Udemy(UDMY) - 2023 Q2 - Quarterly Report

Table of Contents This section provides an organized listing of all chapters and major sections within the report Summary of Risk Factors This section provides a high-level overview of the principal risks that could materially affect the company's business and financial performance Summary of Principal Risks This section summarizes the principal risks faced by Udemy, Inc., including stock price volatility, a history of losses, and challenges in an emerging and competitive market - The trading price of Udemy's common stock may be volatile, leading to potential investment loss[7] - Udemy has a history of losses and may not achieve or maintain profitability in the future[7] - Operating in an emerging and dynamic market makes future results difficult to evaluate[7] - Rapid growth may not be sustainable and depends on attracting and retaining learners, instructors, and organizations[7] - Reliance on a limited number of instructors for popular content poses a risk if these relationships are lost[7] - Failure to maintain and expand relationships with Udemy Business (UB) customers could hinder business and revenue growth[7] - Operating in a highly competitive market may prevent successful competition against current and future rivals[7] - The online learning market is relatively new and may not grow as expected, potentially harming the business[7] Special Note Regarding Forward-Looking Statements This section provides important cautionary information about forward-looking statements contained in the report, highlighting inherent risks and uncertainties Nature of Forward-Looking Statements This section clarifies that forward-looking statements in the Form 10-Q are subject to risks and uncertainties, and actual results may differ materially - Forward-looking statements in this Form 10-Q relate to future results of operations, financial condition, business strategy, and management objectives[8] - Actual events or results may differ from those expressed in forward-looking statements due to risks, uncertainties, assumptions, and other factors[9] - Udemy does not undertake to update any forward-looking statements to reflect events or circumstances after the date of the Form 10-Q, except as required by law[11] - Key areas of forward-looking statements include financial and operating performance, business strategy, customer attraction and retention, industry trends, liquidity, and regulatory effects[10] Market and Industry Data This section addresses the sources and reliability of market and industry data presented in the report Reliance on Third-Party Data This section clarifies that market and industry data, while believed reliable, is from third-party sources and has not been independently verified by the company - Market and industry data in the report is obtained from third-party sources believed to be reliable[13] - Udemy has not independently verified third-party information[13] - Such data involves risks and uncertainties and is subject to change based on various factors, including those discussed in 'Risk Factors'[13] PART I. Financial Information This part presents the company's unaudited condensed consolidated financial statements and management's discussion and analysis of financial condition and results of operations Item 1. Condensed Consolidated Financial Statements (Unaudited) This section provides Udemy's unaudited condensed consolidated financial statements, including balance sheets, statements of operations, comprehensive loss, stockholders' equity, and cash flows, with accompanying notes Condensed Consolidated Balance Sheets This section presents the company's financial position at specific points in time, detailing assets, liabilities, and stockholders' equity | Metric | June 30, 2023 (in thousands) | December 31, 2022 (in thousands) | | :-------------------------------- | :----------------------------- | :------------------------------- | | Total assets | $722,144 | $737,568 | | Total liabilities | $389,023 | $398,258 | | Total stockholders' equity | $333,121 | $339,310 | - Total assets decreased by $15.424 million from December 31, 2022, to June 30, 2023[16] - Total liabilities decreased by $9.235 million from December 31, 2022, to June 30, 2023[16] - Total stockholders' equity decreased by $6.189 million from December 31, 2022, to June 30, 2023[16] Condensed Consolidated Statements of Operations This section reports the company's revenues, expenses, and net loss over specific periods, reflecting operational performance | Metric | Three Months Ended June 30, 2023 (in thousands) | Three Months Ended June 30, 2022 (in thousands) | Six Months Ended June 30, 2023 (in thousands) | Six Months Ended June 30, 2022 (in thousands) | | :-------------------------------- | :-------------------------------------------- | :-------------------------------------------- | :------------------------------------------ | :------------------------------------------ | | Revenue | $178,240 | $153,112 | $354,670 | $305,335 | | Gross profit | $102,302 | $87,300 | $202,031 | $173,085 | | Loss from operations | $(27,462) | $(28,527) | $(74,739) | $(53,843) | | Net loss | $(25,735) | $(29,380) | $(70,279) | $(55,029) | | Net loss per share (Basic and diluted) | $(0.17) | $(0.21) | $(0.48) | $(0.39) | - Revenue increased by 16% for both the three and six months ended June 30, 2023, compared to the prior year periods[18] - Net loss decreased by $3.645 million for the three months ended June 30, 2023, but increased by $15.250 million for the six months ended June 30, 2023, compared to the prior year periods[18] - Interest income, net, significantly increased from $0.127 million to $4.944 million for the three months ended June 30, 2023, and from $0.370 million to $8.876 million for the six months ended June 30, 2023[18] Condensed Consolidated Statements of Comprehensive Loss This section presents the net loss and other comprehensive income/loss items, providing a broader view of financial performance | Metric | Three Months Ended June 30, 2023 (in thousands) | Three Months Ended June 30, 2022 (in thousands) | Six Months Ended June 30, 2023 (in thousands) | Six Months Ended June 30, 2022 (in thousands) | | :------------------------------------------ | :-------------------------------------------- | :-------------------------------------------- | :------------------------------------------ | :------------------------------------------ | | Net loss | $(25,735) | $(29,380) | $(70,279) | $(55,029) | | Foreign currency translation loss, net of tax | $(5) | $(28) | $(16) | $(18) | | Change in unrealized loss on marketable securities, net of tax | $53 | $0 | $201 | $0 | | Comprehensive loss | $(25,687) | $(29,408) | $(70,094) | $(55,047) | - Comprehensive loss improved for the three months ended June 30, 2023, to $(25.687) million from $(29.408) million in the prior year, but worsened for the six months ended June 30, 2023, to $(70.094) million from $(55.047) million[21] - A positive change in unrealized loss on marketable securities of $0.053 million (three months) and $0.201 million (six months) contributed to the comprehensive loss in 2023, compared to zero in 2022[21] Condensed Consolidated Statements of Stockholders' Equity This section details changes in the company's equity accounts, including common stock, additional paid-in capital, and accumulated deficit | Metric | Balance—June 30, 2023 (in thousands) | Balance—December 31, 2022 (in thousands) | | :-------------------------------- | :----------------------------------- | :------------------------------------- | | Total Stockholders' Equity | $333,121 | $339,310 | | Additional Paid-In Capital | $1,015,851 | $951,946 | | Accumulated Deficit | $(682,683) | $(612,404) | | Common Stock Shares Outstanding | 149,845,546 | 145,013,786 | - Total stockholders' equity decreased by $6.189 million from December 31, 2022, to June 30, 2023[24] - Additional paid-in capital increased by $63.905 million, primarily due to stock-based compensation and exercise of stock options[24] - Accumulated deficit increased by $70.279 million, reflecting the net loss for the six months ended June 30, 2023[24] Condensed Consolidated Statements of Cash Flows This section reports the cash inflows and outflows from operating, investing, and financing activities over specific periods | Cash Flow Activity | Six Months Ended June 30, 2023 (in thousands) | Six Months Ended June 30, 2022 (in thousands) | | :-------------------------------- | :-------------------------------------------- | :-------------------------------------------- | | Net cash used in operating activities | $(6,404) | $(16,435) | | Net cash provided by (used in) investing activities | $6,404 | $(12,342) | | Net cash provided by financing activities | $9,467 | $7,808 | | Net increase (decrease) in cash, cash equivalents and restricted cash | $9,442 | $(20,973) | | Cash, cash equivalents and restricted cash—End of period | $326,756 | $515,795 | - Cash used in operating activities significantly decreased from $16.435 million in H1 2022 to $6.404 million in H1 2023[26] - Investing activities shifted from using $12.342 million in H1 2022 to providing $6.404 million in H1 2023, primarily due to proceeds from maturities of marketable securities[26] - Net cash provided by financing activities increased to $9.467 million in H1 2023 from $7.808 million in H1 2022[26] Notes to Unaudited Condensed Consolidated Financial Statements This section provides detailed explanations and disclosures supporting the condensed consolidated financial statements 1. Organization and Description of Business This note describes Udemy's founding, global learning platform, and business model connecting experts with learners - Udemy, Inc. is a global learning company founded in January 2010, headquartered in San Francisco, California[30] - The company's online platform connects subject matter experts with a global audience of learners and offers curated content for Udemy Business (UB) customers[31] 2. Summary of Significant Accounting Policies This note outlines the key accounting principles and estimates used in preparing the financial statements, including segment reporting - Financial statements are prepared in accordance with GAAP and include consolidated accounts of the Company and its wholly-owned subsidiaries[32] - Udemy operates under two reportable segments: Enterprise and Consumer, reviewed by the CEO as the chief operating decision maker[33] - Significant estimates include allowance for credit losses, capitalized software, stock-based compensation, income tax valuation allowance, and valuation of strategic investments[35] - Beginning in 2023, the Company became self-insured for medical benefits for certain employees, accruing costs based on known and estimated incurred but not reported claims[46] Allowance for Credit Losses (in thousands): | Period | Balance at Beginning of Period | Charged to Expenses | Utilized/Written-off, Net of Recoveries | Balance at End of Period | | :-------------------------- | :----------------------------- | :------------------ | :------------------------------------ | :----------------------- | | Six Months Ended June 30, 2023 | $1,528 | $1,011 | $(776) | $1,763 | | Six Months Ended June 30, 2022 | $678 | $517 | $(117) | $1,078 | 3. Revenue Recognition This note details the company's policies for recognizing revenue from its Enterprise and Consumer segments, including deferred revenue Revenue Recognized from Deferred Revenue (in millions): | Period | 2023 | 2022 | | :---------------------------------------------------------------- | :--- | :--- | | Three months ended June 30, from deferred revenue as of March 31 | $135.2 | $115.2 | | Six months ended June 30, from deferred revenue as of December 31 | $200.5 | $157.8 | Deferred Revenue Balances by Segment (in thousands): | Segment | June 30, 2023 | December 31, 2022 | December 31, 2021 | | :-------- | :------------ | :---------------- | :---------------- | | Enterprise | $229,456 | $219,030 | $148,966 | | Consumer | $58,069 | $59,249 | $61,588 | | Total | $287,525 | $278,279 | $210,554 | - Remaining performance obligations totaled $509.0 million as of June 30, 2023, with 72% expected to be recognized over the next twelve months[50] Deferred Contract Costs Rollforward (in thousands): | Period | Balance at Beginning of Period | Additions | Amortization Expense | Balance at End of Period | | :-------------------------- | :----------------------------- | :-------- | :------------------- | :----------------------- | | Six Months Ended June 30, 2023 | $65,645 | $30,036 | $(21,829) | $73,852 | | Six Months Ended June 30, 2022 | $44,545 | $27,381 | $(13,965) | $57,961 | 4. Investments and Fair Value Measurements This note provides information on the company's investments