics and insights to help them improve the quality and increase engagement. And then there's the financial incentive, the potential to earn real income that motivates our instructors to produce the best, most relevant content they can. The efficiencies of the marketplace model have enabled us to build a fast catalog of high-quality courses that provide a comprehensive and immersive learning experience through videos and interactive exercises. Learners can communicate directly with instructors through a Q&A functionality. Machine learning and AI capabilities in our platform enhance course discoverability by personalizing recommendations for each learner. We offer local content and pricing to meet learners' needs across the globe. Again, we believe our marketplace approach allows us to be more affordable and accessible than other solutions while providing the highest quality, deepest, and broadest catalog of courses to our customers and learners. We estimate our market opportunity in online learning to be over $200 billion. According to the World Economic Forum, in the next 6 months, around 40% of workers will require reskilling in nearly all business leaders report that they expect employees to pick up new skills on the job as digital acceleration continues. To keep up with the pace of innovation, individuals and companies must continuously upskill and reskill. Udemy offers the ability to learn these skills with 5,000 new courses created each month, which are in languages other than English, to serve an increasingly global workplace. In order to maintain our position in the market, we're continually innovating our platform and developing new immersive learning products. We launched Udemy Business Pro, which features labs and assessments in a number of technology verticals. We also acquired a company called CorpU, which specializes in cohort-based leadership training for Fortune 500 companies. And in the quarter, we also incorporated new machine learning capabilities to enhance our search functionality and improve conversion and retention within the consumer business. Global distribution continues to be a strategic focus. Earlier in the year, we announced a strategic partnership with Woongjin ThinkBig, one of the largest Korean education companies to expand Udemy in Korea. We're now also expanding our reach into two massive regions, China, via a partnership with Sanjieke, a leading vocational education platform, and Sub-Sahara Africa, through a partnership with the MultiChoice Group, a leading media company in the region. Our partnership in China will focus on building our Udemy business presence in the country thanks to Sanjieke's local Salesforce and market knowledge. Udemy's expansion to Africa will be accelerated by MultiChoice Group, which will advertise Udemy's courses on television to more than 12 million households in 13 countries. These key strategic partnerships further position Udemy as the global learning destination. Over 30 million unique visitors come to Udemy every month to learn. This is the engine that fuels Udemy Business and enables us to disrupt corporate learning. Let me give you a few concrete examples to demonstrate how Udemy business customers engage with us. Citibank started with 5 licenses in 2018 and has now expanded to 100,000 licenses via a multiyear agreement. We're proud that Udemy is Citi's largest learning content provider and the one with the most digital content consumed by Citi employees. Citi chose Udemy Business to partner for two strategic priorities: personalized learning and building learning into the flow of work. Citi's tough courses include everything from technical topics like Python and Agile to power skills like communication and leadership. This quarter, we added new enterprise customers across verticals, including Fortune 500 Alcoa, Fortune 500 Mitsubishi Chemical, Caravan, the leading e-commerce platform for buying and selling used cars, and FREE NOW, Europe's leading multi-modal ability platform, which is deploying Udemy Business wall-to-wall, noting that continuous training is essential. We've also expanded with customers like Citibank, Michelin, and Mercado Libre. Let me also give you a quick overview of how learners are using our platform. A former taxi and limo driver in New York came to Udemy to learn SQL after dabbling with other online education offerings that never worked for him. Now after completing courses in SQL certification and SQL for data science from top Udemy instructor, Imtiaz Ahmad, he recently accepted a full-time tactical position at a large multinational bank headquartered in New York City. Another learner signed up for Udemy courses through the last mile program while serving a prison sentence at San Quentin. As part of our ESG program, Udemy supports this non-profit, which was established to help currently or formerly incarcerated people train for jobs in technology. This individual now teaches others from his community how to code and use the skills he learned on Udemy to secure a role as a software engineer at a leading Silicon Valley communications platform. We're also extremely engaged with our instructors. We drive the quality and breadth of our content and enable us to provide new content in real-time. In 2020, we paid our instructors $161 million, and our top instructors are making over a million dollars in annual revenue. We look at this investment and our instructors as crucial to our differentiation. First, instructors are amazing. Kyle Pew, a Microsoft-certified trainer and instructor at Udemy, reached 1 million students on the platform in September. Kyle posted his first course on Udemy in 2015 and has turned teaching from a side hustle into a full-time job. He even hired a team to assist with maintaining his 20 plus courses and keeping up with the learners. Lindsay Marsh, a Graphic Design Instructor on Udemy, hit $1 million in revenue after 4 years on the platform. Lindsay recently shared that creating and filming courses is now her full-time job. She credits Udemy for providing the platform and marketing resources to help her reach thousands of learners around the world. These are just a few of the over 60,000 instructors that make Udemy's marketplace so special. As a global learning platform, we see a huge opportunity to serve learners and economies where access to continuous learning is problematic or too expensive. Through our free offering, we've provided learning to millions of people around the world. We're committed to inclusion and diversity both in our own workplace and in the learners we serve and take pride in having been ranked by Sustainalytics in the first percentile for ESG risk ratings in the Internet software and services sub-industry as of July 2021, due to our exacting standards and our commitment to enabling access to education for everyone. Overall, we're extremely proud of our success carrying out our mission of connecting people everywhere with the knowledge and skills they need to succeed. With that, I will turn the call over to Sarah.

