Udemy(UDMY) - 2024 Q3 - Quarterly Report

Summary of Risk Factors This section outlines the principal risks Udemy faces, including operational challenges, market dynamics, and financial uncertainties - Udemy faces numerous risks including a history of losses, operating in an emerging and dynamic market, significant fluctuations in results, and dependence on attracting and retaining learners, instructors, and organizations[6] - Key risks also include reliance on a limited number of top instructors, challenges in maintaining and expanding Udemy Business (UB) customer relationships, intense competition, and the potential for the online learning market not to grow as expected[6] - Other risks involve the impact of strategic partnerships, changes in privacy/data protection laws, intellectual property protection issues, liability from platform content, and stock price volatility[6] Special Note Regarding Forward-Looking Statements This section provides cautionary statements regarding future-oriented information, emphasizing inherent risks and uncertainties that may cause actual results to differ materially - This Form 10-Q contains forward-looking statements about Udemy's future financial and operating performance, business strategies, and market trends, which are subject to risks and uncertainties[7] - Key forward-looking statements include expectations for revenue, costs, UB customers, ARR, NDRR, segment performance, operational efficiency, and investments in AI[7] - Actual events or results may differ materially from these statements due to various factors, including those discussed in the 'Risk Factors' section, and investors should not unduly rely on them[7] PART I. Financial Information This part presents Udemy's unaudited condensed consolidated financial statements, including balance sheets, statements of operations, comprehensive loss, stockholders' equity, and cash flows, along with detailed notes Item 1. Financial Statements (Unaudited) This section presents Udemy's unaudited condensed consolidated financial statements and related notes Condensed Consolidated Balance Sheets This table provides a snapshot of Udemy's assets, liabilities, and stockholders' equity at specific reporting dates | Metric | Sep 30, 2024 (in thousands) | Dec 31, 2023 (in thousands) | Change (2024 vs 2023) | | :---------------------------------- | :-------------------------- | :-------------------------- | :-------------------- | | Total Assets | $608,905 | $741,196 | -$132,291 | | Total Liabilities | $412,648 | $384,304 | +$28,344 | | Total Stockholders' Equity | $196,257 | $356,892 | -$160,635 | | Cash and Cash Equivalents | $204,563 | $305,564 | -$101,001 | | Marketable Securities | $152,546 | $171,372 | -$18,826 | | Deferred Revenue, current | $299,955 | $279,414 | +$20,541 | Condensed Consolidated Statements of Operations This table details Udemy's revenues, expenses, and net loss over specified interim periods | Metric | Three Months Ended Sep 30, 2024 (in thousands) | Three Months Ended Sep 30, 2023 (in thousands) | Nine Months Ended Sep 30, 2024 (in thousands) | Nine Months Ended Sep 30, 2023 (in thousands) | | :-------------------------- | :----------------------------------- | :----------------------------------- | :---------------------------------- | :---------------------------------- | | Revenue | $195,417 | $184,722 | $586,623 | $539,392 | | Cost of Revenue | $72,362 | $77,264 | $221,888 | $229,903 | | Gross Profit | $123,055 | $107,458 | $364,735 | $309,489 | | Total Operating Expenses | $152,514 | $128,954 | $442,469 | $405,724 | | Loss from Operations | $(29,459) | $(21,496) | $(77,734) | $(96,235) | | Net Loss | $(25,271) | $(16,767) | $(75,424) | $(87,046) | | Net Loss per Share (Basic and Diluted) | $(0.17) | $(0.11) | $(0.49) | $(0.59) | Condensed Consolidated Statements of Comprehensive Loss This table presents Udemy's net loss and other comprehensive income (loss) components for interim periods | Metric | Three Months Ended Sep 30, 2024 (in thousands) | Three Months Ended Sep 30, 2023 (in thousands) | Nine Months Ended Sep 30, 2024 (in thousands) | Nine Months Ended Sep 30, 2023 (in thousands) | | :-------------------------------------- | :----------------------------------- | :----------------------------------- | :---------------------------------- | :---------------------------------- | | Net Loss | $(25,271) | $(16,767) | $(75,424) | $(87,046) | | Total Other Comprehensive Income (Loss) | $246 | $(14) | $122 | $171 | | Comprehensive Loss | $(25,025) | $(16,781) | $(75,302) | $(86,875) | Condensed Consolidated Statements of Stockholders' Equity This table outlines changes in Udemy's common stock, additional paid-in capital, accumulated other comprehensive