and how their fair values are measured using a hierarchy Fair Value Hierarchy of Assets and Liabilities (in thousands): | Category | June 30, 2023 (Level 1) | June 30, 2023 (Level 2) | June 30, 2023 (Level 3) | | :-------------------------------- | :---------------------- | :---------------------- | :---------------------- | | Money market funds | $281,719 | — | — | | U.S. government securities (marketable) | — | $142,287 | — | | Strategic investments | — | — | $10,311 | | Cash settled stock appreciation rights | — | — | $30 | | Category | December 31, 2022 (Level 1) | December 31, 2022 (Level 2) | December 31, 2022 (Level 3) | | :-------------------------------- | :------------------------ | :------------------------ | :------------------------ | | Money market funds | $130,377 | — | — | | U.S. government securities (cash equivalents) | — | $48,900 | — | | U.S. government securities (marketable) | — | $151,687 | — | | Strategic investments | — | — | $12,104 | | Cash settled stock appreciation rights | — | — | $462 | Changes in Fair Value of Level 3 Financial Instruments (in thousands): | Item | Stock Appreciation Rights (June 30, 2023) | Strategic Investments (June 30, 2023) | | :-------------------------------- | :-------------------------------------- | :------------------------------------ | | Balance—March 31, 2023 | $264 | $12,104 | | Vesting and remeasurement of SARs | $19 | — | | Exercises of SARs | $(253) | — | | Unrealized loss on strategic investments | — | $(1,793) | | Balance—June 30, 2023 | $30 | $10,311 | | Item | Stock Appreciation Rights (June 30, 2022) | Strategic Investments (June 30, 2022) | | :-------------------------------- | :-------------------------------------- | :------------------------------------ | | Balance—March 31, 2022 | $508 | $15,000 | | Vesting and remeasurement of SARs, net | $(89) | — | | Balance—June 30, 2022 | $419 | $15,000 | - An impairment loss of $1.8 million was recorded on strategic investments for the three and six months ended June 30, 2023, bringing cumulative impairment charges to $4.7 million[54] 5. Consolidated Balance Sheet Components This note breaks down key components of the balance sheet, including cash, marketable securities, property, and intangible assets Cash, Cash Equivalents, and Marketable Securities (in thousands): | Category | June 30, 2023 (Fair Value) | December 31, 2022 (Fair Value) | | :-------------------------------- | :--------------------------- | :----------------------------- | | Cash and cash equivalents | $323,227 | $313,685 | | Marketable securities | $142,287 | $151,687 | | Total | $465,514 | $465,372 | - The Company's marketable securities portfolio had remaining contractual maturities of one year or less as of June 30, 2023[58] Property and Equipment, Net (in thousands): | Category | June 30, 2023 | December 31, 2022 | | :-------------------------------- | :------------ | :---------------- | | Total property and equipment | $31,868 | $32,182 | | Less accumulated depreciation and amortization | $(26,383) | $(25,170) | | Property and equipment, net | $5,485 | $7,012 | Depreciation expense: $0.8 million (Q2 2023), $1.1 million (Q2 2022); $1.6 million (H1 2023), $2.3 million (H1 2022) Capitalized Software, Net (in thousands): | Category | June 30, 2023 | December 31, 2022 | | :-------------------------------- | :------------ | :---------------- | | Capitalized software | $74,797 | $63,748 | | Less accumulated amortization | $(44,447) | $(36,336) | | Capitalized software, net | $30,350 | $27,412 | Amortization expense: $4.3 million (Q2 2023), $3.0 million (Q2 2022); $8.2 million (H1 2023), $5.7 million (H1 2022) Intangible Assets, Net (CorpU acquisition, in thousands): | Category | June 30, 2023 (Net) | December 31, 2022 (Net) | | :-------------------------------- | :------------------ | :-------------------- | | Customer relationships | $3,802 | $4,261 | | Vendor relationships | $1,722 | $2,472 | | Developed technology | $1,607 | $2,307 | | Tradename | $66 | $291 | | Total | $7,197 | $9,331 | Amortization expense: $1.0 million (Q2 2023), $1.0 million (Q2 2022); $2.1 million (H1 2023), $2.1 million (H1 2022) - Goodwill of $12.6 million, established from the CorpU acquisition, was allocated to the Enterprise segment with no adjustments as of June 30, 2023[63] 6. Leases This note details the company's operating lease arrangements, including costs and future minimum lease payments Operating Lease Costs (in thousands): | Metric | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :---------------------------------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Operating lease costs | $1,564 | $1,698 | $3,234 | $3,399 | | Variable lease costs | $231 | $203 | $545 | $407 | | Cash paid for operating lease liabilities, net of lease incentives | N/A | N/A | $3,697 | $3,044 | Future Minimum Lease Payments (in thousands): | Year | Amount | | :--- | :----- | | 2023 (Remainder) | $3,590 | | 2024 | $5,918 | | 2025 | $809 | | 2026 | $410 | | Total Gross Lease Payments | $10,727 | | Less Imputed Interest | $(364) | | Present Value of Operating Lease Liabilities | $10,363 | 7. Accrued Expenses and Other Current Liabilities This note provides a breakdown of accrued expenses and other short-term liabilities, including indirect tax reserves Accrued Expenses and Other Current Liabilities (in thousands): | Category | June 30, 2023 | December 31, 2022 | | :-------------------------------- | :------------ | :---------------- | | Accrued expenses | $9,539 | $8,494 | | Indirect tax reserves | $3,914 | $6,627 | | Indirect tax payables | $7,161 | $9,137 | | Other current liabilities | $6,552 | $6,989 | | Total | $27,166 | $31,247 | - Indirect tax payables include amounts collected from customers and withholding taxes on instructor payments[67] - Udemy engaged in a voluntary disclosure program with the IRS regarding historical instructor withholding tax amounts and has filed all outstanding returns and paid associated tax obligations[71] Instructor Withholding Tax Reserve (in thousands): | Period | Balance, beginning of period | Amounts charged to (released from) expense | Net payments and settlements | Balance, end of period | | :-------------------------- | :----------------------------- | :----------------------------------------- | :--------------------------- | :----------------------- | | Three Months Ended June 30, 2023 | $2,572 | $45 | — | $2,617 | | Three Months Ended June 30, 2022 | $15,693 | $157 | — | $15,850 | | Six Months Ended June 30, 2023 | $2,528 | $89 | — | $2,617 | | Six Months Ended June 30, 2022 | $17,036 | $(1,186) | — | $15,850 | 8. Commitments and Contingencies This note discloses the company's future minimum payments under purchase commitments and potential legal liabilities - As of June 30, 2023, Udemy had $56.7 million in future minimum payments under noncancellable purchase commitments, expected to be paid through 2026, primarily with cloud infrastructure, network service, and paid advertising providers[74] - The Company is subject to legal proceedings and claims in the ordinary course of business, but the outcome is not expected to have a material effect on financial position, results of operations, or cash flows[76] 9. Income Taxes This note explains the company's income tax provision, effective tax rate, and valuation allowance against deferred tax assets Effective Tax Rate: | Period | 2023 | 2022 | | :-------------------------- | :----- | :----- | | Three Months Ended June 30 | (4.28)% | (1.10)% | | Six Months Ended June 30 | (3.10)% | (1.20)% | - The difference from the 21% statutory federal tax rate is due to income in higher tax jurisdictions, foreign withholding taxes, tax credits, and changes in valuation allowance[78] - A full valuation allowance is provided against U.S. federal and state deferred tax assets due to uncertainty of realization[79] - The Company is subject to taxation in the U.S. and various foreign jurisdictions, with an income audit in India ongoing since 2022[81] 10. Related Party Transactions This note details revenue and operating expenses arising from transactions with affiliated entities and board members Revenue from Related Parties (in millions): | Related Party | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :-------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Naspers/Prosus affiliated entities | $0.4 | $0.4 | $0.7 | $0.8 | | Board of Directors affiliated customers | $0.1 | $0.1 | $0.2 | $0.2 | Operating Expenses with Related Parties (in millions): | Related Party | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :-------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Insight Partners affiliated vendors | $0.1 | $0.3 | $0.3 | $0.5 | 11. Stockholders' Equity This note provides information on common stock, equity incentive plans, and stock-based compensation expense Common Stock Reserved for Future Issuance: | Plan | June 30, 2023 | December 31, 2022 | | :-------------------------------- | :------------ | :---------------- | | 2010 Equity Incentive Plan (Stock options outstanding) | 8,836,101 | 10,333,771 | | 2021 Equity Incentive Plan (RSUs outstanding and PSUs) | 18,667,968 | 16,178,101 | | 2021 Equity Incentive Plan (Shares available for future issuance) | 4,865,969 | 2,814,126 | | 2021 Employee Stock Purchase Plan (Shares available for future issuance) | 2,754,604 | 1,929,578 | | Total shares of common stock reserved | 35,124,642 | 31,255,576 | - The 2021 Equity Incentive Plan's shares available for future grants automatically increased by 7,250,689 on January 1, 2023[90] - Total unrecognized stock-based compensation expense for unvested RSUs was $224.1 million as of June 30, 2023, to be recognized over 3.0 years[100] - The ESPP purchase price was reset on May 20, 2023, resulting in an incremental compensation cost of $5.9 million[105] Total Stock-Based Compensation Expense (in thousands): | Category | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :-------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Cost of revenue | $1,749 | $989 | $3,342 | $1,829 | | Sales and marketing | $8,099 | $5,007 | $15,376 | $9,144 | | Research and development | $6,423 | $3,711 | $12,717 | $7,045 | | General and administrative | $6,890 | $5,025 | $16,801 | $10,056 | | Restructuring charges | — | — | $1,208 | — | | Total | $23,161 | $14,732 | $49,444 | $28,074 | 12. Net Loss Per Share This note presents the calculation of basic and diluted net loss per share, including anti-dilutive securities Net Loss Per Share (Basic and Diluted): | Metric | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :-------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net loss | $(25,735) | $(29,380) | $(70,279) | $(55,029) | | Weighted-average shares | 148,071,315 | 140,035,203 | 146,910,959 | 139,691,508 | | Net loss per share | $(0.17) | $(0.21) | $(0.48) | $(0.39) | - Potentially dilutive securities, including stock options, RSUs, PSUs, and contingently issuable shares under ESPP, were excluded from diluted EPS calculation due to their anti-dilutive impact[111] 13. Segment and Geographic Information This note provides financial data broken down by operating segment (Enterprise, Consumer) and geographic region Revenue by Segment (in thousands): | Segment | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :-------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Enterprise | $101,619 | $74,627 | $196,861 | $139,538 | | Consumer | $76,621 | $78,485 | $157,809 | $165,797 | | Total revenue | $178,240 | $153,112 | $354,670 | $305,335 | Segment Gross Profit (in thousands): | Segment | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :-------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Enterprise | $67,667 | $49,945 | $130,042 | $92,693 | | Consumer | $41,489 | $42,274 | $85,181 | $89,789 | | Total segment gross profit | $109,156 | $92,219 | $215,223 | $182,482 | - Enterprise revenue grew by 36% (Q2) and 41% (H1) year-over-year, while Consumer revenue decreased by 2% (Q2) and 5% (H1)[114] Revenue by Geographic Region (in thousands): | Region | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :-------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | North America | $71,814 | $62,863 | $143,521 | $123,451 | | Europe, Middle East, Africa | $54,540 | $46,229 | $109,091 | $93,954 | | Asia Pacific | $39,342 | $32,727 | $77,501 | $65,915 | | Latin America | $12,544 | $11,293 | $24,557 | $22,015 | | Total revenue | $178,240 | $153,112 | $354,670 | $305,335 | Long-Lived Assets by Geographic Region (in thousands): | Region | June 30, 2023 | December 31, 2022 | | :------------ | :------------ | :---------------- | | North America | $9,782 | $12,782 | | Rest of world | $4,291 | $5,556 | | Total | $14,073 | $18,338 | 14. Restructuring Charges This note details the restructuring