Sarah Blanchard, CFO

Thank you, Gregg. We're very pleased with the results in the quarter, particularly with the growth in Udemy Business, which we expect to continue to grow as a percentage of revenue over time, with strong unit economics. Before I lay out the quarter, let me briefly explain our revenue model. Our revenue comes from paid consumer learners and Udemy Business customers. As online learning has become more mainstream and organizations have realized its benefits, we have experienced rapid adoption of our solutions, and our revenue mix has been shifting toward Udemy Business. Consumer revenue was 61% of our revenue versus 77% a year ago, while Udemy Business revenue has increased from 23% a year ago to representing 39% of our revenue. Today, consumer revenue mainly consists of individual course purchases made by individual learners. We're also starting to generate revenue from our consumer subscriptions which were initially launched in Q2. Udemy Business revenue primarily relates to Udemy Business subscription contracts with annual or multiyear subscription terms. Udemy Business subscriptions are generally billed in advance on an annual basis. Before I jump into the numbers, it's important to mention that the majority of our consumer revenue is recognized ratably over 4 months following the course purchase, while the majority of our consumer content costs are recognized in the same month as the course is purchased in line with net billing. As a result of this disconnected timing between consumer revenue and content costs, we typically see lower consumer gross margin in quarters with high consumer net billings. This is then followed by a quarter with higher consumer gross margin when their deferred revenue is being recognized with no associated content costs. With that said, third quarter revenue of $129.6 million was up 9% year-over-year, driven by extremely strong growth in our Udemy Business segment. At the same time, our consumer business faced extraordinary comparison given accelerated top-line growth during the early waves of the pandemic last year. We continue to see growth outside North America outpacing North American growth, delivering over 60% of our revenue from international customers and learners. For the remainder of this discussion, all financial metrics are non-GAAP, unless explicitly stated otherwise. Gross profit was $72.2 million, up 4% versus the third quarter of 2020, driven by the strong results in Udemy Business. Gross margin was 55.7% of revenue, approximately 300 basis points lower versus the prior year due to the timing of revenue recognition in the third quarter of 2020 from the COVID peak buying that happened in the second quarter of that year. Again, the instructor costs associated with the COVID peak were incurred in Q2 2020, while a significant portion of that revenue was recorded in Q3 2020, creating an unusual spike in gross margin in the third quarter last year. Our cost of revenue consists primarily of content costs, which are payments to our instructors. Content costs depend on how we acquire each learner. For consumer courses, instructors earn a specific percentage of the net billing amount when a learner purchases the instructor's course, versus on offers for Udemy Business for a consumer subscription offering, instructors are earning per writer share, based on consumption of instructor costs generated by those subscription offerings. We expect content costs as a percentage of revenue to decrease over time as Udemy Business and consumer subscriptions become a larger portion of overall revenue. Turning to OpEx, total operating expense was $74.2 million or 57.2% of revenue compared to 54.2% in Q3 last year. Sales and marketing expense represented 38.6% of total revenue compared to 38.4% in Q3 of 2020. Research and development expense was 11.9% of revenue versus 9.5% in the year-ago period, as we continue to increase investments in immersive learning, consumer subscription, and to further improve our personalization and machine learning capabilities. General and administrative expense was 6.8% of revenue versus 6.3% a year ago, as we ramped up a public company radar. Net loss in the quarter was $1.7 million or 1.3% of revenue. Adjusted EBITDA was positive $1.6 million or 1.2% of revenue. With our huge market opportunity, we're