income, and accumulated deficit | Metric | Balance at Sep 30, 2024 (in thousands) | Balance at Dec 31, 2023 (in thousands) | | :-------------------------- | :----------------------------------- | :----------------------------------- | | Common Stock Amount | $1 | $2 | | Additional Paid-In Capital | $991,176 | $1,076,508 | | Accumulated Other Comprehensive Income | $202 | $80 | | Accumulated Deficit | $(795,122) | $(719,698) | | Total Stockholders' Equity | $196,257 | $356,892 | Condensed Consolidated Statements of Cash Flows This table summarizes Udemy's cash inflows and outflows from operating, investing, and financing activities for interim periods | Cash Flow Activity | Nine Months Ended Sep 30, 2024 (in thousands) | Nine Months Ended Sep 30, 2023 (in thousands) | | :------------------------------------------ | :------------------------------------ | :------------------------------------ | | Net Cash Provided by Operating Activities | $43,461 | $5,263 | | Net Cash Provided by (Used in) Investing Activities | $14,204 | $(3,992) | | Net Cash Provided by (Used in) Financing Activities | $(161,500) | $13,034 | | Net Increase (Decrease) in Cash, Cash Equivalents and Restricted Cash | $(103,774) | $14,189 | | Cash, Cash Equivalents and Restricted Cash — End of Period | $205,778 | $331,503 | Notes to Unaudited Condensed Consolidated Financial Statements This section provides detailed explanations and disclosures supporting the unaudited condensed consolidated financial statements 1. Organization and description of business This note describes Udemy's corporate structure and its primary business activities as a global online learning platform - Udemy, Inc. is a global learning company providing an online platform for skill acquisition and development, connecting learners with expert-created content and offering curated content for Udemy Business (UB) customers[24] 2. Summary of significant accounting policies This note outlines the key accounting principles and methods used in preparing Udemy's financial statements - Udemy's financial statements are prepared in accordance with GAAP, consolidating wholly-owned subsidiaries, and rely on management estimates for areas like credit losses, software capitalization, and stock-based compensation[25][27] - The company operates in two reportable segments: Enterprise and Consumer, with performance reviewed by the CEO[26] - New accounting pronouncements, ASU 2023-07 (Segment Reporting) and ASU 2023-09 (Income Tax Disclosures), will become effective for Udemy in fiscal years 2024 and 2025, respectively, and are currently being assessed for impact[34][36] 3. Revenue recognition This note details Udemy's policies and methods for recognizing revenue from its various offerings | Metric | Three Months Ended Sep 30, 2024 (in millions) | Three Months Ended Sep 30, 2023 (in millions) | Nine Months Ended Sep 30, 2024 (in millions) | Nine Months Ended Sep 30, 2023 (in millions) | | :------------------------------------------------ | :------------------------------------ | :------------------------------------ | :----------------------------------- | :----------------------------------- | | Revenue recognized from deferred revenue (current period) | $152.8 | $143.4 | $252.9 | $242.9 | | Deferred Revenue Segment | Sep 30, 2024 (in thousands) | Dec 31, 2023 (in thousands) | Dec 31, 2022 (in thousands) | | :----------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Enterprise | $244,713 | $220,127 | $219,030 | | Consumer | $57,606 | $62,287 | $59,249 | | Total Deferred Revenue | $302,319 | $282,414 | $278,279 | - As of September 30, 2024, remaining performance obligations totaled $532.6 million, with 74% expected to be recognized within the next twelve months[39] 4. Investments and fair value measurements This note describes Udemy's investment portfolio and the fair value hierarchy used for financial instruments | Asset Type (Sep 30, 2024) | Level 1 (in thousands) | Level 2 (in thousands) | Level 3 (in thousands) | | :------------------------ | :--------------------- | :--------------------- | :--------------------- | | Money market funds | $160,819 | — | — | | Time deposits | $6,445 | — | — | | U.S. government securities | — | $152,546 | — | | Strategic investments | — | — | — | | Total Assets | $167,264 | $152,546 | — | - Udemy recognized an impairment loss of $10.3 million on strategic investments during Q2 2024, reducing their carrying value to zero, following qualitative impairment indicators and a fair value assessment[44] 5. Consolidated balance sheet components This note provides disaggregated information for various asset and liability accounts on Udemy's balance sheet | Asset Category | Sep 30, 2024 (in thousands) | Dec 31, 2023 (in