charges incurred due to workforce reduction, including personnel and stock-based compensation expenses - In February 2023, Udemy reduced its global workforce by approximately 10% in response to macroeconomic conditions[118] - Restructuring charges totaled $10.3 million in the first half of 2023, primarily consisting of $8.9 million in personnel expenses and $1.2 million in stock-based compensation[118] Restructuring Liability Activity (in thousands): | Period | Beginning balance | Restructuring charges | Settlements | Ending balance | | :-------------------------- | :---------------- | :-------------------- | :---------- | :------------- | | March 31, 2023 to June 30, 2023 | $4,544 | $135 | $(4,335) | $344 | | January 1, 2023 to June 30, 2023 | $0 | $9,055 | $(8,711) | $344 | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on Udemy's financial condition and results of operations, including key performance factors, revenue and expense analysis, and liquidity Overview This section introduces Udemy's mission, platform reach, and recent strategic actions like workforce reduction - Udemy's mission is to improve lives through learning, addressing the need for flexible and effective skill acquisition in a rapidly changing job market[121][122] - The platform serves over 64 million learners in 180+ countries and offers Udemy Business (UB) for corporate learning, with over 70,000 instructors creating 200,000+ courses[123] - In February 2023, Udemy reduced its global workforce by approximately 10% due to macroeconomic conditions, incurring $10.3 million in restructuring charges in H1 2023[124] Key Factors Impacting Performance This section outlines critical elements influencing Udemy's financial and operational performance, such as customer acquisition, content, and market shifts - Growth depends on attracting and engaging new learners and Udemy Business customers efficiently, leveraging both organic and paid marketing channels[126] - Retention and expansion of existing learner and customer relationships are crucial, with efforts focused on increasing engagement for consumers and expanding deployments for UB customers[127][129] - Sourcing in-demand content from instructors is vital for attracting and retaining users; a significant portion of popular content comes from a limited number of instructors[131][132] - The shifting mix towards the Enterprise segment is expected to benefit overall gross margins due to higher Enterprise gross margins[133][142] - International expansion is a significant opportunity, with continued investment in personnel, marketing, and strategic partnerships to grow the global customer and learner base[134] - Udemy is actively investing in sales and marketing, course catalog expansion, immersive learning, and AI technology, anticipating increased operating expenses[135] - The pace of adoption of cloud-based skill development solutions impacts growth, as the market is less mature than traditional training[136] Components of Results of Operations This section details the primary components of Udemy's financial results, including revenue recognition, cost of revenue, and operating expenses - Revenue is recognized from UB customer subscriptions (ratably over term) and paid consumer learners (ratably over an estimated four-month service period for single courses, or contractual term for subscriptions)[138][139] - Cost of revenue primarily consists of instructor payments, which vary based on content acquisition method[141] - Operating expenses include sales and marketing, research and development, general and administrative, and restructuring charges, with personnel costs being the most significant component[144] - Sales and marketing expenses are expected to increase in absolute dollars but generally decrease as a percentage of revenue over the long term[145] - Research and development expenses are expected to increase in absolute dollars due to continued investment in the platform[146] - General and administrative expenses are expected to increase in absolute dollars but generally decrease as a percentage of revenue over the long term[148] - Interest income, net, primarily comes from cash equivalents and investments, while other expense, net, includes foreign currency transaction gains/losses and strategic investment valuation changes[150][151] - Income tax provision is mainly foreign and state taxes, with a full valuation allowance against U.S. federal and state deferred tax assets[152] Results of Operations This section provides a detailed analysis of the company's financial performance, including revenue, gross profit, and net loss trends Consolidated Results of Operations (in thousands, except percentages): | Metric | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :-------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Revenue | $178,240 (100%) | $153,112 (100%) | $354,670 (100%) | $305,335 (100%) | | Cost of revenue | $75,938 (43%) | $65,812 (43%) | $152,639 (43%) | $132,250 (43%) | | Gross profit | $102,302 (57%) | $87,300 (57%) | $202,031 (57%) | $173,085 (57%) | | Sales and marketing | $77,371 (43%) | $68,421 (45%) | $157,028 (44%) | $135,299 (44%) | | Research and development | $29,635 (17%) | $23,963 (16%) | $60,522 (17%) | $46,533 (15%) | | General and administrative | $22,623 (13%) | $23,443 (15%) | $48,957 (14%) | $45,096 (16%) | | Restructuring charges | $135 (0%) | — (0%) | $10,263 (3%) | — (0%) | | Loss from operations | $(27,462) (16%) | $(28,527) (19%) | $(74,739) (21%) | $(53,843) (18%) | | Net loss | $(25,735) (14%) | $(29,380) (19%) | $(70,279) (20%) | $(55,029) (18%) | Revenue Growth (in thousands, except percentages): | Segment | Q2 2023 Revenue | Q2 2022 Revenue | Q2 Change ($) | Q2 Change (%) | H1 2023 Revenue | H1 2022 Revenue | H1 Change ($) | H1 Change (%) | | :-------- | :-------------- | :-------------- | :------------ | :------------ | :-------------- | :-------------- | :------------ | :------------ | | Enterprise | $101,619 | $74,627 | $26,992 | 36% | $196,861 | $139,538 | $57,323 | 41% | | Consumer | $76,621 | $78,485 | $(1,864) | (2)% | $157,809 | $165,797 | $(7,988) | (5)% | | Total | $178,240 | $153,112 | $25,128 | 16% | $354,670 | $305,335 | $49,335 | 16% | - Enterprise revenue growth was primarily driven by an increase in UB customers and net expansions, partially offset by negative foreign currency exchange rates[156][159] - Consumer revenue decrease