focused on prudent investment in driving top-line growth and expect that we will continue to incur short-term losses while incrementally getting leverage from longer-term profitability. Free cash flow was negative $8.5 million versus negative $26.6 million a year ago. Moving on to the balance sheet, we ended the quarter with $130.2 million of unrestricted cash, cash equivalents, and marketable securities. Now, let me discuss our consumer and Udemy Business segments individually. Consumer revenue was $79.2 million, down 13% versus a year-ago. The third quarter of 2020 was exceptionally strong, driven by COVID-related buying in Q2 2020. So we expect to see a tough comp this quarter. In the quarter, we had approximately 1.3 million monthly active buyers, which was down 6% year-over-year. Consumer gross profit was $42 million or 53% of consumer revenue. As Gregg mentioned, consumers are a top-of-the-funnel source for Udemy Business. During the quarter, we added 2.4 million new consumer and business learners, bringing our total base to 46.5 million. Udemy Business continues to deliver exceptional growth in Q3 with revenue of $50.4 million, up 84% year-over-year, driven by strength in new logos, as well as expansion within existing customers. We exited the quarter with over 9,500 Udemy Business customers, up 42% year-over-year. Udemy Business net dollar retention rate was 118%, and ending ARR of $207.4 million was up 80% as compared to the prior year. Going forward, we expect to continue to see strong growth in new customers and revenues from Udemy Business. Udemy Business gross profit was $32.9 million or 65.4% of Udemy Business revenue. Gross margin was down slightly year-over-year, as we increased our investment in Customer Success to help support our land and expand strategy. I'd like to share some thoughts on what is ahead for the business over the long term. There is a massive opportunity to support organizations and individuals as the world moves towards a skills-based economy. Our marketplace, with its dynamic ability to create new high-quality content, is uniquely positioned to keep pace with accelerating change and the global need for upskilling and reskilling in a way others cannot. We intend to invest thoughtfully with a focus on driving growth while investing in areas that will improve unit economics, balancing securing our leadership position in global, affordable, and accessible learning with driving long-term improvement in the EBITDA margins. We will continue to invest in immersive, enhanced learning capabilities, as well as furthering our ability to support cohort-based learning in communities. We're just getting started in consumer subscriptions, which will support learners at different stages in their ongoing learning journey. Investing and deepening our competitive modes and continuing to expand our international presence will benefit all of our constituents, while we work to create operating leverage and improve EBITDA margins over time. Looking to the fourth quarter, we expect revenue between $130 million and $134 million, with consumer delivering similar absolute revenue as last year, as we work through the 2020 COVID dynamics, while Udemy Business continues to show very strong double-digit growth. We expect an adjusted EBITDA loss between $28.5 million and $24.5 million or an adjusted EBITDA margin of negative 22% to negative 18.3%. And with that, Operator, please open the call for questions.

Operator, Operator

Thank you. Our first question comes from Sterling Auty of JP Morgan. Your line is open.

Sterling Auty, Analyst

Yeah. Thanks. Hi, guys. So on the consumer business, you'd mentioned that you're starting to see a little bit of traction in the consumer subscription. Any more detail that you can give to that element in terms of where either geographically or what you're doing to kind of support the adoption on the subscription side?

Gregg Coccari, CEO

Hey, Sterling. Thank you for the question. It's very much early days in our consumer subscription journey. We're really focused still on testing and learning, and we're doing it in about five countries right now. It's a very small percentage of our traffic. We're just in the testing and learning phase. And once we find the sweet spot of where we want to be, then we will ramp it up, so we're not there yet.