thousands) | | :------------------------------------------ | :-------------------------- | :-------------------------- | | Cash and cash equivalents | $204,563 | $305,564 | | Marketable securities (U.S. government) | $152,546 | $171,372 | | Total cash, cash equivalents, and marketable securities | $357,109 | $476,936 | - As of September 30, 2024, all marketable securities had remaining contractual maturities of one year or less[47] | Asset Category | Sep 30, 2024 (in thousands) | Dec 31, 2023 (in thousands) | | :-------------------------- | :-------------------------- | :-------------------------- | | Property and equipment, net | $3,320 | $4,439 | | Capitalized software, net | $33,275 | $31,388 | | Intangible assets, net | $2,656 | $5,223 | | Goodwill | $12,646 | $12,646 | 6. Leases This note details Udemy's leasing arrangements, including right-of-use assets and lease liabilities - New leasing activities in Q2 2024 resulted in $9.8 million in additional operating lease right-of-use assets, primarily due to lease term extensions for real estate facilities through fiscal year 2029[58] | Lease Metric | Sep 30, 2024 | Dec 31, 2023 | | :----------------------------- | :----------- | :----------- | | Weighted average remaining term (years) | 3.5 | 1.3 | | Weighted average discount rate | 5.7% | 3.9% | 7. Commitments and contingencies This note discloses Udemy's contractual obligations and potential liabilities from legal matters or other events - Udemy has $37.7 million in noncancellable purchase commitments with remaining terms over one year, primarily for cloud infrastructure, network services, and advertising, expected to be paid through 2027[62] - The company is subject to legal proceedings and claims in the ordinary course of business, including intellectual property and commercial matters, but does not expect them to have a material adverse effect on its financial position[62] 8. Income taxes This note provides information on Udemy's income tax expense, effective tax rates, and deferred tax assets/liabilities | Metric | Three Months Ended Sep 30, 2024 | Three Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2024 | Nine Months Ended Sep 30, 2023 | | :-------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Effective Tax Rate | (3.54)% | (5.08)% | (3.70)% | (3.48)% | - The difference from the 21% statutory federal tax rate is due to income in higher tax jurisdictions, foreign withholding taxes, and tax credits, offset by changes in valuation allowance[63] - Udemy has a full valuation allowance against U.S. federal and state deferred tax assets due to uncertainty of realization, and an Indian subsidiary received a tax assessment challenging transfer pricing, which the company plans to defend[63][66] 9. Related party transactions This note details transactions between Udemy and its related parties, including significant stockholders and affiliates - Naspers and its affiliates, along with Insight Partners and companies affiliated with Board members, are customers of Udemy's Enterprise subscription offering, generating revenue and accounts receivable for the company[67][68][69] | Related Party | Revenue Recognized (3 Months Ended Sep 30, 2024, in millions) | Revenue Recognized (3 Months Ended Sep 30, 2023, in millions) | Revenue Recognized (9 Months Ended Sep 30, 2024, in millions) | Revenue Recognized (9 Months Ended Sep 30, 2023, in millions) | | :------------------------------------ | :---------------------------------------------------- | :---------------------------------------------------- | :---------------------------------------------------- | :---------------------------------------------------- | | Naspers and affiliates | $0.5 | $0.7 | $1.3 | $1.4 | | Insight and affiliates | $0.1 | $0.5 | $0.5 | $0.5 | | Companies affiliated with Board members | $0.1 | $0.1 | $0.3 | $0.3 | 10. Stockholders' equity This note describes changes in Udemy's equity accounts, including common stock, share repurchases, and stock-based compensation - Udemy's Board approved a $150 million share repurchase program, under which the company repurchased 6.3 million shares for $51.4 million in Q3 2024 and 15.1 million shares for $142.5 million year-to-date, retiring them immediately[72] | Equity Incentive Plan Shares Reserved | Sep 30, 2024 | Dec 31, 2023 | | :------------------------------------ | :----------- | :----------- | | Stock options outstanding | 2,208,391 | 4,621,021 | | RSUs outstanding and PSUs | 17,394,641 | 16,738,309 | | Shares available for future issuance (2021 Plan) | 9,658,846 | 4,093,695 | | Shares available for future issuance (ESPP) | 3,374,376 | 2,350,803 | | Total shares of common stock reserved | 32,636,254 | 27,803,828 | - Total stock-based compensation