was primarily due to negative foreign currency exchange rates, partially offset by an increase in monthly average buyers[157][160] - Gross margin remained stable at 57% for both three and six months ended June 30, 2023 and 2022[164][167] - Sales and marketing expenses increased by $9.0 million (Q2) and $21.7 million (H1) YoY, driven by personnel, stock-based compensation, and deferred contract acquisition costs[169][170] - Research and development expenses increased by $5.7 million (Q2) and $14.0 million (H1) YoY, mainly due to higher personnel and stock-based compensation[171][172] - General and administrative expenses decreased by $0.8 million (Q2) but increased by $3.9 million (H1) YoY, with the H1 increase primarily due to accelerated stock-based compensation for the former CEO[173][175] - Restructuring charges totaled $0.1 million (Q2) and $10.3 million (H1) in 2023, with no comparable charges in 2022[176][177] - Total other income, net, significantly improved to $2.8 million (Q2) and $6.6 million (H1) in 2023, from net expenses in 2022, primarily due to increased interest income from investments[178][179] Certain Key Business Metrics and Non-GAAP Financial Metrics This section presents key operational metrics and non-GAAP financial measures used to evaluate the company's performance Monthly Average Buyers (in thousands): | Period | 2023 | 2022 | % Change | | :-------------------------- | :--- | :--- | :------- | | Three Months Ended June 30 | 1,338 | 1,290 | 4% | | Six Months Ended June 30 | 1,366 | 1,337 | 2% | Udemy Business Customers: | Date | 2023 | 2022 | % Change | | :--- | :--- | :--- | :------- | | June 30 | 14,946 | 12,514 | 19% | Udemy Business Annual Recurring Revenue (ARR) (in thousands): | Date | 2023 | 2022 | % Change | | :--- | :--- | :--- | :------- | | June 30 | $420,402 | $316,107 | 33% | Udemy Business Net Dollar Retention Rate (NDRR): | Date | 2023 | 2022 | % Change | | :--- | :--- | :--- | :------- | | UB NDRR | 108% | 118% | (8)% | | UB Large Customer NDRR | 115% | 124% | (7)% | - Decreases in NDRR metrics were driven by lower rates of upsells and expansion, negatively impacted by longer sales cycles due to economic factors[193] Adjusted EBITDA (in thousands): | Metric | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :-------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net loss | $(25,735) | $(29,380) | $(70,279) | $(55,029) | | Adjusted EBITDA | $1,934 | $(8,562) | $(4,354) | $(15,569) | | Adjusted EBITDA margin | 1% | (6)% | (1)% | (5)% | - Adjusted EBITDA improved by $10.5 million (Q2) and $11.2 million (H1) YoY, driven by revenue growth outpacing operating expenses (excluding stock-based compensation and restructuring charges)[203][204] Liquidity and Capital Resources This section discusses the company's cash position, funding sources, and ability to meet short-term and long-term financial obligations - As of June 30, 2023, principal liquidity sources included $326.8 million in cash, cash equivalents, and restricted cash, and $142.3 million in marketable securities[206] - The company believes existing cash and expected cash flows will be sufficient for at least the next 12 months[206] - Historically, operations have been financed through revenue and capital stock issuances, including $397.4 million net proceeds from the 2021 IPO[209] - Future growth and operations may require additional capital through equity, equity-linked, or debt financing[208][210] - Cash used in operating activities decreased from $16.4 million in H1 2022 to $6.4 million in H1 2023, driven by deferred revenue increase and accounts receivable decrease[216][217] - Net cash provided by investing activities was $6.4 million in H1 2023, primarily from marketable securities maturities, a shift from $12.3 million used in H1 2022[218][219] - Net cash provided by financing activities was $9.5 million in H1 2023, mainly from stock option exercises and employee stock purchase plan proceeds[220][221] Critical Accounting Policies and Estimates This section highlights the accounting policies and estimates that require significant judgment and can materially impact financial results - No material changes to critical accounting policies and estimates compared to the Annual Report[224] Recent Accounting Pronouncements This section discusses the potential impact of recently issued accounting standards on the company's financial statements - No recently issued accounting pronouncements are expected to have a material impact on the Company's condensed consolidated financial statements[47] Item 3. Qualitative and Quantitative Disclosures about Market Risk This section details Udemy's exposure to market risks, including interest rate sensitivity and foreign currency fluctuations, and related management strategies Interest Rate Sensitivity This section assesses the potential impact of interest rate changes on the company's financial instruments and investment portfolio - As of June 30, 2023, Udemy held $323.2 million in cash and cash equivalents and $142.3 million in marketable securities, primarily U.S. government securities[227] - A hypothetical 100 basis point change in interest rates would not materially impact the market value of the portfolio or interest income[228] Foreign Currency Risk This section discusses the company's exposure to fluctuations in foreign currency exchange rates and their potential effect on financial results - The reporting currency is the U.S. dollar, and fluctuations in foreign currency exchange rates can lead to transaction gains/losses or translation gains/losses[229] - Udemy does not currently use hedging arrangements for foreign currency risk, and a hypothetical 10% change in exchange rates would not have a material impact on income or expense for H1 2023[229] Item 4. Controls and Procedures This section details management's evaluation of the effectiveness of disclosure controls and internal control over financial reporting, noting inherent limitations Evaluation of Disclosure Controls and Procedures This section presents management's assessment of the effectiveness of the company's disclosure controls and procedures - Management, including the CEO and CFO, concluded that disclosure controls and procedures were effective as of June 30, 2023[230] - Disclosure controls are designed to provide reasonable assurance that required information is recorded, processed, summarized, and reported