Sterling Auty, Analyst

Understood. And then one follow-up on the business side. Looking at the success that you're having in new customer adoption, if you could just talk to us around the ramp of some of your sales resources and effectiveness in the major regions of the world.

Gregg Coccari, CEO

We're continuing to build out our go-to-market team. Our go-to-market team today is about 400 people. And so we're continuing to ramp it up. But there are still a lot of new people because we're continuing to hire. We're building it out across the globe. We started in North America, then we went to EMEA, then we went to APAC, and we're building out all those areas, but then we just started building out Latin America. So we still have a lot of people ramping up while we're seeing good trends with the established salespeople, but there's a lot of new ones coming in as we continue our global expansion.

Sterling Auty, Analyst

Understood. Thank you.

Operator, Operator

Thank you. Our next question comes from Josh Baer, Morgan Stanley. Your line is open.

Josh Baer, Analyst

Great. Thanks for the question and congrats on the first quarter. Question for Gregg. With pressures on enrollment in higher education that we've been hearing about this semester, one thesis is that individuals are choosing higher wages in the workforce over school. And so with that in mind, I'm just wondering if you're picking up any increase in demand on the consumer side related to individuals looking for skills for the workplace.

Gregg Coccari, CEO

Yes. We're seeing those same trends in college enrollments in the U.S. specifically where they are down. And we actually think that for us, there's a headwind. There's a headwind for the schools, but a tailwind for us. So we are in the skills-based economy, we're helping people upskill and reskill and get that first job. So this is something that's actually a positive trend for us.

Josh Baer, Analyst

Great. That makes sense. And for Sarah, with your excellent international presence, was hoping you could provide some context on the overview for foreign currency exposure if there's a hedging program or if it was impacting the quarter. Any context for what constant currency growth was in 2020 or this quarter would be great. And thank you very much.

Sarah Blanchard, CFO

Yeah, great question. So the biggest piece of cost for us is our content cost, and that is a natural hedge for us. We don't have a ton of other exposure from an FX perspective. Obviously, currency gains and losses and constant currency, there are different countries going different ways from an FX perspective, but we have that natural hedge built into our business.

Josh Baer, Analyst

Okay. Thank you. So it's impacting the top-line and as well as in the bottom-line.

Sarah Blanchard, CFO

That's right. Impacts the top-line and the bottom-line together.

Operator, Operator

Thank you. Our next question comes from Terry Tillman of Truist Securities. Your line is open.

Terry Tillman, Analyst

Thank you for taking my questions, and congratulations on the successful IPO. I have two questions for Gregg and Sarah. First, considering the timing of your IPO and the initiation of coverage, you’ve had more than a month into the fourth quarter. I'm interested in how consumer engagement has been, particularly around the promotions during Cyber Week. Can you share any insights into consumer activity during Black Friday or Cyber Monday, or what you've observed so far this quarter regarding seasonal buying?

Gregg Coccari, CEO

Thank you. The fourth quarter is one of our big quarters. In the consumer business, the fourth quarter and the first quarter of next year are two big quarters. We came in and we saw Black Friday, and we do a lot of promotions and a lot of marketing, and we're very happy with what we saw. Our traffic is holding up. The early indicators for us is our traffic, and our traffic has been consistently over 30 million unique visitors and it's up over 50% versus 2019. So our traffic is holding up and we're seeing good trends. Even though Black Friday overall for consumers was off a little bit, we had a very solid performance.

Terry Tillman, Analyst

That's great to hear, Gregg. And then my follow-up for either you or Sarah, is just on the Udemy Business side. What I'm curious about is some of the initiatives you have to just further strengthen engagement, to drive better outcomes for the business customers, like immersive learning, UB Pro. What do you think from some of those initiatives? And could they potentially have a positive impact on the dollar base net revenue retention?

Sarah Blanchard, CFO

Thanks for the question. We're in the early stages of what we are building out for immersive learning, and the response from customers is very positive. So I think it will help not just with net dollar retention, because having more products to sell into our customer base will obviously help net dollar retention, but also in just new logos. There's a lot of excitement about hands-on and community workspaces assessments. And so we're very excited to continue the progress there.

Terry Tillman, Analyst

Thank you.