expense for the nine months ended September 30, 2024, was $70.3 million, down from $72.9 million in the prior year, with significant portions allocated to sales & marketing, R&D, and G&A[80] 11. Net loss per share This note presents the calculation of basic and diluted net loss per share for Udemy | Metric | Three Months Ended Sep 30, 2024 | Three Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2024 | Nine Months Ended Sep 30, 2023 | | :------------------------------------------ | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Net Loss | $(25,271) | $(16,767) | $(75,424) | $(87,046) | | Basic and Diluted Net Loss per Share | $(0.17) | $(0.11) | $(0.49) | $(0.59) | | Weighted-average shares (Basic and Diluted) | 149,179,826 | 151,307,963 | 152,867,160 | 148,392,636 | - Potentially dilutive securities, including RSUs, PSUs, restricted stock, stock options, and ESPP shares, were excluded from diluted EPS calculations as their inclusion would have been anti-dilutive due to the net loss[83] 12. Segment and geographic information This note provides financial data for Udemy's operating segments and revenue by geographic region - Udemy operates two reportable segments: Enterprise and Consumer, with the CEO reviewing separate financial information for resource allocation and performance assessment[84] | Segment Revenue (in thousands) | Three Months Ended Sep 30, 2024 | Three Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2024 | Nine Months Ended Sep 30, 2023 | | :----------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Enterprise | $126,123 | $109,101 | $364,319 | $305,962 | | Consumer | $69,294 | $75,621 | $222,304 | $233,430 | | Total Revenue | $195,417 | $184,722 | $586,623 | $539,392 | | Segment Gross Profit (in thousands) | Three Months Ended Sep 30, 2024 | Three Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2024 | Nine Months Ended Sep 30, 2023 | | :---------------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Enterprise | $92,793 | $74,317 | $264,675 | $204,359 | | Consumer | $37,610 | $40,250 | $122,323 | $125,431 | | Total Segment Gross Profit | $130,403 | $114,567 | $386,998 | $329,790 | - North America, Europe, Middle East, Africa (EMEA), and Asia Pacific are key revenue regions, with the United States and Japan each exceeding 10% of total revenue for the three and nine months ended September 30, 2024[87] 13. Restructuring charges This note details the costs and impacts associated with Udemy's restructuring plans - In September 2024, Udemy initiated a restructuring plan to enhance operational efficiencies, impacting approximately 280 global employees, primarily in higher-cost regions and sales/marketing/R&D functions[90] - The 2024 restructuring is expected to incur $18.0 million in charges, with $11.3 million recognized in Q3 2024, mainly for personnel-related costs like severance and retention payments, and is anticipated to conclude by March 31, 2025[90] - A prior restructuring in February 2023 resulted in $10.1 million in charges, primarily for personnel expenses and stock-based compensation, and was completed in Q3 2023[90] 14. Subsequent events This note discloses significant events that occurred after the balance sheet date but before the financial statements were issued - In October 2024, Udemy repurchased and retired 1,091,031 shares of common stock for $8.4 million under its Repurchase Program[92] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses Udemy's financial condition, operational results, key factors, liquidity, and accounting policies Overview This section provides a high-level introduction to Udemy's business model, mission, and recent strategic initiatives - Udemy's mission is to transform lives through learning by providing an online platform for flexible and effective skill acquisition, connecting global learners with expert content[95] - The platform serves nearly 75 million learners in over 180 countries and offers Udemy Business (UB) for corporate learning, with over 75,000 instructors creating 250,000+ courses in 75 languages[96] - A strategic restructuring in September 2024 impacted approximately 280 global employees, resulting in $11.3 million in charges in Q3 2024, aimed at operational efficiencies[97] Key factors impacting our performance This section discusses the primary internal and external drivers influencing Udemy's financial and operational outcomes - Udemy's growth depends on attracting and engaging new learners and Udemy Business (UB) customers, retaining existing relationships, and expanding platform usage, especially with UB Large Customers (1,000+ employees)[100][101] - Sourcing in-demand content from instructors is crucial, with a focus on expanding the instructor payment pool