timely[230] Changes in Internal Control Over Financial Reporting This section reports any material changes in the company's internal control over financial reporting during the period - No material changes to internal control over financial reporting occurred during the quarter ended June 30, 2023[231] Inherent Limitations on the Effectiveness of Internal Controls Over Financial Reporting This section acknowledges that internal control systems provide reasonable, but not absolute, assurance against misstatement or fraud - Control systems provide only reasonable, not absolute, assurance and may not prevent or detect all errors and fraud[232] PART II. Other Information This part includes disclosures on legal proceedings, risk factors, equity sales, defaults, mine safety, other information, and exhibits Item 1. Legal Proceedings This section outlines Udemy's legal proceedings, including a settled class action, and confirms no current material adverse effects are expected - Udemy is not currently party to any legal proceedings expected to have a material adverse effect on its business, operating results, or financial condition[235] - A California class action complaint (Williams v. Udemy, Inc.) regarding pricing practices was settled for an immaterial amount, with final approval granted on July 28, 2023[236] Item 1A. Risk Factors This section comprehensively details various factors that could materially and adversely affect Udemy's business, financial condition, and results of operations Risks Related to Our Business and Operations This section identifies risks associated with Udemy's business model, market dynamics, growth management, and operational execution - Udemy has a history of losses and may not achieve or maintain profitability due to significant investments in growth[240] - Operating in an emerging and dynamic market makes future results difficult to predict and exposes the company to various challenges[241][242] - Results of operations may fluctuate significantly due to factors like customer acquisition, competition, economic conditions, and revenue mix[243][244] - Sustainable growth depends on attracting and retaining learners, instructors, and organizations, which may be impacted by content appeal, policy changes, or perceived lack of audience[246][247] - Reliance on a limited number of instructors for popular content poses a risk if these relationships are lost, potentially affecting content quality and platform attractiveness[248] - Failure to maintain and expand relationships with UB customers, including renewals and increased usage, could hinder business growth and revenue[249] - The online learning market is highly competitive, with risks from existing and new entrants, including those leveraging advanced AI capabilities[250][251] - The market for online learning solutions may not grow as expected, influenced by macroeconomic conditions and adoption rates, potentially harming demand for Udemy's platform[256] - Adherence to company values and a focus on long-term sustainability may negatively impact short- or medium-term financial performance[257][259] - Changes in pricing models or contract lengths could adversely impact results of operations, especially with new product rollouts or increased competition[260] - Failure to effectively expand sales and marketing capabilities could harm the ability to increase the learner and UB customer base[261][262] - Damage to brand and reputation, from internal factors (platform reliability, customer service) or external factors (negative publicity, litigation), could reduce demand[263][264][266] - Liability or reputational harm could arise from courses posted to the platform that infringe third-party intellectual property or contain other problematic content[267][268] - Failure of resellers or partners to comply with ethical practices or laws could negatively impact business, especially in international jurisdictions[269] - General economic conditions, including inflation and financial market instability, could negatively affect revenue and increase the need for significant expenditures[270][271] - Natural disasters, public health crises, or political crises could materially and adversely affect business and operations[272] - Failure to manage rapid growth effectively could strain operational infrastructure and managerial resources, impacting gross profit or operating expenses[273][274] - Loss of senior management or highly skilled employees, or difficulty attracting new talent, could significantly harm the business[275][276] - Acquisitions and strategic investments expose the company to significant risks, including integration difficulties, failure to realize benefits, and diversion of management attention[277][278] - The company may need to raise additional funds, and if capital is not available on acceptable terms, growth strategy could be impaired[279] - International operations expose the company to risks such as localization costs, competition with local players, regulatory uncertainty, currency fluctuations, and political instability[280][282][283] - Failure to comply with diverse global laws and regulations (privacy, data protection, export controls, anti-bribery) could lead to claims, penalties, and adverse effects on business[285][286][287][288][290][293] - Increased scrutiny on ESG practices could lead to additional costs, resource allocation, and reputational risks[295] - Inadequate self-insurance accruals or insurance coverage for employee healthcare benefits could adversely affect financial results[296] Risks Related to Technology, Privacy, and Cybersecurity This section addresses risks concerning data privacy, cybersecurity threats, platform reliability, and reliance on third-party technology services - Changes in privacy, data protection, or cybersecurity laws (e.g., GDPR, CCPA, PIPL) or non-compliance could adversely affect business, leading to fines, litigation, and increased costs[297][298][299][300][301][302] - A cybersecurity attack or security breach could interrupt service, harm reputation, or lead to significant liability, despite protective measures[304][305][306][308][309] - Interruptions or performance problems with technology and infrastructure could adversely affect business and results of operations[310] - Regulations permitting ISPs to limit internet consumption (e.g., net neutrality changes) could harm business by affecting