Operator, Operator

Thank you. Our next question comes from Rob Oliver of Baird. Your line is open.

Rob Oliver, Analyst

Great. Good evening. Can you guys hear me okay?

Sarah Blanchard, CFO

Yes.

Gregg Coccari, CEO

Yes.

Rob Oliver, Analyst

Thank you. My first question is for you, Gregg, regarding Udemy Business. It appears to be performing very well, and the expansion with Citi looks promising, given it was already a significant deployment. I’m interested in understanding the mix and types of new customers you're attracting with Udemy Business—are they primarily large enterprises or smaller commercial clients? Also, could you remind us about any seasonal trends in enterprise purchasing that we might expect in Q4, similar to what you've mentioned for the consumer side?

Gregg Coccari, CEO

Yes. So yes, there is seasonality on the Udemy Business side, and its fourth quarters. December is always our biggest month for landing. As far as the type of accounts that we're seeing, it's very broad-based. We're seeing small, we're seeing medium, and we're seeing enterprise. So we're seeing everything. We have a land-and-expand strategy as we've talked about before. We're only in about 10% of the seats in our current customers. So we have the ability to expand for many years. And the market is particularly good. The HR people are investing in retention skills and are investing in reskilling and upskilling. So the market's particularly good.

Rob Oliver, Analyst

Thanks, Gregg, appreciate it. And, Sarah, maybe it's a little early to call this out and maybe next fiscal year. But when you guys have been just paying the tape with partnerships and global partnerships and deals, just wondering, it will be just, for example, on MultiChoice, Gregg talked about the advertising element there. Are there any economics that we should bear in mind as these partnerships start to ramp any economic implications, whether it be revenue share or impact on margins, or is it just too early to discuss that? Thank you, guys, very much.

Sarah Blanchard, CFO

Sure. Some of them are too early; some of the partnerships that are more similar to our existing partnership in Japan, they're structured very similarly. So you shouldn't see a difference from an economic perspective.

Operator, Operator

Thank you. Our next question comes from Stephen Sheldon of William Blair. Your line is open.

Stephen Sheldon, Analyst

Good afternoon, and thank you for taking my questions. My first question is about the fourth-quarter guidance. It seems that, compared to my model, revenue has performed slightly better than anticipated, but spending appears to be somewhat higher than what we projected. Are you making any additional growth investments compared to your previous expectations? Is this related to the ongoing success of the fourth-quarter promotional activity, considering there may be a revenue and expense timing mismatch, where expenses will all be accounted for in Q4, while revenue might extend into early 2022?

Sarah Blanchard, CFO

Yeah, great. Thanks for the question. There are a few initiatives that we have increased expenses on. The first is top-of-the-funnel and doing some TV advertising, really building out our brand internationally and in the U.S. We have obviously experienced an increase in cost associated with being a public company. But mostly, we really are investing in the global go-to-market team and the immersive learning, so increasing investments on the sales and marketing side and on the R&D side to build out some of these capabilities.

Stephen Sheldon, Analyst

Okay, got it. And then you have really, really strong growth, I guess on the business side of new customers and seems like some sizable customers, too. Curious if you're seeing any changes in the breadth of initial deployments across the employee base with these new customers. I think you mentioned, Gregg, you're only covering about 10% of total employees, so clearly a lot of upselling opportunities. But are you at least starting to see bigger initial wins that cover a bigger percentage of the employee base than you've seen historically? How about any color on that.

Gregg Coccari, CEO

The initial sales are continually increasing over time. In fact, we had our first land sale exceeding a million dollars. We have developed million-dollar customers before, but we haven't landed one until this quarter. So we are noticing consistent growth in this area.

Operator, Operator

Thank you. Our next question comes from Nat Schindler of Bank of America. Your line is open.

Nat Schindler, Analyst

Thank you. To follow up on the last question, could you explain the basic sales cycle you've experienced with large enterprises on the business side? How long does it typically take to close a deal, and what does the process look like for expansion within those companies? What is considered typical in this context?