and optimizing revenue share (reduced from 25% to 20% in 2024, targeting 15% by 2026)[102][111] - The shift towards the higher-margin Enterprise segment is expected to improve overall margins, and international expansion, particularly through strategic partnerships, is a key growth driver[103][105] - Udemy is investing in high-growth opportunities, including generative artificial intelligence, and anticipates operating expenses will generally decrease as a percentage of revenue over time due to operational efficiency initiatives[106] Components of results of operations This section breaks down the various revenue and expense categories that constitute Udemy's financial performance - Revenue is recognized from Enterprise license subscriptions (ratably over term) and Consumer sales (individual courses over estimated 4-month service period, subscriptions over term)[108][110] - Cost of revenue primarily consists of instructor payments, which vary by acquisition method (percentage of net sale for marketplace, pro-rata share of monthly pool for subscriptions), and is expected to decrease as a percentage of revenue due to UB growth and reduced instructor revenue share[111] - Operating expenses (sales & marketing, R&D, G&A, restructuring) are largely personnel-related and are expected to decrease as a percentage of revenue over time due to operational efficiency and focus on high-growth opportunities[112] Results of operations This section provides a detailed analysis of Udemy's financial performance, including revenue, gross profit, and net loss, for the reported periods | Metric | Three Months Ended Sep 30, 2024 (in thousands) | Three Months Ended Sep 30, 2023 (in thousands) | Nine Months Ended Sep 30, 2024 (in thousands) | Nine Months Ended Sep 30, 2023 (in thousands) | | :-------------------------- | :----------------------------------- | :----------------------------------- | :---------------------------------- | :---------------------------------- | | Revenue | $195,417 | $184,722 | $586,623 | $539,392 | | Cost of Revenue | $72,362 | $77,264 | $221,888 | $229,903 | | Gross Profit | $123,055 | $107,458 | $364,735 | $309,489 | | Gross Margin | 63% | 58% | 62% | 57% | | Total Operating Expenses | $152,514 | $128,954 | $442,469 | $405,724 | | Loss from Operations | $(29,459) | $(21,496) | $(77,734) | $(96,235) | | Net Loss | $(25,271) | $(16,767) | $(75,424) | $(87,046) | - Total revenue increased by 6% to $195.4 million for the three months ended September 30, 2024, and by 9% to $586.6 million for the nine months, primarily driven by a 16% (Q3) and 19% (9M) increase in Enterprise revenue, partially offset by an 8% (Q3) and 5% (9M) decrease in Consumer revenue[128][130] - Gross margin improved to 63% (Q3) and 62% (9M) in 2024, up from 58% and 57% respectively, mainly due to the reduction in instructor revenue share (from 25% to 20% effective Jan 1, 2024) and the continued shift towards the higher-margin Enterprise segment[131][133] - Total operating expenses increased by 18% (Q3) and 9% (9M) in 2024, largely due to a $11.3 million restructuring charge in Q3 2024, increased sales and marketing costs (amortization of deferred contract costs, personnel, direct marketing, sponsorship), and higher R&D personnel costs[134] Certain key business metrics and non-GAAP financial metrics This section presents key operational and non-GAAP financial indicators used to evaluate Udemy's business performance | Metric | Sep 30, 2024 | Sep 30, 2023 | Change | | :------------------------------------ | :----------- | :----------- | :----- | | Udemy Business customers | 16,848 | 15,316 | +10% | | Udemy Business Annual Recurring Revenue (ARR) | $504,625 | $443,145 | +14% | | Udemy Business Net Dollar Retention Rate (NDRR) | 99% | 106% | -7% | | Udemy Business Large Customer NDRR | 104% | 113% | -9% | - The decrease in NDRR metrics was driven by lower rates of upsells and expansion, negatively impacted by longer sales cycles due to overall economic factors[143] | Metric | Three Months Ended Sep 30, 2024 (in thousands) | Three Months Ended Sep 30, 2023 (in thousands) | Nine Months Ended Sep 30, 2024 (in thousands) | Nine Months Ended Sep 30, 2023 (in thousands) | | :----------------------- | :----------------------------------- | :----------------------------------- | :---------------------------------- | :---------------------------------- | | Monthly average buyers | 1,312 | 1,414 | 1,346 | 1,382 | | Segment Gross Margin | Three Months Ended Sep 30, 2024 | Three Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2024 | Nine Months Ended Sep 30, 2023 | | :-------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Enterprise | 74% | 68% | 73% | 67% | | Consumer | 54% | 53% | 55% | 