platform access[312] - Reliance on Amazon Web Services (AWS) for platform services means any disruption or interference with AWS could seriously harm operations and business[313][314] - Dependence on third-party payment processors and evolving payment laws/regulations could lead to service disruptions, increased costs, or compliance issues[315][316][317] - Ineffective mobile solutions could adversely affect platform usage and ability to attract learners, as mobile access is increasingly important[318][319][320] - Failure to appear prominently in internet search results could decline growth rate and adversely affect business[321] Risks Related to Our Intellectual Property This section outlines risks related to protecting and enforcing the company's intellectual property and potential litigation - Inability to adequately obtain, maintain, protect, and enforce intellectual property (patents, trade secrets, trademarks) could adversely affect business and competitive advantage[322][323][324][325][326][327] - Intellectual property litigation, including claims related to content on the platform, could result in significant costs, divert management attention, and harm reputation[329] - Failure to comply with open source software licenses could restrict the ability to provide the platform or require proprietary software to be disclosed[330] Risks Related to Financial Reporting, Taxation, and Operations as a Public Company This section covers risks associated with financial controls, tax liabilities, public company compliance, and accounting changes - Failure to maintain effective disclosure controls and internal control over financial reporting could impair timely and accurate financial statements, affecting investor confidence[331][332][333] - Operating as a public company incurs substantial costs and administrative burdens, exacerbated by the loss of 'emerging growth company' status[334][335] - Unanticipated changes in effective tax rate and additional tax liabilities, including from international operations or new tax rules (e.g., Inflation Reduction Act, global minimum tax), could harm future results[336][337][338] - Taxing authorities may assert improper collection/remittance of indirect taxes (sales, VAT, employment), leading to substantial liabilities and increased compliance costs[339][340][341][342] - Ability to use net operating loss (NOL) carryforwards and other tax attributes may be limited by expiration or ownership changes (Section 382 of the Code)[343][344] - Fluctuations in currency exchange rates could adversely affect reported financial results, especially with 30% of sales denominated in non-U.S. dollars[345] - The effects of inflation could adversely impact operating costs, pricing models, customer acquisition, and retention[347][348][349] - Changes in generally accepted accounting principles (GAAP) or their interpretations could significantly affect reported results of operations[350] Risks Related to Ownership of Our Common Stock This section discusses risks pertinent to the company's common stock, including price volatility, dilution, and corporate governance provisions - The trading price of common stock may be volatile due to various factors, including market fluctuations, operating performance, analyst coverage, and company announcements[351][352][354] - Future sales of common stock by existing stockholders could depress the market price[355][356] - Future issuances of common stock or rights to purchase common stock could result in additional dilution to stockholders[357] - If securities or industry analysts publish inaccurate or unfavorable research, the market price and trading volume of common stock could decline[358] - Udemy does not expect to pay dividends in the foreseeable future, requiring stockholders to rely on stock price appreciation for gains[359] - Directors, executive officers, and principal stockholders beneficially own a substantial percentage (approx. 48%) of common stock, enabling significant control over stockholder-approved matters[360] - Delaware law and company bylaws contain provisions that might delay, discourage, or prevent mergers, tender offers, or proxy contests, potentially depressing the stock price[361][362][364] - Bylaw provisions designating Delaware courts and federal district courts as exclusive forums for certain disputes could limit stockholders' choice of judicial forum and discourage lawsuits[365][366][367][368] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section reports no unregistered sales of equity securities or use of proceeds during the reporting period - No unregistered sales of equity securities or use of proceeds to report[370] Item 3. Defaults Upon Senior Securities This section confirms that there are no defaults upon senior securities to report - Not applicable; no defaults upon senior securities[371] Item 4. Mine Safety Disclosures This section clarifies that mine safety disclosures are not applicable to the company's operations - Not applicable; no mine safety disclosures[372] Item 5. Other Information This section reports no adoption or termination of Rule 10b5-1 or non-Rule 10b5-1 trading arrangements by directors or officers - No director or officer adopted or terminated a Rule 10b5-1 or non-Rule 10b5-1 trading arrangement during the last fiscal quarter[373] Item 6. Exhibits This section lists all exhibits filed with the Quarterly Report on Form 10-Q, including organizational documents, policies, and certifications - The exhibit index includes Amended and Restated Certificate of Incorporation, Bylaws, Outside Director Compensation Policy, and Employment Letter for Genefa Murphy[376] - Certifications of the Principal Executive Officer and Principal Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a) and 18 U.S.C. Section 1350 are included[376] - Inline XBRL documents (Instance, Schema, Calculation Linkbase, Definition Linkbase, Label Linkbase, Presentation Linkbase) and Cover Page Interactive Data File are also listed[377] Signatures This section contains the authorized signatures certifying the accuracy and completeness of the report Signatures This section contains the authorized signatures of Udemy, Inc.'s President, CEO, and CFO, certifying the report's filing on August 3, 2023 - The report is signed by Greg Brown, President and Chief Executive Officer, and Sarah Blanchard, Chief Financial Officer, on August 3, 2023[381]