Gregg Coccari, CEO

On the sales cycle, enterprise can be 3 to 9 months, as we have some that have taken 2 years. So it can be very large. But typically, I think 9 months would be a good average. And as far as the expansion, again, it's all different, but we have is a sales and customer success team that work together with executives in the company to understand what outcomes that they're trying to drive. We work with them to drive those outcomes; we use playbooks and help them achieve whatever their goals are. And the expansion works over time.

Nat Schindler, Analyst

Do they start with specific groups within the organization and then expand from there? Or do they primarily consider how most organizations utilize your service for their business?

Gregg Coccari, CEO

We come in from usually either one or two sides. We are coming from the technology side, and that's where we started when we were smaller. Now we're coming in more in probably about 50-50 in the technology side and the HR side. So we'll go in any way that we can get in. But it tends to be both those ways.

Sarah Blanchard, CFO

I think one of the trends that we're seeing that is a benefit to us is HR and the learning budgets are increasing as customers think about retaining their employees, upskilling, and reskilling all the needs of being an employer today. So we have seen that trend, as Gregg said, shift more and more towards HR. And then at the same time, those budgets are becoming larger and larger as teams are focused on how to retain our employees; how to keep up with the digital transformation and the accelerated pace of change. It's difficult to hire the skills they want right now, so it's really about upskilling and reskilling their teams to the extent possible.

Nat Schindler, Analyst

And finally, can you talk just a little bit on how you competitively are situated against other guys who are coming in the online learning space? For example, Coursera. Are the businesses using you seeing you as a replacement for their similar offerings or are they using you for different things?

Gregg Coccari, CEO

That's a good question. It's almost everything you can pick up. The bigger the enterprise, they tend to have more than one different content provider. So we'll sit alongside our competitors, and while we do all those things, it just depends by customer. The competitors in our enterprise business are Skill Soft, LinkedIn Learning, Pluralsight, and Coursera. Those are the big ones. We have advantages, though, that we believe in. We have a marketplace. Our marketplace is an advantage. We are much more global, we can develop content much faster than everybody else can. But again, people have different strengths and weaknesses and we will sit alongside them.

Operator, Operator

Thank you. Our next question comes from Jason Celino of KeyBanc Capital. Your line is open.

Jason Celino, Analyst

Great. Thanks, Gregg. Thanks, Sarah, for taking my questions. Maybe my first one. I think at the beginning, you mentioned the new AI engines and improved conversion on the consumer side. Maybe can we talk about some of these initiatives? Has this engine already been implemented? Thanks.

Gregg Coccari, CEO

Yes. Thank you. Thanks for the question. We use AI and machine learning in a number of different places on our platform. We built a pricing engine that allows us to price individual courses per country. We use it for matching. We use it for recommendations. We use it to acquire learners. We use it for skills tagging and assessments. And so yes, we are using it in all those places, but it's constantly being tested. You're constantly upgrading the algorithms and testing there. So we're getting wins there all the time, especially in the search and recommendations area.

Jason Celino, Analyst

Perfect. And then you mentioned some new language collections in Italian, Russian, and expansion in Korea and Sub-Sahara Africa. How do you decide which countries or languages that you want to focus into next? And what levers do you have in building content in these areas?

Gregg Coccari, CEO

Yes. It really depends on what we're hearing from our enterprise. Enterprise is the languages that they're looking for. The beginning ones are obvious. We are getting into some that are less obvious, but it's the market that we want to build. For Korea, for example, we're building out our Korean collection right now. We did a deal with a partner, Woongjin ThinkBig, and the two of us are working together to build our Korean collection for Udemy Business, and for our consumer side. So we're building out our collections in a number of different places in the world, and we're just going from one country to the next.

Operator, Operator

Thank you. Our next question comes from Ryan MacDonald, Needham. Your line is open.

Ryan MacDonald, Analyst

Hi, Gregg and Sarah. Thanks for taking my questions and congrats on a nice quarter. I wanted to first start with the CorpU acquisition, just to understand how that's going to be integrated into the platform and what the go-to-market is going to look like there. And then as we think about the fourth-quarter guide, what should we be assuming in terms of contribution from CorpU? Thanks.