54% | - Adjusted EBITDA improved to $11.6 million (Q3) and $23.5 million (9M) in 2024, up from $8.2 million and $3.8 million respectively, primarily driven by the reduction in the instructor revenue share[157][159] Liquidity and capital resources This section assesses Udemy's ability to meet its short-term and long-term financial obligations and fund its operations - As of September 30, 2024, Udemy's liquidity included $205.8 million in cash, cash equivalents, and restricted cash, and $152.5 million in marketable securities, primarily U.S. government securities[161] - The company expects existing cash and cash flows from operations to cover needs for at least the next 12 months, despite ongoing investments in growth and potential impacts from restructuring charges[161][163] - Net cash provided by operating activities significantly increased to $43.5 million for the nine months ended September 30, 2024, from $5.3 million in the prior year, driven by lower net loss (after non-cash adjustments), Enterprise segment deferred revenue growth, and timing of liabilities[170][172] - Net cash used in financing activities was $161.5 million for the nine months ended September 30, 2024, primarily due to $141.6 million in common stock repurchases and $25.4 million in taxes for equity award settlements[175] Critical accounting policies and estimates This section highlights the accounting policies requiring significant judgment and estimation in preparing Udemy's financial statements - There have been no material changes to Udemy's critical accounting policies and estimates compared to those described in its 2023 Annual Report on Form 10-K[179] Recent accounting pronouncements This section provides an update on newly issued accounting standards and their potential impact on Udemy's financial reporting - Refer to Note 2 of the condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for information regarding recently issued accounting pronouncements[180] Item 3. Qualitative and Quantitative Disclosures about Market Risk This section discusses Udemy's exposure to market risks, including interest rate and foreign currency, and their financial impact - Udemy's cash, cash equivalents, and marketable securities portfolio (totaling $357.1 million as of Sep 30, 2024) is primarily held in U.S. government securities and money market funds, and a hypothetical 100 basis point change in interest rates would not materially impact its market value or interest income[182] - The company is exposed to foreign currency risk as 27% of its sales are non-USD denominated, but it does not currently use hedging arrangements, and a hypothetical 10% change in exchange rates would not have a material impact on income or expense[183][267] Item 4. Controls and Procedures This section evaluates Udemy's disclosure controls and procedures, confirming effectiveness and no material changes to internal controls - As of September 30, 2024, management, including the CEO and CFO, concluded that Udemy's disclosure controls and procedures were effective in providing reasonable assurance for timely and accurate financial reporting[184] - There were no material changes to internal control over financial reporting that occurred during the quarter ended September 30, 2024[185] - Disclosure controls and procedures are designed to provide reasonable, not absolute, assurance, acknowledging inherent limitations in preventing or detecting all errors and fraud[186] PART II. Other Information This part includes disclosures on legal proceedings, comprehensive risk factors, equity security sales, and other pertinent information not covered in the financial statements Item 1. Legal Proceedings This section outlines Udemy's legal proceedings, including a VPPA class action and arbitrations, with no expected material adverse financial effect - Udemy is facing a putative class action complaint (Mohamed Saleh v. Udemy, Inc.) alleging VPPA violations for sharing viewing history with an advertiser; a motion to compel arbitration was granted, and the matter is stayed pending individual arbitration[188] - Approximately 20,000 individual arbitrations are threatened, and 4 have been initiated, with claims similar to the VPPA class action; Udemy has resolved claims for about 6,000 learners for an immaterial amount and intends to vigorously defend itself[188] - The company is subject to other ordinary course legal proceedings and claims, but none are currently expected to have a material adverse effect on its business, financial condition, or results of operations[189] Item 1A. Risk Factors This section details significant risks and uncertainties that could materially affect Udemy's business, financial condition, and operations Risks related to our business and operations This section identifies key risks inherent in Udemy's core business model, market environment, and operational execution - Udemy has a history of net losses ($75.4M for 9M 2024, accumulated deficit of $795.1M) and expects continued losses due to significant investments in platform development, market expansion, and sales/marketing, making future profitability uncertain[192] - Operating in an emerging and dynamic online learning market makes future results difficult to evaluate, with uncertainties including attracting/retaining users, competition, market growth, and managing operational expansion[193][194] - Business growth is dependent on attracting and retaining learners, instructors, and organizations, with a risk of slower growth if the marketplace model doesn't scale as expected or if existing users are not retained[197] - Reliance on a limited number of top instructors for popular content poses a risk; loss of these relationships or failure to attract new instructors could negatively impact content quality and platform attractiveness[199] - Failure to maintain and expand relationships with Udemy Business (UB) customers, especially large ones, could hinder revenue growth, as renewal rates and expansion opportunities are critical[200] - The highly competitive online learning market, with evolving business models and new entrants (including those leveraging AI), could impair Udemy's ability to grow and achieve profitability[201][202] - General economic conditions, natural disasters, public health emergencies, and political crises can negatively affect revenue, demand for services, and overall business operations[212][213][214] - Effective management of growth, retention of senior management and skilled employees, and successful integration of acquisitions are critical for future success, with failures in these areas posing significant risks[215][216][218] Risks related to technology, privacy, and cybersecurity This section addresses potential threats arising from technological dependencies, data protection regulations, and security vulnerabilities - Changes in global privacy and data protection laws (e.g., GDPR, U.K. GDPR, CCPA, CPRA, PIPL) and cross-border data transfer regulations create significant compliance burdens, costs, and potential liabilities for Udemy[236][237][238] - Cybersecurity attacks, security breaches, or incidents affecting Udemy or its third-party service providers could disrupt services, harm reputation, and lead to significant liability, litigation, and increased costs, potentially exceeding insurance coverage[239][241][243] - Reliance on Amazon Web Services (AWS) for platform infrastructure means any disruption or interference with AWS could severely impact operations, and increased hosting costs could adversely affect financial results[246][248] - Dependence on third-party payment processors exposes Udemy to risks of inadequate performance, service disruptions, and compliance challenges with evolving payment laws and regulations, potentially impacting revenue and customer/instructor satisfaction[249] - Failure to appear prominently in internet search results could lead to a decline in learner traffic and increased marketing expenditures, adversely affecting growth and operating results[251] Risks related to our intellectual property This section discusses challenges in protecting and enforcing Udemy's intellectual property rights and potential litigation risks - Inability to adequately obtain, maintain, protect, and enforce intellectual property (patents, trademarks, copyrights, trade secrets) could harm Udemy's competitive advantage, especially in foreign jurisdictions with weaker IP protection[252][254] - Intellectual property litigation, including claims related to content posted by instructors, could result in significant costs, divert management attention, and potentially lead to substantial liability or the need for costly licenses[256] - The use of third-party open source software components carries risks, as non-compliance with licenses could restrict platform provision, require proprietary code disclosure, or incur significant re-engineering costs[257] Risks related to financial reporting, taxation, and operations as a public company This section covers risks associated with financial controls, tax compliance, and the regulatory burdens of being a publicly traded entity - Failure to maintain effective disclosure controls and internal control over financial reporting could impair timely and accurate financial statements, adversely affecting investor confidence and stock price[259] - Operating as a public company, especially after losing 'emerging growth company' status, incurs substantial costs and administrative