Gregg Coccari, CEO

We purchased CorpU a few months ago, and the business is leadership training for top universities. They have faculty from top professors from Harvard, MIT, Wharton, and Stanford that are teaching leadership courses. It's our first foray into cohort-based learning, and our plan is to start with leadership, but then work across in Udemy Business into other verticals, cohort-based learning, and then eventually take cohort-based and bring it onto our consumer marketplace.

Sarah Blanchard, CFO

And from a Q4 perspective, the CorpU acquisition was really about the technology, the capabilities, and the skill set that that team had. We don't anticipate it having a huge impact on the fourth quarter. We are integrating that into our go-to-market team. And so it will be sold alongside Udemy Business and Udemy Business Pro, but it'll take some time for that to get into the pipeline.

Operator, Operator

Excellent. Thanks for the color on that. And then when we think about this partnership model as you continue the international expansion, are these partnerships exclusive in each country or are there opportunities to multi-source some of those partnerships? Thanks.

Gregg Coccari, CEO

They are exclusive. We recently established a partnership in Korea, China, and Sub-Sahara Africa with MultiChoice Group. These partnerships are specific to those countries and are unique.

Operator, Operator

Q - David Hager: Hi, guys. This is David on for Brent. Thanks for taking the questions, and congrats on the IPO. Two, if I may. The first one, can you maybe talk a little bit about your strategy to go after instructors? I guess, specifically some of the top instructors. How are you acquiring instructors? Is there any sort of secret sauce that you guys are doing?

Gregg Coccari, CEO

At this point, due to the scale of our marketplace and the $161 million we spent last year in instructor payments, instructors tend to come to us. This allows us to attract the top instructors because we offer better monetization opportunities than anywhere else. Consequently, we no longer need to invest as much time in this area as we did when we were initially building our marketplace. Now, when entering a new country, we focus on creating local content, as we are currently doing in Indonesia. We engage local instructors to bring content online, which starts a flywheel effect. Once we onboard the first 500 to 1,000 instructors in the local language, the process accelerates, and our involvement decreases. For instance, we now have 12,000 Portuguese courses available without requiring our intervention for many years.

David Hager, Analyst

Got it. Thanks for the color. And a follow-up on the consumer business. Obviously, tough comps against last year. But going forward, how should we be thinking about the growth rate for this business over the next few years? And is growth going to be driven by new customers or increasing monetization of existing customers? Thanks.

Sarah Blanchard, CFO

I believe there are a few key points regarding the consumer business. Firstly, the COVID pandemic has accelerated trends that were already in motion. We experienced two years' worth of growth in 2020, with Q3 2021 being our strongest quarter as we recognized revenue from the peak in Q2 2020. Although we are facing some challenging year-over-year comparisons, it seems like things are stabilizing. While the pandemic is still ongoing and the future remains uncertain, our business has grown significantly compared to pre-pandemic levels, and our traffic has increased markedly. As we look towards growth, there are several factors at play. There is a vast opportunity in the consumer markets, and we are just beginning to tap into this potential. We launched our consumer subscription business in Q2, which will not only enhance the lifetime value of our consumers but will also attract new users to our platform. Although we are navigating the last stages of pandemic behavior and aiming for a modest recovery in the short term, the more substantial growth drivers lie ahead, particularly with our subscriptions and the development of immersive learning features. We're initially rolling this out in Udemy Business with Udemy Business Pro and plan to extend it to our consumer segment as well.

David Hager, Analyst

Great. Thanks, guys.

Operator, Operator

Thank you. So no further questions at this time. I'd like to turn the call back over to Gregg Coccari for any closing remarks.

Gregg Coccari, CEO

I want to thank you for your questions and your interest in Udemy. Over the last 11 years, we built a global platform to meet the needs of learners, instructors, and organizations everywhere. Our mission is to democratize learning, and the affordability, accessibility, and high quality of our content make that possible. The Udemy marketplace is disrupting corporate learning, as we're able to keep pace with the ever-changing needs of companies and upskilling and reskilling their employees. Whether we're talking about teams of corporate learners or an instructor creating their first course on Udemy, we're creating new possibilities for people everywhere, every day. Thank you.

Operator, Operator

Ladies and gentlemen, that concludes today's conference. Thank you all for participating. You may now disconnect. Have a great day.