burdens, diverting management attention and potentially impacting business operations[260] - Unanticipated changes in effective tax rates, additional tax liabilities from international operations or new tax rules (e.g., Inflation Reduction Act, global minimum tax), and challenges in collecting/remitting indirect taxes could harm future results[262][263] - Udemy's ability to use its net operating loss (NOL) carryforwards and other tax attributes may be limited by expiration, regulatory changes, or ownership changes under Section 382 of the Code, potentially increasing future tax liabilities[266] - Fluctuations in currency exchange rates, particularly a stronger U.S. dollar, could adversely affect reported financial results, especially as 27% of sales are non-USD denominated, impacting revenue relative to costs[267] - High inflation rates could increase operating costs, potentially requiring pricing model changes that impact customer acquisition or retention, or negatively affecting financial condition if costs are absorbed[269] Risks related to ownership of our common stock This section outlines factors that could affect the market price and liquidity of Udemy's common stock, as well as shareholder rights - The trading price of Udemy's common stock may be volatile due to various factors, including market fluctuations, company performance, analyst coverage, and macroeconomic events, potentially leading to loss of investment[271][273] - Future sales of common stock by existing stockholders, especially directors, executive officers, and principal stockholders (who beneficially own ~52%), or new issuances, could depress the market price and dilute existing stockholders[274][275][279] - Udemy does not expect to pay dividends in the foreseeable future, meaning stockholders must rely on stock price appreciation for investment gains[278] - Delaware law and provisions in Udemy's corporate documents (e.g., staggered board, preferred stock authorization, advance notice requirements) could delay, discourage, or prevent a merger, tender offer, or proxy contest, potentially depressing stock price[282] - Exclusive forum provisions in bylaws for Delaware Chancery Court and federal district courts for certain disputes could limit stockholders' choice of forum and potentially discourage lawsuits against the company or its fiduciaries[284] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section details Udemy's $150 million share repurchase program and summarizes Q3 2024 repurchases - Udemy's Board authorized a share repurchase program of up to $150 million of common stock, which can be executed through various means including open market purchases and Rule 10b5-1 plans[285] | Period (2024) | Total Shares Purchased | Average Price Paid per Share | Approximate Dollar Value Remaining (in thousands) | | :-------------------------- | :--------------------- | :--------------------------- | :------------------------------------------------ | | July 1 - July 31 | 1,961,639 | $8.57 | $42,783 | | August 1 - August 31 | 2,598,313 | $7.66 | $22,876 | | September 1 - September 30 | 1,759,987 | $8.05 | $8,711 | | Total (Q3 2024) | 6,319,939 | $8.05 | $8,711 | Item 3. Defaults Upon Senior Securities This item is marked as 'Not applicable,' indicating no defaults upon senior securities for the reporting period Item 4. Mine Safety Disclosures This item is marked as 'Not applicable,' indicating no mine safety disclosures for the reporting period Item 5. Other Information This section states no director or officer adopted or terminated a Rule 10b5-1 or non-Rule 10b5-1 trading arrangement during the quarter - No director or officer adopted or terminated a Rule 10b5-1 or non-Rule 10b5-1 trading arrangement during the last fiscal quarter[290] Item 6. Exhibits This section lists exhibits filed with the Form 10-Q, including corporate governance documents, compensation policies, and certifications - The Exhibit Index includes corporate documents (Amended and Restated Certificate of Incorporation, Bylaws), compensation policies, and certifications (e.g., CEO/CFO certifications under Sarbanes-Oxley Act), with some incorporated by reference and others filed herewith[293] - Certifications under 18 U.S.C. Section 1350 (Exhibits 32.1 and 32.2) are furnished, not filed, and not incorporated by reference into any filing of Udemy, Inc. under the Securities Act of 1933 or the Securities Exchange Act of 1934[294] Signatures This section formally attests to the accuracy and completeness of the report by authorized corporate officers - The report is duly signed on behalf of Udemy, Inc. by Greg Brown, President and Chief Executive Officer, and Sarah Blanchard, Chief Financial Officer, on October 30, 2024[297]